NASTECH PHARMACEUTICAL CO INC, 10-K405, 1998-03-31

NASTECH PHARMACEUTICAL CO INC
10-K405, 1998-03-31
PHARMACEUTICAL PREPARATIONS

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

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the year ended December 31, 1997

COMMISSION FILE NUMBER 0-13789

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

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

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

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

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

Name of each exchange
Title of each class on which registered
------------------- -------------------------
None None

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

Name of each exchange
Title of each class on which registered
------------------- -------------------------
Common Stock, $.006 par value Nasdaq National Market

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, 1998 based upon the closing price on that date,
on the Nasdaq National Market, was approximately $70,034,000.

As of February 28, 1998, there were 6,107,020 shares of the registrant's $.006
par value common stock outstanding.

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PART I

ITEM 1 - BUSINESS

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 may enable 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, therapeutic or patient compliance limitations that may
be improved with a preferred delivery system.

The Company's first commercially available pharmaceutical is a
prescription pain reliever marketed as Stadol(R) NS(TM) by Bristol-Myers Squibb
("BMS"). Stadol NS is the only transnasal narcotic 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 July 1997, the Company entered into an exclusive licensing agreement
for Nascobal(TM) in the U.S. with Schwarz Pharma, Inc. ("Schwarz") and the
product was commercially launched in October, 1997. In addition to these
approved drugs, the Company's pipeline includes eight drugs, four of which are
being developed under collaborative agreements with other pharmaceutical
companies.

INDUSTRY OVERVIEW

The Company participates in the drug delivery industry estimated at
$12 billion, 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 may 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-

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administer liquids or syrups.

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 preferred 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
pursuing development and commercialization of its proprietary technology and
developing collaborative R&D activities with pharmaceutical companies.

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, Schwarz, Meda AB,
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

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to the Company's technology. As specific formulations are developed and
clinically tested, the Company intends to file for additional patent
protections.

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.

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 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 nasal spray, 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. In July 1997, the
Company entered into an exclusive licensing agreement for Nascobal(TM) in the
U.S. with Schwarz and the product was commercially launched in October, 1997.
The following chart summarizes the Company's current products and product
pipeline:

NASTECH CURRENT PRODUCT PIPELINE
<TABLE>
<CAPTION>
TRADITIONAL
THERAPEUTIC DELIVERY
DRUG CATEGORY METHOD STATUS (1) PARTNER
---------------------- -------------------------- ------------------- --------------------------- -------------------
<S> <C> <C> <C> <C>
Stadol(R) NS(TM) Narcotic Analgesic Injection Marketing (2) BMS

Nascobal(TM) Vitamin/Anti-Anemia Injection Marketing (2) Schwarz, Meda

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

Scopolamine Anti-Motion Sickness Patch/Injection Phase II Schwarz

Doxylamine Sleep-Aid Oral Phase I Pfizer

Buprenorphine Narcotic Analgesic Injection Phase I

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

Ranitidine Gastrointestinal Relief Injection/Oral Preclinical

Clemastine Antihistamine Oral Preclinical

Nalbuphine Narcotic Analgesic Injection Formulation Development (2) DuPont Merck

</TABLE>

(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(R) NS(TM) (BUTORPHANOL TARTRATE NASAL SPRAY) -- Narcotic
analgesic for acute pain. Stadol NS is the only transnasal narcotic 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

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1992, as compared to the injectable formulation. Stadol NS is currently
marketed by BMS under an agreement that generates quarterly royalties to the
Company. Stadol NS has recently been classified by the FDA as a Schedule IV
substance under the Controlled Substances Act which may negatively affect
future sales by BMS and royalties to the Company.

NASCOBAL(TM) (CYANOCOBALAMIN, USP) GEL FOR INTRANASAL ADMINISTRATION --
For Vitamin B-12 deficiency anemia. Nascobal(TM) may 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 a more convenient, painless, self-administered weekly therapy,
which the Company believes will 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 manufactures this product for Schwarz. In
July 1997, the Company entered into an exclusive licensing agreement for
Nascobal(TM) in the U.S. with Schwarz and the product was commercially launched
in October, 1997.

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.

In selecting compounds to develop, 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 filed five Notices of Claimed Investigational
Exemption for a New Drug ("INDs") for the following products in the Company's
product pipeline of nasally delivered pharmaceutical agents: Scopolamine
(anti-motion sickness); Buprenorphine (narcotic analgesic); Metoclopramide
(anti-nausea/anti-emetic); Propranolol (beta-blocker/migraine); and Doxylamine
(sleep-aid).

Products currently under development are as follows:
.
SCOPOLAMINE HYDROBROMIDE -- Anti-motion sickness. Scopolamine
Hydrobromide is a naturally occurring tertiary amine antimuscarinic agent with
a long history of oral and parenteral use for central anticholinergic activity,
including prophylaxis of motion sickness. The drug is currently available as a
transdermal patch for the prevention of nausea and vomiting associated with
motion sickness in adults and is marketed under the tradename Transderm Scop(R)
by Ciba Self-Medication Inc. As a patch dosage form, Transderm Scop(R) must be
applied to the skin at least 4 hours before the antiemetic effect is required
and is programmed to deliver drug over a three day period. The Company believes
that a nasal dosage form of scopolamine will be a more convenient and safer
alternative with a faster onset of action measured in minutes, rather than
hours, allowing for both prevention and treatment of motion sickness. In
February 1997 the sponsorship of the nasal scopolamine hydrobromide IND was
transferred from NASA to the Company. The Company is conducting the required
formulation, preclinical and clinical development activities in support of an
NDA filing. In December 1997, the Company entered into an agreement with
Schwarz for U.S. marketing rights.

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 A. H.
Robins Company Inc. 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.

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. In Phase I
absorption trials, the Company's proprietary nasal

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formulation showed significantly faster peak blood levels when compared to the
traditional oral dosage form. The clinical study program is continuing to
date. In December 1997, Pfizer exercised its option for an exclusive worldwide
license to manufacture and market the Company's intranasal Doxylamine
Succinate.

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 1997, the Company
successfully filed an IND for the nasal delivery of this pharmaceutical agent.

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 American Home Products. 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.

RANITIDINE HCL -- H-2 antagonist. Ranitidine HCL is a histamine H-2
receptor antagonist used to provide short-term symptomatic relief of
gastroesophageal reflux (e.g., heartburn, acid indigestion) and for the
treatment of pathologic gastrointestinal (GI) hypersecretory conditions (e.g.,
Zollinger-Ellison syndrome, systemic mastocytosis, postoperative
hypersecretion, "short-gut" syndrome). In addition, the drug is used for the
treatment of duodenal ulcer, gastric ulcer and errosive esophagitis. In its
traditional oral and injectable dosage forms it is commonly known as Zantac(R),
which is marketed by Glaxo Wellcome. The Company believes that a
self-administered nasal dosage form may provide a more rapid onset of GI relief
and may be a valued alternative to the oral dosage form, which is often
difficult to swallow during GI distress, and to injections which are
inconvenient and painful. In 1997, the Company commenced a research and
development program to begin generating the necessary informational and
preclinical data for the filing of an IND for the nasal delivery of this drug
product.

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 completed a
preliminary research and development program which generated the necessary
information and preclinical data for the filing of an IND for the nasal
delivery of this drug product.

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.

Other Products and Research Activities

In addition to the products contained in the Company's product
development pipeline, the Company is frequently presented with opportunities to
evaluate the feasibility of a given compound for nasal delivery and to develop
new product concepts. In this regard the Company's ongoing preclinical
research and development activities focus on the utilization, optimization or
modification of the Company's core nasal drug delivery technologies for use
with specific drugs or therapies. Among other projects, the Company has
explored the feasibility of utilizing its technologies in several smoking
cessation compounds, including Nicotine and Lobeline. The Company also is in
the process of evaluating several compounds in their nasal delivery form for
pain management, such as morphine and oxymorphone.

The Company also intends to leverage its core technologies by
collaborating with other pharmaceutical and bio-tech companies which have late
stage product concepts or developed pharmaceuticals that may benefit from nasal
delivery. Such collaborative development projects will be initiated only to
the extent the Company believes that (i) the

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project is feasible, (ii) the potential product resulting from the development
program would have significant market potential, and (iii) favorable economic
arrangements can be obtained. In connection with such development programs,
the Company will seek milestone payments for the development cycle, payment of
certain expenses incurred by the Company, manufacturing rights, if applicable,
and a royalty.

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.

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 -- In January 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 the 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.

PFIZER INC. -- In December 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. During the course of the clinical
research program, the Company will be reimbursed for certain development
expenses. In December 1997, Pfizer exercised its option for an exclusive world
wide license to manufacture and market nasal Doxylamine. Pursuant to the
definitive licensing agreement, Pfizer has agreed to pay the company a royalty
on the net sales of such product based upon the product's classification as
either an OTC or prescription product.

SCHWARZ PHARMA -- In July 1997, the Company exclusively licensed to
Schwarz the right to market the Company's Nascobal(TM) (Cyanocobalamin, USP)
Gel for Intranasal Administration in the U.S. The Company retained worldwide
manufacturing rights and the agreement provided for a fixed manufacturing
transfer price to Schwarz. Pursuant to the agreement the Company will receive
royalty payments from Schwarz based upon the net sales of Nascobal(TM). The
royalty rate is, in part, dependent upon sales volume, with a minimum royalty
of $2 million in 1998. The term of the agreement is for the later of 15 years
or the expiration of the applicable patent which expires in 2005.

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In December 1997 the Company exclusively licensed to Schwarz the right
to market the Company's intranasal scopolamine gel in the U.S. Under the terms
of the agreement, the Company will receive royalty and manufacturing payments
from Schwarz. In addition, Schwarz will make milestone payments to the Company
estimated to be in excess of $5 million upon the achievement of certain
development milestones.

MEDA AB -- In September 1997, the Company entered into an Agreement
with Meda AB of Goteborg, Sweden ("Meda"), giving Meda the exclusive right to
market Nascobal(TM) in Sweden, Denmark, Norway and Finland. Pursuant to the
agreement, the Company will receive revenue from the sale of Nascobal(TM) to
Meda and a license fee upon the occurrence of certain regulatory approvals and
commercial events in the Nordic countries.

RIBOGENE, INC. -- (as successor in interest to Rugby Laboratories
Co., Inc. and Darby Pharmaceuticals, Inc.) In June 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 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.

THE DUPONT MERCK PHARMACEUTICAL COMPANY -- In June 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.

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 four 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. Fifteen 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.

- 7 -
<PAGE> 9
In June 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.

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.

In December 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)).

- 8 -
<PAGE> 10
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 commercial quantities of its products and currently
manufactures Nascobal(TM) at its current facilities. All of the Company's
products for clinical and commercial use must be produced under controlled
conditions and under current FDA GMP. 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 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 the manufacturing of Nascobal, the Company entered
into a filling and packaging agreement with a third party. In addition,
contract manufacturing arrangements may be established with third parties in
connection with collaborative agreements. The Company depends 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 expand its internal manufacturing, filling and packaging
capabilities to reduce such reliance on third parties.

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.

- 9 -
<PAGE> 11
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.

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.

- 10 -
<PAGE> 12

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 in the U.S. 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.

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 February 27, 1998, the Company had 32 full-time employees, of whom
23 were engaged in research and development, including the Company's Chief
Executive Officer and Executive 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 is currently evaluating
leasehold improvements to its current facility or entering into an agreement
for additional lease space to accommodate expansion of its research and
development and production activities.

- 11 -
<PAGE> 13
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.

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>
1997 QUARTER ENDED:
-------------------
December 31, 1997 $ 10.25 $ 16.13
September 30, 1997 9.38 13.00
June 30, 1997 8.00 12.88
March 31, 1997 8.50 21.00

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
</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. The statement of operations
data for the year ended December 31, 1997, for the six months ended December
31, 1996 and each of the years in the four-year period ended June 30, 1996 and
the balance sheet data as of December 31, 1997 and 1996 and June 30, 1996,
1995, 1994, and 1993 are derived from, and are qualified by reference to, the
audited financial statements of the Company. The selected financial data for
the year ended December 31, 1996 and the six months ended December 31, 1995 and
for the year ended December 31, 1996 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 for such period.

(In Thousands, Except Share Data)

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31 YEAR ENDED JUNE 30
----------------------------- ----------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1997(1) 1996 1996 1995 1994 1993
------------- ------------ ------------ ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product sales. .. . . . . . . . . . . . . $ 482 $ --- $ --- $ --- $ --- $ ---
License fee, royalty and research income 3,647 3,987 3,629 2,684 2,107 856
Interest income . . . . . . . . . . . . 1,393 344 238 254 93 7
------------- ------------ ------------ ----------- ------------ -----------
Total revenues . . . . . . . . . . . . 5,522 4,331 3,867 2,938 2,200 863
------------- ------------ ------------ ----------- ------------ -----------
Cost and expenses:
Cost of product sales . . . . . . . . . . 454 --- --- --- --- ---
Research and development . . . . . . . . 4,600 1,494 1,164 882 504 444
Royalties . . . . . . . . . . . . . . . 1,586 1,649 1,677 1,251 1,041 311
Sales and marketing . . . . . . . . . . 1,723 169 128 50 10 10
General and administrative . . . . . . . 1,699 1,038 737 787 379 194
Interest expense . . . . . . . . . . . . 6 35 42 47 41 82
------------- ------------ ------------ ----------- ------------ -----------
Total costs and expenses . . . . . . . 10,068 4,385 3,748 3,017 1,975 1,041
------------- ------------ ------------ ----------- ------------ -----------
Income (loss) before provision for income
taxes . . . . . . . . . . . . . . . . . (4,546) (54) 119 (79) 225 (178)
Provision for income taxes . . . . . . . . --- --- --- --- 17 ---
------------- ------------ ------------ ----------- ------------ -----------
Net income (loss) . . . . . . . . . . . . $ (4,546) $ (54) $ 199 $ (79) $ 208 $ (178)
============= ============ ============ =========== ============ ===========
Net income (loss) per common share-Basic . $ (.76) $ (.01) $ .04 $ (.03) $ .09 $ (.13)
============= ============ ============ =========== ============ ===========
Net income (loss) per common share-Diluted $ (.76) $ (.01) $ .03 $ (.03) $ .08 $ (.13)
============= ============ ============ =========== ============ ===========
Average shares outstanding-share-Basic . . 5,978,121 3,706,529 3,221,447 3,119,718 2,419,976 1,395,390
Average shares outstanding-share-Diluted. . 4,297,536 2,524,432

<CAPTION>
SIX MONTHS ENDED
DECEMBER 31
---------------------------
STATEMENT OF OPERATIONS DATA: 1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues: $ --- $ ---
Product sales . . . . . . . . . . . . . .
License fee, royalty and research income 1,880 1,522
Interest income . . . . . . . . . . . . 231 125
------------ ------------
Total revenues . . . . . . . . . . . . 2,111 1,647
------------ ------------
Cost and expenses: --- ---
Cost of product sales . . . . . . . . . .
Research and development . . . . . . . . 1,035 705
Royalties . . . . . . . . . . . . . . . 710 738
Sales and marketing . . . . . . . . . . 76 35
General and administrative . . . . . . . 628 327
Interest expense . . . . . . . . . . . . 15 22
------------ ------------
Total costs and expenses . . . . . . . 2,464 1,827
------------ ------------
Income (loss) before provision for income (353) (180)
taxes . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . --- ---
------------ ------------
Net income (loss) . . . . . . . . . . . . $ (353) $ (180)
============ ============
Net income (loss) per common share-Basic . $ (.08) $ (.06)
============ ============
Net income (loss) per common share-Diluted $ (.08) $ (.06)
============ ============
Average shares outstanding-share-Basic . . 4,191,600 3,221,447
Average shares outstanding-share-Diluted .

</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30 DECEMBER 31
--------------------- ----------------------------------------- ----------------------
BALANCE SHEET DATA: 1997(2) 1996(2) 1996(2) 1995 1994(2) 1993 1996 1995
---------- ---------- --------- --------- --------- -------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Working capital (deficit) . . . . . . . . . $ 24,221 $ 11,342 $ 7,469 $ 4,444 $ 4,699 $ (222) $ 11,342 $ 4,045
Total assets . . . . . . . . . . . . . . . 27,371 12,894 9,367 6,035 6,002 746 12,894 5,616
Long-term debt . . . . . . . . . . . . . . 15 27 136 349 452 566 27 182
Total stockholders' equity (deficit) . . . 24,929 11,813 7,569 4,288 4,309 (735) 11,813 4,108
</TABLE>

- -------------------------
(1) During fiscal 1997, the Company began making shipments of
Nascobal to Schwarz Pharma (see Note 8 to the Company's Financial Statements).

(2) During fiscal 1997, the Company completed a public offering of
1,380,000 shares of common stock. During fiscal 1994 the Company completed a
public offering of 742,500 units of common stock and warrants. For the
periods ended December 31, 1996 and June 30, 1996, the Company received net
proceeds of $4.6 million and $3.2 million, respectively, from the exercise of
the warrants (see Note 4 to the Financial Statements).

- 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
that reflect the Company's intentions, expectations or beliefs concerning
future events, including, but not limited to, expectations with respect to FDA
approval of new products, technology and product development milestones, the
ability of the Company to manufacture and meet market demand for its products,
the market acceptance of products under control of the Company's licensees, the
ability of the Company to negotiate favorable collaborative agreements, the
commencement of sales of new products, and the sufficiency of the Company's
cash flow for future liquidity and capital resource needs. These factors,
among others, could cause results to differ materially from those in the
forward-looking statements. In addition, significant fluctuations in quarterly
and fiscal operating results may occur as a result of varying milestone
payments and the timing of costs and expenses related to the Company's research
and development programs.

The Company receives licensing revenues on two commercial products -
Stadol(R) NS(TM) and Nascobal(TM). Stadol NS, a narcotic analgesic for the
treatment of moderate to severe pain and the acute pain of migraine, is
currently marketed by BMS under an agreement that generates quarterly royalties
to the Company. Stadol NS has recently been classified by the FDA as a
Schedule IV substance under the Controlled Substances Act which, among other
factors, may negatively affect future sales by BMS and royalties to the
Company. The Company anticipates that this negative effect may continue in the
foreseeable future. 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. In July 1997, the Company entered
into an exclusive licensing agreement for Nascobal(TM) in the U.S. with Schwarz
Pharma and commercially launched the product in October, 1997. Under the
agreement, the Company will receive minimum royalty payments in 1998 of $2
million and retains global manufacturing rights. The Company relies on a
contract service provider for the fill and packaging of this product in
accordance with GMP.

The Company's pipeline includes eight drugs under research and
development. Historically, 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 developing nasal
pharmaceuticals. As part of a revised business strategy, the Company will
typically postpone the establishment of strategic alliances until later stages
of development in order to negotiate more favorable collaborative agreements
and retain manufacturing rights. Consistent with this business strategy and at
the time of conducting Phase II/III clinical trials, the Company entered into
an exclusive licensing agreement in December 1997 with Schwarz Pharma to market
in the U.S. the intranasal motion sickness product, scopolamine, for the
prevention and treatment of motion sickness.

The Company intends to commit significant financial resources in the
future to internally fund certain research and development projects with the
goal of achieving greater economic benefit from product sales. In addition,
the Company's future profitability is primarily affected by, among others, the
success of product sales by its licensees, its investment and achievement of
milestones in research and development programs, regulatory uncertainties with
respect to its filings with the FDA, and the success of its financing
activities. As a result of the uncertainties associated with these factors and
the increased investment in research and development, the Company may not be
profitable in calendar 1998.

In 1996, 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 unaudited periods for the calendar year ended
December 31, 1996 and six months ended December 31, 1995 for comparative
purposes.

- 14 -
<PAGE> 16
RESULTS OF OPERATIONS

Year Ended December 31, 1997 Compared to Year Ended December
31, 1996 (unaudited):

Revenues increased by $1,191,000, or 27%, to $5,522,000 as a result
of the launch of the Company's product, Nascobal(TM), in October, 1997 and
interest income on investments. Manufactured product sales and royalty income
on sales of Nascobal(TM) totaled $747,000. Royalty income received from BMS on
sales of Stadol NS decreased $118,000, or 4%, to $3,250,000. Other license
fee, royalty and research income decreased by $487,000. Interest income
increased by $1,049,000 to $1,393,000 and results primarily from the investment
of the proceeds of a public offering of 1,380,000 shares of the Company's
common stock in February, 1997.

Total costs and expenses increased by $5,683,000, or 130%, to
$10,068,000 in 1997. The details of the increase follow:

Research and development expense increased by $3,106,000, or 208% to
$4.6 million primarily as a result of the Company's clinical program for the
intranasal motion sickness compound, scopolamine, the research and development
of certain compounds in collaboration with other pharmaceutical companies, and
the resulting increase in personnel and related expenses. The Company intends
to pursue internally funded projects and anticipates that expenditures for
research and development will continue to increase in 1998.

The Company manufactures Nascobal(TM) exclusively for sale to Schwarz
Pharma in the U.S. In 1997, the cost of product sales was $454,000.

Royalties expense decreased by $63,000, or 4%, to $1,586,000 as a
result of the decline in sales of Stadol NS by BMS and the related royalty
payable to UKRF under a separate agreement between the Company and UKRF.
Royalties expense increases or decreases approximately in proportion to royalty
income associated with Stadol NS.

Sales and marketing expense increased by $1,554,000 to $1,723,000
primarily as a result of the marketing and related costs associated with the
licensing of the intranasal products, Nascobal(TM) and scopolamine, an increase
in services provided by outside business consultants, and the addition of
personnel and related costs. The Company believes that sales and marketing
expenses will decline in 1998.

General and administrative expense increased by $661,000, or 64%, to
$1,699,000 in 1997 as the Company enhanced its infrastructure to accommodate
future product sales of Nascobal and its internal research and development
programs. The increase arises primarily from an increase in personnel and
related costs, an increase in professional fees and expenses related to systems
and strategic planning, and certain mandatory regulatory costs associated with
the Company's FDA-approved facility and prescription product, Nascobal(TM). As
a percentage of total revenues, general and administrative expense increased to
31% in 1997 from 24% in 1996.

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

Revenues increased by $464,000, or 28%, to $2.1 million primarily as a
result of increases in license fee, royalty and research income, which
increased by $358,000, or 24%, to $1.9 million. The increase was primarily due
to research income related to development agreements with Pfizer Inc., Novaris
and Sandoz. Royalty income received from BMS decreased $45,000, or 3%, to
$1,457,000. This decrease is a result of a reduction in sales by BMS of Stadol
NS in the quarter ended December 31, 1996 after significant increases in
earlier periods due to special promotional activities by BMS. Interest income
increased by $106,000, or 84%, to $231,000 due to excess funds invested from
proceeds received from the exercise of warrants.

Total costs and expenses increased by $637,000, or 35%, to $2,464,000
in 1996. The details of the increase follow:

Research and development expense increased in 1996 by $329,000, or
47%, to $1,035,000 primarily as a result of the Company's strategy to
accelerate development of its nasal pharmaceutical formulations.

Royalties expense decreased by $28,000, or 4%, to $710,000 as a result
of the decline in sales of Stadol NS by BMS and the related royalty payable to
UKRF.

- 15 -
<PAGE> 17
General and administrative expense increased by $301,000, or 92%, to
$628,000. The increase arises primarily from increased staffing and consulting
expenses related to strategic planning. As a percentage of revenues, general
and administrative expense increased to 30% in 1996 from 20% in 1995.

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

Revenues increased by $929,000, or 32%, to $3.9 million primarily as a
result of increases in license fee, royalty and research income, which
increased by $945,000, or 35%, to $3.6 million. The increase was primarily due
to royalty income received from BMS on sales of Stadol NS. Royalty income
received from BMS increased $883,000, or 35%, to $3.4 million. This increase
was offset in part by a decrease 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. Interest income decreased by $16,000, or 6%, to
$238,000 due to changed interest rates and reduction in the amount of excess
funds invested.

Total costs and expenses increased by $731,000, or 24%, to $3,748,000
in fiscal 1996. The details of the increase follow:

Research and development expense increased in fiscal 1996 by $282,000,
or 32%, to $1.2 million primarily as a result of the Company's strategy to
accelerate development of its nasal pharmaceutical formulations.

Royalties expense increased by $426,000, or 34%, to $1.7 million as a
result of the increase in sales of Stadol NS by BMS and the related royalty
payable to UKRF.

General and administrative expense decreased by $50,000, or 6%, to
$737,000. As a percentage of revenues, general and administrative expense
decreased to 19% for fiscal 1996 from 27% for fiscal 1995. This improvement
was due to the leveraging of the Company's infrastructure as revenues increased
significantly.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1997, the Company's liquidity included cash and cash
equivalents of $25.3 million compared to $11.5 million at December 31, 1996.
These consisted primarily of the funds related to public offerings. As a
result of these offerings, the Company has budgeted an increase in its research
and development efforts and related general and administrative support.

At December 31, 1997, the Company had working capital of $24.2
million. Management anticipates that its current cash position, 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.

YEAR 2000 COMPLIANCE

The Company is currently analyzing the potential impact of the Year
2000 on the processing of date sensitive information by the Company's
computerized information systems. The Year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
an applicable year. The Company's general ledger system is currently Year 2000
compliant. The Company is studying the impact of the Year 2000 problem on
other aspects of its business and as of December 31, 1997 this impact on the
future financial position, operating results, and cash flows of the Company is
not determinable.

NEW REPORTING PRONOUNCEMENTS

The Company will implement the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information, and
SFAS No. 132. Employers' Disclosures about Pensions and Other Post-retirement
Benefits which require the Company to report and display certain information
related to comprehensive income, operating segments, and employee benefits
plans, respectively, as required in 1998. Adoption of these statements will
not impact the Company's financial position or results of operations.

- 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, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Statements of Operations for the years ended December 31, 1997 and December 31, 1996
(unaudited), six months ended December 31, 1996 and December 31, 1995 (unaudited) and for
the years ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Statements of Stockholders' Equity for the years ended December 31, 1997 and December 31, 1996
(unaudited), six months ended December 31, 1996 and December 31, 1995 (unaudited) and for the
years ended June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Statements of Cash Flows for the years ended December 31, 1997 and December 31, 1996 (unaudited),
six months ended December 31, 1996 and December 31, 1995 (unaudited) and for the years ended
June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>

- 17 -
<PAGE> 19
INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Nastech Pharmaceutical Company Inc.

We have audited the accompanying balance sheets of Nastech Pharmaceutical
Company Inc. (the Company) as of December 31, 1997 and 1996 and related
statements of operations, stockholders' equity and cash flows for the year
ended December 31, 1997 and the six-month period ended December 31, 1996.
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 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 financial statements referred to above present fairly, in
all material respects, the financial position of Nastech Pharmaceutical Company
Inc. as of December 31, 1997 and 1996 and the results of its operations and its
cash flows for the year ended December 31, 1997 and the six-month period ended
December 31, 1996 in conformity with generally accepted accounting principles.

As discussed in Note 2 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

Jericho, New York
March 13, 1998

- 18 -
<PAGE> 20
INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying statements of operations,
stockholders' equity and cash flows of Nastech Pharmaceutical Company Inc. for
the years ended June 30, 1996 and 1995. 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.

In our opinion, the aforementioned financial statements present
fairly, in all material respects, the results of its operations and cash flows
of Nastech Pharmaceutical Company Inc. for the years ended June 30, 1996 and
1995 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
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 25,294 $ 4,494
Short-term investments . . . . . . . . . . . . . . . . . . --- 7,024
Account receivable . . . . . . . . . . . . . . . . . . . . 482 ---
Royalties and fees receivable . . . . . . . . . . . . . . 455 798
Inventories . . . . . . . . . . . . . . . . . . . . . . . 370 ---
Prepaid expenses and sundry . . . . . . . . . . . . . . . 47 80
------------- -------------
Total current assets . . . . . . . . . . . . . . . . 26,648 12,396
------------- -------------
Property and equipment . . . . . . . . . . . . . . . . . . . 1,010 513
Less: Accumulated depreciation and amortization . . . . . 302 128
------------- -------------
Property and equipment, net . . . . . . . . . . . . 708 385
------------- -------------
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 15 113
------------- -------------
Total assets $ 27,371 $ 12,894
============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . $ 1,497 $ 587
Royalties payable . . . . . . . . . . . . . . . . . . . . 191 236
Accrued expenses and sundry liabilities . . . . . . . . . 726 216
Current maturities of long-term debt . . . . . . . . . . . 13 15
------------- -------------
Total current liabilities 2,427 1,054
------------- -------------
Long-term debt, net of current maturities . . . . . . . . . . 15 27
------------- -------------
Stockholders' equity:
Common stock, $0.006 par value; authorized: 25,000,000
shares; issued and outstanding: 6,101,020 and 4,706,158
shares at December 31, 1997 and 1996, respectively. . . 37 28
Additional paid-in capital . . . . . . . . . . . . . . . . 35,978 18,325
Accumulated deficit . . . . . . . . . . . . . . . . . . . (11,086) (6,540)
------------- -------------
Total stockholders' equity . . . . . . . . . . . . . 24,929 11,813
------------- -------------
Total liabilities and stockholders' equity . . . . . $ 27,371 $ 12,894
============= =============
</TABLE>

See accompanying notes to financial statements.

- 20 -
<PAGE> 22
NASTECH PHARMACEUTICAL COMPANY INC.
STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)

<TABLE>
<CAPTION>
YEARS ENDED YEARS ENDED SIX MONTHS ENDED
---------------------------- --------------------------- --------------------------
DEC. 31, DEC. 31, JUNE 30, JUNE 30, DEC. 31, DEC. 31,
1997 1996 1996 1995 1996 1995
------------- ------------- ------------- ------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Product sales . . . . . . . . . . . . . $ 482 $ --- $ --- $ --- $ --- $ ---
License fee, royalty and research income 3,647 3,987 3,629 2,684 1,880 1,522
Interest income . . . . . . . . . . . . 1,393 344 238 254 231 125
------------- ------------- ------------- ------------- ------------ ------------
Total revenues . . . . . . . . . . . 5,522 4,331 3,867 2,938 2,111 1,647
------------- ------------- ------------- ------------- ------------ ------------
Costs and expenses:
Cost of product sales . . . . . . . . . 454 --- --- --- --- ---
Research and development . . . . . . . . 4,600 1,494 1,164 882 1,035 705
Royalties . . . . . . . . . . . . . . . 1,586 1,649 1,677 1,251 710 738
Sales and marketing . . . . . . . . . . 1,723 169 128 50 76 35
General and administrative . . . . . . . 1,699 1,038 737 787 628 327
Interest expense . . . . . . . . . . . 6 35 42 47 15 22
------------- ------------- ------------- ------------- ------------ ------------
Total costs and expenses . . . . . . 10,068 4,385 3,748 3,017 2,464 1,827
------------- ------------- ------------- ------------- ------------ ------------
Net income (loss) . . . . . . . . . . . . . $ (4,546) $ (54) $ 119 $ (79) $ (353) $ (180)
============= ============= ============= ============= ============ ============
Net income (loss) per common share-Basic. . $ (.76) $ (.01) $ .04 $ ( .03) $ (.08) $ (.06)
============= ============= ============= ============= ============ ============
Net income (loss) per common share-Diluted. $ (.76) $ (.01) $ .03 $ ( .03) $ (.08) $ (.06)
============= ============= ============= ============= ============ ============
Average shares outstanding-Basic . . . . . 5,978,121 3,706,529 3,221,447 3,119,718 4,191,600 3,221,447
============= ============= ============= ============= ============ ============
Average shares outstanding-Diluted . . . . 4,297,536
=============

</TABLE>

See accompanying notes to financial statements.

- 21 -
<PAGE> 23
NASTECH PHARMACEUTICAL COMPANY INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (UNAUDITED) AND
FOR THE SIX MONTHS ENDED DECEMBER 1996 AND 1995 (UNAUDITED)
AND THE YEARS ENDED JUNE 30, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------------ ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 30 1994 . . . . . . . . . . 3,111,685 $ 19 $ 10,517 $ (6,227) $ 4,309
Shares issued in connection with exercise
of stock options . . . . . . . . . . . 109,999 --- 58 --- 58
Fractional shares redeemed in connection
with reverse stock split . . . . . . . (237) --- --- --- ---
Net loss . . . . . . . . . . . . . . . . --- --- --- (79) (79)
------------ ----------- ------------ ------------- -----------
BALANCE, JUNE 30, 1995 . . . . . . . . . 3,221,447 19 10,575 (6,306) 4,288
Net loss six months ended December 31,
1995 (unaudited) . . . . . . . . . . . --- --- --- (180) (180)
------------ ----------- ------------ ------------- -----------
BALANCE, DECEMBER 31, 1995 (UNAUDITED) . 3,221,447 19 10,575 (6,486) 4,108
Shares issued in connection with exercise
of warrants . . . . . . . . . . . . . 605,173 4 3,158 --- 3,162
Fractional shares redeemed in connection
with reverse stock split . . . . . . . (187) --- --- --- ---
Net income six months ended June 30, 1996 298 298
------------ ----------- ------------ ------------- -----------
BALANCE, JUNE 30, 1996 . . . . . . . . . 3,826,433 23 13,733 (6,188) 7,568
Shares issued in connection with exercise
of warrants . . . . . . . . . . . . . 879,817 5 4,592 --- 4,597

Fractional shares redeemed in connection
with reverse stock split . . . . . . . (92) --- --- --- ---
Net loss six months ended December 31, (352) (352)
1996 (unaudited) . . . . . . . . . . . --- --- ---
------------ ----------- ------------ ------------- -----------
BALANCE, DECEMBER 31, 1996 . . . . . . . 4,706,158 28 18,325 (6,540) 11,813
Additional shares issued in connection
with public offering at $14 per share,
net of issuance costs . . . . . . . 1,380,000 9 17,460 --- 17,469
Shares issued in connection with exercise
of stock options . . . . . . . . . . . 14,999 --- 18 --- 18
Compensation related to stock options . . --- --- 175 --- 175
Fractional shares redeemed in connection
with reverse stock split . . . . . . (137) --- --- --- ---
Net loss year ended December 31, 1997 (4,546) (4,546)
------------ ----------- ------------ ------------- -----------
BALANCE, DECEMBER 31, 1997 . . . . . . . 6,101,020 $ 37 $ 35,978 $ (11,086) $ 24,929
============ =========== ============ ============= ===========
</TABLE>

See accompanying notes to financial statements.

- 22 -
<PAGE> 24
NASTECH PHARMACEUTICAL COMPANY INC.
STATEMENTS OF CASH FLOWS (IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED YEARS ENDED SIX MONTHS ENDED
------------------------------- ------------------------ ---------------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1996 1996 1995 1996 1995
------------- ----------- ----------- ----------- ----------- ------------
OPERATING ACTIVITIES: (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) . . . . . . . . $ (4,546) $ (54) $ 119 $ (79) $ (353) $ (180)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Compensation related to stock
options. . . . . . . . . . . 175 --- --- --- --- ---
Depreciation and amortization 262 61 55 27 36 30
Abandonment and disposition of
property and equipment . . --- 2 --- 3 2 ---
Changes in assets and liabilities:
Account and other receivables . (139) (91) (331) (5) 292 52
Inventories . . . . . . . . . . (370) --- --- --- --- ---
Prepaid expenses and sundry . . 33 (52) 8 (49) (25) 35
Accounts payable . . . . . . . 910 47 (65) 62 88 (24)
Royalties payable . . . . . . . (45) (112) 152 20 (286) (22)

Accrued expenses and sundry
liabilities . . . . . . . . 510 (73) 122 26 (208) (13)
------------- ----------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
operating activities . . . . . . . (3,210) (272) 60 5 (454) (122)
------------- ----------- ----------- ----------- ----------- ------------
INVESTING ACTIVITIES:
Property, plant and equipment . . (585) (210) (91) (85) (205) (87)
Short-term investments-acquisitions (968) (15,120) (10,290) (11,172) (8,981) (4,150)
Short-term investments-redemptions 7,992 12,312 10,534 8,929 5,912 4,134
Other assets . . . . . . . . . . . --- (98) 5 (14) (98) 5
------------- ----------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
investing activities . . . . . . . 6,439 (3,116) 158 (2,342) (3,372) (98)
------------- ----------- ----------- ----------- ----------- ------------
FINANCING ACTIVITIES:
Repayment of debt . . . . . . . . (13) (297) (169) (117) (308) (180)
Exercise of stock options . . . . 18 --- --- 59 --- ---
Exercise of warrants . . . . . . . --- 7,759 3,162 --- 4,597 ---
Proceeds from sale of common stock 17,566 --- --- --- --- ---
------------- ----------- ----------- ----------- ----------- ------------
Net cash provided by (used in)
financing activities . . . . . . . 17,571 7,462 2,993 (58) 4,289 (180)
------------- ----------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . 20,800 4,074 3,211 (2,395) 463 (400)
Cash and cash equivalents--beginning 4,494 420 820 3,215 4,031 820
------------- ----------- ----------- ----------- ----------- ------------
Cash and cash equivalents--ending. . . $ 25,294 $ 4,494 $ 4,031 $ 820 $ 4,494 $ 420
============= =========== =========== =========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . $ 6 $ 35 $ 47 $ 34 $ 48 $ 47
Capital expenditures and proceeds from
loans have been reduced by
additions financed of . . . . . --- --- $ 11 $ 62 --- ---
</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

In 1996, the Company changed its year end from June 30 to December 31.
The audited statements of operations, changes in stockholders' equity, and cash
flows include the year ended December 31, 1997, the six month transition period
ended December 31, 1996 and the statement of operations and cash flows for the
fiscal years ended June 30, 1996 and 1995.

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 and variable rate preferred securities with maturities
of three months or less when purchased.

Investments

Short-term investments consist of highly liquid United States Treasury
Bills and 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 at December 31, 1997 and 1996.

Inventories

Inventories are stated at the lower of cost (first-in, first-out
basis) or market and consist principally of raw materials.

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
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

Basic net income (loss) per common share is calculated using the
weighted average number of common shares outstanding during the period.
Diluted income (loss) per share is calculated by including all dilutive
potential common shares such as stock options and warrants. Dilutive potential
common shares were 1,076,089 for the year ended June 30, 1996. Potential
common shares are not included for the years ended December 31, 1997 and 1996
and June 30, 1995, and for the six months ended December 31, 1996 and 1995
because they 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.

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 significant 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 9).

New Reporting Pronouncements

Fair Value Financial Instruments

The Company considers the fair value of all financial instruments to
be not materially different from their carrying value at year end.

- 25 -
<PAGE> 27
NOTE 3 -- PROPERTY AND EQUIPMENT

Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------- --------
(In thousands)
<S> <C> <C>
Furniture and fixtures . . . . . . . . . $ 122 $ 64
Machinery and equipment . . . . . . . . . 445 297
Computer equipment . . . . . . . . . . . 177 46
Leasehold improvements . . . . . . . . . 266 106
--------- --------
1,010 513
Less accumulated depreciation
and amortization . . . . . . . . . . . . 302 128
--------- --------
Net property and equipment . . . . . . . $ 708 $ 385
========= ========
</TABLE>

Property and equipment having a net book value of $37,000 at December
31, 1997 has been pledged to secure related liabilities.

NOTE 4 -- STOCKHOLDERS' EQUITY

The Company completed a public offering of 1,380,000 shares of common
stock at $14.00 per share in February, 1997. The proceeds to the Company of
$17,469,000 was net of direct expenses of the offering totaling $1,851,000. In
connection with this public offering, the Company issued to the representatives
of the underwriters warrants to purchase in the aggregate up to 69,000 shares
of Common Stock (the "Representatives' Warrants") at an exercise price per
share equal to 120% of the public offering price per share. The
Representatives' Warrants are exercisable for a period of four years commencing
January 24, 1998. The holders of the Representatives' Warrants will have no
voting, dividend or other stockholder rights until the Representatives'
Warrants are exercised. The Company has granted the Representatives certain
registration rights related to the Representatives' Warrants.

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 31, 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 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 5 -- STOCK OPTION PLAN

Under the Company's 1997 and 1990 Stock Option Plans (the "Plans")
options to purchase a maximum of 1,500,000 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 422 of the Internal Revenue Code of
1986, as amended (the "Code"). The 1997 Stock Option Plan covering 800,000
shares has been approved by the Board of Directors and is subject to approval
by the shareholders.

- 26 -
<PAGE> 28

The Plans provide 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 Plans, 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 Plans are administered
by the Company's Board of Directors. Options outstanding at December 31, 1997
are at prices ranging from $1.77 to $14.50 per share, the fair market value on
the date of grant, (except for non-qualified options for 100,000 shares granted
during 1997 at $8.75 per share, which were granted at $1.75 per share below
market value on the date of grant) and expire at various dates to December 17,
2002. In connection with the granting of the non-qualified options the company
recorded compensation expense and additional paid in capital was credited for
$175,000. The deferred taxes related to such compensation have been offset by
a corresponding valuation allowance. During the year ended December 31, 1997,
options to acquire 8,333 shares of stock at $1.77 and 6,666 shares at $.51 were
exercised. 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.

Data relating to these plans are as follows:

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, YEAR ENDED JUNE 30,
------------- ---------------- ---------------------------
1997 1996 1996 1995
------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
period . . . . . . . . . . . 459,299 244,249 214,749 174,998
Granted . . . . . . . . . . . . 461,902 225,800 34,500 149,750
Exercised . . . . . . . . . . . (14,999) --- --- (109,999)
Cancelled . . . . . . . . . . . (10,000) --- --- ---
Terminated . . . . . . . . . . (18,052) (10,750) (5,000) ---
------------- ---------------- ------------ ------------
Outstanding at end of period . 878,150 459,299 244,249 214,749
============= ================ ============ ============
</TABLE>

NOTE 6 -- INCOME TAXES

The Company's net deferred tax assets as of December 31, 1997 and
1996, are estimated as follows:

<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward . . . . . . . $ 3,280,000 $ 1,644,000
Research and Development Credits . . . . . . 285,000 69,000
Accrued liabilities . . . . . . . . . . . . . 70,000 ---
------------------ ------------------
Total deferred tax assets . . . . . . . . 3,635,000 1,713,000

Deferred tax liabilities:
Depreciation and amortization . . . . . . . . 8,000 4,000
------------------ ------------------
Total deferred tax liabilities . . . . . 8,000 4,000
------------------ ------------------
Net deferred tax assets . . . . . . . . . . . 3,627,000 1,709,000
Valuation allowance . . . . . . . . . . . . . (3,627,000) (1,709,000)
------------------ ------------------

Net deferred taxes . . . . . . . . . . . . . $ --- $ ---
------------------ ------------------
</TABLE>

A valuation allowance for 1997 and 1996 has been applied to offset the
respective deferred tax assets in recognition of the uncertainty that such tax
benefits will be realized.

At December 31, 1997, the Company has available net operating loss
carryforwards for federal and state income tax reporting purposes of
approximately $8,200,000, and has available research and development credit
carryforwards for federal income tax reporting purposes of approximately
$285,000, which are available to offset future taxable income, if any. These
carryforwards expire beginning in 2000. The Company's ability to use such net
operating loss and research

- 27 -
<PAGE> 29
and development credit carryforwards is limited by change of control provisions
under Section 382 of the Internal Revenue Code.

NOTE 7 -- COMMITMENTS AND CONTINGENCIES

(a) Employment Agreements:

The Company's Chief Executive Officer has an employment agreement
expiring December 31, 2000, receives base compensation of $230,000 per year,
and annual incentive compensation of up to 50% of base salary based on the
achievement of certain business objectives of the Company.

The Company's President has an employment agreement expiring October
5, 2000, receives base compensation of $215,000 per year, and annual incentive
compensation of up to 50% of base compensation based on the achievement of
certain business objectives of the Company.

(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>
1998.................................. $ 82,583
1999.................................. 83,583
2000.................................. 35,000
---------
Total........................ $ 201,166
=========
</TABLE>

Rental expense for real property aggregated approximately $95,000,
$83,000, $34,000, $43,000, $83,000, and $78,000 for the years ended December
31, 1997 and 1996, the six months ended December 31, 1996 and 1995 and for the
years ended June 30, 1996 and 1995, respectively.

NOTE 8 -- CONTRACTUAL AGREEMENTS

In January 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, which is
marketed by BMS as Stadol NS and quarterly royalty payments to the Company by
BMS are continuing. During 1997, Stadol NS was classified by the FDA as a
Schedule IV substance under the Controlled Substances Act which may negatively
affect future sales by BMS and royalties to the Company.

In December 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. During the course of the clinical research program, the
Company will be reimbursed for certain development expenses. In December 1997,
Pfizer exercised its option for an exclusive world wide license to manufacture
and market nasal Doxylamine. Pursuant to the definitive licensing agreement,
Pfizer has agreed to pay the company a royalty on the net sales of such product
based upon the product's classification as either an OTC or prescription
product.

- 28 -
<PAGE> 30
In July 1997, the Company exclusively licensed to Schwarz the right to
market the Company's Nascobal(TM) (Cyanocobalamin, USP) Gel in the U.S. The
Company retained worldwide manufacturing rights and the agreement provided for
a fixed manufacturing transfer price to Schwarz. Pursuant to the agreement the
Company will receive royalty payments from Schwarz based upon the net sales of
Nascobal(TM). The royalty rate is, in part, dependent upon sales volume, with
a minimum royalty of $2 million in 1998. The term of the agreement is for the
later of 15 years or the expiration of the applicable patent which expires in
2005.

In December 1997 the Company exclusively licensed to Schwarz the
right to market the Company's intranasal scopolamine gel in the U.S. Under the
terms of the agreement, the Company will receive royalty and manufacturing
payments from Schwarz. In addition, Schwarz will make milestone payments to
the Company estimated to be in excess of $5 million upon the achievement of
certain development milestones.

In September 1997, the Company entered into an agreement with Meda AB
of Goteborg, Sweden ("Meda"), giving Meda the exclusive right to market
Nascobal(TM) in Sweden, Denmark, Norway and Finland. Pursuant to the
agreement, the Company will receive revenue from the sale of Nascobal(TM) to
Meda and a license fee upon the occurrence of certain regulatory approvals and
commercial events in the Nordic countries.

NOTE 9 -- STOCK-BASED COMPENSATION

The per share weighted average fair value of stock options granted
during the year ended December 31, 1997, the six months ended December 31, 1996
and the year ended June 30, 1996 was $6.81, $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>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 JUNE 30, 1996
----------------- ----------------- -------------
<S> <C> <C> <C>
Expected dividend yield - 0-% - 0 -% - 0 -%
Risk free interest rate 6% 6% 6%
Expected stock volatility 65% 54% 49%
Expected option life 5 years 5 years 5 years
</TABLE>

The Company applies APB Opinion No. 25 in accounting for its Plans
and, accordingly, no compensation cost, except as noted in Note 5 in 1997, 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>
YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 JUNE 30, 1996
------------------- -------------------- ----------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net income (loss):
As reported . . . . . . . . . $ (4,546) $ (353) $ 119
Pro forma . . . . . . . . . . $ (6,515) $ (1,263) $ 69
Net earnings (loss) per share:
As reported . . . . . . . . . $ (.76) $ (.08) $ .03
Pro forma . . . . . . . . . . $ (1.09) $ (.30) $ .02
</TABLE>

Proforma net income reflects only options granted during the year
ended December 31, 1997, 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 10 -- RELATED PARTY TRANSACTIONS

A member of the Board of Directors is affiliated with consulting firms
which provided services to the Company in 1997. Fees earned by such affiliates
were $294,000.

- 29 -
<PAGE> 31
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 31 Chairman

Dr. Vincent D. Romeo 41 Chief Executive Officer

Robert H. Rosen 41 President

Dr. Charan R. Behl 46 Executive Vice President of Research
and Development

Andrew P. Zinzi 51 Chief Financial Officer

Joel Girsky 58 Director, Secretary, Treasurer

Grant W. Denison, Jr 48 Director

Dr. Ian R. Ferrier 54 Director

Alvin Katz 68 Director

John V. Pollock 59 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 in a
senior management position at 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

- 30 -
<PAGE> 32
American College of Clinical Pharmacology, the Rho Chi Pharmaceutical Society,
and the New York Academy of 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.

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 Theracom 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 Theracom, Mr. Rosen held increasingly higher positions
at Genentech 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 Genentech, Mr. Rosen was
marketing manager at KabiVitrum Inc. where he was responsible for establishing
a U.S. presence for several hematological products. Mr. Rosen received a BS in
Pharmacy from Northeastern University.

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.

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.

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 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

- 31 -
<PAGE> 33
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 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 officers, directors, employees and agents against certain
liabilities.

ITEM 11 - EXECUTIVE COMPENSATION

Information with respect to executive compensation is set forth in the
Proxy Statement for the Annual Meeting of Shareholders of the Company under the
caption "Executive Compensation and Other Information", and is incorporated
herein by reference.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with respect to security ownership of certain beneficial
owners and management is set forth in the Proxy Statement for the Annual
Meeting of Shareholders of the Company under the caption "Security Ownership of
Certain Beneficial Owners and Management", and is incorporated herein by
reference.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to certain relationships and related
transactions is set forth in the Proxy Statement for the Annual Meeting of
Shareholders of the Company under the caption "Certain Relationships and
Related Transactions", and is incorporated herein by reference.

- 32 -
<PAGE> 34
PART IV

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

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

EXHIBIT NO. DESCRIPTION
----------- -----------

3.1 Articles of Incorporation of Registrant, as amended and filed
with the Secretary of State of Delaware on November 8, 1993.
(Filed as Exhibit 3A to the Company's Registration Statement
on Form SB-2, as amended (Commission File No. 33-70180), filed
on October 12, 1993, and incorporated herein by reference.)
3.2 Amended By-Laws of Registrant. (Filed as Exhibit 3B to the
Company's Registration Statement on Form SB-2, as amended
(Commission File No. 33-70180), filed on October 12, 1993, and
incorporated herein by reference.)
3.3 Certificate of Amendment of Certificate of Incorporation of
Registrant, as filed with the Secretary of State of Delaware
on December 30, 1996. (Filed as Exhibit 3.3 to the Company's
Registration Statement on Form S-2 (Commission File No.
333-16507), filed on November 20, 1996, and incorporated
herein by reference.)
4.1 Form of Representatives' Warrant (Filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-2 (Commission File
No. 333-16507), filed on November 20, 1996, and incorporated
herein by reference.)
10.1 Licensing Agreement with UKRF. (Filed as Exhibit 10.4 to the
Company's Registration Statement on Form S-18, as amended
(Commission File No. 2-88605-NY), filed on December 23, 1983,
and incorporated herein by reference.)
10.2 Lease for facilities at 45 Davids Drive, Hauppauge, NY.
(Filed as Exhibit 10B to the Company's Annual Report on Form
10-KSB for the year ended June 30, 1995 (Commission File No.
0-13789), and incorporated herein by reference.)
10.3 Sublicense Agreement with Bristol-Myers Squibb Co. (Filed as
Exhibit 10E to the Company's Registration Statement on Form
S-1, as amended (Commission File No. 33-5717), filed on May
15, 1986, and incorporated herein as reference.)
10.4 Agreements between Registrant, and RiboGene, Inc. (as
successor in interest to Rugby Laboratories, Inc., and Darby
Pharmaceuticals, Inc.) (Filed as Exhibit 10D to the Company's
Registration Statement on Form S-1, as amended (Commission
File No. 33-5717), filed on May 15, 1986, and incorporated
herein by reference.)
10.5 1995 Agreement between the Registrant and RiboGene, Inc.
(Filed as Exhibit 10F to the Company's Annual Report on Form
10-KSB for the year ended June 30, 1995 (Commission File No.
0-13789), and incorporated herein by reference.)
10.6 Stock Option Agreements. (Filed as Exhibit 10M to the
Company's Annual Report on Form 10-KSB for the year ended June
30, 1995 (Commission File No. 0-13789), and incorporated
herein by reference.)
10.7 License Agreement with The DuPont Merck Pharmaceutical
Company. (Filed as Exhibit 10N to the Company's Registration
Statement on Form SB-2, as amended (Commission File No.
33-70180), filed on October 12, 1993, and incorporated herein
by reference.)
10.8 Nasal Drug Evaluation and Option Agreement. (Filed as Exhibit
10K to the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1996 (Commission File No. 0-13789), and
incorporated herein by reference.)
10.9 Agreement with Ciba Self-Medication, Inc. (Filed as Exhibit
10J to the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1996 (Commission File No. 0-13789), and
incorporated herein by reference.)
10.10 Employment Agreement with Andrew P. Zinzi. (Filed as Exhibit
10.11 to the Company's Registration Statement on Form S-2
(Commission File No. 333-16507), filed on November 20, 1996,
and incorporated herein by reference.)
10.11 Employment Agreement with Dr. Vincent D. Romeo.
10.12 Employment Agreement with Robert H. Rosen.
10.13 Evaluation and Option Agreement with the Consumer Health Care
Division of Pfizer Inc. (Filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-2 (Commission File
No. 333-16507), filed on November 20, 1996, and incorporated
herein by reference.)

- 33 -
<PAGE> 35
10.14 Development and License Agreement with DynaGen, Inc. (Filed
as Exhibit 10.13 to the Company's Registration Statement on
Form S-2 as amended (Commission File No. 333-16507), filed on
November 20, 1996, and incorporated herein by reference.)
10.15 License and Supply Agreement with Schwarz Pharma, Inc. (Filed
as Exhibit 10J to the Company's Financial Report on Form 10Q
for the Quarter Ended June 30, 1997 (Commission File
No.000-13789), filed on August 14, 1997, and incorporated
herein by reference.)
10.16 License and Supply Agreement with Schwarz Pharma, Inc.
10.17 License and Supply Agreement with Meda AB.

- 34 -
<PAGE> 36
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 24, 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 March 27, 1998
- ---------------------------
Devin N. Wenig

/s/ Vincent D. Romeo Chief Executive Officer
- --------------------------- (Principal Executive Officer) March 27, 1998
Vincent D. Romeo, Ph.D.

/s/ Robert Rosen President
- ---------------------------
Robert Rosen March 27, 1998

/s/ Andrew Zinzi Chief Financial Officer March 27, 1998
- --------------------------- (Principal Financial and Accounting Officer)
Andrew Zinzi

/s/ Joel Girsky Director, Secretary/Treasurer March 27, 1998
- ---------------------------
Joel Girsky

/s/ Grant W. Denison Director March 27, 1998
- ---------------------------
Grant W. Denison

/s/ Ian R. Ferrier Director March 27, 1998
- ---------------------------
Dr. Ian R. Ferrier

/s/ Alvin Katz Director March 27, 1998
- ---------------------------
Alvin Katz

/s/ John V. Pollock Director March 27, 1998
- ---------------------------
John V. Pollock
</TABLE>

- 35 -
<PAGE> 37
Index to Exhibits

<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.11 Employment Agreement with Dr. Vincent D. Romeo

10.12 Employment Agreement with Robert H. Rosen

10.16 License and Supply Agreement with Schwarz Pharma
December 1997

10.17 License and Supply Agreement with Meda AB
</TABLE>

- 36 -

<PAGE> 1

EMPLOYMENT AGREEMENT

AGREEMENT, dated this 1st day of September, 1997 between Nastech
Pharmaceutical Company Inc., a Delaware corporation (the "Company") with
offices at 45 Davids Drive, Hauppauge, NY and Vincent D. Romeo, Ph.D. (the
"Executive").

W I T N E S S E T H :

WHEREAS, the Company and the Executive wish to enter into an
employment and compensation arrangement on the following terms and conditions;

1. Employment. Subject to the terms and conditions of this Agreement,
the Company agrees to employ the Executive as its President during the
Employment Period (as defined in Section 7) and to perform such acts and duties
and furnish such services to the Company and its affiliates and related parties
as the Company's Board of Directors shall from time to time direct. The
Executive shall have general and active charge of the business and affairs of
the Company as its Chief Executive Officer, subject to the provisions of
Section 8(b) hereof, and in such capacity shall have responsibility for the
day-to-day operations of the Company, subject to the authority and control of
the Board of Directors of the Company. During the Employment Period, the
Company shall continue to take such actions as necessary to cause the
Executive's nomination as a member of the Board of Directors of the Company.
The Executive hereby accepts such employment and agrees to devote his full time
and best efforts to the duties provided herein, provided, that the Executive
may engage in other business activities which (i) involve no conflict of
interest with the interests of the Company (subject to approval by the Board of
Directors, which approval shall not be unreasonably withheld) and (ii) do not
materially interfere with the performance by the Executive of his duties under
this Agreement.

2. Compensation.

(a) As recognition for the Executive's contribution with respect
to the regulatory approval of Nascobal the Company shall pay the Executive
$60,000 upon the execution of this Agreement.

(1)
<PAGE> 2
(b) For services rendered to the Company during the term of this
Agreement, the Company shall compensate the Executive with an initial salary,
payable in bi-weekly installments, of $230,000 per annum.

3. Incentive Compensation. The Executive shall also be entitled to
annual incentive compensation of up to fifty (50)% of the applicable base
salary if the Company's business objectives as set forth in the Company's
annual business plan are achieved. Such business objectives shall be heavily
weighted to include the performance of the Company's Common Stock on the Nasdaq
National Market as well as material business and research and development
accomplishments. The nature and extent of such incentive compensation shall be
determined by the Compensation Committee of the Company's Board of Directors no
later than ninety (90) days following the end of the Company's fiscal year.

4. Stock Options. As further compensation, Employee shall be issued
60,000 incentive stock options (subject to allowable limitations set forth in
the Internal Revenue Code of 1986, as amended, hereinafter "stock options")
upon the effective date of this Agreement. The stock options shall be issued at
the fair market value of the Employer's common stock as of the date of this
Agreement and shall then be vested at 33 1/3% per full year of service (and
shall not be vested for interim periods on a pro-rata basis, except as
otherwise provided in the applicable Stock Option Agreement) from the date of
this Agreement, over a three year period, all of the foregoing to be in
accordance with the provisions of Employer's Stock Option Plan, as may be
amended from time to time, which is incorporated by reference herein.

If the Executive's employment is terminated (i) because of his death
or disability pursuant to Section 8 of this Agreement, (ii) by the Company for
any reason other than for Cause or (iii) by the Executive for Good Reason:

(x) the portion of the stock option which was exercisable
at termination shall remain exercisable for a period of 1 year after such date;
and

(y) with respect to that portion, if any, of the stock
option which was not yet exercisable at termination, such portion shall
immediately become exercisable and shall remain exercisable until the end of
such 1-year period. The stock option shall be memorialized in a separate
written stock option agreement reasonably satisfactory to the Company and the
Executive.

(2)
<PAGE> 3
In the event that the Common Stock to be issued upon the exercise of
said options has not been registered under the Securities Act of 1933 (the
"Act"), it must be held by the Executive indefinitely, and may not be sold or
disposed of unless (i) a registration statement covering those shares becomes
effective under the Act, or (ii) if an exemption from registration becomes
available. The Company is not under any obligation to register the shares under
the Act. The Company shall use its best efforts to timely file all reports,
statements and other documents as may be required under the Securities and
Exchange Act of 1934 to keep available the exemption under Rule 144 of the Act
or other comparable rules or regulations of the Securities and Exchange
Commission.

5. Benefits. During the Employment Period, the Company shall
provide or cause to be provided to the Executive such employee benefits as are
provided to other executive officers of the Company, including family medical
and dental, disability and life insurance, and participation in pension and
retirement plans, incentive compensation plans, stock option plans and other
benefit plans. During the Employment Period, the Company may provide or cause
to be provided to the Executive such additional benefits as the Company may
deem appropriate from time to time.

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

7. Term; Employment Period. The "Employment Period" shall commence
on the date of this Agreement and shall terminate 3 years and 4 months
thereafter, unless extended by written agreement between the parties or unless
earlier terminated pursuant to Section 8. If the Executive shall remain in the
full-time employ of the Company beyond the Employment Period without any
written agreement between the parties, this Agreement shall be deemed to
continue on a month to month basis and either party shall have the right to
terminate this Agreement at the end of any ensuing calendar month on written
notice of at least 30 days.

8. Termination.

(a) Executive's employment with the Company shall be "at will".
Either the Company or the Executive may terminate this Agreement and
Executive's employment at any time, with or without Cause or Good Reason (as
such terms are defined below), in its or his sole discretion, upon thirty (30)
days' prior written notice of termination.

(3)
<PAGE> 4
(b) Without limiting the foregoing Section 8(a), (i) the Executive
may terminate his employment with the Company at any time for Good Reason, or
(ii) the Company may terminate his employment at any time for Cause. "Good
Reason" shall mean death, Disability (as defined below) or a termination of
employment as a result of a substantial diminution in the Executive's
responsibilities, or base salary below $230,000 or a demotion in title or
status. Notwithstanding the foregoing, the Executive acknowledges and agrees
that the Company may recruit and hire another executive officer to serve as its
Chief Executive Officer during the term of this Agreement. Such event shall not
be deemed Good Reason so long as the Executive retains (i) either the title of
President, Chief Scientific Officer or Chief Operating Officer and (ii)
responsibility for the scientific, research and development functions of the
Company subject only to the authority and control of the Board of Directors of
the Company. "Cause" shall mean (i) the Executive's willful, repeated or
neglectful failure to perform his duties hereunder or to comply with any
reasonable or proper direction given by or on behalf of the Company's Board of
Directors following ten (10) days written notice to such effect; (ii) the
Executive being guilty of serious misconduct on the Company's premises or
elsewhere, whether during the performance of his duties or not, which may cause
damage to the reputation of the Company or render it difficult for the
Executive to satisfactorily continue to perform his duties; (iii) the Executive
being found guilty in a criminal court of any offense of a nature likely to
affect the reputation of the Company or to prejudice its interests if the
Executive were to continue to be employed by the Company; (iv) the Executive's
commission of any act of fraud, theft or dishonesty, or any intentional tort
against the Company; or (v) the Executive's violation of any of the material
terms, covenants, representations or warranties contained in this Agreement.

(c) "Disability" shall mean that the Executive, in the good faith
determination of the Board of Directors of the Company, is unable to render
services of the character contemplated hereby and that such inability (i) may
be expected to be permanent, or (ii) may be expected to continue for a period
of at least six (6) consecutive months (or for shorter periods totaling more
than six (6) months during any period of twelve consecutive months).
Termination resulting from Disability may only be effected after at least
thirty (30) days written notice by the Company of its intention to terminate
the Executive's employment.

(d) "Termination Date" shall mean (i) if this Agreement is
terminated on account of death, the date of death; (ii) if this Agreement is
terminated for Disability, the date established by

(4)
<PAGE> 5
the Company pursuant to Section 8(c) hereof; (iii) if this Agreement is
terminated by the Company, the date on which a notice of termination is given
to the Executive; (iv) if the Agreement is terminated by the Executive, the
date the Executive ceases work; or (v) if this Agreement expires by its terms,
the last day of the term of this Agreement.

9. Severance.

(a) If (i) the Company terminates the employment of the Executive
against his will and without Cause, or (ii) the Executive terminates his
employment for Good Reason (excluding death or Disability), the Executive shall
be entitled to receive salary, target incentive compensation and vacation
accrued through the Termination Date plus the balance of the Executive's
compensation hereunder to the end of the term of this Agreement computed using
the latest applicable salary rate. The Company shall make such termination
payment within 30 days of such termination. Notwithstanding the foregoing, the
Company shall not be required to pay any severance pay for any period following
the Termination Date if the Executive violates the provisions of Section 15,
Section 16 or Section 17 of this Agreement. In such event, the Company shall
provide written notice to the Executive detailing such violation.

(b) If, the Executive's employment is terminated due to death or
Disability, then the Executive, his estate or legal representatives, as the
case may be, shall be entitled to receive earned incentive compensation and
accrued vacation through the Termination Date as well as six months' severance
pay.

(c) If (i) the Executive voluntarily terminates his employment
other than for Good Reason, or (ii) the Executive is terminated by the Company
for Cause, then the Executive shall be entitled to receive salary and accrued
vacation through the Termination Date only.

(d) In addition to the provisions of Section 9(a), 9(b) and 9(c)
hereof, to the extent COBRA shall be applicable to the Company or as provided
by law, the Executive shall be entitled to continuation of group health plan
benefits for the required time period following the Termination Date if the
Executive makes the appropriate conversion and payments.

(5)
<PAGE> 6
(e) The Executive acknowledges that, upon termination of his
employment, he is entitled to no other compensation, severance or other
benefits other than those specifically set forth in this Agreement or any
applicable Stock Option Agreement.

10. Expenses. The Company shall pay or reimburse the Executive for
all expenses normally reimbursed by Company, reasonably incurred by him in
furtherance of his duties hereunder and authorized and approved by the Company
in compliance with such rules relating thereto as the Company may, from time to
time, adopt and as may be required in order to permit such payments as proper
deductions to Company under the Internal Revenue Code of 1986, as amended, and
the rule and regulations adopted pursuant thereto now or hereafter in effect.

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

12. Mitigation Not Required. In the event this Agreement is
terminated, the Executive shall not be required to mitigate amounts payable
pursuant hereto by seeking other employment or otherwise. The Executive's
acceptance of any such other employment shall not diminish or impair the
amounts payable to the Executive pursuant hereto.

13. Place of Performance. The Executive shall perform his duties
primarily in Hauppauge, New York or locations within a reasonable proximity
thereof, except for reasonable travel as the performance of the Executive's
duties may require.

14. Insurance and Indemnity. During the Employment Period, if
available at reasonable costs, the Company shall maintain, at its expense,
officers and directors fiduciary liability insurance covering the Executive and
all other executive officers and directors in an amount of no less than
$1,000,000. The Company shall also indemnify the Executive, to the fullest
extent permitted by law, from any liability asserted against or incurred by the
Executive by reason of the fact that the Executive is or was an officer or
director of the Company or any affiliate or related party or is or was serving
in any capacity at the request of the Company for any other corporation,
partnership, joint venture, trust, employment benefit plan or other enterprise.
This indemnity shall survive termination of this Agreement.

(6)
<PAGE> 7
15. Noncompetition.

A. The Executive agrees that, except in accordance with his
duties under this Agreement on behalf of the Company, he will not during the
term of this Agreement:

Participate in, be employed in any capacity by, serve as director,
consultant, agent or representative for, or have any interest, directly or
indirectly, in any enterprise which is engaged in the business of formulating,
developing, distributing, selling or otherwise trading in pharmaceutical
products which are competitive to any products manufactured, sold or otherwise
traded in by the Company or any of its subsidiaries during the term of the
Executive's employment with the Company, or which are competitive to any
products being actively developed, with the bona fide intent to market same, by
the Company or any of its subsidiaries during the term of the Executive's
employment with the Company;

In addition, the Executive agrees that for a period of two years after
the end of the term of this Agreement (unless this Agreement is terminated due
to a breach of the terms hereof by the Company in failing to pay to the
Executive all sums due him under the terms hereof, in which event the following
shall be inapplicable), the Executive shall observe the covenants set forth in
this Section 15 and shall not own, either directly or indirectly or through or
in conjunction with one or more members of his or his spouse's family or
through any trust or other contractual arrangement, a greater than five percent
(5%) interest in, or otherwise control either directly or indirectly, any
partnership, corporation, or other entity which engages in the field of nasal
drug delivery or other pharmaceutical products which are competitive to any
products or services being developed, distributed, sold, or otherwise traded in
by the Company or any its subsidiaries, during the term of this Agreement, or
being actively developed by the Company or any of its subsidiaries during the
term of this Agreement with the Company with a bona fide intent to market same.
Executive further agrees, for such two year period following termination, to
refrain from directly or indirectly soliciting Company's vendors, collaborative
partners or employees.

(7)
<PAGE> 8
available at law, also may enforce the terms of this Section 15 by injunction
or specific performance, and may obtain any other appropriate remedy available
in equity.

16. Assignment of Patents. Executive shall disclose fully to the
Company any and all discoveries he shall make and any and all ideas, concepts
or inventions which he shall conceive or make during his period of employment,
or during the period of six months after his employment shall terminate, which
are in whole or in part the result of his work with the Company. Such
disclosure is to be made promptly after each discovery or conception, and the
discovery, idea, concept or invention will become and remain the property of
the Company, whether or not patent applications are filed thereon. Upon
request and at the expense of the Company, the Executive shall make application
through the patent solicitors of the Company for letters patent of the United
States and any and all other countries at the discretion of the Company on such
discoveries, ideas and inventions, and to assign all such applications to the
Company, or at its order, forthwith, without additional payment by the Company
during his period of employment and for reasonable compensation for time
actually spent by the Executive at such work at the request of the Company
after the termination of the employment. He is to give the Company, its
attorneys and solicitors, all reasonable assistance in preparing and
prosecuting such applications and, on request of the Company, to execute all
papers and do all things that may be reasonably necessary to protect the right
of the Company and vest in it or its assigns the discoveries, ideas or
inventions, applications and letters patent herein contemplated. Said
cooperation shall also include all actions reasonably necessary to aid the
Company in the defense of its rights in the event of litigation.

17. Trade Secrets.

A. In the course of the term of this Agreement, it is anticipated
that the Executive shall have access to secret or confidential technical and
commercial information, records, data, specifications, systems, methods,
formulations, plans, policies, inventions, material and other knowledge
("Confidential Material") owned by the Company and its subsidiaries. The
Executive recognizes and acknowledges that included within the Confidential
Material are the Company's confidential commercial information, technology,
research and development information, methods of nasal drug formulation and
manufacture, and related materials, all as they may exist from time to time,
and that they are valuable special and unique aspects of the Company's
business. All such Confidential material shall be and remain the property of
the Company. Except as required by his

(8)
<PAGE> 9
duties to the Company, the Executive shall not, directly or indirectly, either
during the term of his employment or at any time thereafter, disclose or
disseminate to anyone or make use of, for any purpose whatsoever, any
Confidential Material. Upon termination of his employment, the Executive shall
promptly deliver to the Company all Confidential Material (including all copies
thereof, whether prepared by the Executive or others) which are in the
possession or under the control of the Executive. The Executive shall not be
deemed to have breached this Section 17 if the Executive shall be specifically
compelled by lawful order of any judicial, legislative, or administrative
authority or body to disclose any confidential material or else face civil or
criminal penalty or sanction.

B. The Executive hereby agrees that damages and any other remedy
available at law would be inadequate to redress or remedy any loss or damage
suffered by the Company upon any breach of the terms of this Section 17 by the
Executive, and the Executive therefore agrees that the Company, in addition to
recovering on any claim for damages or obtaining any other remedy available at
law, also may enforce the terms of this Section 17 by injunction or specific
performance, and may obtain any other appropriate remedy available in equity.

18. Payment and Other Provisions After Change of Control

(a) In the event Executive's employment with the Company is
terminated within one year following the occurance of a Change of Control
(other than as a consequence of death or disability) either (x) by the Company
for any reason other than for Cause, or (y) by Executive for Good Reason, then
Executive shall be entitled to receive from the Company, in lieu of the
severance payment otherwise payable pursuant to Section 9(a), the following:

(i) Base Salary: The balance of the Executive's
compensation hereunder from the Termination Date to the end of the term of this
Agreement computed using the latest applicable salary rate, shall be paid on
the Termination Date;

(ii) Target Incentive Compensation: The amount of the
Executive's target incentive compensation under the applicable Executive Bonus
Plan for the fiscal year in which the date of termination occurs, shall be
paid on the Termination Date; and

(9)
<PAGE> 10
(iii) Other Benefits: Notwithstanding the vesting period
provided for in the Company's Stock Option Plan and any related stock option
agreements between the Company and the Executive for stock options ("options")
granted Executive by the Company all of options shall be fully vested and
exercisable upon a Change of Control and termination of employment.

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

(i) The acquisition, other than from the Company, by any
individual, entity or group (within the meaning of Rule 13d-3
promulgated under the Exchange Act or any successor provision) (any of
the foregoing described in this Paragraph 18.b.i hereafter a "Person")
of 50% or more of either (a) the then outstanding shares of Capital
Stock of the Company (the"Outstanding Capital Stock") or (b) the
combined voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors (the
"Voting Securities"), provided, however, that any acquisition by (x)
the Company or any of its subsidiaries, or any employee benefit plan
(or related trust) sponsored or maintained by the Company or any of
its subsidiaries or (y) any Person that is eligible, pursuant to Rule
13d-1(b) under the Exchange Act, to file a statement on Schedule 13G
with respect to its beneficial ownership of Voting Securities, whether
or not such Person shall have filed a statement on Schedule 13G,
unless such Person shall have filed a statement on Schedule 13D with
respect to beneficial ownership of 50% or more of the Voting
Securities or (z) any corporation with respect to which, following
such acquisition, more than 60% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting
power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Capital Stock and Voting Securities
immediately prior to such acquisition in substantially the same
proportion as their ownership, immediately prior to such acquisition,
of the Outstanding Capital Stock and Voting Securities, as the case
may be, shall not constitute a Change of Control; or

(ii) Individuals who, as of the Effective Date, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board, provided that

(10)
<PAGE> 11
any individual becoming a director subsequent to the date hereof whose
election or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
is in connection with an actual or threatened election contest
relating to the election of the Directors of the Company (as such
terms are used in Rule 14a-11 of Regulation 14A, or any successor
section, promulgated under the Exchange Act); or

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

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

19. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if sent by registered or
certified mail, return receipt requested to his residence in the case of the
Executive, or to its principal office in the case of the Company, or to such
other addresses as they may respectively designate in writing.

(11)
<PAGE> 12
20. Entire Agreement; Waiver. This Agreement contains the entire
understanding of the parties and may not be changed orally but only by an
agreement in writing, signed by the party against whom enforcement of any
waiver, change, modification or discharge is sought. Waiver of or failure to
exercise any rights provided by this Agreement in any respect shall not be
deemed a waiver of any further or future rights.

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

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

23. Governing Law; Arbitration. This Agreement shall be construed in
accordance with and governed for all purposes by the laws and public policy of
the State of New York applicable to contracts executed and to be wholly
performed within such state. Any dispute or controversy arising out of or
relating to this Agreement shall be settled by arbitration in accordance with
the rules of the American Arbitration Association and judgment upon the award
may be entered in any court having jurisdiction 1thereover. The arbitration
shall be held in Suffolk County, New York or in such other place as the parties
hereto may agree.

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

25. Severability. The parties agree that if any one or more of the
terms, provisions, covenants or restrictions of this Agreement shall be
determined by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and

(12)
<PAGE> 13
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.

26. Counterparts. This Agreement maybe executed in several
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same Agreement.

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

NASTECH PHARMACEUTICAL COMPANY INC.

By [SIG]
-----------------------------------------

/s/ VINCENT D. ROMEO
-----------------------------------------
VINCENT D. ROMEO Ph.D.

(13)

<PAGE> 1
EMPLOYMENT AGREEMENT

AGREEMENT, dated this 5th day of January, 1998 between Nastech
Pharmaceutical Company Inc., a Delaware corporation (the "Company") with
offices at 45 Davids Drive, Hauppauge, NY and Robert H. Rosen (the
"Executive").

W I T N E S S E T H :

WHEREAS, the Executive was formerly employed as Executive Vice
President for the Company and as of October 7, 1997 assumed the additional
responsibilities as set forth herein; and

WHEREAS, the Company and the Executive wish to formalize the
Executive's assumption of the title of President of the Company and enter into
an employment and compensation arrangement on the following terms and
conditions.

1. Employment. Subject to the terms and conditions of this Agreement,
the Company agrees to employ the Executive as its President during the
Employment Period (as defined in Section 7) and to perform such acts and duties
and furnish such services to the Company and its affiliates and related parties
as the Company's Board of Directors shall from time to time direct. The
Executive shall have responsibility for the strategic planning, business
development and business operations of the Company, subject to the authority
and control of the Chief Executive Officer and the Board of Directors of the
Company. The Executive hereby accepts such employment and agrees to devote his
full time and best efforts to the duties provided herein, provided, that the
Executive may engage in other business activities which (i) involve no conflict
of interest with the interests of the Company (subject to approval by the Board
of Directors, which approval shall not be unreasonably withheld) and (ii) do
not materially interfere with the performance by the Executive of his duties
under this Agreement.

2. Compensation. For services rendered to the Company during the term
of this Agreement, the Company shall compensate the Executive with an initial
salary, payable in bi-weekly installments, of $215,000 per annum.

(1)
<PAGE> 2
3. Incentive Compensation. The Executive shall also be entitled to
annual incentive compensation of up to fifty (50)% of the applicable base
salary if the Company's business objectives as set forth in the Company's
annual business plan are achieved. Such business objectives shall be heavily
weighted to include the performance of the Company's Common Stock on the Nasdaq
National Market as well as material business development and financial
accomplishments. The nature and extent of such incentive compensation shall be
determined by the Compensation Committee of the Company's Board of Directors no
later than ninety (90) days following the end of the Company's fiscal year.

4. Stock Options. As further compensation, subject to shareholder
approval of a new stock option plan, Executive shall be issued 40,000 incentive
stock options (subject to allowable limitations set forth in the Internal
Revenue Code of 1986, as amended, hereinafter "stock options") upon the
commencement of his employment in this capacity which date was October 7, 1997.
The stock options shall be issued at the fair market value of the Employer's
common stock as of the date of this Agreement and shall then be vested over a
three year period as follows: 50% for the first full year of service and 25%
per full year of service thereafter (and shall not be vested for interim
periods on a pro-rata basis, except as otherwise provided in the applicable
Stock Option Agreement) all of the foregoing to be in accordance with the
provisions of Employer's Stock Option Plan, as may be amended from time to
time, which is incorporated by reference herein.

(x) the portion of the stock option which was exercisable
at termination shall remain exercisable for a period of 1 year after such date;
and

In the event that the Common Stock to be issued upon the exercise of
said options has not been registered under the Securities Act of 1933 (the
"Act"), it must be held by the Executive indefinitely, and may not be sold or
disposed of unless (i) a registration statement covering those

(2)
<PAGE> 3
shares becomes effective under the Act, or (ii) if an exemption from
registration becomes available. The Company is not under any obligation to
register the shares under the Act. The Company shall use its best efforts to
timely file all reports, statements and other documents as may be required
under the Securities and Exchange Act of 1934 to keep available the exemption
under Rule 144 of the Act or other comparable rules or regulations of the
Securities and Exchange Commission.

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

7. Term; Employment Period. The "Employment Period" shall commence
on the date of this Agreement and shall terminate 2 years and 9 months
thereafter, unless extended by written agreement between the parties or unless
earlier terminated pursuant to Section 8. If the Executive shall remain in the
full-time employ of the Company beyond the Employment Period without any
written agreement between the parties, this Agreement shall be deemed to
continue on a month to month basis and either party shall have the right to
terminate this Agreement at the end of any ensuing calendar month on written
notice of at least 30 days.

8. Termination.

(b) Without limiting the foregoing Section 8(a), (i) the Executive
may terminate his employment with the Company at any time for Good Reason, or
(ii) the Company may terminate

(3)
<PAGE> 4
his employment at any time for Cause. "Good Reason" shall mean death,
Disability (as defined below) or a termination of employment as a result of a
substantial diminution in the Executive's responsibilities, or base salary
below $215,000 or a demotion in title or status. "Cause" shall mean (i) the
Executive's willful, repeated or neglectful failure to perform his duties
hereunder or to comply with any reasonable or proper direction given by or on
behalf of the Company's Chief Executive Officer or Board of Directors following
ten (10) days written notice to such effect; (ii) the Executive being guilty of
serious misconduct on the Company's premises or elsewhere, whether during the
performance of his duties or not, which may cause damage to the reputation of
the Company or render it difficult for the Executive to satisfactorily continue
to perform his duties; (iii) the Executive being found guilty in a criminal
court of any offense of a nature likely to affect the reputation of the Company
or to prejudice its interests if the Executive were to continue to be employed
by the Company; (iv) the Executive's commission of any act of fraud, theft or
dishonesty, or any intentional tort against the Company; or (v) the Executive's
violation of any of the material terms, covenants, representations or
warranties contained in this Agreement.

(d) "Termination Date" shall mean (i) if this Agreement is
terminated on account of death, the date of death; (ii) if this Agreement is
terminated for Disability, the date established by the Company pursuant to
Section 8(c) hereof; (iii) if this Agreement is terminated by the Company, the
date on which a notice of termination is given to the Executive; (iv) if the
Agreement is terminated by the Executive, the date the Executive ceases work;
or (v) if this Agreement expires by its terms, the last day of the term of this
Agreement.

(4)
<PAGE> 5
9. Severance.

(a) If (i) the Company terminates the employment of the Executive
against his will and without Cause, or (ii) the Executive terminates his
employment for Good Reason (excluding death or Disability), the Executive shall
be entitled to receive salary, target incentive compensation and vacation
accrued through the Termination Date plus the lesser of (x) six (6) months base
salary or (y) the balance of the Executive's compensation hereunder to the end
of the term of this Agreement computed using the latest applicable salary rate.
The Company shall make such termination payment within 30 days of such
termination. Notwithstanding the foregoing, the Company shall not be required
to pay any severance pay for any period following the Termination Date if the
Executive violates the provisions of Section 15, Section 16 or Section 17 of
this Agreement. In such event, the Company shall provide written notice to the
Executive detailing such violation.

(e) The Executive acknowledges that, upon termination of his
employment, he is entitled to no other compensation, severance or other
benefits other than those specifically set forth in this Agreement or any
applicable Stock Option Agreement.

(5)
<PAGE> 6
10. Expenses. The Company shall pay or reimburse the Executive for
all expenses normally reimbursed by Company, reasonably incurred by him in
furtherance of his duties hereunder and authorized and approved by the Company
in compliance with such rules relating thereto as the Company may, from time to
time, adopt and as may be required in order to permit such payments as proper
deductions to Company under the Internal Revenue Code of 1986, as amended, and
the rule and regulations adopted pursuant thereto now or hereafter in effect.

(6)
<PAGE> 7
15. Noncompetition.

A. The Executive agrees that, except in accordance with his
duties under this Agreement on behalf of the Company, he will not during the
term of this Agreement:

(7)
<PAGE> 8
available at law, also may enforce the terms of this Section 15 by injunction
or specific performance, and may obtain any other appropriate remedy available
in equity.

17. Trade Secrets.

18. Payment and Other Provisions After Change of Control

(a) In the event Executive's employment with the Company is
terminated within one year following the occurrence of a Change of Control
(other than as a consequence of death or disability) either (x) by the Company
for any reason other than for Cause, or (y) by Executive for Good Reason, then
Executive shall be entitled to receive from the Company, in lieu of the
severance payment otherwise payable pursuant to Section 9(a), the following:

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

(ii) Individuals who, as of the Effective Date, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board, provided that

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

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

(12)
<PAGE> 13
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.

26. Counterparts. This Agreement maybe executed in several
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same Agreement.

NASTECH PHARMACEUTICAL COMPANY INC.

By
-------------------------------------------

-------------------------------------------
ROBERT H. ROSEN

(13)

<PAGE> 1
[EXECUTION COPY]

LICENSE AND SUPPLY AGREEMENT

by and between

NASTECH PHARMACEUTICAL COMPANY INC.

and

SCHWARZ PHARMA, INC.

dated as of December 11, 1997
<PAGE> 2
TABLE OF CONTENTS

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SECTION 1
DEFINITIONS

SECTION 2
GRANT OF LICENSES; LICENSE OPTION

2.1 Grant of Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.2 Sublicenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3 Nastech Retained Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.4 Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.5 Additional Indication Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.6 Scopolamine Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

SECTION 3
ROYALTY AND MILESTONE PAYMENTS

3.1 Royalty and Milestone Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.2 Records and Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.3 Quarterly Reports of Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.4 Late Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

SECTION 4
SUPPLY OF SCOPOLAMINE UNITS

4.1 Supply of Scopolamine Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.2 Minimum Annual Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.3 Identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.4 Supply Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.5 Forecasts, Delivery and Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.6 Rejection and Replacement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.7 Invoice and Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.8 Supply Disruption; Alternate Manufacturing Site . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>

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<PAGE> 3
TABLE OF CONTENTS
(continued)

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SECTION 5
CONDITIONS PRECEDENT TO THE CLOSING;
CLOSING DATE; TERM OF AGREEMENT

5.1 Conditions Precedent to Schwarz's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.2 Conditions Precedent to Nastech's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.3 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

SECTION 6
REPRESENTATIONS AND WARRANTIES OF NASTECH

6.1 Organization, Power and Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.2 Due Authority; No Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.3 IND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.4 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.5 Technology Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.6 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.7 Governmental Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.8 Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.9 Implied Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

SECTION 7
REPRESENTATIONS AND WARRANTIES OF SCHWARZ

7.1 Organization, Power and Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.2 Due Authority; No Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.3 Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.4 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.5 Governmental Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

SECTION 8
ADDITIONAL COVENANTS AND AGREEMENTS OF THE PARTIES

8.1 Governmental Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.2 Responsibility for NDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.3 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
8.4 Recall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8.5 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>

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TABLE OF CONTENTS
(continued)

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8.6 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.7 Reasonable Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.8 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.9 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.10 Competition; No Sale for Resale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.11 Scopolamine Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.12 Conflicting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.13 Patent and Trademark Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8.14 Infringement; Enforcement of Proprietary Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.15 Supply of Scopolamine Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.16 Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.17 Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.18 Referral of Orders and Inquiries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.19 Deemed Breach of Covenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.20 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

SECTION 9
INDEMNIFICATION

9.1 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.2 Notice and Opportunity To Defend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.3 Indemnification Payment Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
9.4 Indemnification Payment Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.5 Indemnification Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.6 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

SECTION 10
TERMINATION

10.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

SECTION 11
MISCELLANEOUS

11.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
11.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.3 Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.4 Survival of Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>

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(continued)

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11.5 Independent Contractors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.7 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.9 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.10 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
11.11 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
11.12 No Third-Party Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
11.13 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
11.14 Attachments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>

<TABLE>
<CAPTION>
SCHEDULES
<S> <C>
Schedule 2.1(a) IND
Schedule 3.1(a) Royalty Payments
Schedule 3.1(b) Milestone Payments
Schedule 4.2(a) Sales Forecast
Schedule 4.5(d) Quality Assurance Addendum
Schedule 6.4 Intellectual Property
</TABLE>

-iv-
<PAGE> 6
LICENSE AND SUPPLY AGREEMENT

This LICENSE AND SUPPLY AGREEMENT ("Agreement"), dated as of December
11, 1997, is by and between NASTECH PHARMACEUTICAL COMPANY INC., a Delaware
corporation ("Nastech"), and SCHWARZ PHARMA, INC., a Delaware corporation
("Schwarz").

W I T N E S S E T H

WHEREAS, Nastech is engaged, among other things, in the business of
research, development, manufacturing and commercialization of nasally
administered forms of pharmaceutical products;

WHEREAS, Schwarz is engaged, among other things, in the business of
manufacturing, marketing and selling of pharmaceutical products; and

WHEREAS, subject to the terms and conditions set forth in this
Agreement, Nastech wishes to license to Schwarz and Schwarz wishes to license
from Nastech certain rights to a pharmaceutical specialty, containing
scopolamine as its active ingredient;

NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:

SECTION 1

DEFINITIONS

For purposes of this Agreement, the following terms shall have the
meanings set forth below:

"Activities" shall mean the manufacturing, promoting, marketing,
selling and distributing of Scopolamine in the Territory as contemplated by
this Agreement.

"Affiliates" shall mean, with respect to any Person, any Persons
directly or indirectly controlling, controlled by, or under common control
with, such other Person. For purposes hereof, the term "controlled" (including
the terms "controlled by" and "under common control with"), as used with
respect to any Person, shall mean the direct or indirect ability or power to
direct or cause the direction of management policies of such Person or
otherwise direct the affairs of such Person, whether through ownership of
voting securities or otherwise.

"Annual Net Sales" shall mean, for any Year, the Net Sales for such
Year.
<PAGE> 7
"Closing Date" shall have the meaning given in Section 5.3 hereof.

"Copyrights" shall mean all of Nastech's copyright rights in the
Territory that are used or exercised by Nastech solely in connection with the
Activities, including, without limitation, Nastech's copyright rights in the
Marketing and Pricing Data and the Marketing Materials.

"Damages" shall mean any and all actions, costs, losses, claims,
liabilities, fines, penalties, demands, damages and expenses, court costs, and
reasonable fees and disbursements of counsel, consultants and expert witnesses
incurred by a party hereto (including interest which may be imposed in
connection therewith).

"Defective" shall mean, as to any Scopolamine Unit, the failure of
such Scopolamine Unit to strictly conform to the Specifications, the NDA, this
Agreement and all applicable law, including, without limitation, PDMA.

"FDA" shall mean the United States Food and Drug Administration.

"GMP" shall mean current Good Manufacturing Practices, as determined
by the FDA from time to time.

"Improved Scopolamine Unit" shall mean an improved version of the
Scopolamine Unit that is approved for marketing by the FDA.

"IND" shall have the meaning set forth in Section 2.1(a).

"Indemnified Party" shall have the meaning given in Section 9.2
hereof.

"Indemnifying Party" shall have the meaning given in Section 9.2
hereof.

"Intellectual Property" shall mean, collectively, (i) the Copyrights,
(ii) the Patents, and (iii) the Marketing Materials.

"Launch" shall mean the date, after Scopolamine receives final
marketing approval from the FDA, when Scopolamine Units are first made
commercially available by Schwarz.

"Licensed Assets" shall have the meaning set forth in Section 2.1
hereof.

"Marketing and Research Data" shall mean, with respect to Scopolamine,
all Nastech customer lists, price lists, pricing information, studies, research
data and reports.

"Marketing Materials" shall mean all labeling, marketing and
promotional materials and inserts currently used by Nastech solely in
connection with the Activities.

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"Nastech" shall have the meaning given in the preamble and shall
include its Affiliates.

"NDA" shall have the meaning set forth in Section 2.1(a).

"Net Average Sales Price" shall, for any Quarter, mean (i) Net Sales
for such Quarter, divided by (ii) the number of Nascobal Units sold during such
Quarter.

"Net Sales" shall mean, with respect to Scopolamine, the gross amount
invoiced to unrelated third parties for Scopolamine in the Territory, less:

(a) trade and reasonable and customary cash discounts allowed;

(b) refunds, rebates, chargebacks, retroactive price adjustments
and any other allowances which effectively reduce the net
selling price; and

Such amounts shall be determined from books and records maintained in
accordance with GAAP, consistently applied.

"Patents" shall mean the provisional U.S. patent application serial
number 60/058,651 and those United States patents or patent applications
pending or filed by Nastech or its Affiliates (or the rights to which have been
assigned to Nastech) as of the date hereof relating to Scopolamine, including
any such patents and patent applications set forth on Schedule 6.4 hereto, and
any patents and patent applications resulting therefrom, including any
extension, reissue, renewal, reexamination or continuation-in-part of such
patent or patent application.

"PDMA" shall mean the Prescription Drug Marketing Act of 1987, as
amended from time to time, together with any rules or regulations promulgated
thereunder.

"Person" shall mean a natural person, a corporation, a partnership, a
trust, a joint venture, a limited liability company, any governmental authority
or any other entity or organization.

"Promotional Materials" shall mean any tangible advertising and
promotional labeling bearing a name (trade name or generic name) used in the
promotion of Scopolamine, including, without limitation, promotional materials
produced by Schwarz (examples include, but are not limited to, journal ads,
brochures, service items, managed care pull through sheets, formulary
presentations, price lists, monographs, Internet pages and telephone or
television advertisements) and materials produced by outside sources (examples
include, but are not limited to, medical reprints, textbooks and CME materials)
to the extent funded by, created in cooperation with, reviewed, or distributed
by Schwarz. The definition of Promotional Materials shall also include press
releases and other releases of information to the media regarding Scopolamine.

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"Quarter" shall mean, as the case may be, the three months ending on
March 31, June 30, September 30 or December 31 in any Year.

"Regulatory Problem" shall have the meaning given in Section 8.2(b).

"Schwarz" shall have the meaning given in the preamble and shall
include its Affiliates.

"Scopolamine" shall mean an intranasal form of scopolamine for the
prevention and treatment of motion sickness and all other additional
indications and product line extensions, in all dosage strengths and sizes that
may potentially, pursuant to applicable laws and regulations, be developed
under the IND and manufactured, marketed and sold in the Territory under the
NDA (when approved), together with all expansions and improvements to
Scopolamine which may be included in any supplement, modification or addition
to the NDA.

"Scopolamine Unit" shall mean a ready for sale packaged unit
containing (i) a sealed prescription vial containing a metered dose actuator
and a dust cover, (ii) a 5.0 ml glass bottle containing Scopolamine gel
solution, and (iii) a patient instruction sheet. A screw-on actuator is
provided. The actuator, following priming, will deliver 0.1 ml of the
Scopolamine gel solution. The dosing of the Scopolamine Unit is to be
determined, but will fall within a range of 0.1 mg to 0.4 mg per dose. One
bottle will deliver twenty-four doses.

"Specifications" shall mean, at any time, the specifications for
Scopolamine that are then approved by the FDA and contained in the NDA in
effect at such time.

"Target Indication" shall mean the multiple daily dosing for the
prevention and treatment of motion sickness.

"Technology" shall mean all of Nastech's Patents, technology, know-how
and all other information necessary to the manufacture of Scopolamine.

"Territory" shall mean the fifty (50) states, the District of Columbia
and the territories and possessions comprising the United States of America,
including Puerto Rico.

"Trademarks" shall have the meaning given in Section 8.13(b).

"Year" shall mean a calendar year during the term of this Agreement.

SECTION 2

GRANT OF LICENSES; LICENSE OPTION

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2.1 Grant of Licenses. Nastech hereby grants to Schwarz an
exclusive, even as to Nastech (except as set forth in Section 2.3), license
under the following assets to make, use and sell Scopolamine, for all
indications and for all product line extensions, in the Territory (such assets
are referred to herein collectively as the "Licensed Assets"):

(a) all of Nastech's rights under the Investigational New
Drug Application No. 33,983 filed by Nastech with the FDA for
Scopolamine (the "IND") (which IND is set forth on Schedule 2.1(a)),
any future New Drug Applications filed by Nastech with the FDA for
Scopolamine (collectively, the "NDA"), and all other regulatory
filings and approvals, registrations and governmental authorizations
that relate to Scopolamine in the Territory;

(b) the Intellectual Property;

(d) the Technology.

2.2 Sublicenses. The licenses granted herein shall not be
sublicensed by Schwarz without the prior written consent of Nastech, which
consent shall not be unreasonably withheld.

2.3 Nastech Retained Rights. Anything herein contained to the
contrary notwithstanding, Nastech shall retain at all times during the term of
this Agreement, and shall bear all costs associated with, all rights necessary:
(a) to manufacture, or to have manufactured, Scopolamine for Schwarz hereunder
and otherwise fulfill its obligations under this Agreement, (b) to manufacture,
have manufactured, use or sell Scopolamine in the Territory for any
subsequently developed product pursuant to Section 2.5, (c) to manufacture,
have manufactured, use or sell Scopolamine outside of the Territory, (d) to
manufacture or have manufactured Scopolamine in the Territory for sales outside
the Territory, and (e) subject to Section 8.3, to make such changes as Nastech
may deem reasonably appropriate in connection with any differing approach to
manufacturing it may adopt in a facility(ies) in which any of the components of
Scopolamine are produced. Except as provided by this Section, Nastech shall
have no right to use or sell the Licensed Assets.

2.4 Marketing. After Scopolamine receives final marketing approval
from the FDA, Schwarz shall use commercially reasonable efforts to market and
sell Scopolamine in the Territory. Such efforts shall be consistent with
industry norms, given the product profile, product potential and the state of
the market at Launch. Schwarz will consult with Nastech on the development of
Schwarz's marketing plan for the Scopolamine.

2.5 Additional Indication Option. Should Schwarz fail to (i) conduct
clinical studies within six months after approval of the NDA for the Target
Indication as to any single indication for Scopolamine in addition to the
Target Indication (an "Additional Indication"), (ii) provide

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Nastech with a plan for the development of such Additional Indication within
six months after approval of the NDA for the Target Indication, or (iii) submit
a NDA as to such Additional Indication within four years after approval of the
NDA for the Target Indication, then rights to all indications other than the
Target Indication (the "Other Indications") shall, at Nastech's option, revert
back to Nastech; provided, however, that (A) any product subsequently developed
by Nastech that is based on the Other Indications shall not appear
substantially similar to Scopolamine (including as further developed by
Schwarz) and shall not use the same or similar bottle, dispensed dose
concentration of active ingredient or packaging; (B) Nastech shall use its best
efforts throughout the term of this Agreement to prevent "off-label" sales of
such product from competing with sales of Scopolamine for the Target Indication
in the Territory; (C) Nastech shall not enter into any license, joint venture,
distribution, marketing, sales or similar agreement in respect of any product
based on an Other Indication unless such third party has agreed, for Schwarz's
benefit, to use its best efforts throughout the term of this Agreement to
prevent "off-label" sales of such product from competing with sales of
Scopolamine for the Target Indication in the Territory; and (D) all data,
discoveries, improvements, reports, research and studies generated by Schwarz
in connection with the development of any additional Indication shall be the
exclusive property of Schwarz. Notwithstanding the foregoing, (x) Nastech
shall cooperate and assist Schwarz in its development of an Additional
Indication; and (y) should Nastech fail to perform its obligations pursuant to
clause (y) of this sentence in any material respect, no rights to any Other
Indications shall revert to Nastech under this Section 2.5.

2.6 Scopolamine Development. Nastech shall have authority over the
development of Scopolamine in accordance with this Agreement, but shall consult
with Schwarz on all significant development issues. Nastech will develop
specifications for Scopolamine and conduct research and development necessary
or desirable to enable the production and marketing of Scopolamine for the
Target Indication. Further, Nastech will conduct all pre-clinical and clinical
trials and design specific protocols for Scopolamine that are, in each case,
necessary or desirable in obtaining a Letter of Approval from the FDA approving
the marketing of Scopolamine for the Target Indication. Nastech shall send
Schwarz a written report as to the status of Nastech's development efforts on
June 30 and December 31 of each Year prior to receiving the Letter of Approval
referenced above. Nastech shall use its best efforts to fulfill its
development obligations hereunder as expeditiously as possible.

SECTION 3

ROYALTY AND MILESTONE PAYMENTS

3.1 Royalty and Milestone Payments.

(a) Schwarz shall make combined royalty and cost of goods
payments to Nastech, at the times, in the amounts and subject to the
conditions set forth on Schedule 3.1(a).

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(b) Schwarz shall make milestone payments to Nastech, at the
times, in the amounts and subject to the conditions set forth on
Schedule 3.1(b).

(c) In the event that (i) the Net Average Sales Price falls
below $20.80, (ii) a Patent is not granted in respect of Scopolamine
before December 31, 2000 or any Patent is unenforceable, (iii) a
generic drug competitor with a nasal scopolamine product emerges, (iv)
there is an interruption in the supply of the Scopolamine for a period
of 60 days, and/or (v) the occurrence of any circumstance having a
materially adverse effect on Scopolamine which is beyond the control
of Schwarz, then, in each case, the obligation of Schwarz to make any
payments pursuant to Section 3.1(a) or Schedule 3.1(a) shall terminate
and be deemed waived by Nastech and shall be promptly renegotiated in
good faith by Schwarz and Nastech. Any renegotiated obligations
pursuant to this Section 3.1(c) shall be retroactively effective to
the date the applicable event described above occurred.

(d) In the event of any patent infringement, illegality or
severe side effect profile having a materially adverse effect on
Scopolamine, then the obligation of Schwarz to make any payments
pursuant to Section 3.1(b) or Schedule 3.1(b) shall terminate and be
deemed waived by Nastech and shall be promptly renegotiated in good
faith by Schwarz and Nastech. Any renegotiated obligations pursuant
to this Section 3.1(d) shall be retroactively effective to the date
the applicable event described above occurred.

3.2 Records and Audit.

(a) Schwarz and its Affiliates shall keep full, true and
accurate books of account containing all particulars that may be
necessary for the purpose of showing the amounts payable to Nastech
hereunder. Such books of account shall be kept at Schwarz's principal
place of business or the principal place of business of the
appropriate Affiliate of Schwarz to which this Agreement relates.
Such books and the supporting data shall be open, at all reasonable
times and upon reasonable notice during the term of this Agreement and
for 2 years after its termination, to the inspection of a firm of
certified public accountants selected by Nastech and reasonably
acceptable to Schwarz, for the limited purpose of verifying Schwarz's
royalty statements; provided, however, that such examination shall not
take place more often than once each Year and shall not cover more
than the preceding 3 Years, with no right to audit any period
previously audited. Except as otherwise provided in this Section,
the cost of any such examination shall be paid by Nastech. In the
event that any such inspection reveals a deficiency in excess of 5% of
the reported royalty for the period covered by the inspection, Schwarz
shall promptly pay Nastech the deficiency, plus interest, and shall
reimburse Nastech for the fees and expenses paid to such accountants
in connection with their inspection. The parties agree that neither
party shall be required to retain books and records with respect to
the above other than books and records relating to the current Year
and the immediately preceding 3 Years.

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(b) Nastech and its Affiliates shall keep full, true and
accurate books of account containing all particulars that may be
necessary for the purpose of showing the cost of manufacturing the
Scopolamine Units and Scopolamine samples supplied hereunder. Such
books of account shall be kept at Nastech's principal place of
business or the principal place of business of the appropriate
Affiliate of Nastech to which this Agreement relates. Such books and
the supporting data shall be open, at all reasonable times and upon
reasonable notice during the term of this Agreement and for 2 years
after its termination, to the inspection of a firm of certified public
accountants selected by Schwarz and reasonably acceptable to Nastech,
for the limited purpose of verifying the cost of manufacturing the
Scopolamine Units and Scopolamine samples supplied hereunder;
provided, however, that such examination shall not take place more
often than once each Year and shall not cover more than the preceding
3 Years, with no right to audit any period previously audited.
Except as otherwise provided in this Section, the cost of any such
examination shall be paid by Schwarz. In the event that any such
inspection reveals that the actual cost invoiced to Schwarz for
Scopolamine samples (prior to the 20% mark-up under Section 4.4(b))
exceeds the cost of manufacturing the Scopolamine samples by more than
5% during the period covered by the inspection, Nastech shall promptly
pay Schwarz the amount by which Schwarz previously overpaid for any
Scopolamine samples under Section 4.4(b), plus interest, and shall
reimburse Schwarz for the fees and expenses paid to such accountants
in connection with their inspection. The parties agree that neither
party shall be required to retain books and records with respect to
the above other than books and records relating to the current Year
and the immediately preceding 3 Years.

3.3 Quarterly Reports of Royalties. In any Year, Schwarz shall,
within 30 days after the end of each Quarter, deliver to Nastech true and
accurate reports, certified by an authorized official of Schwarz, setting forth
the estimated or actual Annual Net Sales and total royalties due under Section
3.1(a) for such Year. If no royalties shall be due, Schwarz shall so report.

3.4 Late Payments. Any amounts not paid by Schwarz when due under
this Agreement shall be subject to interest from and including the date payment
is due through and including the date upon which Nastech received such amounts
at a rate equal to the sum of one and one half percent (1 1/2%) plus the prime
rate of interest quoted in the Money Rates section of The Wall Street Journal
(or similarly reputable data source), calculated daily on the basis of a
365-day year.

SECTION 4

SUPPLY OF SCOPOLAMINE UNITS

4.1 Supply of Scopolamine Units.

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(a) For the term of this Agreement, or for as long as Nastech
manufactures Scopolamine, whichever is shorter, Schwarz agrees to
purchase from Nastech and Nastech agrees to supply Schwarz with all of
its requirements for Scopolamine Units and Scopolamine samples for
their subsequent use, sale, lease or transfer by Schwarz. In case
Nastech develops Improved Scopolamine Units, Nastech may, with
Schwarz's consent, to be given or withheld in Schwarz's sole
discretion, supply Improved Scopolamine Units instead of Scopolamine
Units under this Agreement.

(b) Schwarz agrees to initiate purchases of Scopolamine Units
and Scopolamine samples hereunder by issuing Nastech purchase orders
not less than 60 days prior to the required delivery date set forth
therein. Nastech agrees to accept any order issued in accordance with
this Section 4.1(b) which specifies quantities reasonably consistent
with those set forth in the purchase forecasts for such Quarter and to
meet the delivery dates specified thereon. All purchase orders
hereunder shall be on Schwarz's standard purchase order form (a copy
of which has been delivered to Nastech) and shall be directed to
Nastech at the address set forth below. The terms and conditions of
purchase enumerated on the reverse side of such standard purchase
order form shall prevail over any inconsistent or conflicting language
as may exist on invoices, confirmation or order acknowledgment forms
of Nastech, provided, however, that in the event any terms thereof are
in conflict, or are inconsistent with any terms of this Agreement, the
terms and conditions hereof shall prevail. All Scopolamine Units
shall have at least a 22 month shelf life upon delivery to Schwarz.

(c) Schwarz may increase, without payment of any penalty or
premium, the quantities of Scopolamine specified on any purchase order
by up to thirty-five percent (35%) from the forecasts provided under
Section 4.5, provided, however, that notice of such increase is
received by Nastech on a supplemental purchase order not less than 45
days prior to the requested delivery date for such increased quantity
of Scopolamine. Subject to conformity with the manufacturing lead
times for Scopolamine ordered on such supplemental purchase order,
Nastech agrees to accept supplemental purchase orders for increased
quantities issued in accordance with this Section 4.1(c).

4.2 Minimum Annual Net Sales.

(a) Schwarz shall guarantee minimum Annual Net Sales equal to
50% of the sales forecast set forth on Schedule 4.2(a).

(b) In the event that (i) the Net Average Sales Price falls
below $20.80, (ii) a Patent is not granted in respect of Scopolamine
before December 31, 2000 or any Patent is unenforceable, (iii) a
generic drug competitor with a nasal scopolamine product emerges, (iv)
there is an interruption in the supply of the Scopolamine for a period
of 60 days, and/or (v) the occurrence of any circumstance having a
materially adverse effect on Scopolamine which is beyond the control
of Schwarz, then, in each case, the minimum

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Annual Net Sales requirements under Section 4.2(a) shall terminate and
be deemed waived by Nastech and shall be promptly renegotiated in good
faith by Schwarz and Nastech. Any renegotiated minimum Annual Net
Sales requirement shall be retroactively effective to the date the
applicable event described above occurred.

4.3 Identification. Schwarz may market Scopolamine under its name,
with its packaging and logo; Schwarz will, however, identify Nastech as the
supplier in a fair manner, reasonably acceptable to Nastech. Nastech will bear
all the costs of labeling Scopolamine so as to appropriately display the
Schwarz name provided Schwarz supplies all the appropriate graphics, designs,
logos and related and appropriate artwork, provided that such labeling costs
will reasonably approximate Nastech's existing labeling costs. Schwarz may use
Nastech's name and derivations thereof in promoting, marketing and selling
Scopolamine in the Territory; provided, however, that the particular
formulation of any reference to Nastech's name in any promotional material
shall be subject to Nastech's review and consent; and provided, further, that
once the formulation of any such reference has been reviewed and consented to
by Nastech, any subsequent reference to Nastech's name using such formulation
or a substantially similar formulation shall not be subject to the review or
consent of Nastech. All samples shall be clearly marked "for sample use only".

4.4 Supply Price.

(a) During the first 12 months after Launch, Nastech shall
supply Scopolamine Units to Schwarz at the fixed price of $2.30 per
Scopolamine Unit. At all times after such 12 month period, Nastech
shall supply Scopolamine Units to Schwarz at no additional cost to
Schwarz. The combined royalty and cost of goods payments set forth on
Section 3.1(a) and Schedule 3.1(a) include any and all consideration
for the supply of Scopolamine Units. Accordingly, any payments to
Nastech pursuant to this Section 4.4(a) shall be deducted from future
payments to Nastech pursuant to Section 3.1(a) and Schedule 3.1(a), as
provided by Schedule 3.1(a).

(b) Nastech shall supply Scopolamine samples to Schwarz at
Nastech's actual cost in manufacturing such samples (determined in
accordance with GAAP) plus 20%; provided, however, that Nastech's
actual cost in manufacturing such samples shall in no event exceed the
actual cost in manufacturing Scopolamine Units.

4.5 Forecasts, Delivery and Quality.

(a) Schwarz shall provide Nastech with forecasts a minimum of
two Quarters prior to anticipated delivery dates; provided, that, only
60% of the forecast for the first such Quarter shall be binding.
These forecasts will be revised and extended in each succeeding
Quarter.

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(b) Delivery of Scopolamine Units shall be in accordance with
the destination and dates set forth in Schwarz's purchase order.
Delivery shall be C.I.F. point of delivery, and identification and
delivery of Scopolamine shall be deemed to have occurred when they
have been packed for shipment and delivered to Schwarz's single
designated point of delivery, at which time title and risk of loss
shall pass to Schwarz. All deliveries shall be made using ground
transportation.

(c) All deliveries of Scopolamine Units hereunder shall
include a certificate of analysis provided by the quality control
manager of Nastech attesting to the fact that such Scopolamine Units
(i) have been manufactured by a process which complies with GMP and
has as its goal compliance with ISO 9002 standards and (ii) are of
quality which is in accordance with criteria established in the
Specifications, the NDA and all FDA requirements.

(d) The Scopolamine Units supplied hereunder shall have been
manufactured by a process which complies with the quality assurance
addendum set forth on Schedule 4.5(d).

4.6 Rejection and Replacement.

(a) In the event Schwarz determines that any Scopolamine
Units as manufactured are Defective, then, within 60 days after
delivery of such Scopolamine Units to Schwarz, Schwarz shall provide
to Nastech a written notice of rejection, specifying in reasonable
detail the manner in which Scopolamine are Defective (the "Notice of
Rejection"). If no written Notice of Rejection is given to Nastech by
Schwarz within such 60 day period, such Scopolamine Units shall be
deemed to have been accepted by Schwarz, provided, however, that
nothing contained in this Section 4.6(a) shall be deemed to relieve
Nastech of its obligations under the warranties set forth in Section 6
below.

(b) Upon receipt of a Notice of Rejection from Schwarz and in
order to minimize any hardship to Schwarz's customers, Nastech shall
use its best efforts to promptly supply to Schwarz a quantity of
replacement Scopolamine Units meeting the Specifications equal to the
size of the lot which Schwarz claims was Defective so that such
replacement Scopolamine Units shall be received by Schwarz within 60
days following Nastech's receipt of Schwarz's Notice of Rejection.
All actual and documented costs and expenses relating to any rejection
and replacement pursuant to this Section 4.6 shall be paid by Nastech.

4.7 Invoice and Payment. Upon delivery of any Scopolamine shipment,
Nastech shall be entitled to submit invoices therefor to Schwarz, and Schwarz
agrees to remit payment within 30 days from receipt of the invoice.

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4.8 Supply Disruption; Alternate Manufacturing Site.

(a) Nastech shall use its best efforts to supply Schwarz with
Scopolamine Units in a timely manner in accordance with the orders and
forecasts received by Nastech pursuant to Sections 4.1(b) and 4.5(a),
respectively, such efforts to include the maintenance of a stock of
the glass bottles and pumps from FDA approved vendors sufficient to
produce 100% of the quantity of Scopolamine Units shipped to Schwarz
during the immediately preceding Quarter. In any Quarter, should
Nastech fail to supply Schwarz with the greater of (x) 90% of the of
the quantity of Scopolamine Units forecasted for such Quarter pursuant
to Section 4.5(a) or (y) 90% of the quantity of Scopolamine Units
shipped to Schwarz during the immediately preceding Quarter (if at
least so many are ordered for such Quarter pursuant to Section
4.1(b)), Schwarz shall have the right to manufacture Scopolamine Units
and Schwarz and Nastech shall transfer the manufacture of the
Scopolamine Units to Schwarz's Seymour facility or other designated
facility. Nastech will assume all costs of such transfer, such costs
not to exceed $150,000. Should Nastech cure its failure to supply,
Nastech shall have the right to resume the manufacture of Scopolamine
Units and Schwarz and Nastech shall, at Nastech's expense, transfer
the manufacture of Scopolamine Units back to Nastech within a
commercially reasonable amount of time.

(b) Schwarz shall have the option, at its sole discretion, to
transfer the manufacture of Scopolamine to its Seymour facility or
other designated facility. If Schwarz exercises such option, Nastech
will use its best efforts to assist Schwarz in transferring
Scopolamine to its designated facility. Schwarz will assume all costs
of such transfer, such costs not to exceed $150,000. Any provision
herein to the contrary notwithstanding, should Schwarz assume the
manufacture of Scopolamine, including pursuant to Section 4.8(a) or
this Section 4.8(b), Schwarz and Nastech will renegotiate in good
faith the combined royalty and cost of goods rates provided for in
Section 3.1(a) prior to such manufacturing assumption.

(c) Should the manufacture of Scopolamine Units transfer to
Schwarz pursuant to Sections 4.8(a) or (b), Schwarz shall supply
Nastech Scopolamine Units for sales outside the Territory at Schwarz's
actual cost in manufacturing such Scopolamine Units plus 35%.

(d) Nastech and Schwarz shall, as soon as practicable
following FDA approval of the NDA, qualify a manufacturing plant
designated by Schwarz as an alternate FDA approved manufacturing and
packaging site for the Scopolamine Units. The costs of obtaining such
approval shall be borne equally by Nastech and Schwarz.

SECTION 5

CONDITIONS PRECEDENT TO THE CLOSING;

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CLOSING DATE; TERM OF AGREEMENT

5.1 Conditions Precedent to Schwarz's Obligations. Subject to waiver
as set forth in Section 11.3, all obligations of Schwarz to close the
transactions contemplated under this Agreement are subject to the fulfillment
or satisfaction of each of the following conditions precedent:

(a) Representations and Warranties True as of the Closing
Date. The representations and warranties of Nastech contained in this
Agreement or in any schedule, certificate or document delivered by
Nastech to Schwarz pursuant to the provisions hereof shall have been
true on the date hereof and shall be true on the Closing Date with the
same effect as though such representations and warranties were made as
of such date.

(b) Compliance with this Agreement. Nastech shall have
performed and complied with all agreements and conditions required by
this Agreement to be performed or complied with by it prior to or by
the Closing Date.

(c) Closing Certificate. Schwarz shall have received a
certificate from Nastech, executed by an officer of Nastech,
certifying in such detail as Schwarz may reasonably request that the
conditions specified in Sections 5.1(a) and 5.1(b), above, have been
fulfilled and certifying that Nastech has obtained all consents and
approvals required hereunder.

(d) No Threatened or Pending Litigation. On the Closing
Date, no suit, action or other proceeding, or injunction or final
judgment relating thereto, shall, to the best of Nastech's knowledge,
be threatened or be pending before any court or governmental or
regulatory official, body or authority in which it is sought to
restrain or prohibit or to obtain damages or other relief in
connection with this Agreement or the consummation of the transactions
contemplated hereby, and no investigation that might result in any
such suit, action or proceeding shall be pending or, to the best of
Nastech's knowledge, threatened.

5.2 Conditions Precedent to Nastech's Obligations. Subject to waiver
as set forth in Section 11.3, all obligations of Nastech to close the
transactions contemplated under this Agreement are subject to the fulfillment
or satisfaction of each of the following conditions precedent:

(a) Representations and Warranties True as of the Closing
Date. The representations and warranties of Schwarz contained in this
Agreement or in any schedule, certificate or document delivered by
Schwarz to Nastech pursuant to the provisions hereof shall have been
true on the date hereof and shall be true on the Closing Date with the
same effect as though such representations and warranties were made as
of such date.

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(b) Compliance with this Agreement. Schwarz shall have
performed and complied with all agreements and conditions required by
this Agreement to be performed or complied with by it prior to or by
the Closing Date.

(c) Closing Certificate. Nastech shall have received a
certificate from Schwarz, executed by an officer of Schwarz,
certifying in such detail as Nastech may reasonably request that the
conditions specified in Sections 5.2(a) and 5.2(b), above, have been
fulfilled and certifying that Schwarz has obtained all consents and
approvals required hereunder.

(d) No Threatened or Pending Litigation. On the Closing
Date, no suit, action or other proceeding, or injunction or final
judgment relating thereto, shall, to the best of Schwarz's knowledge,
be threatened or be pending before any court or governmental or
regulatory official, body or authority in which it is sought to
restrain or prohibit or to obtain damages or other relief in
connection with this Agreement or the consummation of the transactions
contemplated hereby, and no investigation that might result in any
such suit, action or proceeding shall be pending or, to the best of
Schwarz's knowledge, threatened.

5.3 Closing Date.

(a) Subject to Section 5.3(b), below, the closing of the
transactions contemplated by this Agreement shall take place at 10:00
a.m., local time, on December 11, 1997, or on such other date as may
be mutually agreed upon in writing by the parties (the "Closing
Date"), at the offices of Mayer, Brown & Platt, 1675 Broadway, New
York, New York 10019.

(b) Each party hereby agrees to use its best efforts to
consummate the transactions contemplated herein, as modified, on or
before December 11, 1997; provided, however, that if the parties are
unable to close the transactions contemplated hereby by December 11,
1997, or such later date as shall be mutually agreed to in writing by
Nastech and Schwarz, then all of the rights and obligations of the
parties under this Agreement shall terminate without liability.

SECTION 6

REPRESENTATIONS AND WARRANTIES OF NASTECH

Nastech hereby represents and warrants to Schwarz that:

6.1 Organization, Power and Authority. Nastech is a corporation duly
organized and validly existing under the laws of the State of Delaware.
Nastech has all necessary corporate

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power and authority to enter into, and be bound by the terms and conditions of,
this Agreement, and to license the Licensed Assets, the Patents and the
Technology to Schwarz pursuant hereto.

6.2 Due Authority; No Breach. The execution, delivery and
performance by Nastech of this Agreement and each agreement or instrument
contemplated by this Agreement, and the performance of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action by Nastech. This Agreement is, and each agreement or
instrument contemplated by this Agreement, when executed and delivered by
Nastech in accordance with the provisions hereof, will be (assuming the due
execution and delivery hereof and thereof by Schwarz) the legal, valid and
binding obligation of Nastech, in each case enforceable against Nastech in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, moratorium, reorganization, or similar laws
from time to time in effect which affect the enforcement of creditors' rights
generally and by legal and equitable limitations on the availability of
specific performance and other equitable remedies against Nastech. All persons
who have executed this Agreement on behalf of Nastech, or who will execute on
behalf of Nastech any agreement or instrument contemplated by this Agreement,
have been duly authorized to do so by all necessary corporate action. Neither
the execution and delivery of this Agreement or any such other agreement or
instrument by Nastech, nor the performance of the obligations contemplated
hereby and thereby, will (i) conflict with or result in any violation of or
constitute a breach of any of the terms or provisions of, or result in the
acceleration of any obligation under, or constitute a default under any
provision of the Articles of Incorporation or By-laws of Nastech or any
material contract or any other material obligation to which Nastech is a party
or to which it is subject or bound, or (ii) violate any judgment, order,
injunction, decree or award of any court, administrative agency, arbitrator or
governmental body against, or affecting or binding upon, Nastech or upon the
securities, property or business of Nastech, or (iii) constitute a violation by
Nastech of any applicable law or regulation of any jurisdiction as such law or
regulation relates to Nastech, or to the property or business of Nastech except
for such conflict, acceleration, default, breach or violation that is not
reasonably likely to have a material adverse effect on Nastech's ability to
perform its obligations under this Agreement or under any agreement or
instrument contemplated hereby.

6.3 IND. Nastech has furnished Schwarz with access to a complete
copy of the IND, including all material amendments and supplements thereto.
Nastech is the lawful holder of all rights under the IND. Nastech has complied
in all material respects with all applicable laws and regulations in connection
with the transfer and continuation of the IND from the U.S. National
Aeronautical Space Administration, and the IND has been accepted by, and
nothing has come to the attention of Nastech which has, or reasonably should
have, led Nastech to believe that the IND is not in good standing with, the
FDA. Other than pursuant to this Agreement, Nastech has neither independently
marketed, nor has it made arrangements for others to market Scopolamine or
Scopolamine Units in the Territory.

6.4 Intellectual Property. Set forth on Schedule 6.4 hereto is a
list of all present and pending Intellectual Property and Patents. Except as
set forth on Schedule 6.4 hereto, (i) Nastech

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is the lawful owner of the Intellectual Property, Patents and Technology, (ii)
Nastech can license the Intellectual Property, Patents and Technology without
the consent of any third party, (iii) there is no pending or overtly threatened
claim against Nastech asserting that any of the Intellectual Property, Patents
or Technology infringes or violates the rights of third parties or that
Schwarz, by practicing under the Licensed Assets or Technology in running the
Activities, would violate any of the intellectual property rights of any third
party, and (iv) nothing has come to the attention of Nastech which has, or
reasonably should have, led Nastech to believe that any of the Intellectual
Property, Patents or Technology infringes or violates the right of third
parties. Except as set forth on Schedule 6.4 hereto, Nastech has not given any
notice to any third parties asserting infringement by such third parties upon
any of the Intellectual Property, Patents or Technology. Nastech is not aware
of and has not received any communications challenging the ownership, validity
or effectiveness of any of the Intellectual Property, Patents or Technology, or
any other intellectual property rights relating to the Activities. Nastech has
not granted any right to any third party relating to the Activities which would
violate the terms of or conflict with the rights granted to Schwarz pursuant to
this Agreement.

6.5 Technology Rights. The Patents and the Technology contain all
the technology, patents, know-how, trade secrets and other intellectual
property necessary to manufacture Scopolamine Units.

6.6 Litigation. There are no pending or, to the best of Nastech's
knowledge, threatened judicial, administrative or arbitral actions, claims,
suits or proceedings pending as of the date hereof against Nastech relating to
the Activities, the Licensed Assets, Patents or the Technology which, either
individually or together with any other, would have a material adverse effect
on the Activities, the Licensed Assets, the Patents, Technology or the ability
of Nastech to perform its obligations under this Agreement or any agreement or
instrument contemplated hereby. There are no pending, and Nastech does not
presently contemplate bringing, any actions or suits relating to the
Activities, the Licensed Assets, the Patents or the Technology brought by
Nastech against others.

6.7 Governmental Approval. Other than FDA approval of the
Scopolamine Units pursuant to a NDA, no consent, approval, waiver, order or
authorization of, or registration, declaration or filing with, any governmental
authority is required in connection with the execution, delivery and
performance of this Agreement, or any agreement or instrument contemplated by
this Agreement, by Nastech or the performance by Nastech of its obligations
contemplated hereby and thereby.

6.8 Brokerage. Other than Mazier Partners LLC, no broker, finder or
similar agent has been employed by or on behalf of Nastech, and no Person with
which Nastech has had any dealings or communications of any kind is entitled to
any brokerage commission, finder's fee or any similar compensation, in
connection with this Agreement or the transactions contemplated hereby.
Nastech shall bear any brokerage commission, finder's fee or any similar
compensation owed to Mazier Partners LLC.

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6.9 Implied Warranties. EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION
6, NASTECH MAKES NO REPRESENTATION OR WARRANTY AS TO THE LICENSED ASSETS, THE
PATENTS, THE TECHNOLOGY OR THE ACTIVITIES, EITHER IN FACT OR BY OPERATION OF
LAW, AND NASTECH SPECIFICALLY DISCLAIMS ANY AND ALL IMPLIED OR STATUTORY
WARRANTIES.

SECTION 7

REPRESENTATIONS AND WARRANTIES OF SCHWARZ

Schwarz represents and warrants to Nastech that:

7.1 Organization, Power and Authority. Schwarz is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Schwarz has all necessary corporate power and authority to enter
into, and be bound by the terms and conditions of, this Agreement, and to
license the Licensed Assets, the Patents and the Technology from Nastech
pursuant hereto.

7.2 Due Authority; No Breach. The execution, delivery and
performance by Schwarz of this Agreement, and each agreement or instrument
contemplated by this Agreement, and the performance of the transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate action by Schwarz. This Agreement is, and each agreement or
instrument contemplated by this Agreement, when executed and delivered by
Schwarz in accordance with the provisions hereof, will be (assuming due
execution and delivery hereof and thereof by Nastech) the legal, valid and
binding obligation of Schwarz, in each case enforceable against Schwarz in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, moratorium, reorganization, or similar laws
from time to time in effect which affect the enforcement of creditors' rights
generally and by legal and equitable limitations on the availability of
specific performance and other equitable remedies against Schwarz. All persons
who have executed this Agreement on behalf of Schwarz, or who will execute on
behalf of Schwarz any agreement or instrument contemplated by this Agreement,
have been duly authorized to do so by all necessary corporate action. Neither
the execution and delivery of this Agreement by Schwarz, or any such other
agreement or instrument by Schwarz, nor the performance of the obligations
contemplated hereby and thereby, will (i) conflict with or result in any
violation of or constitute a breach of any of the terms or provisions of, or
result in the acceleration of any obligation under, or constitute a default
under any provision of the Articles of Incorporation or By-laws of Schwarz or
any material contract or any other material obligation to which Schwarz is a
party or to which it is subject or bound, or (ii) violate any judgment, order,
injunction, decree or award of any court, administrative agency, arbitrator or
government body against, or affecting or binding upon, Schwarz or upon the
securities, property or business of Schwarz, or (iii) constitute a violation by
Schwarz of any applicable law or regulation of any jurisdiction as such law or
regulation relates to Schwarz or to the property or business of Schwarz, except
for such conflict,

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<PAGE> 23
acceleration, default, breach or violation that is not reasonably likely to
have a material adverse effect on Schwarz's ability to perform its obligations
under this Agreement or any agreement or instrument contemplated hereby.

7.3 Brokerage. No broker, finder or similar agent has been employed
by or on behalf of Schwarz and no Person with which Schwarz has had any
dealings or communications of any kind is entitled to any brokerage commission,
finder's fee or any similar compensation, in connection with this Agreement or
the transactions contemplated hereby.

7.4 Litigation. There are no pending or, to the best of Schwarz's
knowledge, threatened judicial, administrative or arbitral actions, claims,
suits or proceedings pending as of the date hereof against Schwarz which,
either individually or together with any other, will have a material adverse
effect on the ability of Schwarz to perform its obligations under this
Agreement or any agreement or instrument contemplated hereby.

7.5 Governmental Approval. No consent, approval, waiver, order or
authorization of, or registration, declaration or filing with, any governmental
authority is required in connection with the execution, delivery and
performance of this Agreement, or any agreement or instrument contemplated by
this Agreement, by Schwarz or the performance by Schwarz of its obligations
contemplated hereby and thereby.

SECTION 8

ADDITIONAL COVENANTS AND AGREEMENTS OF THE PARTIES

8.1 Governmental Filings. Nastech and Schwarz each agree to prepare
and file whatever filings, requests or applications are required to be filed
with any governmental authority in connection with this Agreement and to
cooperate with one another as reasonably necessary to accomplish the foregoing.

8.2 Responsibility for NDA.

(a) Nastech shall remain responsible for fulfilling all
regulatory requirements with respect to Scopolamine that are imposed
upon Nastech as the owner of the IND and shall complete all steps
necessary for obtaining approval of the NDA for the Target Indication.
Nastech shall maintain the NDA in its own name and at its own cost.
Nastech shall provide Schwarz, upon request after reasonable notice
from Schwarz, with access to copies of all filings submitted by
Nastech to the FDA in respect of the Scopolamine. Schwarz shall, on a
timely basis, provide to Nastech all information that Schwarz has that
Nastech does not have that is reasonably necessary and relevant to
Nastech's obligations hereunder to fulfill such requirements
including, but not limited to, sales distribution information
concerning Scopolamine, and shall otherwise cooperate with Nastech as
reasonably necessary in connection therewith. Nastech and Schwarz
shall collaborate in

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good faith in every matter relating to the NDA and in every case on
whether and how to supplement, amend or otherwise alter the NDA and
any other issues in connection with the NDA and on whether and how to
communicate with the FDA in connection therewith. If Schwarz elects
to undertake a regulatory obligation, such election shall be subject
to Nastech and Schwarz mutually agreeing upon the terms and conditions
(including, but not limited to, compensation to Schwarz) of any such
obligation.

(b) Anything to the contrary in Section 8.2(a)
notwithstanding, Nastech may, and in the event of any regulatory
problem that disrupts the promotion, marketing or sale of Scopolamine
or Scopolamine Units or has a materially adverse effect on the
Activities (each a "Regulatory Problem"), Nastech shall pay Schwarz
$75,000 per annum to assume responsibility for fulfilling all
regulatory requirements with respect to Scopolamine that are imposed
upon Nastech as the owner of the NDA. In any such case, Nastech
shall, on a timely basis, perform any action and provide to Schwarz
all information and materials that Nastech can or has that Schwarz can
not or does not have that are reasonably necessary and relevant to
Schwarz's obligations hereunder to fulfill such requirements,
including providing copies of Form 356(h) or other letter required by
the FDA or applicable law to be received from the NDA owner, and
Nastech shall otherwise cooperate with Schwarz as reasonably necessary
in connection therewith. Schwarz shall have the final decision-making
authority in every case on whether and how to supplement, amend or
otherwise alter the NDA and any other issues in connection with the
NDA and on whether and how to communicate with the FDA in connection
therewith.

(c) If Nastech is forced pursuant to Section 8.2(b) to
transfer the responsibility for fulfilling regulatory requirements
with respect to Scopolamine to Schwarz because of a Regulatory
Problem, then Nastech shall, upon its development of procedures and/or
the capability to cure such Regulatory Problem, have the right to
reassume such responsibility and Schwarz and Nastech shall transfer
such responsibility back to Nastech within a commercially reasonable
amount of time; provided, however, that Nastech shall pay all
reasonable costs and expenses of Schwarz associated with such
transfer, including, without limitation, the cost of terminating any
employees of Schwarz specifically hired to fulfill the regulatory
requirements with respect to Scopolamine.

(d) Schwarz and Nastech shall jointly develop written
procedures and define responsibilities for (i) the reporting of
adverse drug experiences, (ii) the submission by Schwarz to Nastech
and by Nastech to FDA of labeling and promotional materials related to
Scopolamine, (iii) the administration of and response to medical
inquiries concerning Scopolamine by consumers, physicians, pharmacists
and other health care professionals, (iv) the administration and
analysis of and response to complaints concerning Scopolamine, and (v)
the development of training materials related to Scopolamine. Schwarz
and Nastech shall each comply with the provisions of such written
procedures.

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8.3 Compliance with Law. Schwarz and Nastech shall each comply with
all federal, state and local laws and regulations applicable to developing,
approving, manufacturing, marketing and selling Scopolamine in the Territory,
the Licensed Assets, the Patents and the Technology or the performance of their
respective obligations hereunder. Nastech and Schwarz each shall keep all
records and reports required to be kept by applicable laws and regulations, and
each shall make its facilities available at reasonable times during business
hours for inspection by representatives of governmental agencies. Nastech and
Schwarz each shall notify the other within twenty-four (24) hours of receipt of
any notice or any other indication whatsoever of any FDA or other governmental
agency inspection, investigation or other inquiry, or other material notice or
communication of any type, involving Scopolamine. Schwarz and Nastech shall
cooperate with each other during any such inspection, investigation or other
inquiry including, but not limited to, allowing upon request a representative
of the other to be present during the applicable portions of any such
inspection, investigation or other inquiry and providing copies of all relevant
documents. Schwarz and Nastech shall discuss any response to observations or
notifications received in connection with any such inspection, investigation or
other inquiry and each shall give the other an opportunity to comment upon any
proposed response before it is made. In the event of disagreement concerning
the form or content of such response, however, Nastech shall be responsible for
deciding the appropriate form and content of any response with respect to any
of its cited activities and Schwarz shall be responsible for deciding the
appropriate form and content of any response with respect to any of its cited
activities.

8.4 Recall. Schwarz and Nastech shall consult with one another as to
all decisions concerning recall or withdrawal of Scopolamine from the market,
including, but not limited to, determining whether or not to make any such
recall or withdrawal, the timing and scope thereof, and the means of conducting
any recall or withdrawal. The party requesting any recall or withdrawal must
receive the prior written consent of the other party, such consent not to be
unreasonably withheld, prior to initiating such recall or withdrawal. No
consent shall be necessary if the recall or withdrawal is required by the FDA
or other governmental authority. Nastech shall bear the costs (including but
not limited to, shipping and product credits) for any recall or withdrawal
primarily due to the failure of the product integrity of the Scopolamine Units,
including but not limited to, Nastech's failure to comply with this Agreement,
GMP, federal regulations or the FDA approved specifications. The costs for any
other recall or withdrawal shall be the responsibility of Schwarz. In the
event of any material recall or withdrawal of Scopolamine due to the failure of
the product integrity of the Scopolamine Units, the minimum Annual Net Sales
requirements pursuant to Section 4.2 shall terminate and be deemed waived by
Nastech and shall be renegotiated in good faith by Nastech and Schwarz. Each
party will cooperate fully with the other in connection with any recall or
withdrawal.

8.5 Confidentiality. Schwarz shall treat as confidential the
Licensed Assets, the Patents, the Technology, and all other information of
Nastech of which Schwarz becomes aware in connection with this Agreement
(collectively, "Nastech Proprietary Information"). Schwarz shall neither
disclose Nastech Proprietary Information to any third party nor use Nastech
Proprietary Information for any purpose other than as set forth in this
Agreement. Nastech shall treat as

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confidential all information of Schwarz of which Nastech becomes aware in
connection with this Agreement (collectively, "Schwarz Proprietary
Information"). Nastech shall neither disclose Schwarz Proprietary Information
to any third party nor use Schwarz Proprietary Information for any purpose
other than as set forth in this Agreement.

Nothing contained herein will in any way restrict or impair either
party's (the "Using Party's") right to use, disclose or otherwise deal with any
Proprietary Information of the other party which:

(a) at the time of disclosure is known to the public or
thereafter becomes known to the public by publication or otherwise
through no fault of the Using Party;

(b) the Using Party can establish was in its possession prior
to the time of the disclosure and was not obtained directly or
indirectly from the other party;

(c) is independently made available as a matter of right to
the Using Party by a third party who is not thereby in violation of a
confidential relationship with the other party;

(d) is developed by the Using Party independently of the
Proprietary Information received from the other party and the Using
Party can establish such development; or

(e) is information required to be disclosed by legal or
regulatory process; provided, in each case the Using Party timely
informs the other party and uses reasonable efforts to limit the
disclosure and maintain confidentiality to the extent possible and
permits the other party to intervene and contest or attempt to limit
the disclosure.

Schwarz shall obtain no right or license of any kind under the Nastech
Proprietary Information except as set forth in this Agreement. Nastech shall
obtain no right or license of any kind under the Schwarz Proprietary
Information except as set forth in this Agreement.

8.6 Expenses. Nastech and Schwarz shall each bear their own direct
and indirect expenses incurred in connection with the negotiation and
preparation of this Agreement and, except as set forth in this Agreement, the
performance of the obligations contemplated hereby.

8.7 Reasonable Efforts. Nastech and Schwarz each hereby agrees to
use all reasonable efforts to take, or cause to be taken, all actions and to
do, or cause to be done all things necessary or proper to make effective the
transactions contemplated by this Agreement, including such actions as may be
reasonably necessary to obtain approvals and consents of governmental Persons
and other Persons (including, without limitation, all applicable drug listing
and NDA notifications to the FDA identifying Schwarz as a distributor of
Scopolamine).

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8.8 Publicity. The parties agree that no publicity release or
announcement concerning the transactions contemplated hereby shall be issued
without the advance written consent of the other, except as such release or
announcement may be required by law, in which case the party making the release
or announcement shall, before making any such release or announcement, afford
the other party a reasonable opportunity to review and comment upon such
release or announcement.

8.9 Cooperation. If either party shall become engaged in or
participate in any investigation, claim, litigation or other proceeding with
any third party, including the FDA, relating in any way to Scopolamine or any
of the Licensed Assets, the Patents or the Technology, the other party shall
cooperate in all reasonable respects with such party in connection therewith,
including, without limitation, using its reasonable efforts to make available
to the other such employees who may be helpful with respect to such
investigation, claim, litigation or other proceeding, provided that, for
purposes of this provision, reasonable efforts to make available any employee
shall be deemed to mean providing a party with reasonable access to any such
employee at no cost for a period of time not to exceed 24 hours (e.g., three
8-hour business days). Thereafter, any such employee shall be made available
for such time and upon such terms and conditions (including, but not limited
to, compensation) as the parties may mutually agree.

8.10 Competition; No Sale for Resale.

(a) Nastech agrees that, commencing on the Closing Date and
continuing for the term of this Agreement, it shall not directly or
indirectly, engage in any activity in competition with the Activities
in the Territory. It is understood that Nastech may manufacture or
have manufactured Scopolamine in the Territory for sale outside the
Territory. It is further understood that the remedies at law are
inadequate in the case of any breach of this covenant and that Schwarz
shall be entitled to equitable relief, including the remedy of
specific performance, with respect to any breach of such covenant.

(b) Neither Schwarz nor any sublicensee of Schwarz shall
knowingly sell any Scopolamine Units to anyone in the Territory for
subsequent distribution or resale outside the Territory and each shall
take all reasonable precautions to prevent such distribution or resale
outside the Territory. Nastech shall not knowingly sell any
Scopolamine Units to anyone in the Territory or outside the Territory
for subsequent distribution or resale in the Territory and Nastech
shall take all reasonable precautions to prevent such distribution or
resale in the Territory.

8.11 Scopolamine Returns. Schwarz shall be responsible for all
rebates, chargebacks and returns of Scopolamine Units sold on or after the date
of this Agreement and Nastech shall be responsible for all rebates, chargebacks
and returns of Scopolamine Units sold prior to the date of this Agreement.

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8.12 Conflicting Rights. Nastech shall not grant any right to any
third party relating to the Activities which would violate the terms of or
conflict with the rights granted to Schwarz pursuant to this Agreement.

8.13 Patent and Trademark Maintenance.

(a) Nastech shall be solely responsible for filing,
prosecuting, and maintaining all of the Patents, and Nastech shall pay
the costs associated therewith. Nastech shall file, prosecute, and
maintain all Patents so as to fully continue the benefits under the
licenses granted to Schwarz hereunder, including, without limitation,
convert the Patent Application to a non-provisional patent application
as soon as practicable. In the event that any extension,
registration, confirmation, reissue, renewal, reexamination or
continuation-in-part is to be filed with respect to a Patent, Nastech
shall provide Schwarz with the opportunity to review such extension,
registration, confirmation, reissue, renewal, reexamination or
continuation-in-part and provide input thereto. Nastech shall use its
best efforts to diligently and expeditiously prosecute the Patent
Application.

(b) Schwarz shall be solely responsible for filing,
prosecuting, and maintaining all trademarks for Scopolamine (the
"Trademarks"), and Schwarz shall pay the costs associated therewith.
All registrations, variations, logos, goodwill and other rights under
or acquired through use of the Trademarks shall accrue and belong to
Schwarz. Nastech shall have no rights to use the Trademarks,
including, without limitation, in connection with any product
subsequently developed by Nastech pursuant to Section 2.6. Nastech
will not use in its business, in or outside of the Territory, any
other mark or name which is similar to or nearly resembles the
Trademarks in use by Schwarz to indicate the source and origin of
Scopolamine as to be likely to cause deception or confusion. Nastech
recognizes that Schwarz is the owner of all Trademarks used in
commerce to indicate the source of Scopolamine and agrees that the
Trademarks shall remain vested in Schwarz both during the term of this
Agreement and thereafter. Nastech shall not contest the validity of
the Trademarks or Schwarz's ownership of the Trademarks. Use of the
Trademarks by Schwarz in conjunction with the manufacture, use, and
sale of Scopolamine and all good will related thereto shall inure to
the benefit of Schwarz for purposes of building the longevity and
extent of use of the Trademarks. Nastech may from time to time
license such Trademarks from Schwarz for use (or, with the prior
written consent of Schwarz, such consent not to be unreasonably
withheld, for sublicense) outside the Territory for consideration of
3% of Nastech's net sales outside the Territory.

(c) Schwarz and Nastech agree that, where applicable, all
packaging of the Scopolamine Units shall identify (i) the number of
the Patents and Nastech as the owner thereof and (ii) Schwarz as the
owner of the Trademarks.

(d) Any improvements to the Technology (whether or not
patentable) that are developed solely by either party shall be owned
solely by such party. Such party shall

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have the right, at its own expense, and solely in its own name, to
apply for, prosecute and defend its proprietary rights with respect
thereto. Jointly developed improvements shall be jointly owned by the
parties.

8.14 Infringement; Enforcement of Proprietary Rights.

(a) Infringement of Patent Rights. Each party shall promptly
notify the other of any alleged infringement by third parties of any
Patent and provide any information available to that party relating to
such alleged infringement. Nastech shall have the responsibility to
investigate such alleged infringement and act diligently to end any
infringement of such rights, including, but not limited to, bringing
suit against such third party infringer.

(b) Procedures. No settlement, consent judgment or other
voluntary final disposition of the suit may be entered into without
the consent of each party, which consent shall not be unreasonably
withheld or delayed. Any recovery of damages in any such suit shall
be retained by the party bearing the costs of such suit. In the event
of any infringement suit against a third party brought by either party
pursuant to this Section 8.14, the party not bringing such suit shall
cooperate in all respects, execute any documents reasonably necessary
to permit the other party to prosecute such suit, and to the extent
reasonable shall make available its employees and relevant records to
provide evidence for such suit.

(c) Infringement of Third Party Rights. If, during the term
of this Agreement, any third party (other than an Affiliate of
Schwarz) claims that Schwarz's marketing or selling of Scopolamine
Units hereunder infringes on a third party patent based upon claims
that dominate claims in the Patents, within 120 days after notice by
Schwarz, Nastech shall (i) initiate an action for a declaratory
judgment of invalidity and/or non-infringement of any such patents, or
(ii) procure for Schwarz the right to exercise all rights licensed
under this Agreement without any additional payment therefor by
Schwarz.

8.15 Supply of Scopolamine Units. Nastech shall maintain the
capacity throughout the term of this Agreement to meet the requirements of
Schwarz for Scopolamine Units hereunder.

8.16 Technology. Nastech shall be solely responsible for maintaining
the Technology in accordance with the terms set forth in this Agreement.

8.17 Liability Insurance. Prior to Launch, Nastech shall obtain and
carry in full force and effect insurance for clinical studies as required by
law and consistent with industry standards. At and after Launch, Nastech shall
obtain and carry in full force and effect product liability insurance in
respect of Scopolamine in the amount of $1,000,000 per occurrence, $3,000,000
in the aggregate. At and after Launch, Schwarz shall obtain and carry in full
force and effect product

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liability insurance in respect of Scopolamine in the amount of $10,000,000 per
occurrence, $10,000,000 in the aggregate.

8.18 Referral of Orders and Inquiries. Nastech shall refer all
Persons sending orders or making inquiries regarding Scopolamine or Scopolamine
Units within the Territory to Schwarz and shall promptly notify Schwarz of the
name of each such Person and the nature of the inquiry of such Person.

(a) Deemed Breach of Covenant. Neither Nastech nor Schwarz
shall be deemed to be in breach of any covenant contained in this
Section 8 if such party's deemed breach is the result of any action or
inaction on the part of the other party.

8.19 Board of Directors. Nastech agrees to cause Mr. Lars Ekman to
become elected to Nastech's scientific advisory board on or prior to March 1,
1998 to fill a vacancy that will exist at that time. Nastech shall indemnify,
defend and hold Mr. Ekman harmless from and against any Damages arising out of
his tenure on Nastech's scientific advisory board.

SECTION 9

INDEMNIFICATION

9.1 Indemnification.

(a) Nastech shall indemnify, defend and hold Schwarz (and its
directors, officers, employees, and Affiliates) harmless from and
against any and all Damages incurred or suffered by Schwarz (and its
directors, officers, employees, and Affiliates) as a consequence of:

(i) any breach of any representation or warranty
made by Nastech in this Agreement or any agreement, instrument
or document delivered by Nastech pursuant to the terms of this
Agreement;

(ii) any failure to perform duly and punctually any
covenant, agreement or undertaking on the part of Nastech
contained in this Agreement;

(iii) any act or omission of Nastech with respect to
the operation of Nastech's business, or the handling,
manufacturing, sale, consumption or use of Scopolamine by
Nastech; or

(iv) the infringement of the Licensed Assets, the
Patent or the Technology of any patent, trademark, copyright,
trade secret or other intellectual property right of any
person other than Nastech or Schwarz.

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(b) Schwarz shall indemnify, defend and hold Nastech (and its
directors, officers, employees, and Affiliates) harmless from and
against any and all Damages incurred or suffered by Nastech (and its
directors, officers, employees, and Affiliates) as a consequence of:

(i) any breach of any representation or warranty
made by Schwarz in this Agreement or any agreement, instrument
or document delivered by Schwarz pursuant to the terms of this
Agreement;

(ii) any failure to perform duly and punctually any
covenant, agreement or undertaking on the part of Schwarz
contained in this Agreement; or

(iii) any act or omission of Schwarz with respect to
the operation of Schwarz's business or the handling,
manufacturing, sale, consumption or use of Scopolamine by
Schwarz.

9.2 Notice and Opportunity To Defend. Promptly after receipt by a
party hereto of notice of any claim which could give rise to a right to
indemnification pursuant to Section 9.1. such party (the "Indemnified Party")
shall give the other party (the "Indemnifying Party") written notice describing
the claim in reasonable detail. The failure of an Indemnified Party to give
notice in the manner provided herein shall not relieve the Indemnifying Party
of its obligations under this Section, except to the extent that such failure
to give notice materially prejudices the Indemnifying Party's ability to defend
such claim. The Indemnifying Party shall have the right, at its option, to
compromise or defend, at its own expense and by its own counsel, any such
matter involving the asserted liability of the party seeking such
indemnification. If the Indemnifying Party shall undertake to compromise or
defend any such asserted liability, it shall promptly (and in any event not
less than 10 days after receipt of the Indemnified Party's original notice)
notify the Indemnified Party in writing of its intention to do so, and the
Indemnified Party agrees to cooperate fully with the Indemnifying Party and its
counsel in the compromise or defense against any such asserted liability. All
reasonable costs and expenses incurred in connection with such cooperation
shall be borne by the Indemnifying Party. If the Indemnifying Party elects not
to compromise or defend the asserted liability, fails to notify the Indemnified
Party of its election to compromise or defend as herein provided, fails to
admit its obligation to indemnify under this Agreement with respect to the
claim, or, if in the reasonable opinion of the Indemnified Party, the claim
could result in the Indemnified Party becoming subject to injunctive relief or
relief other than the payment of money damages that could materially adversely
affect the ongoing business of the Indemnified Party in any manner, the
Indemnified Party shall have the right, at its option, to pay, compromise or
defend such asserted liability by its own counsel and its reasonable costs and
expenses shall be included as part of the indemnification obligation of the
Indemnifying Party hereunder. Notwithstanding the foregoing, neither the
Indemnifying Party nor the Indemnified Party may settle or compromise any claim
over the objection of the other; provided, however, that consent to settlement
or compromise shall not be unreasonably withheld. In any event, the
Indemnified Party and the Indemnifying Party may participate, at their own
expense, in the

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<PAGE> 32
defense of such asserted liability. If the Indemnifying Party chooses to
defend any claim, the Indemnified Party shall make available to the
Indemnifying Party any books, records or other documents within its control
that are necessary or appropriate for such defense. Notwithstanding anything
to the contrary in this Section 9.2, (i) the party conducting the defense of a
claim shall (A) keep the other party informed on a reasonable and timely basis
as to the status of the defense of such claim (but only to the extent such
other party is not participating jointly in the defense of such claim), and (B)
conduct the defense of such claim in a prudent manner, and (ii) the
Indemnifying Party shall not cease to defend, settle or otherwise dispose of
any claim without the prior written consent of the Indemnified Party (which
consent shall not be unreasonably withheld).

9.3 Indemnification Payment Obligation. No Indemnifying Party will
have any obligations under Sections 9.1(a) or 9.1(b) until the cumulative
aggregate amount of Damages incurred or suffered by the Indemnified Party which
the Indemnifying Party is otherwise subject to under this Agreement exceeds
$50,000 at which time the entire cumulative aggregate amount of such Damages
shall be covered. The provisions of this Section 9.3 shall not limit or
otherwise affect the obligations of any Indemnifying Party under any other
Section of this Agreement.

9.4 Indemnification Payment Adjustments. The amount of any Damages
for which indemnification is provided under this Section 9 shall be reduced to
take account of any net tax benefit and shall be increased to take account of
any net tax detriment arising from the incurrence or payment of any such
Damages or from the receipt of any such indemnification payment and shall be
reduced by the insurance proceeds received and any other amount recovered, if
any, by the Indemnified Party with respect to any Damages; provided, however,
that an Indemnified Party shall not be subject to an obligation to pursue an
insurance claim relating to any Damages for which indemnification is sought
hereunder. If any Indemnified Party shall have received any payment pursuant
to this Section 9 with respect to any Damages and shall subsequently have
received insurance proceeds or other amounts with respect to such Damages, then
such Indemnified Party shall pay to the Indemnifying Party an amount equal to
the difference (if any) between (i) the sum of the amount of those insurance
proceeds or other amounts received and the amount of the payment by such
Indemnifying Party pursuant to this Section 9 with respect to such Damages and
(ii) the amount necessary to fully and completely indemnify and hold harmless
such Indemnified Party from and against such Damages; provided, however, in no
event will such Indemnified Party have any obligation pursuant to this sentence
to pay to such Indemnifying Party an amount greater than the amount of the
payment by such Indemnifying Party pursuant to this Section 9 with respect to
such Damages.

9.5 Indemnification Payment. Upon the final determination of
liability and the amount of the indemnification payment under this Section 9,
the appropriate party shall pay to the other, as the case may be, within 10
business days after such determination, the amount of any claim for
indemnification made hereunder.

9.6 Survival. The provisions of Section 9 shall survive any
termination of this Agreement. Each Indemnified Party's rights under Section 9
shall not be deemed to have been

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<PAGE> 33
waived or otherwise affected by such Indemnified Party's waiver of the breach
of any representation, warranty, agreement or covenant contained in or made
pursuant this Agreement, unless such waiver expressly and in writing also
waives any or all of the Indemnified Party's right under Section 9.

SECTION 10

TERMINATION

10.1 Termination. The term of this Agreement shall begin upon the
Closing Date and, unless sooner terminated as hereinafter provided, shall end
upon the later of (i) the fifteenth anniversary of the Closing Date, (ii) the
expiration of the approved Patent Application (including any continuation
thereof) and (iii) the fifteenth anniversary of the date of launch of any
product line extensions related to Scopolamine. Notwithstanding the foregoing,
this Agreement may be terminated as follows:

(a) Termination for Insolvency. If either Schwarz or Nastech
(i) makes a general assignment for the benefit of creditors or becomes
insolvent; (ii) files an insolvency petition in bankruptcy; (iii)
petitions for or acquiesces in the appointment of any receiver,
trustee or similar officer to liquidate or conserve its business or
any substantial part of its assets; (iv) commences under the laws of
any jurisdiction any proceeding involving its insolvency, bankruptcy,
reorganization, adjustment of debt, dissolution, liquidation or any
other similar proceeding for the release of financially distressed
debtors; or (v) becomes a party to any proceeding or action of the
type described above in (iii) or (iv) and such proceeding or action
remains undismissed or unstayed for a period of more than 60 days,
then the other party may by written notice terminate this Agreement in
its entirety with immediate effect.

(b) Termination for Default. Schwarz and Nastech each shall
have the right to terminate this Agreement for default upon the
other's failure to comply in any material respect with the terms and
conditions of this Agreement. At least 30 days prior to any such
termination for default, the party seeking to so terminate shall give
the other written notice of its intention to terminate this Agreement
in accordance with the provisions of this Section 10.1(b), which
notice shall set forth the default(s) which form the basis for such
termination. If the defaulting party fails to correct such default(s)
within 30 days after receipt of notification, or if the same cannot
reasonably be corrected or remedied within 30 days, then if the
defaulting party has not commenced curing said default(s) within said
30 days and be diligently pursuing completion of same, then such party
immediately may terminate this Agreement. This Section 10.1(b) shall
not be exclusive and shall not be in lieu of any other remedies
available to a party hereto for any default hereunder on the part of
the other party.

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<PAGE> 34
(c) Continuing Obligations. Termination of this Agreement
for any reason shall not relieve the parties of any obligation
accruing prior thereto with respect to Scopolamine and any ongoing
obligations hereunder with respect to the remaining Scopolamine and
shall be without prejudice to the rights and remedies of either party
with respect to any antecedent breach of the provisions of this
Agreement. Without limiting the generality of the foregoing, no
termination of this Agreement, whether by lapse of time or otherwise,
shall serve to terminate the obligations of the parties hereto under
Sections 8.4, 8.5, 8.6, 8.8, 8.11, 8.17, 9, 10.1(c) and 11 hereof, and
such obligations shall survive any such termination.

SECTION 11

MISCELLANEOUS

11.1 Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns; provided, however, that neither Nastech nor
Schwarz may assign any of its rights, duties or obligations hereunder without
the prior written consent of the other, which consent shall not be unreasonably
withheld, except that no prior written consent shall be required in the event
that a third party acquires substantially all of the assets or outstanding
shares of, or merges with, Schwarz or Nastech, as the case may be.

11.2 Notices. All notices or other communications required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been duly given if delivered by hand or facsimile and confirmed in writing, or
mailed first class, postage prepaid, by registered or certified mail, return
receipt requested (mailed notices and notices sent by facsimile shall be deemed
to have been given on the date received) as follows:

If to Nastech, as follows:

Nastech Pharmaceutical Company Inc.
45 Davids Drive
Happauge, New York 11788
Facsimile: 516-273-0252
Attention: President

If to Schwarz, as follows:

Schwarz Pharma, Inc.
5600 County Line Road
Mequon, Wisconsin 53092
Facsimile: 414-242-1641

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<PAGE> 35
Attention: Sandra Kallis

or in any case to such other address or addresses as hereafter shall be
furnished as provided in this Section 11.2 by any party hereto to the other
party.

11.3 Waiver; Remedies. Any term or provision of this Agreement may
be waived at any time by the party entitled to the benefit thereof by a written
instrument executed by such party. No delay on the part of Nastech or Schwarz
in exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any waiver on the part of either Nastech or Schwarz of any
right, power or privilege hereunder operate as a waiver of any other right,
power or privilege hereunder nor shall any single or partial exercise of any
right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder. The
indemnification provided in Section 9 shall be the sole remedy available for
any Damages arising out of or in connection with this Agreement except for any
rights or remedies which the parties hereto may otherwise have in equity.

11.4 Survival of Representations. Each of the representations and
warranties made in this Agreement shall continue for the term of this Agreement
and shall thereafter be extinguished.

11.5 Independent Contractors. The parties hereto are independent
contractors, and nothing contained in this Agreement shall be deemed to create
the relationship of partners, joint venturers, or of principal and agent,
franchisor and franchisee, or of any association or relationship between the
parties other than as expressly provided in this Agreement. Schwarz
acknowledges that it does not have, and Schwarz shall not make representations
to any third party, either directly or indirectly, indicating that Schwarz has
any authority to act for or on behalf of Nastech or to obligate Nastech in any
way whatsoever. Nastech acknowledges that it does not have, and it shall not
make any representations to any third party, either directly or indirectly,
indicating that it has any authority to act for or on behalf of Schwarz or to
obligate Schwarz in any way whatsoever.

11.6 Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements or understandings of the parties relating
thereto.

11.7 Amendment. This Agreement may be modified or amended only by
written agreement of the parties hereto.

11.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute a single instrument.

11.9 Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of New York excluding any choice of
law rules which may direct the application of the law of another state.

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<PAGE> 36
11.10 Arbitration. Any dispute, controversy or claim arising out of
or in connection with this Agreement shall be determined and settled by
arbitration in New York, New York, pursuant to the Rules of Arbitration then in
effect of the American Arbitration Association. Any award rendered shall be
final and conclusive upon the parties and a judgment thereon may be entered in
a court having competent jurisdiction. Any arbitration hereunder shall be (i)
submitted to an arbitration tribunal comprised of three (3) independent members
knowledgeable in the pharmaceutical industry, one of whom shall be selected by
Schwarz, one of whom shall be selected by Nastech, and one of whom shall be
selected by the other two arbitrators; (ii) allow for the parties to request
discovery pursuant to the rules then in effect under the Federal Rules of Civil
Procedure for a period not to exceed 90 days; and (iii) require the award to be
accompanied by findings of fact and a statement of reasons for the decision.
Each party shall bear its own costs and expenses, including attorney's fees
incurred in any dispute which is determined and/or settled by arbitration
pursuant to this Section. Except where clearly prevented by the area in
dispute, both parties agree to continue performing their respective obligations
under this Agreement while the dispute is being resolved. Arbitration shall
not prevent any party from seeking injunctive relief where such remedy is an
appropriate form of remedy under the circumstances.

11.11 Captions. All section titles or captions contained in this
Agreement, in any Schedule referred to herein or in any Exhibit annexed hereto,
and the table of contents, if any, to this Agreement are for convenience only,
shall not be deemed a part of this Agreement and shall not affect the meaning
or interpretation of this Agreement.

11.12 No Third-Party Rights. No provision of this Agreement shall be
deemed or construed in any way to result in the creation of any rights or
obligation in any Person not a party or not affiliated with a party to this
Agreement.

11.13 Severability. If any provision of this Agreement is found or
declared to be invalid or unenforceable by any court or other competent
authority having jurisdiction, such finding or declaration shall not invalidate
any other provision hereof, and this Agreement shall thereafter continue in
full force and effect.

11.14 Attachments. All Schedules, Exhibits and other attachments to
this Agreement are by this reference incorporated herein and made a part of
this Agreement.

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<PAGE> 37
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered on the day and year first above written.

NASTECH PHARMACEUTICAL
COMPANY INC.

By: /s/ DEVIN N. WENIG
-----------------------------------
Name: Devin N. Wenig
Title: Chairman

SCHWARZ PHARMA, INC.

By: /s/ KLAUS JULICHER
-----------------------------------
Name: Klaus Julicher
Title: President

[License and Supply Agreement]

<PAGE> 1

LICENSE AND SUPPLY AGREEMENT

This LICENSE AND SUPPLY AGREEMENT ("Agreement"), dated as of September 29,1997,
is by and between NASTECH PHARMACEUTICAL COMPANY INC., a Delaware corporation
("Nastech"), and MEDA AB, a Swedish corporation ("Meda").

W I T N E S S E T H

WHEREAS, Nastech is engaged, among other things, in the business of
research, development, manufacturing and commercialization of nasally
administered forms of pharmaceutical products;

WHEREAS, Meda is engaged among other things, through wholly owned
subsidiaries, in the business of marketing and selling of pharmaceutical
products in the ScandiBaltic area;

WHEREAS, Nastech wishes to find a partner in the ScandiBaltic area for
its intranasal cyanocobalamine product and Meda is interested in obtaining
marketing rights in such territory and to obtain a product license in its own
name and at its own expense; and

WHEREAS, subject to the terms and conditions set forth in this
Agreement, Nastech wishes to license to Meda and Meda wishes to license from
Nastech certain rights under certain of the assets which Nastech uses in the
conduct of its intranasal pharmaceutical business;

NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:

1.0 Definitions

1.1 "Product" shall mean a pharmaceutical preparation in intranasal form
containing cyanocobalamine as the active therapeutic ingredient as well as any
future developments thereof.

1.2 "Territory" shall mean the ScandiBaltic area comprising Sweden,
Denmark, Norway, Finland, Iceland, Estonia, Lithuania, Latvia and Russia.

1.3 "Patents" shall mean letters patent granted and patent applications
pending or filed by Nastech or its Affiliates (or the rights to which have been
assigned to Nastech) as of the date hereof relating to the Product and those
patents set forth on Schedule 6.1 hereto including any patent application or
patent which constitutes an extension, registration, confirmation, reissue,
renewal, reexamination or continuation-in-part of such patent application or
patent.

1.4 "Party", "Parties" mean Nastech, Meda, either Nastech or Meda or both
as the case may be.

<PAGE> 2
1.5 "Proprietary Information" shall mean the information submitted to the
United States Food and Drug Administration ("FDA") with respect to the
manufacture and regulatory approval of dosage forms of the Product.

1.6 "Effective Date" shall mean the last date of signing this Agreement.

1.7 "Launch Date" shall mean the date when the Product is put on the
market in Sweden.

2.0 Marketing rights

2.1 Nastech hereby grants to Meda a license solely for the purpose of
promoting, marketing, selling and distributing the Product in the Territory.
As long as this Agreement is in force and effect Nastech shall refrain from
granting rights to market and sell the Product in the Territory to any third
party.

2.2 Meda shall market the Product at its choice under a trademark of its
own or under Nastech's trademark "Nascobal", providing that such mark can be
registered in the Territory. The proprietary rights to the trademark "Nascobal"
shall be licensed to Meda in the Territory solely for the term of this
Agreement. Meda may use Nastech's name and derivations thereof in promoting,
marketing and selling the Product in the Territory; provided, however, that the
particular formulation of any reference to Nastech's name in any promotional
material shall be subject to Nastech's review and consent.

2.3 The licenses granted herein shall not be sublicensed by Meda without
the prior written consent of Nastech, except that Meda shall have the right to
sub-license its rights to its wholly owned subsidiaries in the Nordic countries
as well as to MediNet International Ltd. within the Baltic countries and
Russia.

2.4 Anything herein contained to the contrary notwithstanding, Nastech
shall retain at all times during the term of this Agreement, and shall bear all
costs associated with, all rights necessary: (a) to manufacture, or to have
manufactured, the Product for Meda hereunder and otherwise fulfill its
obligations under this Agreement, (b) to manufacture or have the Product
manufactured in the Territory, (c) to make such changes as Nastech may deem
reasonably appropriate in connection with any differing approach to
manufacturing it may adopt in a facility(ies) in which any of the components of
the Product are produced, as long as Meda is furnished with necessary
regulatory documentation as to enable Meda to obtain required regulatory
approval prior to the introduction of any modified Product.

2.5 Meda shall use reasonable and adequate efforts to market the Product
in the Territory. Meda shall direct its marketing efforts to the Territory only
and shall refrain from seeking customers, from establishing any branch and from
maintaining any distribution depot in any

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<PAGE> 3
country outside the Territory. Any inquiries or orders received from customers
outside the Territory, shall be forwarded from Meda to Nastech, however solely
for information purposes.

3. Purchase of the Product; Other Obligations

3.1 During the term of this Agreement, Meda agrees to purchase from
Nastech and Nastech agrees to supply Meda with all of its requirements for the
Product for its subsequent use, sale, lease or transfer by Meda. Nastech
assumes the obligation to supply the Product to Meda upon firm orders given by
Meda and confirmed by Nastech in sufficient quantities to satisfy Meda's
marketing requirements, provided such requirements do not exceed 120% of the
yearly forecasts submitted by Meda pursuant to Section 3.4.

3.2 Meda assumes the obligation to purchase and receive the Product
exclusively from Nastech. The purchase price and terms of delivery agreed
between the Parties are set out in Schedule 3.2 to this Agreement.

3.3 From the Launch Date and during the term of this Agreement, Meda shall
place minimum quantity orders for the Products as follows:

3.3.1 for the first twelve (12) months from Launch Date eighty (80)
% of the volume forecast according to Clause 3.4 below, shall be guaranteed by
Meda.

3.3.2 for each of the first four (4) calendar years, following the
expiry of the twelve (12) months period according to Clause 3.3.1, at least
fifty (50) %, calculated during a period of two (2) consecutive calendar years
of the purchase volume according to the renegotiated forecast in Clause 3.4.2
below, shall be guaranteed by Meda.

3.3.3 if Meda during any period of two (2) consecutive calendar
years of the period in Clause 3.3.2 should fail to reach at least (fifty) 50%
of the volume forecast, then Nastech is entitled to terminate this Agreement by
giving (12) months notice in writing to Meda, always provided that Nastech
exercises its rights to terminate not later than March 31 following the end of
such period of two calendar years. In this event, such termination shall be
in full and final settlements of Meda's obligations regarding such minimum
anticipated quantities. Nastech shall, however, give Meda an opportunity to
explain the reasons for the failure to perform under the minimum obligations
and Nastech shall take them into consideration.

3.4 During the term of this Agreement Meda shall submit to Nastech written
forecast of the quantity of the Product, which Meda anticipates to purchase
from Nastech as follows:

3.4.1 For the period of twelve (12) months from Launch Date, this
forecast to be

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<PAGE> 4
submitted not later than fourteen (14) days from CPMP approval being obtained
in each country, together with a preliminary forecast for the subsequent four
(4) calendar years.

3.4.2 Following the expiry of the first twelve (12) month period
from Launch Date, the Parties shall in good faith renegotiate the anticipated
volume to be purchased during the following four (4) calendar years.

3.4.3 In addition thereto, Meda shall submit to Nastech in July of
every year during the term of this Agreement a revised written forecast of the
quantity of the Product which Meda anticipate to purchase during the next
calendar year. These forecasts will, if necessary be revised in each
succeeding quarter.

3.4.4 If, at any time, Meda should find that a given forecast is
inaccurate, Meda shall inform Nastech thereof without delay and submit a
modified forecast for the period in question.

3.4.5 Should Meda be exposed to competition within the Territory or
in any individual country thereof from generic versions of the Product or other
directly competing products in intranasal form, Meda shall have the right to
ask for renegotiation in good faith of the terms of this Agreement in order to
reflect Meda's new position on the market. Should the parties fail to reach an
agreement within three (3) months from Meda's request for renegotiation, either
Party may terminate this Agreement prematurely by giving twelve (12) months
notice in writing to the other Party.

3.5 Upon the written request of Nastech, Meda shall apply for and obtain
marketing authorization for the Product in the Territory in its own name and at
its own cost. Nastech shall reasonably cooperate and provide Meda with such
Proprietary Information, to the extent such data presently exists and is
possessed by Nastech, as may be necessary to pursue such marketing
authorization. Meda will promptly provide Nastech with copies of, among other
things, all of the following documents, such list is not meant to be
exhaustive: (i) License Application, (ii) License Approval, (iii) Any
communication to and from regulatory authorities, and (iv) Marketing
information relating to reimbursement and other activities.

3.6 Nastech will make its best efforts to promptly make available to Meda
any documentation, clinical results, training material, marketing or promotion
or sales support documentation, developed by Nastech or by other licensees of
Nastech.

4.0 Warranties

4.1 Nastech assumes the obligation to manufacture the Product in
accordance with the health registration granted by the health authorities in
the Territory for the Product. Nastech will submit a sample of the Product to
Meda for its approval ("Approved Samples") and shall make available

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<PAGE> 5
to Meda a certificate of analysis for every Production batch of Product
supplied to Meda. Nastech warrants that the Product supplied to Meda will
conform to the Approved Samples and will be manufactured in accordance with
applicable good manufacturing practices as promulgated by the proper
authorities within each country of the Territory. Meda's sole remedy for
breach of warranty shall be to require Nastech to replace any Product that does
not substantially conform to the Approved Samples. In no event shall Nastech be
liable to Meda for consequential or incidental damages including, without
limitation, expenditures of any kind, loss of profits or prospective profits of
any kind. Nastech HEREBY DISCLAIMS ANY WARRANTY OTHER THAN THOSE SET FORTH
ABOVE WHETHER EXPRESS OR IMPLIED INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR WARRANTY THAT THE Product IS FIT FOR ANY SPECIFIC PURPOSE.

4.2 Meda warrants that (i) it will not make any claim either orally or in
writing with respect to the Product which will violate any law in the
Territory, (ii) it shall store and handle the Product according to label and
shipping carton directions or as may be specified from time to time by Nastech,
(iii) all trade names and trademarks which itrequests Nastech to affix to the
Product are either owned by it or it has obtained the legal right to use the
same and it agrees to indemnify and hold Nastech harmless against any claim,
liability, loss, cost, damage, amount paid in settlement and/or reasonable and
actual expense (including, without limitation, the reasonable costs of
investigation and attorney's fees incurred in litigation or otherwise) based
upon the use of any such trade name or trademark.

5.0 Insurance and Indemnification

5.1 Nastech shall name Meda as an additional insured on product liability
insurance it may carry, if any, and shall provide Meda with a certificate of
insurance so naming Meda as an additional insured. The foregoing shall not be
construed to require Nastech to carry Product liability insurance.

5.2 Nastech shall indemnify and hold Meda harmless against any claim,
liability, loss, cost, damage, amount paid in settlement and/or reasonable and
actual expense (including, without limitation, the reasonable costs of
investigation and attorney's fees incurred in litigation or otherwise), to
which Meda may become subject arising out of or based upon the sale or use of
any Product manufactured by Nastech which does not conform to the Approved
Samples; provided Nastech is promptly notified of any such claim and is given
the opportunity to defend the same with counsel of its own choice.

5.3 Meda shall name Nastech as an additional insured on product liability
insurance it may carry, if any, and shall provide Nastech with a certificate of
insurance so naming Nastech as an additional insured. The foregoing shall not
be construed to require Meda to carry product liability insurance.

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<PAGE> 6
5.4 Meda shall indemnify and hold Nastech harmless against any claim,
liability, loss, cost, damage, amount paid in settlement and/or reasonable and
actual expense (including, without limitation, the reasonable costs of
investigation and attorney's fees incurred in litigation or otherwise), to
which Nastech may become subject arising out of or based upon Meda's promotion,
distribution or sale of the Product, including without limitation any claim
made by Meda with respect to the effects of the Product in the marketing of the
Product or by reason of Meda's failure to properly store or handle the Product.

5.5 The Parties shall cooperate in the defense of any claim or suits
against one of them arising out of their activities under this Agreement.

6.0 Patent Rights

6.1 Set forth on Schedule 6.1 hereto is a list of all Patents issued and
applied for by Nastech relating to the Product. Nastech shall be solely
responsible for filing, prosecuting, and maintaining all of the Patents and
Nastech shall pay the costs associated therewith. Nastech shall file,
prosecute, and maintain all Patents so as to fully continue the benefits under
the licenses granted to Meda hereunder. Meda and Nastech agree that, where
applicable, all packaging of the Product shall identify (i) the number of the
Patents and (ii) Nastech as the owner.

6.2 Each party shall promptly notify the other of any alleged infringement
by third parties of any Patent and provide any information available to that
party relating to such alleged infringement. Nastech shall have the
responsibility to investigate such alleged infringement and act diligently to
end any infringement of such rights, including, but not limited to, bringing
suit against such third party infringer. No settlement, consent judgment or
other voluntary final disposition of the suit may be entered into without the
consent of Nastech and any recovery of damages in any such suit shall be
retained by Nastech. In the event of any infringement suit against a third
party brought by Nastech Meda shall cooperate in all respects, execute any
documents reasonably necessary to permit Nastech to prosecute such suit, and to
the extent reasonable shall make available its employees and relevant records
to provide evidence for such suit.

7.0 Payments

7.1 For the marketing rights, the right to refer to the Proprietary
information and the reasonable assistance of Nastech in assisting Meda to
obtain marketing authorizations in the Territory, the following amounts shall
be paid by Meda to Nastech:

7.1.1 Meda shall pay to Nastech a License Fee of USD $350,000.00
(three hundred fifty thousand Dollars) which is payable to Nastech.

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<PAGE> 7

a.) with USD 150.000 within seven (7) days from CPMP's
approvals being obtained in Sweden, Denmark, Finland
and Norway,

b.) with USD 50.000 within four (4) months after CPMP
approval or, within seven (7) days from reimbursement
acceptance in the said four countries of the
Territory, whichever occurs first,

c.) with USD 100.000 within seven (7) days from
reimbursement acceptance in Sweden and

d.) with USD 50.000 upon the date of receiving the
initial shipment of the Product from Nastech to Meda.

7.1.2 Nastech shall notify Meda within thirty (30) days of the date
of this Agreement as to whether Meda or another third party licensee of Nastech
will apply for marketing approval under the CPMP or other regulatory procedure.

7.1.3 In the event that Meda is required to perform additional
clinical or pharmaceutical studies to obtain marketing approval it shall
promptly notify Nastech. In the event that Nastech elects for Meda to continue
with the application for marketing approval in the Territory it shall share the
costs of such additional studies equally with Meda and any study so generated
shall be the property of both parties. In the event that Nastech requests Meda
to apply for a license under the CPMP mutual recognition the additional costs
for this will be born by Nastech or their partners in the other territories.

8.0 Nondisclosure

8.1 During the term of this Agreement and thereafter, for a period of
three years, Meda assumes the obligation to maintain in strict confidence all
the information, including but not limited to the Proprietary Information,
received from Nastech hereunder and / or contained in its documentation for
government health registration for the Product, except disclosures to
government bodies for registration purposes. Meda shall impose a similar
secrecy obligation on its employees, consultants and clinicians as well as on
third parties to whom any information is given for the purpose of this
Agreement. Meda shall not sell, disclose or otherwise make available the
health registration documentation to third parties and shall not use it outside
the Territory.

8.2 The following are not subject of the secrecy-obligations hereunder:

8.2.1 information, which at the time of disclosure, is in the public
domain;

- 7 -
<PAGE> 8

8.2.2 information, which after disclosure, becomes part of the
public domain by publication or otherwise, except by breach of this Agreement
by Meda;

8.2.3 information, which Meda can establish by competent proof, was
in Meda's possession at the time of disclosure by Nastech and was not acquired
either directly or indirectly from Nastech;

8.2.4 information, which Meda receives from a third party, provided
however, that such information was not obtained by said party directly or
indirectly from Nastech;

8.2.5 information, which Meda develops independently of Nastech, as
evidenced in writing.

8.3 During the period of secrecy specified under Section 8.1. Meda shall
not undertake, either directly or indirectly, to develop the manufacture of the
Product based on Nastech's confidential information or otherwise.

9.0 Additional Covenants and Agreements of the Parties

9.1 No liability shall result from delay in performance in whole or in part
hereunder by the occurrence of a contingency, the nonoccurrence of which is
basic assumption on which this Agreement is made, including, but not limited
to, acts of God, fire, flood, accident, riot, war, sabotage, strike, labor
trouble, supply shortage or embargo. If any such circumstances affect only a
part of Nastech's capacity tp perform, quantities affected by this section may,
at the option of either party, be eliminated from the Agreement without
liability, but the Agreement shall remain otherwise unaffected. A party shall
be excused from performance under this Agreement to the extent that and for so
long as such performance is substantially hindered or prevented by causes
beyond its reasonable control; provided, however, that this Section shall not
be construed to excuse performance unless prompt written notice of such
inability tom perform is given to the other party.

9.2 Meda and Nastech shall jointly develop written procedures and define
responsibilities for (i) the reporting of adverse drug experiences, (ii) the
administration and analysis of and response to complaints concerning the
Product, and (v) the development of training materials related to the Product.
Meda and Nastech shall each comply with the provisions of such written
procedures.

9.3 Meda and Nastech shall each comply with all laws and regulations
applicable to manufacturing, marketing and selling the Product in the Territory
and the performance of their respective obligations hereunder. Nastech and
Meda each shall keep all records and reports required to be kept by applicable
laws and regulations, and each shall make its facilities available at
reasonable times during business hours for inspection by representatives of
governmental agencies. Nastech and Meda each shall notify the other within
twenty-four (24) hours of receipt

- 8 -
<PAGE> 9
of any notice or any other indication whatsoever of any governmental agency
inspection, investigation or other inquiry, or other material notice or
communication of any type, involving the Product. Meda and Nastech shall
cooperate with each other during any such inspection, investigation or other
inquiry including, but not limited to, allowing upon request a representative
of the other to be present during the applicable portions of any such
inspection, investigation or other inquiry and providing copies of all relevant
documents.

9.4 If either party shall become engaged in or participate in any
investigation, claim, litigation or other proceeding with any third party,
relating in any way to the Product, the other party shall cooperate in all
reasonable respects with such party in connection therewith, including, without
limitation, using its reasonable efforts to make available to the other such
employees who may be helpful with respect to such investigation, claim,
litigation or other proceeding, provided that, for purposes of this provision,
reasonable efforts to make available any employee shall be deemed to mean
providing a party with reasonable access to any such employee at no cost for a
period of time not to exceed 24 hours (e.g., three 8-hour business days).
Thereafter, any such employee shall be made available for such time and upon
such terms and conditions (including, but not limited to, compensation) as the
parties may mutually agree.

9.5 Nastech and Meda shall each bear their own direct and indirect
expenses incurred in connection with the negotiation and preparation of this
Agreement and, except as set forth in this Agreement, the performance of the
obligations contemplated hereby.

9.6 Nastech and Meda each hereby agrees to use all reasonable efforts to
take, or cause to be taken, all actions and to do, or cause to be done all
things necessary or proper to make effective the transactions contemplated by
this Agreement, including such actions as may be reasonably necessary to obtain
approvals and consents of governmental applicable governmental agencies.

10.0 Duration and Termination

10.1 This Agreement shall commence on the Effective Date and shall
thereafter remain in force, unless terminated prematurely by mutual agreement
or according to Clause 3.3.3 or 3.4.5, 10.1.1 or 10.1.2, up to and including
December 31 of the fifteenth year following the Effective Date. The Agreement
shall thereafter be automatically renewed for another period of two (2) years
each time, unless terminated by either Party giving twelve (12) months notice
in writing to the other Party before the expiry of the initial fifteen (15)
year period or any subsequent extension. Notwithstanding the foregoing, this
Agreement may be terminated prematurely as follows:

10.1.1 If either Nastech or Meda makes a general assignment for
the benefit of creditors or becomes insolvent; (ii) files an insolvency
petition in bankruptcy; (iii) petitions for or acquiesces in the appointment of
any receiver, trustee or similar officer to liquidate or conserve its business
or any substantial part of its assets; (iv) commences under the laws of any
jurisdiction

- 9 -
<PAGE> 10
any proceeding involving its insolvency, bankruptcy, reorganization, adjustment
of debt, dissolution, liquidation or any other similar proceeding for the
release of financially distressed debtors; or (v) becomes a party to any
proceeding or action of the type described above in (iii) or (iv) and such
proceeding or action remains undismissed or unstayed for a period of more than
60 days, then the other party may by written notice terminate this Agreement in
its entirety with immediate effect.

10.1.2 Nastech and Meda each shall have the right to terminate
this Agreement for default upon the other's failure to comply in any material
respect with the terms and conditions of this Agreement. At least 30 days
prior to any such termination for default, the party seeking to so terminate
shall give the other written notice of its intention to terminate this
Agreement in accordance with the provisions of this Section 10.1.2, which
notice shall set forth the default(s) which form the basis for such
termination. If the defaulting party fails to correct such default(s) within
30 days after receipt of notification, or if the same cannot reasonably be
corrected or remedied within 30 days, then if the defaulting party has not
commenced curing said default(s) within said 30 days and be diligently pursuing
completion of same, then such party immediately may terminate this Agreement.

10.1.3 Termination of this Agreement for any reason shall not
relieve the parties of any obligation accruing prior thereto with respect to
the Product and any ongoing obligations hereunder with respect to the remaining
Product and shall be without prejudice to the rights and remedies of either
party with respect to any antecedent breach of the provisions of this
Agreement. Without limiting the generality of the foregoing, no termination of
this Agreement, whether by lapse of time or otherwise, shall serve to terminate
the obligations of the parties hereto under Sections 5.0, 8.0, 9.0, 10.0 and
11.0 hereof, and such obligations shall survive any such termination.

10.2 In addition to the foregoing, Nastech may terminate this Agreement (i)
in the event that Meda fails to purchase the minimum quantities of the Product
as required by Section 3.3.3 hereof for the time periods specified in that
Section, and (ii) if Meda fails to obtain marketing approval for the Product in
the Territory within twenty four (24) months of the Effective Date of this
Agreement provided such failure is due to Meda's negligence or inability when
handling the registration of application process for Nascobal and further
provided that such failure is not due to Nastech's refusal or failure to
provide necessary Proprietary Information. If terminated in advance Meda may
sell its existing stock of Nascobal.

11.0 General Provisions

11.1 This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and permitted assigns;
provided, however, that neither Nastech nor Meda may assign any of its rights,
duties or obligations hereunder without the prior written

- 10 -
<PAGE> 11
consent of the other, which consent shall not be unreasonably withheld, except
that no prior written consent shall be required in the event that a third party
acquires substantially all of the assets or outstanding shares of, or merges
with, Meda or Nastech, as the case may be.

11.2 All notices or other communications required or permitted to be given
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or facsimile and confirmed in writing, or mailed first class,
postage prepaid, by registered or certified mail, return receipt requested
(mailed notices and notices sent by facsimile shall be deemed to have been
given on the date received) as follows:

If to Nastech, as follows:

Nastech Pharmaceutical Company Inc.
45 Davids Drive
Hauppauge, New York 11788
Facsimile: 516-273-0252
Attention: President

If to Meda, as follows:

Meda AB
Box 138
S-401 22 Goteborg
Facsimile: +46 31 701 29 02
Attention: President

or in any case to such other address or addresses as hereafter shall be
furnished as provided in this Section 11.2 by any party hereto to the other
party.

11.3 Any term or provision of this Agreement may be waived at any time by
the party entitled to the benefit thereof by a written instrument executed by
such party. No delay on the part of Nastech or Meda in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of either Nastech or Meda of any right, power or privilege
hereunder operate as a waiver of any other right, power or privilege hereunder
nor shall any single or partial exercise of any right, power or privilege
hereunder preclude any other or further exercise thereof or the exercise of any
other right, power or privilege hereunder. The indemnification provided in
Section 5.0 shall be the sole remedy available for any damages arising out of
or in connection with this Agreement except for any rights or remedies which
the parties hereto may otherwise have in equity.

11.4 The parties hereto are independent contractors, and nothing contained
in this Agreement

- 11 -
<PAGE> 12
shall be deemed to create the relationship of partners, joint venturers, or of
principal and agent, franchisor and franchisee, or of any association or
relationship between the parties other than as expressly provided in this
Agreement. Meda acknowledges that it does not have, and Meda shall not make
representations to any third party, either directly or indirectly, indicating
that Meda has any authority to act for or on behalf of Nastech or to obligate
Nastech in any way whatsoever. Nastech acknowledges that it does not have, and
it shall not make any representations to any third party, either directly or
indirectly, indicating that it has any authority to act for or on behalf of
Meda or to obligate Meda in any way whatsoever.

11.5 This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and supersedes all prior agreements
or understandings of the parties relating thereto.

11.6 This Agreement may be modified or amended only by written agreement of
the parties hereto.

11.7 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original but all of which together shall constitute a
single instrument.

11.8 This Agreement shall be governed and construed in accordance with the
laws of the State of New York excluding any choice of law rules which may
direct the application of the law of another state.

11.9 Any dispute, controversy or claim arising out of or in connection with
this Agreement shall be determined and settled by arbitration in New York, New
York, pursuant to the Rules of Arbitration then in effect of the American
Arbitration Association. Any award rendered shall be final and conclusive upon
the parties and a judgment thereon may be entered in a court having competent
jurisdiction. Any arbitration hereunder shall be (i) submitted to an
arbitration tribunal comprised of three (3) independent members knowledgeable
in the pharmaceutical industry, one of whom shall be selected by Meda, one of
whom shall be selected by Nastech, and one of whom shall be selected by the
other two arbitrators; (ii) allow for the parties to request discovery pursuant
to the rules then in effect under the Federal Rules of Civil Procedure for a
period not to exceed 90 days; and (iii) require the award to be accompanied by
findings of fact and a statement of reasons for the decision. Each party shall
bear its own costs and expenses, including attorney's fees incurred in any
dispute which is determined and/or settled by arbitration pursuant to this
Section. Except where clearly prevented by the area in dispute, both parties
agree to continue performing their respective obligations under this Agreement
while the dispute is being resolved. Arbitration shall not prevent any party
from seeking injunctive relief where such remedy is an appropriate form of
remedy under the circumstances.

- 12 -
<PAGE> 13
11.10 All section titles or captions contained in this Agreement, in any
Schedule referred to herein or in any Exhibit annexed hereto, and the table of
contents, if any, to this Agreement are for convenience only, shall not be
deemed a part of this Agreement and shall not affect the meaning or
interpretation of this Agreement.

11.11 No provision of this Agreement shall be deemed or construed in any
way to result in the creation of any rights or obligation in any person not a
party or not affiliated with a party to this Agreement.

11.12 If any provision of this Agreement is found or declared to be invalid
or unenforceable by any court or other competent authority having jurisdiction,
such finding or declaration shall not invalidate any other provision hereof,
and this Agreement shall thereafter continue in full force and effect.

11.13 All Schedules, Exhibits and other attachments to this Agreement are by
this reference incorporated herein and made a part of this Agreement.

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered on the day and year first above written.

NASTECH PHARMACEUTICAL
COMPANY INC.

By:
---------------------------------
Name: Vincent D. Romeo, Ph.D.
Title: President

MEDA AB.

By:
---------------------------------
Name: Goran Pettersson
Title: President

- 13 -
<PAGE> 14

SCHEDULE 3.2
Purchase Price and Terms

The following terms and conditions complete Section 3.2 of the License and
Supply Agreement as follows:

Product is available for supply in packages of 5ml bottles equivalent to 8
doses.

Firms Orders shall be placed by Meda at least three (3) months before required
delivery date and shall be subject to confirmation by Nastech.

Meda shall supply to Nastech artwork including films, which must be available
at Nastech at least ninety (90) days before the required delivery dates.

The following prices shall be applicable for delivery until December 1999:

No price increase shall be effective before January 1st, 2000 and any increase
shall be notified in writing at least 60 (sixty) days before such date. The
base index figure shall be $15.00 as of the Effective Date of the Agreement.

The above prices are subject to yearly revision by January 1st, based on the
price increases for the pharmaceuticals in the Territory, as calculated by LSAB
in Sweden in October and corresponding institutions in other countries in the
Territory. However, Nastech can only claim price increases if Meda is granted
price increases for Nascobal in the Territory.

Nastech shall not revise its prices more than once a year.

Payment conditions: Invoices are payable net without discount within sixty
(60) days after the date of invoice. Payment to be made in U.S. dollars.
Interest shall be paid on overdue amounts at a rate of four (4%) percent over
the prime rate of interest as announced and in effect, from time to time, by
the Chase Manhattan Bank.

Delivery terms: Delivery shall be CIF Meda warehouse (Incoterms 1990).

This Schedule shall form an integral part of the License and Supply Agreement
of same date between the Parties.

- 14 -
<PAGE> 15
SCHEDULE 2.5
Patents for the Product Relating to the Territory

Danish Patent Application No. 6038/86

Norwegian Patent No. 174.182

Swedish Patent No. 86902732.6

Swedish Patent Nol 86902640.1

- 15 -

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