NASTECH PHARMACEUTICAL CO INC, 10-K405, 1997-04-30

NASTECH PHARMACEUTICAL CO INC
10-K405, 1997-04-30
PHARMACEUTICAL PREPARATIONS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
[ ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Or
[ x ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 For the
transition period from July 1, 1996 to December 31,
1996

COMMISSION FILE NUMBER 0-13789

NASTECH PHARMACEUTICAL COMPANY INC.
(Exact name of registrant as specified in its charter)

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<S> <C>
DELAWARE 11-2658569
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

45 DAVIDS DRIVE, HAUPPAUGE, NEW YORK 11788
(Address of principal executive offices) (Zip Code)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 273-0101

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

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<S> <C>
Name of each exchange
Title of each class on which registered
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None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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<S> <C>
Name of each exchange
Title of each class on which registered
------------------- -------------------------
Common Stock, $.006 par value Nasdaq National Market
</TABLE>

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ X ]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 28, 1997 based upon the closing price on that date,
on the Nasdaq National Market, was approximately $66,499,492.

As of February 28, 1997, there were 6,086,158 shares of the registrant's $.006
par value common stock outstanding.

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PART I

ITEM 1 - BUSINESS

Except for historical information contained herein, the statements in
this Item are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause Nastech Pharmaceutical Company Inc.'s ("Company") actual
results in future periods to differ materially from forecasted results. Those
include, among others, risks associated with the Company's business strategy,
product development, plans concerning the commercialization of products,
certain financial information and other statements that are not historical
facts.

OVERVIEW

The Company is engaged in the research, development, manufacturing and
commercialization of nasally administered forms of prescription and
over-the-counter pharmaceuticals that are currently delivered in oral,
injectable or other dosage forms. The nasal delivery of certain
pharmaceuticals enables more rapid systemic absorption, lower required dosages,
quicker onset of desired effect, and painless, convenient patient
self-administration, resulting in improved patient compliance and
pharmacoeconomics. The Company focuses its research primarily on drugs with
demonstrated safety and efficacy, which, through current delivery forms, have
certain bioavailability or patient compliance limitations that may be improved
with a novel delivery form.

The Company's first commercially available pharmaceutical is a
prescription pain reliever marketed as Stadol NS by Bristol-Myers Squibb
("BMS"). Stadol NS is the only transnasal analgesic therapy marketed for the
treatment of moderate to severe pain and the acute pain of migraine. Stadol NS
provides significant advantages over the only alternative delivery method for
this drug, injection, including patient self-administration, increased patient
compliance, cost containment and the additional indication of usage, migraine
headache pain. Similarly, Nascobal(TM) (Cyanocobalamin, USP) Gel for
Intranasal Administration, the Company's nasal Vitamin B-12 product, provides
both therapeutic and patient benefits over injectable therapy for chronic
Vitamin B-12 deficiency anemia. Nascobal(TM), which was independently
developed by the Company, was cleared for marketing by the FDA on November 5,
1996. In addition to these approved drugs, the Company's pipeline includes
nine drugs, five of which are being developed under collaborative agreements
with other pharmaceutical companies.

INDUSTRY OVERVIEW

The Company participates in the drug delivery industry, a subset of
the pharmaceutical industry. Conventional methods of drug delivery include
oral administration and injections. Newer delivery methods or routes of
delivery include improved versions of traditional methods of drug delivery as
well as expanded technologies and systems with novel routes of administration,
such as the Company's nasal delivery, new oral sustained and controlled release
delivery systems, oral mucosal administration, transdermal systems and
pulmonary administration. Among the principal reasons for the development of
new methods of drug delivery is the facilitation of the introduction of a
pharmaceutical agent into a patient or consumer in a manner that provides
greater safety and efficacy, lower side effect profile, improved patient
compliance and greater economy than conventional methods.

The nasal delivery of certain drugs offers significant advantages over
other methods of delivery. These advantages include: (i) rapid systemic
absorption; (ii) lower required dosages, resulting in lower levels of
metabolites and less severe side effects; (iii) more rapid onset of desired
therapeutic effects and more desirable blood profiles; (iv) convenient
self-administration by patient; (v) improved patient compliance; and (vi)
improved pharmacoeconomics. The Company believes that due to these advantages
of nasal delivery, significant opportunities exist to address the limitations
of currently available delivery forms for certain drugs.

Although oral, injectable, patch and pulmonary dosage forms are
accepted for a variety of systemic pharmaceuticals, the Company believes that
nasal delivery may optimize the delivery of certain of these drugs. While the
oral route is the most popular and least expensive method of delivery, it
exposes the drug to liver and gastrointestinal metabolism which may diminish
the activity of a drug prior to its systemic distribution. Therefore, nasal
delivery may allow for administration of lower dosages to achieve the desired
therapeutic effect. In addition, some patients, particularly pediatric and
geriatric patients, may find this route inconvenient due to difficulty in
swallowing tablets or capsules. The oral route of delivery may also require
the use of fluids or measuring devices to allow the patient to self-administer
liquids or syrups.

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Some pharmaceutical agents are delivered by injection to circumvent
significant liver or gastrointestinal metabolism following oral administration.
However, because of patient discomfort and the required assistance of a health
care professional, injection therapy is generally inconvenient and expensive,
often resulting in patient non-compliance.

Like the injectable route, transdermal patches also bypass liver or
gastrointestinal metabolism but generally do not provide rapid systemic
absorption of a drug and may result in local irritation at the site following
prolonged application.

Pulmonary drug delivery is widely accepted for the administration of
drugs locally to the lung or to treat respiratory conditions such as bronchial
asthma. Although this route is being considered for the systemic delivery of
pharmaceuticals, including peptides and proteins, it requires the use of
delivery devices that may be expensive and require extensive patient education.

The Company believes that changes in the economics of healthcare in
the past several years have created a need for alternative drug delivery
methods, including nasal administration. Due to managed care policies and
increased competition from manufacturers of generic drugs, drug companies are
faced with difficulties in raising prices and overall margin pressure. The
Company's nasal drug delivery technology provides traditional large
pharmaceutical companies with a novel delivery method that may improve and
differentiate existing pharmaceutical products, make new indications possible
and provide proprietary protection, thereby reducing competition from
manufacturers of generic drugs. As a result of these industry trends, the
Company believes that large pharmaceutical companies will increasingly seek to
establish collaborative agreements with drug delivery specialists.

BUSINESS STRATEGY

The Company's business strategy is to become a leading drug delivery
specialist by expanding the applications of nasal drug delivery in the
prescription and over-the-counter markets. The Company's strategy incorporates
the following principal elements:

Focus Initial Efforts on Approved Drugs. The Company has focused
primarily on drugs that have proven efficacy and safety, are approved for
marketing and which the Company believes could benefit from a nasal form of
delivery. In addition, the Company's proprietary nasal formulations utilize
compounds that are generally recognized as safe ("GRAS") by the FDA. The
Company believes that by focusing its research and development activities on
drugs with demonstrated safety and efficacy, and with an unaddressed market
need, it may reduce the technical and marketing risk of its projects by
decreasing the time period required to bring a new product to market and
expanding the market for certain drugs.

Internally Fund Development Through Later Stages. The Company
believes that internally funding development until later stages will allow the
Company to retain product rights and enable it (i) to negotiate more favorable
collaborative agreements or (ii) to manufacture and market its products
independently. Although historically focused on establishing early stage
alliances, the Company believes it is now able to leverage its product
development experience and broad product pipeline to pursue internally funded
development and commercialization projects, as appropriate. Therefore, the
Company intends to commit significant financial resources to research and
development with the goal of achieving greater economic benefit from product
sales.

Leverage Strategic Alliances. Where appropriate, the Company seeks
to establish domestic and international relationships with major pharmaceutical
companies for the marketing and distribution of certain of the Company's
products or technology. This approach allows the Company to devote its
resources to the further development of its technology while leveraging the
established sales and marketing capabilities of such collaborative partners.
The Company currently has collaborative agreements with BMS, RiboGene, Pfizer,
DuPont Merck and Novartis and will continue to pursue additional partners where
appropriate.

Protect and Expand Intellectual Property. The Company has and will
continue to seek patent protection for its formulations and other technology in
the United States and key international markets. The Company is the exclusive
licensee of six U.S. patents and owns four additional U.S. patents, all
covering approximately 65 drugs. The Company has filed other U.S. patent
applications, as well as corresponding patent applications outside the United
States, relating to the Company's technology. As specific formulations are
developed and clinically tested, the Company intends to file for additional
patent protections.

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Augment Technology Through Licensing and Acquisition. The
pharmaceutical drug delivery systems industry is characterized by a large
number of relatively small organizations which focus on various modalities of
drug delivery and administration but may lack the capital or regulatory
experience necessary to succeed. The Company believes that large
pharmaceutical companies may seek to establish relationships with drug delivery
companies that are able to offer alternative, multiple or combination delivery
methods and are organizationally and financially stable. Therefore, the
Company intends to augment its internal growth through licensing technology and
the acquisition of companies that provide complementary technology, management
and markets. The Company was recently granted an exclusive license from
DynaGen, Inc. ("DynaGen") to develop a nasal formulation of Lobeline for
smoking cessation. No specific acquisition of any company is currently
contemplated.

PRODUCTS

The Company is engaged in the research and commercialization of
nasally administered forms of prescription and over-the-counter pharmaceuticals
that are currently delivered in oral, injectable or other dosage forms. The
Company currently holds or licenses patents covering approximately 65
pharmaceuticals. The Company leverages its intellectual property and reduces
the technical risk of its projects by focusing its research efforts on the
development of drugs with demonstrated safety and efficacy. In order to
address market needs, the Company targets drugs whose current delivery methods
present certain bioavailability, patient compliance or cost limitations. Based
on its research, the Company believes that advantages of nasal delivery include
ease of use, rapid systemic absorption, lower side-effect profile, improved
cost-effectiveness, lower required dosage and more rapid onset of desired
effect.

The Company's current agreement with BMS provides for the sales and
marketing of its first product, Butorphanol Tartrate, a pain reliever marketed
as Stadol NS. In November 1996, the Company received marketing clearance from
the FDA for Nascobal(TM), the Company's nasal gel for the treatment of chronic
Vitamin B-12 deficiency anemia. The following chart summarizes the Company's
current products and product pipeline:

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NASTECH CURRENT PRODUCT PIPELINE

TRADITIONAL
THERAPEUTIC DELIVERY
DRUG CATEGORY METHOD STATUS (1) PARTNER
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<S> <C> <C> <C> <C>
Stadol NS Narcotic Analgesic Injection Marketing (2) BMS

Nascobal(TM) Vitamin/Anti-Anemia Injection Cleared for Marketing

Metoclopramide Anti-Nausea/Anti-Emetic Injection/Oral Phase III (2) RiboGene

Propranolol Beta-Blocker/Migraine Injection/Oral Phase I (2) RiboGene

Doxylamine Sleep-Aid Oral Phase I Pfizer

Meclizine & Others Anti-Motion Sickness Oral/Injection Phase I

Buprenorphine Narcotic Analgesic Injection Preclinical

Clemastine Antihistamine Oral Preclinical

Chlorpheniramine Antihistamine Oral Preclinical

Nalbuphine Narcotic Analgesic Injection Formulation Development (2) DuPont Merck

Nicotine Smoking Cessation Patch/Gum Formulation Development Novartis
</TABLE>
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(1) See "-- Government Regulation" for a description of the different stages
of development.

(2) Marketing or development activities performed by collaborative partners

Stadol(R) NS(TM) is a trademark of the Bristol-Myers Squibb Company
("BMS"). Stadol NS is a narcotic analgesic sublicensed to BMS for
marketing as a prescription pain-reliever. Nascobal(TM) is a
trademark of Nastech. Trade names and trademarks of other companies
appearing herein are the property of their respective holders.
Metoclopramide, Propranolol and Nalbuphine development activities are
performed by collaborative partners.

Approved and Marketable Products

STADOL NS (BUTORPHANOL TARTRATE) -- Narcotic analgesic for acute pain.
Stadol NS is the only transnasal analgesic therapy marketed for the treatment
of moderate to severe pain and the acute pain of migraine. Prior to Stadol NS,
the only acceptable and effective means of delivery for Butorphanol Tartrate
was the injectable form. Transnasal Butorphanol Tartrate offers significant
advantages over injectable formulations of the drug, including patient
self-administration, increased patient compliance, cost containment, and the
additional indication of usage. Because of these advantages, transnasal
Butorphanol Tartrate has enjoyed significant growth in market size since 1992,
as compared to the injectable formulation. Stadol NS is currently marketed by
BMS under an agreement that generates quarterly royalties to the Company.

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NASCOBAL(TM) (CYANOCOBALAMIN, USP) GEL FOR INTRANASAL ADMINISTRATION
- -- For Vitamin B-12 deficiency anemia. Nascobal(TM) is intended to replace
inconvenient, painful and often expensive monthly injections by a health care
professional for the maintenance treatment of chronic Vitamin B-12 deficiency
anemia. Nascobal(TM) is intended to be a more convenient, painless,
self-administered weekly therapy, which the Company believes may result in
improved patient compliance. On November 5, 1996, the Company received
marketing clearance from the FDA for this product. The Company independently
developed Nascobal(TM) through FDA marketing clearance, and presently intends
to manufacture and market this product. Accordingly, the Company intends to
retain product rights, thereby receiving greater economic benefit from product
sales.

Products Under Development

All of the pharmaceutical products currently being considered by the
Company for nasal delivery are commercially available and have received FDA
marketing approval in non-nasal dosage forms. Consequently, preliminary
testing by the Company is designed only to determine the suitability of the
drug for nasal delivery.

The Company's development efforts focus primarily on chemical
compounds protected by the Company's patents. In selecting compounds to
target, the Company considers drugs which may benefit significantly from the
advantages of transnasal delivery. The Company also targets pharmaceuticals
which may benefit in the form of increased market size as a result of the
switch to a transnasal formulation.

The Company has four active Notices of Claimed Investigational
Exemption for a New Drug ("INDs") for products in the Company's product
pipeline of nasally delivered pharmaceutical agents: Metoclopramide
(anti-nausea/anti-emetic); Propranolol (beta-blocker/migraine); Doxylamine
(sleep-aid); and Meclizine (anti-motion sickness). The further development and
marketing of Metoclopramide and Propranolol are subject to collaborative
agreements between the Company and RiboGene.

Products currently under development are as follows:

METOCLOPRAMIDE HCL -- Anti-nausea/anti-emetic. Metoclopramide HCl is
an anti-nausea/anti-emetic agent indicated for the treatment of nausea and
vomiting due to emetogenic cancer chemotherapy. In its oral and injectable
dosage forms, it is commonly known as Reglan(R) which is marketed by
Whitehall-Robbins Company. The Company believes that a self-administered nasal
dosage form will provide a patient friendly alternative to injections, which
are inconvenient and painful, and to oral doses, which are often difficult to
swallow when nauseous. RiboGene has conducted Phase III clinical trials under
an agreement that provides for certain minimum royalties to the Company
beginning in 1998, in addition to royalties based on net sales if and when
Metoclopramide HCl is cleared for marketing.

PROPRANOLOL HCL -- Beta-blocker/migraine. Propranolol HCl is a
non-selective beta-blocker indicated for the treatment of hypertension, angina
pectoris, cardiac arrhythmias, myocardial infarction and prophylaxis of
migraine headache. In its oral and injectable dosage forms, it is marketed as
Inderal(R) by Wyeth-Ayerst Laboratories. The Company believes that a nasal
dosage form would be rapid acting, effective and convenient to use and carry
for self-administration. RiboGene has conducted Phase I clinical trials under
an agreement that provides for royalties based on net sales if and when
Propranolol HCl is cleared for marketing, in addition to the payment of all
patent maintenance and other fees.

DOXYLAMINE SUCCINATE -- Sleep-aid. Doxylamine Succinate is an
ethanolamine derivative antihistamine used as a nighttime sleep aid in the
short-term management of insomnia. In its traditional oral dosage form it is
commonly known as Unisom(R), which is marketed by Pfizer. The Company believes
that a nasal dosage form will provide rapid systemic absorption, may minimize
side effects including morning drowsiness and will be convenient for the
consumer to administer. In June 1995, the results of certain pre-clinical
studies and additional support documentation were compiled and submitted with
the Company's IND to the FDA. The Company has conducted initial Phase I human
trials to screen formulations for optimal clinical effect. This clinical study
program is continuing to date. The Company recently entered into an agreement
with Pfizer to continue research and development activities with respect to
Doxylamine Succinate.

MECLIZINE HCL AND OTHERS -- Anti-motion sickness. Various nasal
antihistaminic and non-antihistaminic compounds are being evaluated by the
Company for the prevention of motion sickness. The Company is conducting
formulation and pre-clinical work necessary to file the required INDs allowing
for the screening of selected compounds in clinical trials. An IND has been
filed for one of the compounds, Meclizine HCl, for which Phase I clinical
trials have

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been conducted. The Company believes that the anti-motion sickness market is
underserved by existing pharmaceutical agents which often require patients to
pre-dose or intake oral medication after the condition manifests itself. The
most common route, oral dosage, does not provide rapid absorption and is often
difficult for a patient to administer due to nausea.

BUPRENORPHINE HCL -- Narcotic analgesic. Buprenorphine HCl is a
narcotic agonist-antagonist analgesic indicated for the relief of moderate to
severe pain. In its injectable dosage form, it is commonly known as
Buprenex(R), which is marketed by Reckitt & Colman Pharmaceutical, Inc. The
only method currently approved by the FDA for administering Buprenorphine HCl
is by injection. The Company believes that a nasal dosage form will allow for
patient-friendly self-administration and will provide a rapid systemic
absorption of the drug for quick pain relief. In 1996, the Company commenced a
pre-clinical research program to generate the required data for filing an IND
for the nasal delivery of this pharmaceutical agent.

CLEMASTINE FUMARATE -- Antihistamine. Clemastine Fumarate is an
antihistamine indicated for the treatment of seasonal allergic rhinitis. In
its oral dosage form, it is commonly known as Tavist(R), which is marketed by
Sandoz Pharmaceuticals Corporation ("Sandoz"). The Company believes that a
nasal dosage form will provide rapid systemic absorption as well as local
effect for the relief of symptoms. In the past year, the Company commenced a
research and development program to begin generating the necessary information
and preclinical data for the filing of an IND for the nasal delivery of this
drug product. In March 1996, the Company began a feasibility study under an
agreement with Sandoz, which was terminated in November 1996. The Company
intends to continue to develop this product independently and to pursue
discussions with strategic marketing partners at a later stage.

CHLORPHENIRAMINE MALEATE -- Antihistamine. Chlorpheniramine Maleate
is an antihistamine indicated for the relief of symptoms associated with hay
fever and upper respiratory allergies (allergic rhinitis). In its oral dosage
form it is commonly known as ChlorTrimeton(R), which is marketed by Schering
Plough Corp. The Company believes that a nasal dosage form will provide rapid
systemic absorption as well as local effect for the relief of symptoms. The
Company has continued its research program to generate the necessary
information and preclinical data for the filing of an IND for the nasal
delivery of Chlorpheniramine Maleate. A pilot bioavailability study of nasal
Chlorpheniramine Maleate in animal models demonstrated higher systemic
absorption of the drug following nasal versus oral administration. The Company
commenced a pre-clinical research program to allow for the submission of an IND
with the FDA. There can be no assurance that these results will be reproduced
in Phase I clinical trials.

NALBUPHINE HCL -- Narcotic analgesic. Nalbuphine HCl is a narcotic
agonist-antagonist analgesic agent indicated for the treatment of moderate to
severe pain. Nalbuphine HCl can also be used as a supplement to balanced
anesthesia, for preoperative and postoperative analgesia, and for obstetrical
analgesia during labor and delivery. The only method currently approved by the
FDA for administering Nalbuphine HCl is by injection, and is currently marketed
as Nubain(R) by DuPont Merck. The Company believes that a nasal dosage form
will allow for patient-friendly self-administration and will provide a rapid
systemic absorption of the drug. Under a sublicense agreement with the
Company, DuPont Merck is currently conducting formulation development work in
preparation for preclinical and clinical testing.

NICOTINE -- Smoking cessation. Nicotine is a naturally occurring
autonomic drug used as a temporary adjunct in the cessation of cigarette
smoking in conjunction with a behavior modification program. It is
commercially available as a transdermal patch and chewing gum marketed by a
number of pharmaceutical companies including Novartis. Under an agreement with
Novartis to develop a nicotine nasal spray for smoking cessation, the Company
has commenced a research and development program to begin generating the
necessary information and preclinical data for the filing of an IND for the
nasal delivery of this drug product.

STRATEGIC ALLIANCES

The Company's product development strategy had been to focus its
attention and resources in a manner that minimized the risk, time and cost
typically associated with the early stages of commercializing a family of
pharmaceuticals. As the Company has matured in its regulatory experience and
as additional financial resources have been obtained, it has conducted more of
the research and development process internally and independently. The Company
intends to continue this internal development, and accordingly retain product
rights until later stages of the development process. The Company believes
that such a strategy may increase the value of future collaborative agreements
and provide the Company with the option of conducting sales or marketing
efforts where appropriate.

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The Company may independently develop and market certain nasal drug
products, such as certain prescription products for which there are a
relatively limited number of clinicians specializing in the treatment of a
condition that can be treated with one of the Company's products. Because the
Company has limited experience in marketing, distributing or selling
pharmaceutical products, it will have to develop adequate sales and marketing
capabilities. Other nasal pharmaceuticals, such as some of the Company's
proposed over-the-counter products, may lend themselves to development and
marketing in conjunction with established pharmaceutical companies that can
provide the financial means, marketing and distribution systems to successfully
commercialize such a new nasal pharmaceutical product. The Company also plans
to evaluate collaboration with commercial partners for distribution and
marketing of its products in international markets.

The Company's current collaborative arrangements generally provide for
a development project to be followed by commercialization pursuant to a
licensing arrangement. If a development project is successful, the
collaborative partner may elect to proceed to commercialize the Company's
technology pursuant to a definitive marketing and license agreement.

The Company's current strategic alliances are as follows:

BRISTOL-MYERS SQUIBB COMPANY -- On January 1, 1986, the Company
sublicensed to BMS its development and commercial exploitation rights with
respect to its licensed patent rights for the nasal delivery of Butorphanol
Tartrate, in exchange for which BMS agreed to pay the Company a royalty based
on the net sales of such product (the "BMS Agreement"). The Company must pay a
percentage of these royalties to University of Kentucky Research Foundation
("UKRF") under the Company's separate license agreement with UKRF. The BMS
Agreement, which may be terminated by BMS at any time upon 60 days written
notice to the Company, is coextensive with the Company's licensed patent rights
to nasal Butorphanol Tartrate. The nasal Butorphanol Tartrate patent expires
in the year 2001 in the United States, subject to any right of extension or
renewal. In December 1991, the FDA granted marketing clearance to BMS for this
product and quarterly royalty payments to the Company by BMS are continuing.

CIBA SELF-MEDICATION, INC. -- In August 1996, the Company entered
into an agreement with Ciba Self-Medication, Inc. a division of Novartis, Inc.
("Novartis") to develop a nicotine nasal dosage form to assist with smoking
cessation. Novartis markets the Habitrol (TM) transdermal patch. Under the
terms of such agreement, the Company is to perform formulation and related
preclinical research and development up to and including the filing of an IND.
Upon the successful achievement of certain specified milestones, the Company
and Novartis have agreed to negotiate definitive development, manufacturing and
marketing agreements.

THE DUPONT MERCK PHARMACEUTICAL COMPANY -- On June 30, 1994, the
Company exclusively sublicensed to DuPont Merck its development and commercial
exploitation rights with respect to its licensed patent rights for the nasal
delivery of Nalbuphine HCl, in exchange for which DuPont Merck agreed to pay
the Company a royalty based on the net sales of such product (the "DuPont Merck
Agreement"). The Company must pay a percentage of these royalties to UKRF
under the Company's separate licensing agreement with UKRF. Nalbuphine HCl is
a synthetic narcotic analgesic agent indicated for the relief of moderate to
severe pain. The DuPont Merck Agreement is limited to the countries of Canada
and Mexico and is coextensive with the Company's licensed patent rights to
nasal Nalbuphine HCl in those countries. The nasal Nalbuphine HCl patent
expires in the year 2001 in Canada, subject to any right of extension or
renewal. The Mexican patent for nasal Nalbuphine HCl is currently pending.
The DuPont Merck Agreement may be terminated by DuPont Merck at any time upon
60 days written notice to the Company.

PFIZER INC. -- On December 30, 1996, the Company entered into an
Evaluation and Option Agreement with Pfizer to conduct a drug delivery
feasibility study with respect to Doxylamine Succinate (the "Doxylamine
Agreement"). In its traditional oral dosage form, Doxylamine Succinate is
currently marketed by Pfizer as Unisom(R). Pursuant to the Doxylamine
Agreement, the Company is to design, undertake and complete a clinical research
program for the nasally delivered product. The Company will receive certain
development milestone payments and has granted Pfizer an option for an
exclusive license for the manufacture and marketing of the product for a
specified evaluation period. In the event an NDA is filed and Pfizer exercises
such option, the parties have agreed to the form of a definitive licensing
agreement.

RIBOGENE, INC. -- (as successor in interest to Rugby Laboratories
Co., Inc. and Darby Pharmaceuticals, Inc.) -- On June 26, 1987, the Company
entered into a license agreement wherein RiboGene, as successor in interest, is
the Company's sole and exclusive worldwide licensee for the manufacture,
distribution and marketing of the nasal dosage form of Propranolol HCl for the
life of the Company's U.S. patent covering the nasal route of administration
for that drug (the "Propranolol Agreement"). If and when nasal Propranolol HCl
is approved for marketing and commercialized, the Company will receive
royalties based upon net sales of the product. The Company must pay a
percentage of these

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royalties to UKRF under the Company's separate license agreement with UKRF. In
addition, RiboGene is obligated to pay all patent maintenance fees with respect
to Propranolol HCl and pay certain other fees thereunder. RiboGene can
terminate the Propranolol Agreement at any time.

In March 1990, the Company entered into an agreement whereby RiboGene,
as successor in interest, purchased the Company's Metoclopramide HCl patent and
certain proprietary research information related thereto (the "Metoclopramide
Agreement"). The Metoclopramide Agreement provides for certain royalties and
other fees to the Company if and when nasal Metoclopramide HCl is approved for
marketing and commercialized. RiboGene has a sublicense for nasal
Metoclopramide HCl with Crinos Industria Farmacobiologica SpA in Italy and
Prodes in Spain.

In December 1994, the Company and RiboGene amended the Propranolol
Agreement and the Metoclopramide Agreement whereby the Company waived its
option to repurchase the exclusive rights to nasal Propranolol HCl and
Metoclopramide HCl in consideration of a three-year right of first refusal to
perform dosage-form development work for both projects. The amended
Metoclopramide Agreement also provided for an increased royalty rate and
certain minimum royalties commencing in 1998.

PATENTS AND PROPRIETARY RIGHTS

The Company pursues a strong policy of obtaining patent protection in
both the United States and selected foreign jurisdictions. The Company has
been granted five U.S. patents and has two pending U.S. patent applications.
One patent has been assigned to RiboGene for Metoclopramide HCl and another
covering Propranolol HCl has been exclusively licensed to RiboGene. The
primary technology protected by the Company's patent and proprietary rights
relates to the nasal administration of various compositions and compounds.
Both the compositions and compounds and the method of nasal administration of
such compositions and compounds are protected. Approximately 65 compositions
and compounds are covered by U.S. patents and corresponding foreign patents and
applications held by or licensed to the Company. Thirteen additional
compositions are disclosed in pending U.S. patent applications.

The establishment of a strong proprietary position is an important
element of the Company's strategy, as the pharmaceuticals to which the Company
has proprietary rights for nasal delivery have been commercially available in
traditional oral or injectable forms for many years and have been approved for
use by those delivery methods by the FDA.

On June 1, 1983, the Company entered into an agreement with the
University of Kentucky Research Foundation and Dr. Anwar Hussain ("UKRF
Agreement"), pursuant to which the Company obtained an exclusive worldwide
(except for the Middle East region) license for the development and commercial
exploitation of certain patents, patent applications and related know-how
(collectively the "UKRF Information") pertaining to the nasal delivery of the
following drugs:

Narcotic Antagonists and Analgesics: naloxone, naltrexone,
diprenorphine, nalmexone, cyprenorphine, alazocine, oxilorphan,
cyclorphan, morphine, metopon, desomorphine, dihydromorphine,
hydromorphone, 3-hydroxy-N-methylmorphinan, levophenacylmorphan,
metazocine, norlevorphanol, phenomorphan, levorphanol, oxymorphone,
buprenorphine, butorphanol, cyclazocine, phenazocine, pentazocine,
nalorphine, levallorphan, nalbuphine.

Beta Blockers: propranolol.

Natural Female Sex Hormones: 17 beta-estradiol and progesterone.

The UKRF Agreement will terminate upon the expiration date of the
latest patent included in the UKRF Information. UKRF's U.S. patents expire
between 1999 and 2001.

The UKRF Agreement requires the Company to pay UKRF the greater of (i)
the minimum annual royalties set forth below, or (ii) royalties based on a
percentage of sales of any product utilizing the UKRF Information (collectively
"UKRF Products"). If the UKRF Product is covered by a patent, royalties are
based on a schedule ranging between 4% and 6% of aggregate net sales. Minimum
royalties are payable commencing one year after FDA approval of a New Drug
Application ("NDA") with respect to a UKRF Product and are $100,000 per year.
If the UKRF Product, or any portion thereof, is not covered by a patent, the
Company is required to pay UKRF 50% of the greater of the aforementioned
minimum annual royalty or percentage royalty, whichever shall be applicable.

- 7 -
<PAGE> 9
The UKRF Agreement accords the Company the right to grant sublicenses
for UKRF Products. In such event, the royalties payable to UKRF for domestic
and foreign sales thereof will be limited to 50% and 20%, respectively, of
revenues received by the Company therefrom. The Company has granted three
sublicenses to date.

On December 30, 1996, the Company entered into a Development and
License Agreement with DynaGen whereby the Company acquired an exclusive
worldwide license for the development, manufacture, distribution or use of
Lobeline via the nasal membrane for the treatment of nicotine addiction (the
"Lobeline License"). The Lobeline License is subject to the satisfactory
completion of certain milestones set forth in a development program.

At present, in addition to the patented drugs licensed from the UKRF
and DynaGen, the Company owns four issued U.S. patents and corresponding or
related foreign patents and applications pending, related to the nasal
administration of various therapeutic agents. All of the Company's patent
applications are directed to compositions for delivering the therapeutic agents
by the nasal route or to the use of such compositions for nasal delivery.

The Company pursues a general policy of obtaining patent protection in
both the U.S. and selected foreign jurisdictions for patentable subject matter.
In 1986 and 1988, U.S. patents were issued to the Company describing and
claiming nasal delivery of a variety of antihistamine, anti-nausea and
anti-emetic pharmaceutical agents including Meclizine and Metoclopramide; as
well as nasal compositions containing Vitamin B-12 and caffeine. Corresponding
or related patent applications for most of these pharmaceutical agents were
filed in several foreign countries.

U.S. patents, which expire between 2003 and 2005 have been issued to
the Company for the nasal delivery of the following pharmaceutical agents:

Antihistamines and/or Anti-nausea/Anti-emetics: metoclopramide,
diphenhydramine, clemastine, dimenhydrinate, doxylamine,
carbinoxamine, phenyltoloxamine, tripelennamine, pyrilamine,
brompheniramine, pheniramine, chlorpheniramine, dexchlorpheniramine,
triprolidine, promethazine, trimeprazine, propiomazine, methdilazine,
cyproheptadine, azatadine, methapyrilene, diphenylpyraline,
phenindamine, hydroxyzine, terfenadine, cimetidine, ranitidine,
cyclizine, chlorcyclizine, meclizine, buclizine, trimethobenzamide,
benzquinamide.

Vitamin: cyanocobalamin/vitamin B-12 (Nascobal(TM)).

Stimulant: caffeine.

The Company can make no assurances that any issued patent, whether
domestic or foreign, will provide commercially significant patent protection.
Further, patent positions of pharmaceutical companies are generally uncertain
and involve complex legal and factual issues. Therefore, although the Company
believes its patents are valid, it cannot predict with any precision the scope
or enforceability of the claims allowed thereunder. In addition, there can be
no assurance that the Company's patent applications will result in issued
patents, that issued patents will provide an adequate measure of protection
against competitive technology which could circumvent such patents or that
issued patents would withstand review and be held valid by a court of competent
jurisdiction. Furthermore, there can be no assurance that any issued patents
will not be infringed or otherwise circumvented by others or that the Company
will be able to fund the cost of litigation against such parties.

The Company depends upon the knowledge, experience and skills of its
key scientific and technical personnel. To protect its rights to its
proprietary information, the Company requires all employees, consultants,
advisors and others to enter into confidentiality agreements which prohibit the
disclosure of confidential information to third parties and require disclosure
and assignment to the Company of developments, inventions and discoveries.
There can be no assurance that these agreements will effectively prevent the
unauthorized use or disclosure of the Company's confidential information.

MANUFACTURING

The Company has established internal manufacturing capabilities for
clinical trials and small commercial quantities of its products. All of the
Company's products for clinical and commercial use must be produced under
controlled conditions and under current FDA GMP. In August 1995, the Company
completed moving its executive offices, laboratory and manufacturing facilities
to a larger, more efficient and modern facility. The Company's laboratory and
manufacturing facilities are registered to operate by both the FDA and the New
York State Board of Pharmacy thereby enabling the Company to manufacture and
test its own pharmaceutical products. In order to insure

- 8 -
<PAGE> 10
continued compliance with GMP requirements, the Company is required to maintain
sufficient technical staff to oversee all production operations, including
quality control, quality assurance, technical support and manufacturing
management. Manufacturing facilities and laboratories are subject to biennial
inspections by the FDA.

In connection with collaborative agreements and if contract
manufacturing arrangements are established with third parties, the Company will
depend upon third parties to produce and deliver products in accordance with
GMP. There can be no assurance that such parties will perform their
obligations in a timely fashion and any failures by such third parties could
cause a delay in clinical trials, commercialization of product, or ability to
supply the market. The Company intends to manufacture its Nascobal(TM) product
at its current facilities.

GOVERNMENT REGULATION

The Company's research and development activities are, and its future
business will be, subject to significant regulation by numerous governmental
authorities in the United States and other countries. Pharmaceutical products
intended for therapeutic use in humans are governed by FDA regulations in the
United States and by comparable regulations in foreign countries. The process
of completing clinical testing and obtaining FDA approval for a new drug
product requires a number of years and the expenditure of substantial
resources.

Following initial formulation, the steps required before any new
pharmaceutical product may be marketed in the United States include (i)
preclinical laboratory and animal tests, (ii) the submission to the FDA of an
IND application, (iii) adequate and well-controlled clinical trials to
establish the safety and efficacy of the drug, (iv) the submission of an NDA to
the FDA, and (v) FDA approval of the NDA prior to any commercial sale or
shipment of the drug.

Typically, preclinical studies are conducted in the laboratory and in
animal model systems to gain preliminary information on the drug's
bioavailability or efficacy and to identify any significant safety problems.
The results of these studies are submitted to the FDA as part of the IND
application. Testing in humans may commence 30 days after filing of the IND
unless the FDA issues a "clinical hold". A three phase clinical program is
usually required for FDA approval of a pharmaceutical product.

Phase I clinical trials are conducted to determine the safety and
optimal dosage of the product in normal volunteers who do not have the disease
or condition that the proposed drug is designed to treat. Phase I studies are
conducted at approved institutions at which the absorption and excretion
(pharmacokinetics) of the drug as well as any side effects are closely
monitored.

If the Phase I testing data is positive and there are no adverse
reactions, a Phase II clinical trial is conducted to gain preliminary evidence
as to the safety and efficacy of the product in a selected patient population.
A Phase III clinical trial is conducted on a more complex patient population
including patients with multiple disease states and taking one or more
medications to provide sufficient data for the statistical proof of safety and
efficacy. Phase II and III studies are usually multi-center trials in order to
achieve greater statistical validity. A clinical trial may combine the
elements of more than one phase.

Upon completion of clinical testing which demonstrates that the
product is safe and effective for a specific indication, an NDA may be filed
with the FDA. This application includes details of the testing processes,
preclinical studies, clinical trials, as well as chemical, analytical,
manufacturing, packaging and labeling information. FDA approval of the
application is required before the applicant may market the new drug product.

Recent user-fee legislation establishes specific time frames for
completion of FDA regulatory reviews. While this program provides some measure
of assurance that the FDA's review is conducted in a timely fashion, there is
no guarantee that the time periods will be met in all cases or that the review
will provide positive results. Even after initial FDA approval has been
obtained, the NDA must be supplemented with any new data subsequently obtained
with respect to the drug's safety and efficacy. Further studies may be
required to provide additional data on safety or to gain approval for the use
of a product as a treatment in clinical indications other than those for which
the product was initially tested. The FDA may also require post-marketing
testing and surveillance programs or Phase IV post-approval trials to monitor
the drug's effects. Side effects resulting from the use of pharmaceutical
products may prevent or limit the further marketing of products.

- 9 -
<PAGE> 11
In addition to regulations enforced by the FDA, the Company is subject
to regulations under the Occupational Safety and Health Act, various state and
federal environmental protection laws, the Toxic Substances Control Act, the
Resource Conservation and Recovery Act and other similar federal, state and
local regulations governing permissible laboratory activities, waste disposal
and other matters.

For marketing outside of the United States, the Company will be
subject to foreign regulatory requirements governing human clinical trials and
marketing approval for drugs. The requirements relating to the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country.

HEALTH CARE REIMBURSEMENT

The Company's ability to achieve a competitive position with respect
to prescription pharmaceutical product applications will depend in part upon
the extent to which reimbursement for the cost of such products and related
treatments will be available to health care consumers from government health
administration authorities, private health care insurers and other health care
payers, such as health maintenance organizations and self-insured employee
plans. There can be no assurance that such reimbursement will be available at
all or at levels sufficient to allow the Company and its collaborative partners
to maintain profitable price levels for products incorporating the Company's
technology. If adequate reimbursement levels are not provided by government and
third-party payers for products incorporating the Company's technology, sales
of these products would be adversely affected.

The health care industry is changing rapidly as the public,
government, medical professionals and the pharmaceutical industry examine ways
to broaden medical coverage while controlling the increase in health care
costs. The Company believes that Congress may continue to consider health care
reform proposals which, if enacted, would significantly affect health care,
pharmaceutical and drug delivery companies, among others. Potential changes
could put pressure on the prices of prescription pharmaceutical products.
Health care reform may adversely affect the Company's business, particularly to
the extent that the Company develops products for prescription drug
applications. The Company is unable to predict, however, when any proposed
health care reforms will be implemented, if ever, or the effect of any
implemented reforms on the Company's business or prospects.

COMPETITION

The Company is engaged in the pharmaceutical, drug delivery systems
industry which is characterized by extensive research efforts, rapid
technological progress and intense competition. Competitors of the Company in
the United States and abroad are numerous and include, among others, major
pharmaceutical companies, biotechnology firms, universities and other research
institutions. At the present time, the Company does not know of another
pharmaceutical company engaging exclusively in the development of drugs
intended for nasal administration, but other pharmaceutical companies which are
larger than the Company are known to be engaged in researching non-exclusively
some nasally administered pharmaceuticals, and may be expected to enter this
field if the nasal route ever becomes the method of choice for the
administration of certain classes of drugs.

Further, there can be no assurance that the Company's competitors will
not succeed in developing technologies and products that are more effective
than the nasal technology being developed by the Company or which would render
the Company's technology and products obsolete or noncompetitive. Many of these
competitors have substantially greater financial and technical resources and
production and marketing capabilities than the Company. Many of the Company's
competitors have greater experience than the Company in conducting preclinical
testing and clinical trials of pharmaceutical products and obtaining FDA and
other regulatory approvals. Accordingly, the Company's competitors may succeed
in obtaining FDA approval for products more rapidly than the Company. If the
Company commences commercial sales of its products, it will also be competing
with respect to manufacturing efficiency and marketing capabilities, areas in
which it has limited or no experience.

The Company believes that direct competition with its patented nasal
delivery products may be difficult because of the Company's patent position.
However, the Company's products must also compete with other modalities of drug
delivery and administration including, but not limited to, such promising
technologies and methods as controlled release, target organ or site release,
pumps, polymers, microemulsion, monoclonal antibodies, inhalation, ocular,
liposomal, implants, transdermal passive and transdermal electrotransport.
Other products using these or other delivery alternatives may be developed that
will be as or more effective than the Company's products and proposed products.

- 10 -
<PAGE> 12
There can be no assurance that the Company will be able to compete effectively
with other commercially available products or that development of other
technologies or methods of drug delivery will not detrimentally affect the
Company's commercial opportunities.

EMPLOYEES

At March 31, 1997, the Company had 23 full-time employees, of whom 14
were engaged in research and development, including the Company's President and
Vice President of Research and Development, both of whom hold Ph.D. degrees in
pharmaceutical sciences, as well as the Company's Director of Clinical
Research. The balance of the Company's employees are engaged in administration
and support functions.

None of the Company's employees are covered by a collective bargaining
agreement or are represented by a labor union. The Company considers its
relationship with its employees to be satisfactory.

The development, manufacture and marketing of the Company's products
requires substantial scientific and technical capabilities in several disparate
disciplines, including but not limited to biochemistry, analytical chemistry,
pharmacology, therapeutics, toxicology, pharmacy and statistics. While the
Company believes that the capability and experience of its technical employees
compares favorably with the industry as a whole, there can be no assurance that
it can retain existing employees or attract and hire the highly capable
technical and scientific employees it may need in the future on terms deemed
favorable to the Company, if at all.

ITEM 2 - PROPERTY

The Company leases approximately 10,000 square feet at 45 Davids
Drive, Hauppauge, New York for its laboratory, manufacturing facility as well
as its corporate and administrative offices. The lease provides for minimum
annual rent of approximately $82,000 and expires in May 2000 with the Company
having an option to renew for an additional five-year term at increased annual
rental rates. The Company is also responsible for all utilities, maintenance,
security and property tax increases. The Company believes this facility is
suitable for its operations for the initial term of the lease, however, it will
require leasehold improvements in order to enable the Company to engage in
full-scale manufacturing of its Nascobal(TM) product.

ITEM 3 - LEGAL PROCEEDINGS

The Company knows of no litigation or proceeding, pending or
threatened, to which the Company is or may become a party.

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

There were no matters submitted to the vote of security holders
through the solicitation of proxies or otherwise, during the last quarter of
the fiscal period covered by this report.

- 11 -
<PAGE> 13
PART II

ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock trades on the NASDAQ National Market (prior
to January 27, 1997 it traded on the NASDAQ Small Cap Market) under the symbol
NSTK. The following table sets forth the range of high and low closing bid
prices for the Company's common stock as reported by the NASDAQ Stock Market
for the last two years. These quotations represent inter-dealer prices,
without adjustment for retail mark-ups, mark-downs or commissions and do not
necessarily represent actual transactions.

<TABLE>
<CAPTION>
SALE PRICE
------------------------
YEARS LOW HIGH
- ------------------------ ----------- ------------
<S> <C> <C>
1996 QUARTER ENDED:
- -------------------
December 31, 1996 $13.00 $23.50
September 30, 1996 9.50 15.00
June 30, 1996 8.25 13.00
March 31, 1996 8.25 9.87
1995 QUARTER ENDED:
- -------------------
December 31, 1995 7.38 10.00
September 30, 1995 6.88 7.88
June 30, 1995 4.88 8.00
March 31, 1995 4.75 6.00
</TABLE>

The Company believes that its common stock is held of record by
approximately 17,000 persons, including several brokerage firms holding shares
in street name for beneficial owners.

DIVIDEND POLICY

Since its inception, the Company has neither paid nor declared any
cash or other dividends on its shares of common stock. The Company has no
current plans to pay dividends on its common stock and intends to retain
earnings, if any, for working capital purposes. Any future determination as to
the payment of dividends on the common stock will depend upon the results of
operations, capital requirements, the financial condition of the Company and
other factors that the Board of Directors deems relevant.

- 12 -
<PAGE> 14
ITEM 6 - SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction
with the Financial Statements and Notes thereto included elsewhere herein. The
statement of operations data for the six months ended December 31, 1996 and for
the years in the five year period ended June 30, 1996 and the balance sheet
data as of June 30, 1996, 1995, 1994, 1993 and 1992 are derived from, and are
qualified by reference to, the audited financial statements of the Company.
The selected financial data as of and for the six months ended December 31,
1995 has been derived from unaudited financial statements of the Company which,
in the opinion of management, include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of such information as
of and for such period. The results of operations for the six months ended
December 31, 1996 are not necessarily indicative of the results of operations
to be expected for an entire 12-month period or for any subsequent period.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31 YEAR ENDED JUNE 30
-------------------------- -----------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1996 1995 1996 1995 1994 1993 1992
------------ ------------- ---------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
License fee, royalty and
research income . . . .$ 1,879,703 $1,521,621 $3,628,735 $ 2,683,925 $2,106,662 $ 855,590 $ 298,855
Interest income . . . . . 231,390 125,552 238,178 253,858 93,583 7,061 15,988
Total revenues . . . . . 2,111,093 1,647,173 3,866,913 2,937,783 2,200,245 862,651 314,843
------------ ------------- ---------- ------------ ----------- ----------- -----------
Costs and expenses:
Research and development . 1,034,826 705,384 1,164,172 882,356 504,140 444,095 407,489
------------ ------------- ---------- ------------ ----------- ----------- -----------
Royalties . . . . . . . . 709,862 737,773 1,676,870 1,250,789 1,041,703 310,822 3,000
General and administrative 704,039 361,544 864,784 836,549 388,898 203,700 196,705
Interest expense . . . . . 15,004 22,445 42,562 47,534 40,857 82,439 116,921
------------ ------------- ---------- ------------ ----------- ----------- -----------
Total costs and expenses 2,463,731 1,827,146 3,748,388 3,017,228 1,975,598 1,041,056 724,115
------------ ------------- ---------- ------------ ----------- ----------- -----------
Income (loss) before
provision for income taxes (352,638) (179,973) 118,525 (79,445) 224,647 (178,405) (409,272)
Provision for income taxes . --- --- --- --- 17,000 --- ---
------------ ------------- ---------- ------------ ----------- ----------- -----------
Net income (loss) . . . . . .$ (352,638) $ (179,973) $ 118,525 $ (79,445) $207,647 $(178,405) $ (409,272)
============ ============= ========== ============ =========== =========== ===========
Net income (loss) per common
share . . . . . . . . . .$ (.08) $ (.06) $ .03 $ (.03) $ .08 $ (.13) $ (.35)
============ ============= ========== ============ =========== =========== ===========
Average shares outstanding 4,191,600 3,221,447 4,297,536 3,119,718 $2,524,432 1,395,390 1,184,388
============ ============= ========== ============ =========== =========== ===========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
-------------------------- -----------------------------------------------------------
BALANCE SHEET DATA: 1996 1995 1996 1995 1994 1993 1992
------------ ------------- ---------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital (deficit) . . $11,342,368 $4,044,655 $7,469,378 $4,444,108 $4,698,540 $(222,006) $(199,098)
Total assets . . . . . . . . 12,893,972 5,616,204 9,366,796 6,034,912 6,001,963 746,319 494,052
Long-term debt . . . . . . . 26,742 181,791 135,907 348,965 452,296 565,556 600,000
Total stockholders' equity
(deficit) . . . . . . . . 11,813,135 4,108,209 7,568,734 4,288,182 4,309,027 (734,786) (722,685)
</TABLE>

- 13 -
<PAGE> 15
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

Except for historical information contained herein, the statements in
this Item are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecasted results. Those include, among others, risks
associated with the Company's business strategy, product development, plans
concerning the commercialization of products, certain financial information and
other statements that are not historical facts.

In December 1991, BMS received marketing approval from the FDA for a
nasal formulation of Stadol NS, a narcotic analgesic, which was sublicensed to
BMS by the Company pursuant to the BMS Agreement. In 1992, the Company began
to generate revenues from the receipt of royalties in connection with the BMS
Agreement. On November 5, 1996, the Company received FDA marketing clearance
for Nascobal(TM), its Vitamin B-12 nasal gel. The Company's pipeline includes
nine additional drugs, five of which are being developed under collaborative
agreements with other pharmaceutical companies. Through at least June 30,
1997, the Company expects revenues to consist principally of revenues from BMS,
milestone payments and research fees. The Company does not expect revenues
from its Nascobal(TM) product until after July 1, 1997.

In the past, the Company's product development strategy has generally
been to seek strategic alliances in order to minimize the risk, time and cost
typically associated with the early stages of commercializing a family of
pharmaceuticals. The Company believes it is now able to leverage its product
development experience and broad product pipeline to pursue internally funded
development projects. The Company believes that postponing the establishment
of strategic alliances until later stages of product development will allow the
Company to negotiate more favorable collaborative agreements and retain product
rights. Therefore, the Company intends to commit significant financial
resources to research and development with the goal of achieving greater
economic benefit from product sales. As a result of this increased investment
in the development of the Company's product pipeline, the Company does not
expect to be profitable until at least through 1998.

On February 11, 1997, the Company changed its year end from June 30 to
December 31. The financial statements reflect an audited six month transition
period ended December 31, 1996 and an unaudited comparable period for the six
months ended December 31, 1995.

RESULTS OF OPERATIONS

Six Months Ended December 31, 1996 Compared to Six Months Ended
December 31, 1995 (unaudited)

Revenues. Revenues for the six months ended December 31, 1996
increased by $464,000 to $2.1 million, or 28%, over such revenues for the six
months ended December 31, 1995. This increase was due to increases in license
fee, royalty and research income, which for the six months ended December 31,
1996 increased by $358,000 to $1.9 million, or 24%, over such income for the
six months ended December 31, 1995. The license fee, royalty and research
income increase primarily was due to an increase in research income related to
recent research and development agreements with Pfizer Inc., Novartis and
Sandoz. Royalty income received from the BMS Agreement for the current
six-month period decreased by $45,000 to $1,457,000, or 3%, from such income
for the similar period in 1995. This decrease is a result of a reduction in
sales by BMS of Stadol NS in the three month period ended December 31, 1996
after significant increases in earlier periods due to special promotional
activities by BMS. The decrease is expected to be temporary. Interest income
for the current six-month period increased by $106,000 to $231,000, or 84%,
compared to such income for the similar period in 1995 due to an increase in
the amount of excess funds invested from proceeds received from the exercise of
warrants.

Research and development expense. In the six months ended December
31, 1996, the Company continued to conduct pharmaceutical and pharmacological
research and assemble the technical and reference data required to gain

- 14 -
<PAGE> 16
marketing approval from the appropriate regulatory agencies for nine new drug
products. Preclinical and clinical research and development expense for the
six months ended December 31, 1996 increased by $329,000 to $1,034,000, or 47%,
over such expense for the six months ended December 31, 1995. Such increase
was due to the execution of the Company's strategy to accelerate development of
its nasal pharmaceutical formulations.

Royalties expense. Royalties expense for the six months ended
December 31, 1996 decreased by $28,000 to $710,000, or 4%, from such expense
for the six months ended December 31, 1995. Such decrease was due to the
decrease in royalties paid by the Company to the UKRF in connection with the
BMS Agreement. Pursuant to a separate license agreement between the Company
and UKRF, the Company pays UKRF royalties based on royalty income received by
the Company under the BMS Agreement. Accordingly, royalties expense in
connection with the BMS Agreement increases or decreases approximately in
proportion to royalty income.

General and administrative expense. General and administrative
expense for the six months ended December 31, 1996 increased by $342,000 to
$704,000, or 95% over such expense for the six months ended December 31, 1995
due to increased staffing costs and consulting expenses related to strategic
planning. As a percentage of revenues, general and administrative expense
increased to 33% for the current six-month period from 22% for the similar
period in 1995.

Year Ended June 30, 1996 Compared to Year Ended June 30, 1995

Revenues. Revenues for fiscal 1996 increased by $929,000 to $3.9
million, or 32%, over such revenues for fiscal 1995. This increase was due to
increases in license fee, royalty and research income, which for fiscal 1996
increased by $945,000 to $3.6 million, or 35%, over such income for fiscal
1995. The license fee, royalty and research income increase primarily was due
to royalty income received from BMS, pursuant to the BMS Agreement. The
increased revenue associated with the BMS Agreement primarily was due to
increased sales of Stadol NS. Royalty income received from the BMS Agreement
for fiscal 1996 increased by $883,000 to $3.4 million, or 35%, over such income
for fiscal 1995. This increase was offset in part by a decrease for fiscal
1996 of $97,000 to $19,000 for royalty income received from the marketing of
the licensed non-prescription Vitamin B-12 nasal gel by Nature's Bounty, Inc.
("NB"). The Company does not expect any significant future royalty payments
from NB. Interest income for fiscal 1996 decreased by $16,000 to $238,000, or
6%, compared to such income for fiscal 1995 due to changed interest rates and
reduction in the amount of excess funds invested.

Research and development expense. In fiscal 1996, the Company
continued to conduct pharmaceutical and pharmacological research and assemble
the technical and reference data required to gain marketing approval from the
appropriate regulatory agencies for six new drug products. Preclinical and
clinical research and development expense for fiscal 1996 increased by $282,000
to $1.2 million, or 32%, over such expense for fiscal 1995. Such increase was
due to the execution of the Company's strategy to accelerate development of its
nasal pharmaceutical formulations.

Royalties expense. Royalties expense for fiscal 1996 increased by
$426,000 to $1.7 million, or 34%, over such expense for fiscal 1995. Such
increase was due to the increase in royalties paid by the Company to the UKRF
in connection with the BMS Agreement.

General and administrative expense. General and administrative
expense for fiscal 1996 increased by $28,000 to $865,000, or 3%, over such
expense for fiscal 1995. As a percentage of revenues, however, general and
administrative expense decreased to 22% for fiscal 1996 from 28% for fiscal
1995. This improvement was due to the leveraging of the Company's
infrastructure as revenues increased significantly while general and
administrative expenses increased slightly.

Year Ended June 30, 1995 Compared To Year Ended June 30, 1994

Revenues. Revenues for fiscal 1995 increased by $738,000 to $2.9
million, or 34%, over such revenues for fiscal 1994. This increase was due to
increases in license fee, royalty and research income, which for fiscal 1995
increased by $577,000 to $2.7 million, or 27%, over such income for fiscal
1994. The license fee, royalty and research income, increase primarily was due
to royalty income received from BMS pursuant to the BMS Agreement. Royalty
income received from the BMS Agreement for fiscal 1995 increased by $630,000 to
$2.5 million, or 33%, over such income for fiscal 1994. This increase was
offset in part by a decrease for fiscal 1995 of $28,000 to $116,000, or 20%,

- 15 -
<PAGE> 17
compared to fiscal 1994 for royalty income received from the marketing of the
licensed non-prescription Vitamin B-12 nasal gel by NB. Interest income for
fiscal 1995 increased by $160,000 to $254,000, or 171%, over such income for
fiscal 1994. Such increase was due to funds from the Company's December 1993
public offering that were invested for a full fiscal year as of June 30, 1995,
compared with a partial period in the prior year.

Research and development expense. Preclinical and clinical research
and development expense for fiscal 1995 increased by $378,000 to $882,000, or
75%, over such expense for fiscal 1994. Such increase was due to the execution
of the Company's strategy to accelerate development of its nasal pharmaceutical
formulations.

Royalties expense. Royalties expense for fiscal 1995 increased by
$209,000 to $1.3 million, or 20%, over such expense for fiscal 1994. Such
increase was due to the increase in royalties paid by the Company to UKRF in
connection with the BMS Agreement.

General and administrative expense. General and administrative
expense for 1995 increased by $448,000 to $837,000, or 115%, over such expense
for 1994. As a percentage of revenues, general and administrative expense
increased to 28% for fiscal 1995 from 18% for fiscal 1994. This increase was
due to increased staffing costs, costs associated with the Company's move to
larger and more modern laboratory, manufacturing and office facilities, and
consulting expenses relating to strategic planning.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, the Company's liquidity included cash and cash
equivalents and short-term investments of $11.5 million compared to $8.0
million at June 30, 1996. These consisted primarily of the funds received from
the exercise of warrants outstanding from the Company's December 1993 public
offering. Royalty income receivable at December 31, 1996, totaled
approximately $.8 million, which consisted principally of royalty income
received pursuant to the BMS Agreement. In February 1997, the Company
completed a public offering of 1,380,000 shares of the Company's common stock.
The net proceeds received by the Company approximated $17.3 million.

As a result of the availability of funds provided by the BMS Agreement
as well as the liquidity provided by the Company's recent public offering
completed in February 1997, the December 1993 public offering and the exercise
of the related warrants, the Company has budgeted an increase in its research
and development efforts and related general and administrative support.

At December 31, 1996, the Company had working capital of $11.3
million. Management anticipates that its current cash position, including the
net proceeds of the 1997 public offering, together with cash generated from
operations will provide adequate funds for the Company's anticipated needs,
including working capital, through 1998. Based upon the anticipated future
financing requirements of the Company, management expects that the Company may,
from time to time, engage in additional financings of a character and in
amounts to be determined.

The foregoing Management's Discussion and Analysis of Financial
Condition and Results of Operations contains various "forward looking
statements" within the meaning of Section 27A of the Securities Act which
represent the Company's intentions, expectations or beliefs concerning future
events, including, but not limited to, statements regarding management's
expectations with respect to FDA approval of new products, technology and
product development milestones, the ability of the Company to leverage its
product development and negotiate favorable collaborative agreements, the
commencement of sales and the sufficiency of the Company's cash flow for the
Company's future liquidity and capital resource needs. These forward looking
statements are qualified by important factors that could cause actual results
to differ materially from those in the forward looking statements.

- 16 -
<PAGE> 18

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-19

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Balance Sheets at December 31, 1996, December 31, 1995 (unaudited), June 30, 1996 and 1995 . . . . . . . . . . 20
Statements of Operations for the six months ended December 31, 1996 and
December 31, 1995 (unaudited) and for the years ended June 30, 1996, 1995 and 1994 . . . . . . . . . . . . 21
Statements of Stockholders' Equity for the six months ended December 31, 1996 and
December 31, 1995 (unaudited) and for the years ended June 30, 1996, 1995 and 1994 . . . . . . . . . . . . 22
Statements of Cash Flows for the six months ended December 31, 1996 and
December 31, 1995 (unaudited) and for the years ended June 30, 1996, 1995 and 1994 . . . . . . . . . . . . 23
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>

- 17 -
<PAGE> 19
INDEPENDENT AUDITORS' REPORTS

To the Board of Directors
Nastech Pharmaceutical Company Inc.

We have audited the accompanying balance sheet of Nastech Pharmaceutical
Company Inc. (the Company) as of December 31, 1996 and related statements of
operations, stockholders' equity and cash flows for the six-month period then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the December 31, 1996 financial statements referred to above
present fairly, in all material respects, the financial position of Nastech
Pharmaceutical Company Inc. as of December 31, 1996 and the results of its
operations and its cash flows for the six-month period then ended in conformity
with generally accepted accounting principles.

As discussed in Note 1 to the financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," in 1996.

KPMG PEAT MARWICK LLP

March 24, 1997
New York, New York

- 18 -
<PAGE> 20

To the Stockholders and
Board of Directors
Nastech Pharmaceutical Company Inc.

We have audited the accompanying balance sheet of Nastech
Pharmaceutical Company Inc. as of June 30, 1996 and 1995 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based upon our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the aforementioned financial statements present
fairly, in all material respects, the financial position of Nastech
Pharmaceutical Company Inc. as of June 30, 1995 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1996 in conformity with generally accepted accounting
principles.

ROBBINS, GREENE, HOROWITZ, LESTER & CO., LLP

August 15, 1996
New York, New York

- 19 -
<PAGE> 21
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NASTECH PHARMACEUTICAL COMPANY INC.
BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1996 1995 1996 1995
-------------- --------------- --------------- --------------
ASSETS (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . $ 4,494,441 $ 420,415 $ 4,031,252 $ 819,985
Short-term investments . . . . . . . . . . . . . . . 7,024,511 4,214,708 3,954,945 4,198,869
Royalties and fees receivable . . . . . . . . . . . 797,576 707,604 1,089,966 759,349
Prepaid expenses and sundry . . . . . . . . . . . . 79,935 28,132 55,370 63,670
-------------- --------------- --------------- --------------
Total current assets 12,396,463 5,370,859 9,131,533 5,841,873
-------------- --------------- --------------- --------------
Property and equipment . . . . . . . . . . . . . . . . 513,084 306,428 321,154 219,283
Less: Accumulated depreciation and amortization . . 128,032 75,583 100,391 45,857
-------------- --------------- --------------- --------------
Property and equipment, net . . . . . . . . . 385,052 230,845 220,763 173,426
-------------- --------------- --------------- --------------
Other assets:
Deferred offering costs . . . . . . . . . . . . . . 97,957 --- --- ---
Security deposits . . . . . . . . . . . . . . . . . 14,500 14,500 14,500 19,613
-------------- --------------- --------------- --------------
Total other assets . . . . . . . . . . . . . . 112,457 14,500 14,500 19,613
-------------- --------------- --------------- --------------
Total assets $ 12,893,972 $ 5,616,204 $ 9,366,796 $ 6,034,912
============== =============== =============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . $ 587,417 $ 541,366 $ 499,815 $ 565,185
Royalties payable . . . . . . . . . . . . . . . . . 235,590 346,575 521,127 368,630

Note payable . . . . . . . . . . . . . . . . . . . . 8,000 5,852 32,000 40,942
Accrued interest payable . . . . . . . . . . . . . . --- 18,635 33,216 42,966
Accrued expenses and sundry liabilities . . . . . . 207,977 229,956 359,389 218,856
Current maturities of long-term debt . . . . . . . . 15,111 183,820 216,608 161,186
-------------- --------------- --------------- --------------
Total current liabilities 1,054,095 1,326,204 1,662,155 1,397,765
-------------- --------------- --------------- --------------
Long-term debt, net of current maturities . . . . . . . 26,742 181,791 135,907 348,965
-------------- --------------- --------------- --------------
Stockholders' equity:
Common stock, $0.006 par value; authorized:
25,000,000 shares at December 31, 1996, 6,000,000
shares at December 31, 1995, June 30, 1996 and
1995; issued and outstanding: 4,706,158,
3,221,447, 3,826,433, and 3,221,447 shares at
December 31, 1996 and 1995, June 30, 1996 and
1995, respectively 28,237 19,329 22,959 19,329
Additional paid-in capital . . . . . . . . . . . . . 18,325,317 10,575,159 13,733,556 10,575,159
Accumulated deficit . . . . . . . . . . . . . . . . (6,540,419) (6,486,279) (6,187,781) (6,306,306)
-------------- --------------- --------------- --------------
Total stockholders' equity . . . . . . . . . . 11,813,135 4,108,209 7,568,734 4,288,182
-------------- --------------- --------------- --------------
Total liabilities and stockholders' equity . . $ 12,893,972 $ 5,616,204 $ 9,366,796 $ 6,034,912
============== =============== =============== ==============
</TABLE>

See accompanying notes to financial statements.

- 20 -
<PAGE> 22
NASTECH PHARMACEUTICAL COMPANY INC.
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
--------------------------------- --------------------------------------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995 1994
---------------- --------------- ---------------- -------------- ----------------
Revenues (UNAUDITED)
<S> <C> <C> <C> <C> <C>
License fee, royalty and research
income . . . . . . . . . . . . $ 1,879,703 $ 1,521,621 $ 3,628,735 $ 2,683,925 $ 2,106,662
Interest income . . . . . . . . . 231,390 125,552 238,178 253,858 93,583
---------------- --------------- ---------------- -------------- ----------------
Total revenues . . . . . . . . 2,111,093 1,647,173 3,866,913 2,937,783 2,200,245
---------------- --------------- ---------------- -------------- ----------------
Costs and expenses:
Research and development . . . . . 1,034,826 705,384 1,164,172 882,356 504,140
Royalties . . . . . . . . . . . . 709,862 737,773 1,676,870 1,250,789 1,041,703
General and administrative . . . . 704,039 361,544 864,784 836,549 388,898
Interest expense . . . . . . . . 15,004 22,445 42,562 47,534 40,857
---------------- --------------- ---------------- -------------- ----------------
Total costs and expenses . . . 2,463,731 1,827,146 3,748,388 3,017,228 1,975,598
---------------- --------------- ---------------- -------------- ----------------
Income (loss) before provision for
income taxes . . . . . . . . . . . (352,638) (179,973) 118,525 (79,445) 224,647

Provision for income taxes . . . . . --- --- --- --- 17,000
---------------- --------------- ---------------- -------------- ----------------
Net income (loss) . . . . . . . . . . $ (352,638) $ (179,973) $ 118,525 $ (79,445) $ 207,647
---------------- --------------- ---------------- -------------- ----------------
Net income (loss) per common share . $ (.08) $ (.06) $ .03 $ (.03) $ .08
---------------- --------------- ---------------- -------------- ----------------
Average shares outstanding . . . . . 4,191,600 3,221,447 4,297,536 3,119,718 2,524,432
================ =============== ================ ============== ================
</TABLE>

See accompanying notes to financial statements.

- 21 -
<PAGE> 23
NASTECH PHARMACEUTICAL COMPANY INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended December 1996 and 1995 (unaudited)
and the Years Ended June 30, 1996, 1995 and 1994

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------------ ---------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993 . . . . . . . . . 1,428,723 $8,572 $5,691,150 $(6,434,508) $(734,786)

Shares issued in connection with private
placement at $1.20 per share . . . . . 200,000 1,200 203,814 --- 205,014
Additional shares issued in connection
with public offering at $3.75 per
share . . . . . . . . . . . . . . . . 1,485,000 8,910 4,627,242 --- 4,636,152
Fractional shares redeemed in connection
with reverse stock split . . . . . . . (2,038) (12) (4,988) --- (5,000)
Net income . . . . . . . . . . . . . . . --- --- --- 207,647 207,647
------------ ---------- ------------- -------------- --------------
BALANCE, JUNE 30 1994 . . . . . . . . . . 3,111,685 18,670 10,517,218 (6,226,861) 4,309,027
Shares issued in connection with
exercise of stock options . . . . . . 109,999 660 57,940 --- 58,600
Fractional shares redeemed in connection
with reverse stock split . . . . . . . (237) (1) 1 --- ---
Net loss . . . . . . . . . . . . . . . . --- --- --- (79,445) (79,445)
------------ ---------- ------------- -------------- --------------
BALANCE, JUNE 30, 1995 . . . . . . . . . 3,221,447 19,329 10,575,159 (6,306,306) 4,288,182
Net loss six months ended December 31,
1995 (unaudited) . . . . . . . . . . . --- --- --- (179,973) (179,973)
------------ ---------- ------------- -------------- --------------
BALANCE, DECEMBER 31, 1995 (UNAUDITED) . 3,221,447 19,329 10,575,159 (6,486,279) 4,108,209

Shares issued in connection with
exercise of warrants . . . . . . . . . 605,173 3,631 3,158,396 --- 3,162,027
Fractional shares redeemed in connection
with reverse stock split . . . . . . . (187) (1) 1 --- ---
Net income six months ended June 30,
1996 (unaudited) . . . . . . . . . . . --- --- --- 298,498 298,498
------------ ---------- ------------- -------------- --------------
BALANCE, JUNE 30, 1996 . . . . . . . . . 3,826,433 22,959 13,733,556 (6,187,781) 7,568,734
Shares issued in connection with
exercise of warrants . . . . . . . . . 879,817 5,279 4,591,760 --- 4,597,039
Fractional shares redeemed in connection
with reverse stock split . . . . . . . (92) (1) 1 --- ---
Net loss six months ended December 31,
1996 . . . . . . . . . . . . . . . . . --- --- --- (352,638) (352,638)
------------ ---------- ------------- -------------- --------------
BALANCE, DECEMBER 31, 1996 . . . . . . . 4,706,158 $28,237 $18,325,317 $(6,540,419) $11,813,135
============ ========== ============= ============== ==============
</TABLE>

See accompanying notes to financial statements.

- 22 -
<PAGE> 24
NASTECH PHARMACEUTICAL COMPANY INC.
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
------------------------------- -----------------------------------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995 1994
-------------- --------------- ------------ -------------- ---------------
OPERATING ACTIVITIES: (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss) . . . . . . . . $ (352,638) $ (179,973) $ 118,525 $ (79,445) $ 207,647
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization 35,776 29,726 54,534 27,395 22,040
Amortization of deferred charges --- --- --- --- 10,000
Abandonment and disposition of
property and equipment . . 1,713 --- --- 3,376 ---
Changes in assets and liabilities:
Royalties and fees receivable . 292,390 51,745 (330,617) (5,242) (371,986)
Prepaid expenses and sundry . . (24,565) 35,538 8,300 (49,460) (9,272)
Accounts payable . . . . . . . 87,602 (23,819) (65,370) 62,208 50,797
Royalties payable . . . . . . . (285,537) (22,055) 152,497 20,540 178,090
Note payable . . . . . . . . . (24,000) --- (8,942) 40,942 ---

Accrued interest payable . . . (33,216) (24,331) (9,750) 13,798 8,168
Accrued expenses and sundry
liabilities . . . . . . . . (151,412) 11,100 140,533 (28,817) 21,692
-------------- --------------- ------------- -------------- ---------------
Net cash provided by (used in)
operating activities . . . . . . . (453,887) (122,069) 59,710 5,295 117,176
-------------- --------------- ------------- -------------- ---------------
INVESTING ACTIVITIES:
Property, plant and equipment . . (204,959) (87,145) (90,796) (85,327) (42,047)
Short-term investments --
acquisitions . . . . . . . . . (8,981,293) (4,150,442) (10,290,174) (11,172,459) (8,804,029)

Short-term investments --
redemptions . . . . . . . . . . 5,911,727 4,134,603 10,534,098 8,929,524 6,848,095
Other assets . . . . . . . . . . . (97,957) 5,113 5,113 (14,000) ---
-------------- --------------- ------------- -------------- ---------------
Net cash provided by (used in)
investing activities . . . . . . . (3,372,482) (97,871) 158,241 (2,342,262) (1,997,981)
-------------- --------------- ------------- -------------- ---------------
FINANCING ACTIVITIES:
Repayment of debt . . . . . . . . (307,481) (179,630) (168,711) (116,577) (46,916)
Exercise of stock options . . . . --- --- --- 58,600 ---
Exercise of warrants . . . . . . . 4,597,039 --- 3,162,027 --- ---
Redemption of fractional shares . --- --- --- --- (5,000)
Proceeds from sale of common stock --- --- --- --- 4,841,166
-------------- --------------- ------------- -------------- ---------------
Net cash provided by (used in)
financing activities . . . . . . . 4,289,558 (179,630) 2,993,316 (57,977) 4,789,250
-------------- --------------- ------------- -------------- ---------------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . 463,189 (399,570) 3,211,267 (2,394,944) 2,908,445
Cash and cash equivalents--beginning 4,031,252 819,985 819,985 3,214,929 306,484
-------------- --------------- ------------- -------------- ---------------
Cash and cash equivalents--ending . . $ 4,494,441 $ 420,415 $ 4,031,252 $ 819,985 $ 3,214,929
-------------- --------------- ------------- -------------- ---------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . $ 48,220 $ 46,796 $ 46,796 $ 33,736 $ 32,689
============== =============== ============= ============== ===============
Capital expenditures and proceeds from
loans have been reduced by
additions financed of . . . . . . --- --- 11,075 61,700 ---
</TABLE>
See accompanying notes to financial statements.

- 23 -
<PAGE> 25
NASTECH PHARMACEUTICAL COMPANY INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- BUSINESS AND BASIS OF PRESENTATION

Business

The Company is engaged in the research, development, manufacturing and
commercialization of nasally administered forms of prescription and
over-the-counter pharmaceuticals.

Basis of Presentation

On February 11, 1997 the Company changed its year end from June 30 to
December 31. The statements of operations, changes in stockholders' equity,
and cash flows reflect the six month transition period ended December 31, 1996
and the historical results for the fiscal years ended June 30, 1996, 1995 and
1994.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS

Use of Estimates

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

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and temporary investments of
highly liquid United States Treasury Bills and other highly-rated investment
grade commercial paper with maturities of three months or less when purchased.

Short-Term Investments

Short-term investments consist of highly liquid United States Treasury
Bills and other highly-rated investment grade commercial paper having original
maturities greater than three months and up to one year. There were no
material unrealized holding gains or losses.

Patents

The cost of acquired patents is capitalized and amortized over the
remaining life of the patents at acquisition or their useful life, whichever is
shorter. Legal costs and fees related to patent applications developed by the
Company are charged to expense as incurred.

Property and Equipment

Property and equipment are carried at cost and depreciated using
accelerated methods over estimated useful lives ranging from 5 to 7 years.
Leasehold improvements are carried at cost and amortized using the
straight-line method over the lesser of the estimated useful life or the
remaining lease term. When assets are sold or retired, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the period. Expenditures for maintenance and repairs
are charged to expense as incurred.

- 24 -
<PAGE> 26
NASTECH PHARMACEUTICAL COMPANY INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED
MATTERS--(CONTINUED)

License Fee, Royalty and Research Income

The Company has entered into various collaborative arrangements with
major pharmaceutical companies and recognizes income from royalties based upon
the sale of licensed products as reported by licensees. Income from license
fees and research income are recognized as earned pursuant to the terms of the
related agreements. A substantial portion of the Company's revenues is derived
from a royalty agreement with Bristol-Myers Squibb Company.

Net Income (Loss) per Common Share

Net income (loss) per common share is calculated using the weighted
average number of common shares outstanding during the period and the net
additional number of shares which would be issuable upon the exercise of stock
options and warrants, assuming that the Company used the proceeds received to
purchase additional shares at market value. For the six months ended December
31, 1996 and 1995 and for the year ended June 30, 1995 the effect of stock
options, warrants and convertible debt is not included because it would be
anti-dilutive.

Income Taxes

The Company accounts for income taxes under the provisions of
Statement 109, Accounting for Income Taxes issued by the Financial Accounting
Standards Board. Under such statement, the tax benefits of tax operating loss
carryforwards are recorded to the extent available less a valuation allowance
if it is more likely than not that some portion of the deferred tax asset will
not be realized. At December 31, 1996, approximately $1,400,000 of available
tax benefits of the loss carryforwards are offset by a corresponding amount of
valuation allowance.

Reverse Stock Split and Increase in Authorized Shares

On November 8, 1993, stockholders approved a one-for-three reverse
split of the common stock of the Company and an increase in the newly
authorized shares to 6,000,000. On December 9, 1996 the authorized shares
were increased to 25,000,000. Numbers of shares and per share data disclosed
herein have been retroactively adjusted to reflect the stock split for all
periods presented.

Accounting Changes

Effective July 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". This statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of assets may not be recoverable. There was no impact on the Company's results
of operations or financial position.

The Company accounts for stock-based compensation using the intrinsic
value method in accordance with APB No. 25, "Accounting for Stock Issued to
Employees." Effective July 1, 1996, the Company adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", which
require the disclosure of pro forma net income and earnings per share as if the
Company adopted the fair value-based method in measuring compensation expense
as of the beginning of fiscal 1996 (see Note 10).

- 25 -
<PAGE> 27

NASTECH PHARMACEUTICAL COMPANY INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 3 -- PROPERTY AND EQUIPMENT

Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- -------------------------
1996 1995 1996 1995
-------- ----------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Furniture and fixtures . . . . . . . . . $ 64,122 $ 71,034 $ 71,424 $ 64,066
Machinery and equipment . . . . . . . . . 296,776 114,515 118,509 74,916
Computer equipment . . . . . . . . . . . 45,753 25,085 29,828 20,777
Leasehold improvements . . . . . . . . . 106,433 95,794 101,393 59,524
---------- ---------- ---------- ----------
513,084 306,428 321,154 219,283
Less accumulated depreciation and
amortization . . . . . . . . . . . . . 128,032 75,583 100,391 45,857
---------- ---------- ---------- ----------
Net property and equipment . . . . . . . $ 385,052 $ 230,845 $ 220,763 $ 173,426
========== ========== ========== ==========
</TABLE>

Property and equipment having a net book value of $47,529 at December 31,
1996 has been pledged to secure related liabilities.

NOTE 4 -- LONG-TERM DEBT

Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- --------------------------
1996 1995 1996 1995
---------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Loan payable -- Basil Properties . . . . $ --- $ 299,978 $ 299,978 $ 446,867
Other: equipment loans . . . . . . . . . 41,853 65,633 52,537 63,284
---------- ---------- ---------- ----------
41,853 365,611 352,515 510,151
Less: amount payable within one year . . 15,111 183,820 216,608 161,186
---------- ---------- ---------- ----------
Total . . . . . . . . . . . . . . . . $ 26,742 $ 181,791 $ 135,907 $ 348,965
========== ========== ========== ==========
</TABLE>

On May 3, 1989, Basil Properties ("Basil") made a loan to the Company of
$600,000. The loan was secured by the Company's right to receive royalties,
with respect to any products related to the nasal administration of vitamin
B-12 gel. Additionally, Basil was given the option to convert any outstanding
portion of the principal balance of the $600,000 loan to the Company's common
stock. Effective January 1, 1993, interest accrues on the unpaid principal
balance at a rate of prime plus 1% and was payable each September 30. For the
six months ended December 31, 1996 and 1995 and for the years ended June 30,
1996, 1995 and 1994 the prime interest rate was 8.25% and ranged from 9% to
8.5%, 8.25% to 9%, 7.25% to 9% and 6% to 7.25%, respectively. The year-end
prime rates at December 31, 1996 and 1995 and June 30, 1996 and 1995 were
8.25%, 8.5%, 8.25 and 9% respectively. As of December 31, 1996, Basil is a
shareholder of the Company and has representation on the Board of Directors.
The loan was fully repaid during the six month period ended December 31, 1996.
Interest on this debt for the six months ended December 31, 1996 and 1995 and
the years ended June 30, 1996, 1995 and 1994 amounted to $6,994, $18,348,
$33,216, $42,946 and $40,312, respectively. Maturities of long-term debt are
$15,111, $12,342, $12,342 and $2,058 for the years ending December 31, 1997,
1998, 1999 and 2000, respectively.

NOTE 5 -- STOCKHOLDERS' EQUITY

The Company completed a public offering of 742,500 units of common stock
and warrants in fiscal 1994. The units in the aggregate consisted of 1,485,000
shares of common stock and 1,485,000 common stock warrants. Each warrant
entitles the holder to purchase one share of common stock at a price of $5.50 at
any time through December

- 26 -
<PAGE> 28
NASTECH PHARMACEUTICAL COMPANY INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 5 -- STOCKHOLDERS' EQUITY--(CONTINUED)

7, 1996. At December 31, 1996 and June 30, 1996, 1,484,990 and 605,173
warrants have been exercised with net proceeds to the Company of $4,597,039 and
$3,162,027 during each period, respectively. At December 7, 1996, any
unexercised warrants expired.

The Company sold to the representative of the underwriter for the offering
at a price of $67.50, warrants to purchase one unit for every ten units sold in
the offering up to an aggregate of 67,500 units at an exercise price per
warrant of $8.25 per Unit (110% of the initial public offering price per unit),
exercisable for a period of four years commencing December 7, 1994.

The Company had a private placement of 200,000 shares of common stock on
September 14, 1993 resulting in net proceeds to the Company of $205,000. The
proceeds were used to provide funding for the costs incurred related to the
fiscal 1994 public offering.

The Company is authorized to issue up to 100,000 shares of preferred stock
the designations, powers, preferences and rights of which may be determined,
from time to time, by the Company's Board of Directors.

NOTE 6 -- STOCK OPTION PLAN

Under the Company's Stock Option Plan (the "Plan") options to purchase a
maximum of 700,000 shares of common stock (subject to adjustment in the event
of stock splits, stock dividends, recapitalization and other capital
adjustments) may be granted to employees, officers and directors of the Company
and other persons who provide services to the Company. The options to be
granted under the Plan are designated as incentive stock options or
non-incentive stock options by the Board of Directors which also has discretion
as to the person to be granted options, the number of shares subject to the
options and the terms of the option agreements. Only employees, including
officers and part-time employees of the Company may be granted incentive stock
options. The options are intended to receive incentive stock option tax
treatment pursuant to Section 422A of the Internal Revenue Code of 1986, as
amended (the "Code").

The Plan provides that options granted thereunder shall be exercisable
during a period of no more than ten years (five years in the case of 10%
shareholders) from the date of grant, depending upon the specific stock option
agreement, and that, with respect to incentive stock options, the option
exercise price shall be at least equal to 100% of the fair market value of the
common stock at the time of grant (110% in the case of 10% shareholders).
Pursuant to the provisions of the Plan, the aggregate fair market value
(determined on the date of grant) of the common stock with respect to which
incentive stock options are exercisable for the first time by an employee
during any calendar year shall not exceed $100,000. The Plan is in lieu of
all prior option and incentive plans and is administered by the Company's Board
of Directors. Options outstanding at December 31, 1996 are at prices ranging
from $.51 to $22.75 per share, the fair market value on the date of grant, and
expire at various dates to November 26, 2001. During the year ended June 30,
1995, options to acquire 50,000 shares of stock at $.56 and 59,999 shares at
$.51 were exercised. No options were exercised during the six months ended
December 31, 1996 and 1995 and during the years ended June 30, 1996 and 1994.

Data relating to this plan is as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
------------------------ -------------------------------------
1996 1995 1996 1995 1994
---------- ----------- -------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of 244,249 214,749 214,749 174,998 124,998
period . . . . . . . . . . .
Granted . . . . . . . . . . . . 225,800 --- 34,500 149,750 50,000
Exercised . . . . . . . . . . . --- --- --- (109,999) ---
Terminated . . . . . . . . . . (10,750) --- (5,000) --- ---
---------- ---------- --------- ---------- -----------
Outstanding at end of period . 459,299 214,749 244,249 214,749 174,998
========== ========== ========= ========== ===========
</TABLE>

- 27 -
<PAGE> 29
NASTECH PHARMACEUTICAL COMPANY INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 7 -- INCOME TAXES

Internal Revenue Service regulations require that limitations be placed on
the Company's use of its net operating loss carryforward as a result of the
change in ownership created by the fiscal 1994 public offering of the Company's
common stock. At December 31, 1996, the estimated maximum amount of the net
operating loss carryforward available to reduce future taxable income is
approximately $4,110,000, expiring from 2000 through 2011. The net operating
loss carryforward may be used to reduce taxable income by approximately
$300,000 per year for losses expiring through 2008.
<TABLE>
<CAPTION>
Amount Year of Expiration
------ ------------------
<S> <C>
$ 490,000 ............................................ 2000
1,110,000 ............................................ 2001
320,000 ............................................ 2002
320,000 ............................................ 2003
320,000 ............................................ 2004
320,000 ............................................ 2005
320,000 ............................................ 2006
320,000 ............................................ 2007
170,000 ............................................ 2008
70,000 ............................................ 2010
350,000 ............................................ 2011
</TABLE>

Federal income taxes normally provided for income have been offset by the
effects of the reduction of the valuation allowance at June 30, 1996 and June
30, 1994. The income tax provision for the year ended June 30, 1994 represents
the New York State minimum tax on income. This provision does not recur in
years subsequent to 1994 because New York State revised its regulations and now
allows a deduction for substantially all of the net operating loss carryforward
to offset the minimum tax on income.

NOTE 8 -- COMMITMENTS AND CONTINGENCIES

(a) Employment Agreement:

The Company and Dr. Vincent D. Romeo, its president, have an employment
agreement expiring August 1, 1997. Pursuant to this agreement, Dr. Romeo
receives compensation of $160,000 per year. Upon completion of Phase II
studies for two of the Company's proposed products such compensation will be
increased to $175,000 per year. Dr. Romeo is also entitled to a $20,000 bonus
each time an NDA for one of the Company's proposed products is accepted for
filing by the FDA.

(b) Minimum Royalty Payments:

In connection with the license agreement with UKRF, the Company agreed to
make royalty payments to UKRF with respect to sales of products covered under
the patents licensed to the Company by UKRF. A minimum royalty payment of
$100,000 begins twelve months after FDA marketing approval is received by the
Company for any product covered under the agreement.

The Company leases office and laboratory space under a lease agreement
expiring on May 31, 2000, with a 5 year renewal option. The following is a
schedule of future minimum lease payments:

<TABLE>
<S> <C>
1997.................................................... $ 81,583
1998.................................................... 82,583
1999.................................................... 83,583
2000.................................................... 35,000
--------
Total............................................. $ 282,749
=========
</TABLE>

- 28 -
<PAGE> 30
NASTECH PHARMACEUTICAL COMPANY INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8 -- COMMITMENTS AND CONTINGENCIES--(CONTINUED)

Rental expense for real property aggregated approximately $34,000,
$42,768, $83,000, $78,000 and $43,000 for the six months ended December 31,
1996 and 1995 and for the years ended June 30, 1996, 1995 and 1994,
respectively.

(d) Consulting Agreement:

The Company has entered into an arrangement with a consultant (which has
representation on the board of directors) whereby the consultant is paid a
nominal percentage fee related to revenues generated from research contracts it
was instrumental in arranging for the Company.

NOTE 9 -- CONTRACTUAL AGREEMENTS

On January 1, 1986, the Company sublicensed to BMS (the "BMS Agreement")
its development and commercial exploitation rights with respect to its licensed
patent rights for the nasal delivery of Butorphanol Tartrate, in exchange for
which BMS agreed to pay the Company a royalty based on the net sales of such
product pursuant to the BMS Agreement, which resulted in royalty income of
approximately $1,456,703, $1,502,000, $3,410,000, $2,530,000 and $1,901,000 for
the six months ended December 31, 1996 and 1995 and for the years ended June
30, 1996, 1995 and 1994, respectively. The Company must pay a percentage of
these royalties to UKRF under the Company's separate license agreement with
UKRF. The BMS Agreement, which may be terminated by BMS at any time upon 60
days written notice to the Company, is coextensive with the Company's licensed
patent rights to nasal Butorphanol Tartrate. The nasal Butorphanol Tartrate
patent expires in the year 2001 in the United States, subject to any right of
extension or renewal.

On June 26, 1987, the Company entered into a license agreement wherein
RiboGene, as successor in interest to Rugby Laboratories Co., Inc. and Darby
Pharmaceuticals, Inc., is the Company's sole and exclusive worldwide licensee
for the manufacture, distribution and marketing of the nasal dosage form of
Propranolol HCl for the life of the Company's U.S. patent covering the nasal
route of administration for that drug (the "Propranolol Agreement"). If and
when nasal Propranolol HCl is approved for marketing and commercialized, the
Company will receive royalties based upon net sales of the product. The
Company must pay a percentage of these royalties to UKRF under the Company's
separate license agreement with UKRF. In addition, RiboGene is obligated to
pay all patent maintenance fees with respect to Propranolol HCl and pay certain
other fees thereunder. RiboGene can terminate the Propranolol Agreement at
any time. The Company receives an annual licensing fee of $32,000 payable
quarterly. During each of the six month periods ended December 31, 1996 and
1995 and each of the years ended June 30, 1996, 1995 and 1994, the Company
received $16,000 and $32,000, respectively, as license fee income on this
contract.

In March 1990, the Company entered into an agreement whereby RiboGene, as
successor in interest to Rugby Laboratories Co., Inc. and Darby
Pharmaceuticals, Inc., purchased the Company's Metoclopramide HCl patent and
certain proprietary research information related thereto (the "Metoclopramide
Agreement"). The Metoclopramide Agreement provides for certain royalties and
other fees to the Company if and when nasal Metoclopramide HCl is approved for
marketing and commercialized.

During November 1985, the Company entered into an exclusive agreement with
Nature's Bounty, Inc. ("NB"), which provided that NB manufacture, market and
sell a nonprescription, nasally administered vitamin B-12 dietary supplement.
The financial arrangements include the Company receiving a percentage of net
sales of the product. For the years ended June 30, 1996, 1995 and 1994, the
Company earned royalties of, $19,000, $116,000 and $144,000,

- 29 -
<PAGE> 31
NASTECH PHARMACEUTICAL COMPANY INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 9 -- CONTRACTUAL AGREEMENTS--(CONTINUED)

respectively, under the agreement. However, in March 1995, the FDA was
successful in litigation brought against NB requiring that NB obtain FDA
approval in order to market this product. The Company does not expect any
future royalties from NB.

In March 1996, the Company executed a memorandum of understanding with
Sandoz Pharmaceuticals Corporation ("Sandoz") to conduct a nasal drug delivery
feasibility study with respect to a nasal formulation of an antihistamine
currently marketed by Sandoz utilizing an oral dosage form. The agreement
provides for the Company to determine the feasibility of nasally delivering
this compound. During the six months ended December 31, 1996, the Company
recorded $100,000 of income from this agreement. During November 1996, this
agreement was terminated by Sandoz.

In August 1996, the Company entered into an agreement with Ciba
Self-Medication, Inc. ("Ciba"), a division of Novartis, to develop a nicotine
nasal dosage form to assist with smoking cessation. Ciba markets the Habitrol
(TM) transdermal patch. Under the terms of such agreement, the Company is to
perform formulation and related preclinical research and development up to and
including the filing of an IND. Upon the successful achievement of certain
specified milestones, the Company and Ciba have agreed to negotiate definitive
development, manufacturing and marketing agreements. During the six months
ended December 31, 1996 and the year ended June 30, 1996, the Company recorded
$207,000 and $50,000, respectively, of research revenue related to this
agreement.

On June 30, 1994, the Company exclusively sublicensed to The DuPont
Merck Pharmaceutical Company ("DuPont Merck") its development and commercial
exploitation rights with respect to its licensed patent rights for the nasal
delivery of Nalbuphine HCl, in exchange for which DuPont Merck agreed to pay
the Company a royalty based on the net sales of such product (the "DuPont Merck
Agreement"). The Company must pay a percentage of these royalties to UKRF
under the Company's separate licensing agreement with UKRF. Nalbuphine HCl is
a synthetic narcotic analgesic agent indicated for the relief of moderate to
severe pain. The DuPont Merck Agreement is limited to the countries of Canada
and Mexico and is coextensive with the Company's licensed patent rights to
nasal Nalbuphine HCl in those countries. The nasal Nalbuphine HCl patent
expires in the year 2001 in Canada, subject to any right of extension or
renewal. The Mexican patent for nasal Nalbuphine HCl is currently pending. The
DuPont Merck Agreement may be terminated by DuPont Merck at any time upon 60
days written notice to the Company.

On December 30, 1996, the Company entered into an Evaluation and Option
Agreement with Pfizer to conduct a drug delivery feasibility study with respect
to Doxylamine Succinate (the "Doxylamine Agreement"). In its traditional oral
dosage form, Doxylamine Succinate is currently marketed by Pfizer as Unisom(R).
Pursuant to the Doxylamine Agreement, the Company is to design, undertake and
complete a clinical research program for the nasally delivered product. The
Company will receive certain development milestone payments and has granted
Pfizer an option for an exclusive license for the manufacture and marketing of
the product for a specified evaluation period. In the event an NDA is filed
and Pfizer exercises such option, the parties have agreed to the form of a
definitive licensing agreement. During the six months ended December 31, 1996,
the Company recorded $100,000 of research revenue under this agreement based on
the attainment of specified milestones.

NOTE 10 -- STOCK-BASED COMPENSATION

The per share weighted average fair value of stock options granted
during the six months ended December 31, 1996 and the year ended June 30, 1996
was $7.86 and $5.01, respectively, on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:

<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Expected dividend yield - 0 -% - 0 -%
Risk free interest rate 6% 6%
Expected stock volatility 54% 49%
Expected option life 5 years 5 years
</TABLE>

- 30 -
<PAGE> 32
NASTECH PHARMACEUTICAL COMPANY INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10 -- STOCK-BASED COMPENSATION--(CONTINUED)

The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized in the financial
statements for its stock options which have an exercise price equal to the fair
value of the stock on the date of the grant. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 JUNE 30, 1996
------------------- ----------------
<S> <C> <C>
Net income (loss):
As reported . . . . . . . . $ (352,638) $ 118,525
Pro forma . . . . . . . . . $ (1,263,106) $ 69,421

Net earnings (loss) per share:
As reported . . . . . . . . $ (.08) $ .03
Pro forma . . . . . . . . . $ (.30) $ .02
</TABLE>

Proforma net income reflects only options granted during the six months
ended December 31, 1996 and year ended June 30, 1996. Therefore, the full
impact of calculating compensation cost for stock options under SFAS No. 123 is
not reflected in the pro forma net income amounts presented above because
compensation cost is reflected over the options' vesting period of 5 years and
compensation cost for options granted prior to July 1, 1995 was not considered.

NOTE 11 -- SUBSEQUENT EVENT

In February 1997, the Company completed an additional public offering of
1,380,000 shares of the Company's common stock. The net proceeds received by
the Company approximated $17.3 million.

- 31 -
<PAGE> 33

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

On January 2, 1997, the appointment of Robbins, Greene, Horowitz,
Lester & Co., LLP as independent auditors for the Company was terminated by the
Company and KPMG Peat Marwick LLP was engaged as independent auditors. The
decision to change independent auditors was approved by the Audit Committee and
Board of Directors of the Company. During the fiscal years ended June 30,
1994, 1995 and 1996, and the subsequent interim period through January 2, 1997,
there were no disagreements between the Company and Robbins, Greene, Horowitz,
Lester & Co., LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures which
disagreements if not resolved to the satisfaction of Robbins, Greene, Horowitz,
Lester & Co., LLP would have caused them to make reference to the subject
matter of the disagreement in connection with their report.

The audit reports of Robbins, Greene, Horowitz, Lester & Co., LLP on
the Registrant's financial statements as of and for the years ended June 30,
1994, 1995 and 1996, did not contain an adverse opinion or a disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope or
accounting principles.

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers, directors and senior employees of the Company
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Devin N. Wenig 30 Chairman
Dr. Vincent D. Romeo 40 President and Chief Executive Officer
Dr. Charan R. Behl 45 Vice President of Research and Development

Robert H. Rosen 40 Executive Vice President, Marketing & Business Development
Andrew P. Zinzi 50 Chief Financial Officer
John Marinaro 48 Director of Clinical Research
Dr. John Wei Xia 40 Senior Research Scientist
Joel Girsky 57 Director, Secretary, Treasurer

Grant W. Denison, Jr 47 Director
Dr. Ian R. Ferrier 53 Director
Alvin Katz 67 Director
John V. Pollock 58 Director
</TABLE>

All directors hold office until the next annual meeting of
shareholders or until their successors are elected and qualify. Executive
officers hold office until their successors are chosen and qualify, subject to
earlier removal by the Board of Directors.

Set forth below is a biographical description of each director,
executive officer and senior employee of the Company based on information
supplied by each of them.

Devin N. Wenig. Mr. Wenig was appointed Chairman of the Company's
Board of Directors in June 1991. From March 1991 to March 1994, Mr. Wenig was
a mergers and acquisitions attorney with the New York law firm of Cravath,
Swaine and Moore. From March 1994 to the present, Mr. Wenig has served as
corporate counsel to Reuters America Holdings Inc., and serves as a director of
several subsidiaries of Reuters. Mr. Wenig received a B.A. degree from Union
College and a J.D. degree from the Columbia University School of Law.

Dr. Vincent D. Romeo. Dr. Romeo has been employed by the Company
since 1985 as Director of Research and was appointed President and Chief
Executive Officer of the Company in August 1991. Dr. Romeo is a registered
pharmacist in the State of New York and received a Ph.D. degree from St. John's
University College of Pharmacy and Allied Health Professions in Pharmaceutical
Sciences in 1984, with a specialty in pharmacology. He continues at St. John's
as an Adjunct Professor of Pharmacology, Graduate Division, College of Pharmacy
and Allied Health Professions. He has authored and co-authored several
published articles in the field of drug delivery. Dr. Romeo has also presented
his work at various meetings and conferences sponsored by the American
Association of Pharmaceutical Scientists ("AAPS") and the American College of
Clinical Pharmacology. Dr. Romeo is an active member of the AAPS, the American
College of Clinical Pharmacology, the Rho Chi Pharmaceutical Society, and the
New York Academy of

- 32 -
<PAGE> 34

Sciences. He is currently co-chairing the Nasal Drug Delivery Focus Group of
the AAPS. Dr. Romeo has also been appointed as an Adjunct Assistant Professor
of Pharmaceutics at The University of Rhode Island, College of Pharmacy.

Dr. Charan R. Behl. Dr. Behl has been employed by the Company since
January 1995 as Vice President of Research and Development. Dr. Behl
previously held senior research positions in the Pharmaceutical Research and
Development Department of Hoffmann La-Roche, Inc, for approximately 14 years.
During his tenure at Roche and as a research faculty member at the University
of Michigan, he has done extensive research and product development on various
drug delivery systems. Dr. Behl has worked on the optimization of drug
delivery via different routes including nasal, enteral, transdermal (local and
systemic), rectal, vaginal and trans-nail. Dr. Behl has authored or coauthored
over 100 articles and major meeting abstracts including many book chapters.
Working closely with his colleagues at the FDA, academia, National Institute of
Health and other companies, Dr. Behl has been instrumental in organizing
international workshops, conferences and meetings to address crucial issues
pertaining to drug delivery. Currently he is co-chairing the Nasal Drug
Delivery Focus Group of the AAPS. Dr. Behl is an active member of the American
Pharmaceutical Association, AAPS and Controlled Release Society, and is a
Fellow of the AAPS.

Robert H. Rosen. Mr. Rosen has been employed by the Company since
February 1997 as Executive Vice President of Marketing and Business
Development. In 1996, Mr. Rosen served as President of Thericom Inc., a
commercialization outsource company providing services from clinical
development to reimbursement and distribution for biotechnology and
international pharmaceutical companies seeking to establish a presence in the
U.S. Prior to joining Thericom, Mr. Rosen held increasingly higher positions
at Genetech Inc. for 10 years, his most recent being Associate Director of
Marketing, where he was responsible for managing three therapeutic areas
contributing $300 million in annual sales. During his tenure, he managed the
worldwide introduction of Pulmozyme for Cystic Fibrosis and the collaboration
with partner Roche Pharmaceutical. Prior to joining Genetech, Mr. Rosen was
marketing manager at KabiVitrum Inc. where he was responsible for establishing
a U.S. presence for several hematological products.

Andrew P. Zinzi. Mr. Zinzi has been employed by the Company since
November 1996 as the Company's Chief Financial Officer. From February 1992 to
November 1996, Mr. Zinzi was employed by IVAX Corporation ("IVAX"), a
pharmaceutical company, most recently as Vice President-Finance and Treasurer.
From March 1985 to February 1992, Mr. Zinzi held various management positions
in finance and operations with Goldline Laboratories and Bioline Laboratories,
distributors of generic pharmaceutical products, which were subsequently
acquired by IVAX in December 1991. Mr. Zinzi is a CPA, member of the AICPA and
earned a Master of Business Administration degree from New York University.

John Marinaro. Mr. Marinaro, who joined the Company as Director of
Clinical Research in June 1996, has extensive experience in the clinical
development of drugs for the treatment of cancer, AIDS, nausea/vomiting,
anxiety and Alzheimer's disease. From 1995 until joining the Company, he was a
self-employed consultant. From 1993 to 1995, Mr. Marinaro, directed the
ovarian cancer clinical program of Anthra Pharmaceuticals. From 1973 to 1993,
Mr. Marinaro was employed in several capacities by BMS, including Project
Leader for Paraplatin(R) and Taxol(R), the two definitive drugs for the
treatment of ovarian cancer. In that position, he coordinated the
international clinical program that led to FDA approval of these drugs. Mr.
Marinaro is a graduate of Drew University and holds a Master of Science degree
in biology from Seton Hall University.

Dr. John Wei Xia. Dr. Xia has been employed by the Company since
April 1996 as a Senior Research Scientist. Dr. Xia received his Ph.D. degree
from The University of Illinois at Chicago, College of Pharmacy in
Pharmaceutical Sciences in 1996. Dr. Xia also has a M.S. degree in Immunology
and a Bachelor Degree in Medicine which he received from The University of
Chinese Medicine of Shanghai in 1987 and 1984, respectively. Dr. Xia had
worked as a Physician and as a Research Associate in The Department of
Immunology, Research Institute of Chinese Medicine of Shanghai before his Ph.D.
study. Dr. Xia is an active member of the AAPS and Control Release Society.

Joel Girsky. Mr. Girsky has been a Director of the Company since
October 1983, and the Company's Secretary and Treasurer since April 1986. From
1961 to the present, Mr. Girsky has been President and Chairman of the Board of
Jaco Electronics, Inc., Hauppauge, New York, a publicly held company engaged in
the distribution of electronic components. Mr. Girsky received a degree in
Marketing from Brooklyn College in 1957.

Grant W. Denison, Jr. Mr. Denison, who was appointed to the Company's
Board of Directors in September 1996, was President, Worldwide Consumer
Products of G.D. Searle & Co. ("Searle") and served in such capacity from 1993
to 1995. Mr. Denison has also served as Corporate Vice President, Strategic
Planning for Searle's parent company Monsanto Company from 1989 to 1993. In
addition, Mr. Denison also served as President of Searle's U.S. Pharmaceutical
Operations from 1987 to 1989. Prior to joining Searle, Mr. Denison was Vice
President of International

- 33 -
<PAGE> 35

Operations for Squibb Medical Systems and also held a number of senior
management positions at Pfizer, Inc. Mr. Denison is a member of the board of
directors of Genetronics Inc., a subsidiary of Genetronics Biomedical Ltd. He
has served as national chairman of the President's Council for the American
Lung Association. Mr. Denison holds a Master of Business Administration degree
from Harvard Business School and received a Bachelor's Degree from Colgate
University.

Dr. Ian R. Ferrier. Dr. Ferrier, who was appointed to the Company's
Board of Directors in January 1995, is the founder, President and Chief
Executive Officer of Bogart Delafield Ferrier Inc., and has served in such
capacity since its inception in 1982. Trained in medicine and pharmacology,
Dr. Ferrier has managed and directed pharmaceutical programs and guided the
growth of several multinational companies. He has served on the Board of
Directors of a number of health care and biotechnical firms, as well as serving
as consultant to many of the world's major pharmaceutical companies. From 1982
to 1987, Dr. Ferrier served as President of McCann Healthcare Inc. From 1982
to 1983, Dr. Ferrier served as Chairman of The Covington Group of Companies, in
1982 as Executive Vice President of TechAmerica Group and from 1979 to 1982, as
Vice President of Kalipharma Inc. From 1975 to 1979, Dr. Ferrier served as
Chief Executive Officer of the Monadnock Medical Center. Dr. Ferrier received
a BSc in Pharmacology from the University of Edinburgh, Edinburgh Scotland;
served his residency training in nephrology/clinical pharmacology at Southmead
General Hospital, University of Bristol Associated Hospitals, Bristol, England;
and his post-graduate internship at the Western General Hospital of the
University of Edinburgh Associated Hospitals, Edinburgh, Scotland.

Alvin Katz. Mr. Katz was appointed to the Board of Directors of the
Company in September 1993. Since 1981, he has served as an adjunct professor
of business management at Florida Atlantic University. In 1991, Mr. Katz was
appointed Chief Executive Officer of Odessa Engineering Corp., a company
engaged in the manufacturing of pollution monitoring equipment. He held this
position until that company was sold in September 1992. Mr. Katz also serves
on the Board of Directors of Amtech Systems Inc. which is engaged in the
manufacture of capital equipment in the computer chip manufacturing business;
BCT International, Inc., a franchisor of thermo graphic printing plants; Micron
Instruments Inc., a manufacturer of infrared temperature measuring instruments;
Ozo Diversified Inc., a manufacturer of depaneling equipment for the computer
chip manufacturing industry; and Blimpie International, Inc., which is engaged
in fast food franchising. Mr. Katz holds a B.S. in Business Administration
degree from New York University and has done graduate work at C.U.N.Y. --
Baruch School.

John V. Pollock. Mr. Pollock was appointed to the Company's Board of
Directors in September 1993. From 1991 to the present, Mr. Pollock has served
as a director of Frank E. Basil, Inc., a worldwide provider of facilities
maintenance, engineering and operations management services. Mr. Pollock also
serves as a consultant to the partners of Basil Properties and has served as
the President of Nastech-Basil International, Inc. From 1975 to 1991, Mr.
Pollock was a senior banking executive in the Washington, D.C. area, serving as
President and Chief Executive Officer of Dominion Bank of Washington and the
John Hanson Savings Bank.

COMMITTEES OF THE BOARD

The Company's Board of Directors has established a Compensation
Committee which is comprised of Dr. Ian R. Ferrier, Joel Girsky and John V.
Pollock. The purpose of this Committee is to review and approve the
compensation of the Company's officers and to administer and interpret the
Company's stock option plan. The Audit Committee of the Company's Board of
Directors is comprised of Alvin Katz, Joel Girsky and John V. Pollock. The
purpose of this Committee is to review with the Company's independent auditors
the financial controls and practices of the Company and the plans for and
results of the audit engagement.

The Company's Certificate of Incorporation contains provisions
indemnifying its officer, directors, employees and agents against certain
liabilities.

- 34 -
<PAGE> 36

ITEM 11 - EXECUTIVE COMPENSATION

The following table sets forth certain information regarding
compensation paid by the Company during each of the Company's last three fiscal
years to the Company's Chief Executive Officer and to each of the Company's
executive officers who received salary and bonus payments in excess of $100,000
on an annual basis during the six months ended December 31, 1996:

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------
OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (SHARES) COMPENSATION
- ------------------------------------ ----------- ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Dr. Vincent D. Romeo,
President/Chief Executive Officer (A) 1996 $ 80,000 25,000 ---

(B) 1996 160,000 --- --- ---

(B) 1995 156,000 --- 25,000 ---

(B) 1994 125,000 --- 25,000 ---
</TABLE>

(A) Six months ended December 31, 1996

(B) Twelve months ended June 30 (former fiscal years)

OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table provides the specified information concerning
grants of options to purchase the Company's Common Stock during the six months
ended December 31, 1996, to the person named in the Summary Compensation Table:

<TABLE>
<CAPTION>
INDIVIDUAL GRANT IN LAST FISCAL YEAR

OPTIONS % OF TOTAL OPTIONS EXERCISE OR
GRANTED GRANTED TO EMPLOYEES BASE PRICE EXPIRATION
NAME (SHARES)(1) IN FISCAL PERIOD ($/SHARE)(2) DATE
- ---------------------- ------------------ ------------------------- ----------------- --------------
<S> <C> <C> <C> <C>
Dr. Vincent Romeo 25,000 11.1 $14.50 10/02/01
</TABLE>

(1) The options to be granted under the Plan are designated as
incentive stock options or non-incentive stock options by the
Board of Directors which also has discretion as to the persons
to be granted options, the number of shares subject to the
options and the terms of the options agreements. The Plan
provides that options granted thereunder shall be exercisable
during a period of no more than ten years (five years in the
case of 10% stockholders) from the date of grant, depending
upon the specific stock option agreement, and that, with
respect to incentive stock options, the option exercise price
shall be at least equal to 100% of the fair market value of
the Common Stock at the time of grant (110% in the case of 10%
stockholders). All outstanding options are subject to
optionee's continuous employment or association with the
Company. Under the Stock Option Plan, the Board retains
discretion to modify the terms of outstanding options, subject
to the provisions of the Plan

(2) All options were granted at market value on the date of grant.

- 35 -
<PAGE> 37

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES

The following table provides information related to the number and
value of stock options and stock appreciation rights held at year end by the
named executive officer:

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED IN THE MONEY
DECEMBER 31, 1996 OPTIONS AT DECEMBER 31, 1996
------------------------------------- -------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------------- ------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Dr. Vincent D. Romeo 63,233 20,100 $829,933 $263,813
</TABLE>

COMPENSATION OF DIRECTORS

The Company has not paid and does not presently propose to pay
compensation to any director for acting in such capacity, except for nominal
sums for attending Board of Directors meetings and reimbursement for reasonable
expenses in attending those meetings

Devin N. Wenig, the Company's Chairman, earned approximately $86,000
in the six month period ended December 31, 1996 for acting as Chairman of the
Executive Committee of the Company's Board of Directors.

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS

In August 1994, the Company and Dr. Romeo entered into a three year
employment agreement. Pursuant to this agreement, Dr. Romeo receives
compensation of $160,000 per year. Upon completion of Phase II studies for two
of the Company's proposed products such compensation will be increased to
$175,000 per year. Dr. Romeo is also entitled to a $20,000 incentive bonus if
and when the Company's prescription Vitamin B-12 nasal formulation is approved
for marketing by the FDA and a $20,000 bonus each time an NDA for one of the
Company's proposed products is accepted for filing by the FDA. In addition,
Dr. Romeo received an additional incentive stock option to acquire 25,000
shares of the Company's Common Stock in accordance with the terms and
conditions of the Company's Stock Option Plan. Dr. Romeo received the $20,000
bonus related to FDA approval of Vitamin B-12 in 1997.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Compensation Committee presently consists of Dr. Ian R.
Ferrier, Joel Girsky and John V. Pollock, outside directors of the Company.
The Compensation Committee is responsible for reviewing and approving the
compensation of the President, other officers of the Company and administering
and/or interpreting the Company's stock option plan.

REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

The Company's Compensation Committee made no discretionary
recommendations regarding executive compensation in the last fiscal year as the
compensation of the Company's President was determined by contract.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who beneficially own more
than 10% of the Company's Common Stock to file initial reports of ownership and
reports of changes in ownership with the Securities and Exchange Commission
("SEC"). Such persons are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms filed by such persons.

Based solely on the Company's review of such forms furnished to the
Company and written representations from certain reporting persons, the Company
believes that all such filing requirements were complied with.

STOCK OPTION PLAN

Under the Company's Stock Option Plan (the "Plan") options to purchase
a maximum of 700,000 shares of Common Stock of the Company (subject to
adjustment in the event of stock splits, stock dividends, recapitalizations and
other capital adjustments) may be granted to employees, officers and directors
of the Company and other persons who provide services to the Company. Options
for 109,999 shares have been exercised, and as of December 31, 1996,

- 36 -
<PAGE> 38

there are 459,299 such options granted and outstanding. The options to be
granted under the Plan are designated as incentive stock options or
non-incentive stock options by the Board of Directors which also has discretion
as to the persons to be granted options, the number of shares subject to the
options and the terms of the option agreements. Only employees, including
officers and part-time employees of the Company may be granted incentive stock
options. The options are intended to receive incentive stock option tax
treatment pursuant to Section 422A of the Internal Revenue Code of 1986, as
amended (the "Code").

The purpose of the Plan is to increase the ability of the Company to
attract and retain individuals of exceptional skill upon whom, in large
measure, its sustained progress, growth and ultimate profitability depend. In
addition, the Plan is intended to advance the interests of the Company by
enabling its directors, officers and employees to acquire a financial interest
in the Company through grants of options to acquire the Company's Common Stock.
The Plan is intended to provide an increased incentive to these individuals,
thereby providing such persons with an added incentive to continue in the
employ or service of the Company and to stimulate their efforts in promoting
the growth, efficiency and profitability of the Company.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Set forth below is information concerning the Common Stock ownership
on February 28, 1997 by (i) each person who is known by the Company to own
beneficially 5% or more of its outstanding Common Stock, (ii) each director and
named executive officer, and (iii) all directors and named executive officer of
the Company as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF
AMOUNT AND NATURE OF SHARES
BENEFICIAL BENEFICIALLY OWNED
NAME OF BENEFICIAL OWNER(1) OWNERSHIP(2) (3)
--------------------------- ------------ ---
<S> <C> <C>
Devin N. Wenig(4) 383,066 6.3%
Basil Properties(5)(8) 283,537 4.7
Alvin Katz(6) 127,000 2.1
Vincent D. Romeo(7) 93,845 1.5
Ian Ferrier(9) 50,000 *
Joel Girsky(6) 28,749 *
John V. Pollock(6)(8) 28,333 *
Grant W. Denison, Jr.(10) 25,000 *

All Directors and Named Executive
Officer as a Group (7 persons)(11) 1,019,530 16.1
</TABLE>
- --------------
* Represents less than 1% of the outstanding shares of the Company's
Common Stock.

(1) The address of all persons other than Basil Properties, Messrs. Alvin
Katz and John V. Pollock is c/o the Company. The address of Basil
Properties and John V. Pollock is 1510 H St., N.W., Washington DC; and
the address of Alvin Katz is 301 N. Birch Rd., Fort Lauderdale, FL.

(2) All shares are owned beneficially and of record unless indicated
otherwise. Includes 253,333 shares issuable pursuant to outstanding
stock options with the Company.

(3) Does not give effect to (i) 270,000 shares issuable upon exercise of
warrants that expire on December 6, 1998 and (ii) 446,667 shares of
Common Stock reserved for issuance under the Company's Stock Option
Plan.

(4) Devin N. Wenig's shares, as indicated above, include 35,000 shares
issuable pursuant to outstanding stock options with the Company, which
may be exercised within 60 days of the date of this table, 166 shares
held by Mr. Wenig's wife and 6,666 shares held in a trust for which
Carol Wenig, his mother, serves as the trustee.

(5) Includes 40,000 shares held by Mrs. Sophie Basil, a general partner of
Basil Properties.

(6) Includes 20,000 shares issuable pursuant to outstanding stock options
with the Company, which may be exercised within 60 days of the date of
this table.

(7) Includes 83,333 shares issuable pursuant to outstanding stock options
with the Company, which may be exercised within 60 days of the date of
this table.

(8) John V. Pollock is a managing director of Basil Properties.

(9) Includes 50,000 shares issuable pursuant to outstanding stock options
with the Company, which may be exercised within 60 days of the date of
this table.

(10) Includes 25,000 shares issuable pursuant to outstanding stock options
with the Company, which may be exercised within 60 days of the date of
this table.

(11) Includes shares held by Basil Properties. See notes (5) and (8) above.

- 37 -
<PAGE> 39

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Bruce R. Thaw, a former director of the Company, billed the Company
approximately $151,000 for legal fees for representing the Company in
connection with certain legal and regulatory matters in the six months ended
December 31, 1996. Mr. Thaw continues to represent the Company for which he
will be paid customary legal fees.

Dr. Ian Ferrier, a director of the Company, is the Chief Executive Officer
of Bogart Delafield Ferrier Inc. ("BDF") and is an affiliate of Mazier Partners
LLC ("MP"). BDF and MP provided consulting services to the Company in areas of
strategic planning, market planning and research and development
prioritization. For the six months ended December 31, 1996 the Company
incurred fees of $125,000 and $42,000, for BDF and MP, respectively.

- 38 -
<PAGE> 40

PART IV

ITEM 14 - EXHIBITS, LISTS AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

<TABLE>
<CAPTION>
Sequential Page
Exhibit Number Description Number
- ---------------------- ------------------------------------------------------------------ ------------------
<S> <C> <C>
3A Articles of Incorporation of Registrant, as amended and filed I/B/R(3)
with the Secretary of State of Delaware on November 8, 1993

3B Amended By-Laws of Registrant I/B/R(3)

4A Specimen of Common Stock Certificate of Registrant I/B/R(3)

4B Specimen Warrant Certificate I/B/R(3)

4C Form of Warrant Agreement I/B/R(3)

10A Licensing Agreement with UKRF I/B/R(1)

10B Lease for facilities at 45 Davids Drive, Hauppauge, New York I/B/R

10C Sublicense Agreement with Bristol-Myers Squibb Company I/B/R(2)

10D Agreements with Rugby Laboratories Inc. I/B/R

10E 1995 Agreement with RiboGene Inc. I/B/R

10F Employment Agreement with Dr. Vincent D. Romeo I/B/R

10G Restructure Agreement with Basil Properties I/B/R

10H Stock Option Agreements I/B/R

10I License Agreement with the DuPont Merck Pharmaceutical I/B/R(3)
Company

23A Consent of KPMG Peat Marwick LLP Independent Auditors

23B Consent of Robbins, Greene, Horowitz, Lester & Co., LLP
Independent Auditors

27 Financial Data Schedule
</TABLE>

(b) Reports on Form 8-K:

Changes in Registrant's Certifying Accountant filed on January 6, 1997.

- 39 -
<PAGE> 41

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Hauppauge, State of New York, on April ___, 1997.

NASTECH PHARMACEUTICAL COMPANY INC.

By: /s/ Devin N. Wenig
---------------------------------
Devin N. Wenig
Chairman

Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Devin N. Wenig Chairman of the Board April 24, 1997
- ----------------------------------------
Devin N. Wenig

/s/ Vincent D. Romeo, Ph.D. President and Chief Executive Officer
- ---------------------------------------- (Principal Executive Officer) April 24, 1997
Vincent D. Romeo, Ph.D.

/s/ Andrew Zinzi Chief Financial Officer April 24, 1997
- ---------------------------------------- (Principal Financial and Accounting Officer)
Andrew Zinzi

/s/ Joel Girsky Director, Secretary/Treasurer April 24, 1997
- ----------------------------------------
Joel Girsky

/s/ Grant W. Denison Director April 24, 1997
- ----------------------------------------
Grant W. Denison

/s/ Dr. Ian R. Ferrier Director April 24, 1997
- ----------------------------------------
Dr. Ian R. Ferrier

/s/ Alvin Katz Director April 24, 1997
- ----------------------------------------
Alvin Katz

/s/ John V. Pollock Director April 24, 1997
- ----------------------------------------
John V. Pollock
</TABLE>

- 40 -

<PAGE> 1
EXHIBIT 23A

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
Nastech Pharmaceutical Company Inc.:

We consent to incorporation by reference in the Annual Report on Form 10-K of
our report dated March 24, 1997, relating to the balance sheet of Nastech
Pharmaceutical Company Inc. as of December 31, 1996, and the related statements
of operations, stockholders' equity and cash flows for the six months ended
December 31, 1996.

KPMG PEAT MARWICK LLP

Jericho, New York
March 24, 1997

<PAGE> 1
EXHIBIT 23B

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
Nastech Pharmaceutical Company Inc.:

ROBBINS, GREENE, HOROWITZ, LESTER & CO., LLP

Jericho, New York
March 24, 1997

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,494,441
<SECURITIES> 7,024,511
<RECEIVABLES> 797,576
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,396,463
<PP&E> 513,084
<DEPRECIATION> 128,032
<TOTAL-ASSETS> 12,893,972
<CURRENT-LIABILITIES> 1,054,095
<BONDS> 26,742
0
0
<COMMON> 28,237
<OTHER-SE> 11,784,898
<TOTAL-LIABILITY-AND-EQUITY> 12,893,972
<SALES> 0
<TOTAL-REVENUES> 2,111,093
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,448,727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,004
<INCOME-PRETAX> (352,638)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (352,638)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> 0

</TABLE>