NASTECH PHARMACEUTICAL CO INC, 10-K405, 1999-03-30

NASTECH PHARMACEUTICAL CO INC
10-K405, 1999-03-30
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, 1998

COMMISSION FILE NUMBER 0-13789

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

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

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

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

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

<TABLE>
<S> <C>
Title of each class Name of each exchange
- ------------------- on which registered
None -------------------------
None

</TABLE>

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

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

</TABLE>

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

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

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 26, 1999 based upon the closing price on that date,
on the Nasdaq National Market, was approximately $17,276,000.

As of February 26, 1999, there were 6,381,915 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 with particular emphasis on treating
conditions mediated by the central nervous system. 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
Company ("BMS"). Stadol NS is the only transnasal opioid 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(R)
(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(R),
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(R) in the U.S. with Schwarz Pharma,
Inc. ("Schwarz") and the product was commercially launched in October, 1997. In
addition to these approved drugs in the U.S., the Company's pipeline includes
three drugs in development, one of which is being developed by another
pharmaceutical company.

INDUSTRY OVERVIEW

The Company participates in the drug delivery industry estimated at
$12 billion in revenues, 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 and patch 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 and
those suffering from disease conditions that cause nausea and vomiting, may
find

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this route inconvenient due to difficulty in swallowing tablets or capsules.
The oral route of delivery may also require the use of fluids or measuring
devices to allow the patient to self-administer liquids or syrups.

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 or caretaker, 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 and continuous blood levels of a drug after removal of
the patch.

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 and potentially
other dosage forms in the prescription and over-the-counter markets. The
Company's strategy incorporates pursuing development and commercialization of
its proprietary technology and, in certain instances, 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 has
historically utilized its cash and cash equivalents to fund its research and
development and for other working capital purposes. The Company's working
capital and capital requirements depend upon numerous factors, including the
results of research and development activities, technological developments, and
changes in the Company's relationships with its collaborative partners. The
degree of dependence of the Company's working capital requirements of each of
the foregoing factors cannot be quantified; increased research and development
activities and related costs would increase such requirements and changes in
relationships with collaborative partners would have a favorable or negative
impact depending upon the nature of such changes.

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 and (ii) to retain
manufacturing rights on a global basis. 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. Eventual success of the Company and
generation of positive cash flow will be dependent upon the products developed
by the Company and the licensing of these products to third parties.

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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,
Cambridge Laboratories, and RiboGene, among others, 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 has twelve U.S.
patents and six additional U.S. patents pending, all covering approximately 67
drugs. The Company has filed other U.S. patent applications, as well as
corresponding patent applications outside the United States, relating to the
Company's technology. As specific formulations are developed and clinically
tested, the Company intends to file for additional patent protection.

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 may seek 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 generally 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 pharmacokinetic, patient compliance or cost limitations. Based
on its research, the Company believes that advantages of nasal delivery include
rapid systemic absorption, more rapid onset of therapeutic effect, lower
side-effect profile, ease of use, improved cost-effectiveness, and lower
required dosage.

The following chart summarizes the Company's current products and
product pipeline:

NASTECH CURRENT PRODUCT PIPELINE
<TABLE>
<CAPTION>
TRADITIONAL
DRUG THERAPEUTIC DELIVERY
CATEGORY METHOD STATUS (1) PARTNER
------------------ ----------------------- ---------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
MARKETED:
Stadol(R) NS(TM) Opioid Analgesic Injection Global (2) BMS
Nascobal(R) Vitamin/Anti-Anemia Injection U.S. only (2) Schwarz, Meda (4),
Cambridge (4)
Metoclopramide Anti-Nausea/Anti-Emetic Injection/Oral Italy(2) RiboGene
ACTIVE DEVELOPMENT
STATUS:
Scopolamine Anti-Motion Sickness Patch/Injection Phase III Schwarz
Undisclosed Opioid Analgesic Injection/Oral Phase I
Metoclopramide Anti-Nausea/Anti-Emetic Injection/Oral Phase III (3) RiboGene
RESEARCH STATUS:
Undisclosed Erectile Dysfunction Oral Formulation Development
Undisclosed Otitis Media N/A Formulation Development
</TABLE>

(1) See "-- Government Regulation" for a description of the different stages
of development.

(2) Marketing or development activities performed by collaborative partners.

(3) Approved for marketing in Italy.

(4) Marketing partners for Nascobal ex-U.S.

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

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Approved and Marketable Products

STADOL(R) NS(TM) (BUTORPHANOL TARTRATE NASAL SPRAY) -- Opioid
analgesic for acute pain. Stadol NS is the only transnasal opioid analgesic
therapy marketed for the treatment of moderate to severe pain and the acute
pain of migraine. Prior to Stadol NS, the only acceptable and effective means
of delivery for Butorphanol Tartrate was the injectable form. Transnasal
Butorphanol Tartrate offers significant advantages over injectable formulations
of the drug, including patient self-administration, increased patient
compliance, cost containment, and the additional indication of usage. Because
of these advantages, transnasal Butorphanol Tartrate has enjoyed significant
growth in market size since 1992, as compared to the injectable formulation.
Stadol NS is currently marketed by BMS under an agreement that generates
quarterly royalties to the Company. Stadol NS has been classified by the FDA
as a Schedule IV substance under the Controlled Substances Act which has
negatively affected sales by BMS and royalties to the Company in 1997 and 1998.

NASCOBAL(R) (CYANOCOBALAMIN, USP) GEL FOR INTRANASAL ADMINISTRATION --
For Vitamin B-12 deficiency anemia. Nascobal(R) 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(R) is a more convenient, painless, self-administered weekly therapy,
which the Company believes will result in improved patient compliance. The
Company independently developed Nascobal(R) through FDA marketing clearance,
and presently manufactures this product for Schwarz Pharma. In July 1997, the
Company entered into an exclusive licensing agreement for Nascobal(R) in the
U.S. with Schwarz, and the product was commercially launched in October, 1997.
In 1997 and 1998, the Company expanded its licensing arrangements into
territories outside the U.S. through agreements with Meda AB and Cambridge
Laboratories.

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 and for the claimed indication.

In selecting compounds to develop, the Company considers drugs which
may benefit significantly from the advantages of intranasal delivery. The
Company also targets pharmaceuticals which may benefit in the form of increased
market size as a result of the changeover to intranasal therapy.

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 anti-emetic 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 development
activities in support of an NDA filing, which is anticipated in 1999. In
December 1997, the Company entered into an agreement with Schwarz for U.S.
marketing rights.

UNDISCLOSED COMPOUND -- Opioid Analgesic. The Company has two
products, Morphine Sulfate and Buprenorphine HCl, in Phase I clinical trials
and has selected one product for further development at this time. These
compounds are commonly indicated for the relief of moderate to severe pain.
Morphine sulfate is an opioid agonist currently marketed in multiple dosage
forms including injectable, oral and rectal. Buprenorphine HCl is a partial
opioid agonist analgesic. In its injectable dosage form, it is commonly known
as Buprenex, which is marketed by Reckitt and 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 of these
products will allow for patient-friendly self-administration and will provide a
rapid systemic absorption of the drug for quick pain relief.

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METOCLOPRAMIDE HC1 -- 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. In 1998
Metoclopramide HCl was cleared for marketing in Italy.

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 research
activities focus on the utilization, optimization or modification of the
Company's core nasal drug delivery technologies for use with specific drugs or
therapies. The Company is in the process of evaluating certain compounds in
their nasal delivery form for erectile dysfunction and otitis media.

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 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, including potential
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 concurrent with the Company's

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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.

SCHWARZ -- 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.

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 by the Company. In 1998, the Company received
$3 million in milestone payments under this agreement.

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(R) in Sweden, Denmark, Norway and Finland. Pursuant to the
agreement, the Company will receive revenue from the sale of Nascobal(R) to
Meda and a license fee upon the occurrence of certain regulatory approvals and
commercial events in the Nordic countries.

CAMBRIDGE LABORATORIES - In July 1998, the Company entered into an
Agreement with Cambridge Laboratories ("Cambridge"), giving Cambridge the
exclusive right to market Nascobal(R) in several European countries, Australia
and New Zealand. Pursuant to the agreement, the Company will receive revenue
from the sale of Nascobal(R) to Cambridge.

RIBOGENE, INC. -- (as successor in interest to Rugby Laboratories
Co., Inc. and Darby Pharmaceuticals, Inc.) 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 Prodis Pharma in Spain. In
1998, Metoclopromide HCl was approved for marketing in Italy.

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
twelve U.S. patents and has six pending U.S. patent applications. Two patents
have been assigned to RiboGene. The primary technology protected by the
Company's patent and proprietary rights relates to the nasal administration of
various compositions and compounds. Generally, both the compositions and
compounds and the method of nasal administration of such compositions and
compounds are protected. Approximately 67 compositions and compounds are
covered by U.S. patents and corresponding foreign patents and applications held
by or licensed to the Company. 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.

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
certain opioid antagonists and analgesics, including naloxone, naltrexone,
hydromorphone, oxymorphone, morphine, levorphanol, buprenorphine, butorphanol,
and nalbuphine, among others.

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

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50% of its royalties received from Bristol-Myers Squibb on its product sales of
Stadol NS.

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.

The Company pursues a general policy of obtaining patent protection in
both the U.S. and selected foreign jurisdictions for patentable subject matter.
In 1998, a U.S. patent was issued to the Company which claims a method for
increasing the solubility of Clemastine and pharmaceutical compositions
prepared therefrom. The patent expires in 2016. 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. These U.S. patents, which have been
issued for the nasal delivery of certain agents such as metaclopromide,
doxylamine and ranitidine, among others, expire between 2004 and 2007.
Corresponding or related patent applications for most of these pharmaceutical
agents were filed in several foreign countries.

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(R) 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(R), 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.

-7-
<PAGE> 9
Following initial formulation, the steps required before any new
pharmaceutical product may be marketed in the United States include (i)
preclinical laboratory and animal tests, (ii) the submission to the FDA of an
IND application, (iii) adequate and well-controlled clinical trials to
establish the safety and efficacy of the drug, (iv) the submission of an NDA to
the FDA, and (v) FDA approval of the NDA prior to any commercial sale or
shipment of the drug.

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

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

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

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

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.

-8-
<PAGE> 10
The health care industry is changing rapidly as the public,
government, medical professionals and the pharmaceutical industry examine ways
to broaden medical coverage while controlling the increase in health care
costs. The Company believes that Congress may continue to consider health care
reform proposals which, if enacted, would significantly affect health care,
pharmaceutical and drug delivery companies, among others. Potential changes
could put pressure on the prices of prescription pharmaceutical products.
Health care reform may adversely affect the Company's business, particularly to
the extent that the Company develops products for prescription drug
applications. The Company is unable to predict, however, when any proposed
health care reforms will be implemented, if ever, or the effect of any
implemented reforms on the Company's business or prospects.

COMPETITION

The Company is engaged in the pharmaceutical, drug delivery systems
industry which is characterized by extensive research efforts, rapid
technological progress and intense competition. Competitors of the Company in
the United States and abroad are numerous and include, among others, major
pharmaceutical companies, biotechnology firms, universities and other research
institutions. At the present time, the Company does not know of another
pharmaceutical company 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, on a
non-exclusive basis, some nasal 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 26, 1999, the Company had 46 full-time employees, of whom
36 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 Executive Director of Medical/Clinical Affairs. 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.

-9-
<PAGE> 11
ITEM 2 - PROPERTY

The Company leases approximately 28,000 square feet for its research
and development activities and 10,000 square feet for its manufacturing and
corporate and administrative offices. The R&D site is in proximity to the
corporate offices in Hauppauge, New York. The leases provide for minimum
annual rent of approximately $210,000 which escalates to $420,000 in 2008. with
the Company having an option to renew for an additional five-year term at
increased annual rental rates. The Company plans to exercise its option to
renew the corporate office lease in 1999. The Company is also responsible for
all utilities, maintenance, security and property tax increases.

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.

-10-
<PAGE> 12

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>
1998 QUARTER ENDED:
-------------------
December 31, 1998 $3.00 $5.50
September 30, 1998 3.75 8.25
June 30, 1998 7.63 12.50
March 31, 1998 10.38 15.38
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
</TABLE>

The Company believes that its common stock is held of record by
approximately 23,000 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.

-11-
<PAGE> 13

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 years ended December 31, 1998 and 1997, for the six
months ended December 31, 1996 and each of the years in the three-year period
ended June 30, 1996 and the balance sheet data as of December 31, 1998, 1997
and 1996 and June 30, 1996, 1995 and 1994 are derived from 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 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 and Per Share Data)

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------------------------------
STATEMENT OF OPERATIONS DATA: 1998 1997(1) 1996
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues: $ 516 $ 482 $ --
Product sales. . . . . . . . . . . . . . .
License fee, royalty and research income . 7,632 3,647 3,987
Interest income . . . . . . . . . . . . . 1,442 1,393 344
----------- ---------- ----------

Total revenues . . . . . . . . . . 9,590 5,522 4,331
----------- ---------- ----------
Cost and expenses: 589 454 --
Cost of product sales. . . . . . . . . . .
Research and development . . . . . . . . . 6,014 4,600 1,494
Royalties . . . . . . . . . . . . . . . . 1,251 1,586 1,649
Sales and marketing . . . . . . . . . . . 875 1,723 169
General and administrative . . . . . . . . 1,737 1,705 1,073
----------- ---------- ----------
Total costs and expenses . . . . . 10,466 10,068 4,385
----------- ---------- ----------
Income (loss) before provision for income
taxes . . . . . . . . . . . . . . . . . (876) (4,546) (54)
Provision for income taxes . . . . . . . . . . -- -- --
----------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . $ (876) $ (4,546) $ (54)
=========== ========== ==========
Net income (loss) per common share-basic . . . $ (.14) $ (.76) $ (.01)
=========== ========== ==========
Net income (loss) per common share-diluted . . $ (.14) $ (.76) $ (.01)
=========== ========== ==========

Average shares outstanding- basic . . . . . . . 6,296,019 5,978,121 3,706,529
Average shares outstanding- diluted . . . . . . 6,296,019 5,978,121 3,706,529

<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31
---------------------------------------- -------------------------
STATEMENT OF OPERATIONS DATA: 1996 1995 1994 1996 1995
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues: $ -- $ -- $ -- $ -- $ --
Product sales. . . . . . . . . . . . . . .
License fee, royalty and research income . 3,629 2,684 2,107 1,880 1,522
Interest income . . . . . . . . . . . . . 238 254 93 231 125
---------- ---------- ---------- ---------- ----------

Total revenues . . . . . . . . . . 3,867 2,938 2,200 2,111 1,647
---------- ---------- ---------- ---------- ----------
Cost and expenses: -- -- -- -- --
Cost of product sales. . . . . . . . . . .
Research and development . . . . . . . . . 1,164 882 504 1,035 705
Royalties . . . . . . . . . . . . . . . . 1,677 1,251 1,041 710 738
Sales and marketing . . . . . . . . . . . 128 50 10 76 35
General and administrative . . . . . . . . 780 834 420 643 349
---------- ---------- ---------- ---------- ----------
Total costs and expenses . . . . . 3,749 3,017 1,975 2,464 1,827
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for income
taxes . . . . . . . . . . . . . . . . . 118 (79) 225 (353) (180)
Provision for income taxes . . . . . . . . . . -- -- 17 -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . $ 118 $ (79) $ 208 $ (353) $ (180)
========== ========== ========== ========== ==========
Net income (loss) per common share-basic . . . $ .04 $ (.03) $ .09 $ (.08) $ (.06)
========== ========== ========== ========== ==========
Net income (loss) per common share-diluted . . $ .03 $ (.03) $ .08 $ (.08) $ (.06)
========== ========== ========== ========== ==========

Average shares outstanding- basic . . . . . . . 3,221,447 3,119,718 2,419,976 4,191,600 3,221,447
Average shares outstanding- diluted . . . . . . 4,297,536 3,119,718 2,524,432 4,191,600 3,221,447
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------
BALANCE SHEET DATA: 1998(2) 1997(2) 1996(2)
--------- ------------- ----------
<S> <C> <C> <C>

Working capital . . . . . . . . . . . . . . . $24,454 $24,206 $11,342
Total assets . . . . . . . . . . . . . . . . . 27,518 27,371 12,894
Total stockholders' equity 25,502 24,929 11,813

<CAPTION>
JUNE 30 DECEMBER 31
-----------------------------------------------------------
BALANCE SHEET DATA: 1996(2) 1995 1994(2) 1996 1995
--------- --------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Working capital . . . . . . . . . . . . . . . $7,469 $4,444 $4,699 $11,342 $4,045
Total assets . . . . . . . . . . . . . . . . . 9,367 6,035 6,002 12,894 5,616
Total stockholders' equity 7,569 4,288 4,309 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, 1998 and 1996 and June 30, 1996, the Company received net
proceeds of $1.4 million, $4.6 million and $3.2 million, respectively, from the
exercise of the warrants (see note 4 to the financial statements).

-12-
<PAGE> 14
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(R). Stadol NS, an opiod analgesic for the
treatment of moderate to severe pain and the acute pain of migraine, is
currently marketed by Bristol-Myers Squibb Company (BMS) under an agreement
that generates quarterly royalties to the Company. In 1997, Stadol NS was
classified by the FDA as a Schedule IV substance under the Controlled
Substances Act which, among other factors, has negatively affected sales by BMS
and royalties to the Company and may continue to affect sales in the future.
The Company anticipates that this negative effect may continue in the
foreseeable future. In July 1997, the Company entered into an exclusive
licensing agreement for Nascobal(R) in the U.S. with Schwarz Pharma Inc.
(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 minimum royalty expires
in December 1998. Sales re-orders of Nascobal in 1998 are below expectations
as a result of a marketing issue which requires a change in the packaging
configuration of the product. As a result, Schwarz Pharma has deferred
delivery to 1999 of its outstanding purchase orders of Nascobal from the
Company. The Company relies on a contract service provider for the fill and
packaging of Nascobal in accordance with current Good Manufacturing Practice.

In December 1997, the Company entered into an agreement with Schwarz
Pharma for U.S. marketing rights with respect to the Company's planned
intranasal compound, scopolamine, for the prevention and treatment of motion
sickness. The Company has successfully met certain milestones, generating
revenues of $3 million in 1998, and plans to file an NDA in 1999. As discussed
in note 11 of the financial statements, the Company is negotiating an extension
of the NDA filing date with Schwarz Pharma.

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.

In October 1998, the Company received a notice of termination from
Pfizer with respect to its licensing agreement for intranasal Doxylamine
Succinate. The termination arose from certain events within Pfizer that
contributed to a change in priorities. Pursuant to terms of the licensing
agreement, all technology and other rights to Doxylamine Succinate revert to
the Company.

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

-13-
<PAGE> 15
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 anticipates a loss in
calendar 1999.

RESULTS OF OPERATIONS

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Revenues increased by $4.1 million, or 73.7%, to $9.6 million
primarily as a result of manufactured product sales and royalty income from the
sales of Nascobal of $2 million and the achievement of milestones of $3 million
on the intranasal motion sickness product, scopolamine, under its collaborative
licensing agreements with Schwarz Pharma. Royalty income received from BMS on
sales of Stadol NS decreased $675,000 or 21%, to $2.6 million. The Company
anticipates a decline in total revenues in 1999 primarily as a result of the
non-recurrence of the $2 million minimum royalty on Nascobal and the amount of
milestone payments available from Schwarz Pharma on intranasal scopolamine.

Total costs and expenses increased by $398,000 to $10.5 million in
1998. The details of the increase follow:

Research and development expense increased by $1.4 million, or 31% to
$6.0 million primarily as a result of the Company's clinical program for
intranasal scopolamine. The Company has entered into an operating lease for a
larger R&D facility and intends to pursue internally funded projects. The
Company anticipates that expenditures for research and development may continue
to increase in the foreseeable future.

In connection with the manufacture of Nascobal(R), the Company entered
into a filling and packaging agreement with a third party. In 1998, the
Company has incurred certain costs associated with its plan to expand its
manufacturing capabilities and reduce its reliance on third parties. The total
cost of product sales, including certain costs associated with this plan of
operations, was $589,000 in 1998.

Royalties expense decreased by $335,000 or 21% to $1.3 million as a
result of the decline in sales of Stadol NS by BMS and the related royalty
payable to the University of Kentucky Research Foundation (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 expenses decreased by $848,000, or 49%, to
$875,000. The Company eliminated its marketing costs associated with the
product, Nascobal(R), as a result of the licensing agreement entered into with
Schwarz Pharma in 1997.

As a percentage of total revenues, general and administrative expenses
decreased to 18% in 1998 as compared to 31% in 1997.

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

Revenues increased by $1.2 million, or 27%, to $5.5 million as a
result of the launch of the Company's product, Nascobal(R), in October, 1997
and interest income on investments. Manufactured product sales and royalty
income on sales of Nascobal(R) totaled $747,000. Royalty income received from
BMS on sales of Stadol NS decreased $118,000, or 4%, to $3.3 million. Other
license fee, royalty and research income decreased by $487,000. Interest
income increased by $1 million to $1.4 million 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 $5.7 million, or 130%, to $10
million in 1997. The details of the increase follow:

Research and development expense increased by $3.1 million, 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 manufactures Nascobal(R) 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 $1.6 million as a
result of the decline in sales of Stadol NS

-14-
<PAGE> 16
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 $1.6 million to $1.7 million
primarily as a result of the marketing and related costs associated with the
licensing of the intranasal products, Nascobal(R) and scopolamine, an increase
in services provided by outside business consultants, and the addition of
personnel and related costs.

General and administrative expense increased by $661,000, or 64%, to
$1.7 million 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.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1998, the Company's liquidity included cash and cash
equivalents of $23.5 million compared to $25.3 million at December 31, 1997.
Royalties and fees receivable at December 31, 1998, consist principally of
receivables pursuant to the BMS and Schwarz Pharma agreements which were
collected subsequent to December 31, 1998. During the year ended December 31,
1998, warrants were exercised which provided the Company additional cash of
$1.4 million.

At December 31, 1998, the Company had working capital of $24.5
million. Management anticipates that its current cash position will provided
adequate funds for the Company's anticipated needs, including working capital,
through 1999. In 1999, the Company plans to invest up to $3 million in
equipment and leasehold improvements in connection with its new R&D facility.
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 has conducted a review of its computer systems to identify
the systems that could be affected by the Year 2000 issue and, with minor
modifications to its computer systems, the Year 2000 will not pose a
significant operational problem for the Company. However, improper or
inadequate remediation of Year 2000 problems by suppliers, customers and
financial institutions could adversely affect the Company's operations,
liquidity or financial condition.

The Company is in the process of contacting all significant suppliers,
customers and financial institutions in order to identify potential areas of
concern. It is anticipated that this inquiry will be completed by the third
quarter of 1999. The Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material adverse impact on the
Company.

Based on the results of the above inquiries, the Company may need to
create a contingency plan to identify and document potential business
disruptions and continuity planning procedures. The Company expects this
activity to be an on-going process during 1999.

The above comments on the Year 2000 issue contain forward-looking
statements relating to the Company's plans, strategies, expectations,
intentions, and resources that should be read in conjunction with the Company's
disclosures on forward-looking statements above.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and
Hedging Activities," which is required to be adopted in years beginning after
June 15, 1999. The Company expects to adopt the new statement effective
January 2, 2000. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. In accordance with SFAS No.
133, an entity is required to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gain and losses to offset related results

-15-
<PAGE> 17
on the hedged item in the income statement and requires that a company formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. The Company does not believe that the implementation of SFAS
No. 133 will have a material effect on its financial position and results of
operations.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

-16-
<PAGE> 18

ITEM 8 - INDEX TO FINANCIAL STATEMENTS

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

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Balance Sheets at December 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Statements of Operations for the years ended December 31, 1998, 1997, and December 31, 1996
(unaudited), six months ended December 31, 1996 and for the year ended June 30, 1996 . . . . . . 21
Statements of Stockholders' Equity for the years ended December 31, 1998, and December 31, 1997
six months ended December 31, 1996 and for the year ended June 30, 1996 . . . . . . . . . . . . . 22
Statements of Cash Flows for the years ended December 31, 1998, 1997 and December 31, 1996
(unaudited), six months ended December 31, 1996 and for the year ended June 30, 1996 . . . . . . 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, 1998 and 1997 and related
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1998 and 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 audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nastech Pharmaceutical Company
Inc. as of December 31, 1998 and 1997 and the results of its operations and its
cash flows for the years ended December 31, 1998 and 1997 and the six-month
period ended December 31, 1996 in conformity with generally accepted
accounting principles.

KPMG LLP

Melville, New York
February 5, 1999,
except as to note 11, which
is as of March 26, 1999

-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 year ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based upon our audit.

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

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

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

New York, New York
August 15, 1996

-19-
<PAGE> 21

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

NASTECH PHARMACEUTICAL COMPANY INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS

Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 23,515 $ 25,294

Accounts receivable . . . . . . . . . . . . . . . . . . . . . 20 482

Royalties and fees receivable . . . . . . . . . . . . . . . . 2,265 455

Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 390 370

Prepaid expenses and sundry assets . . . . . . . . . . . . . . 248 47

Due from related party . . . . . . . . . . . . . . . . . . . . 32 ---
-------- --------

Total current assets . . . . . . . . . . . . . . . 26,470 26,648
-------- --------

Property and equipment . . . . . . . . . . . . . . . . . . . . . 1,635 1,010

Less: Accumulated depreciation and amortization . . . . . . . 602 302
-------- --------

Property and equipment, net . . . . . . . . . . . 1,033 708
-------- --------

Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 15 15
-------- --------

Total assets $ 27,518 $ 27,371
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 625 $ 1,497

Royalties payable . . . . . . . . . . . . . . . . . . . . . . 597 191

Accrued expenses and sundry liabilities . . . . . . . . . . . 794 754
-------- --------

Total current liabilities 2,016 2,442
-------- --------

Stockholders' equity:

Common stock, $0.006 par value; authorized: 25,000,000 shares; 38 37
issued and outstanding: 6,376,915 and 6,101,020 shares at
December 31, 1998 and 1997, respectively. . . . .

Additional paid-in capital . . . . . . . . . . . . . . . . . . 37,426 35,978

Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (11,962) (11,086)
-------- --------

Total stockholders' equity . . . . . . . . . . . . . . . 25,502 24,929
-------- --------

Total liabilities and stockholders' equity . . . . . . . $ 27,518 $ 27,371
======== ========
</TABLE>

See accompanying notes to financial statements.

-20-
<PAGE> 22

NASTECH PHARMACEUTICAL COMPANY INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

YEARS ENDED
-----------------------------------------------------------------------------
DEC. 31, DEC. 31, DEC. 31, JUNE 30,
1998 1997 1996 1996
------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Revenues: (UNAUDITED)
Product sales . . . . . . . . . . . . . $ 516 $ 482 $ --- $ ---
License fee, royalty and research income 7,632 3,647 3,987 3,629
Interest income . . . . . . . . . . . . 1,442 1,393 344 238
------------- --------------- -------------- ------------
Total revenues . . . . . . . . . . . 9,590 5,522 4,331 3,867
------------- --------------- -------------- ------------
Costs and expenses:
Cost of product sales . . . . . . . . . 589 454 --- ---
Research and development . . . . . . . . 6,014 4,600 1,494 1,164
Royalties . . . . . . . . . . . . . . . 1,251 1,586 1,649 1,677
Sales and marketing . . . . . . . . . . 875 1,723 169 128
General and administrative . . . . . . . 1,737 1,705 1,073 780
------------- --------------- -------------- ------------
Total costs and expenses . . . . . . 10,466 10,068 4,385 3,749
============= =============== ============== ============
Net income (loss) . . . . . . . . . . . . . $ (876) $ (4,546) $ (54) $ 118
============= =============== ============== ============
Net income (loss) per common share-basic. . $ (.14) $ (.76) $ (.01) $ .04
============= =============== ============== ============
Net income (loss) per common share-diluted. $ (.14) $ (.76) $ (.01) $ .03
============= =============== ============== ============
Average shares outstanding-basic . . . . . 6,296,019 5,978,121 3,706,529 3,221,447
============= =============== ============== ============
Average shares outstanding-diluted . . . . 6,296,019 5,978,121 3,706,529 4,297,536
============= =============== ============== ============

<CAPTION>
SIX MONTHS
ENDED
-------------
DEC. 31,
1996
-------------
<S> <C>
Revenues:
Product sales . . . . . . . . . . . . . $ ---
License fee, royalty and research income 1,880
Interest income . . . . . . . . . . . . 231
-------------
Total revenues . . . . . . . . . . . 2,111
-------------
Costs and expenses:
Cost of product sales . . . . . . . . . ---
Research and development . . . . . . . . 1,035
Royalties . . . . . . . . . . . . . . . 710
Sales and marketing . . . . . . . . . . 76
General and administrative . . . . . . . 643
-------------
Total costs and expenses . . . . . . 2,464
=============
Net income (loss) . . . . . . . . . . . . . $ (353)
=============
Net income (loss) per common share-basic. . $ (.08)
=============
Net income (loss) per common share-diluted. $ (.08)
=============
Average shares outstanding-basic . . . . . 4,191,600
=============
Average shares outstanding-diluted . . . . 4,191,600
=============
</TABLE>

See accompanying notes to financial statements.

-21-
<PAGE> 23
NASTECH PHARMACEUTICAL COMPANY INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 AND
FOR THE SIX MONTHS ENDED DECEMBER 1996 AND THE YEAR ENDED JUNE 30, 1996
(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, 1995 . . . . . . . . . 3,221,447 $ 19 $ 10,575 $ (6,306) $ 4,288
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 year ended June 30, 1996 . . . 118 118
------------- ----------- --------------- -------------------- -----------------
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,
1996 (unaudited) . . . . . . . . . . . --- --- --- (352) (352)
------------- ----------- --------------- -------------------- -----------------
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
Shares issued in connection with exercise 270,000 1 1,402 --- 1,403
underwriter's warrants . . . . . . . .
Shares issued in connection with exercise
of stock options . . . . . . . . . . . 6,000 --- 46 --- 46
Fractional shares redeemed in connection
with reverse stock split . . . . . . (105) --- --- --- ---
Net loss year ended December 31, 1998 --- --- --- (876) (876)
------------- ----------- --------------- -------------------- -----------------
BALANCE, DECEMBER 31, 1998 . . . . . . . 6,376,915 $ 38 $37,426 $ (11,962) $ 25,502
============= =========== =============== ==================== =================
</TABLE>

See accompanying notes to financial statements.

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

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
----------------------------------------------------------- -------------
DEC.31, DEC. 31, DEC. 31, JUNE 30, DEC.31,
1998 1997 1996 1996 1996
--------- ---------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES: (UNAUDITED)

Net income (loss) . . . . . . . . . . . $ (876) $ (4,546) $ (54) $ 118 $ (353)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Compensation related to stock --- 175 --- --- ---
options. . . . . . . . . . . . . .
Depreciation and amortization. . . 300 262 61 55 36
Abandonment and disposition of
property and equipment . . . . . . --- --- 2 --- 2
Changes in assets and liabilities:
Accounts and other receivables . . . (1,348) (139) (91) (331) 292
Inventories . . . . . . . . . . . . . (20) (370) --- --- ---
Prepaid expenses and sundry assets. . (233) 33 (52) 8 (25)
Accounts payable . . . . . . . . . . (872) 910 47 (65) 88
Royalties payable . . . . . . . . . . 406 (45) (112) 152 (286)
Accrued expenses and sundry
liabilities . . . . . . . . . . . 52 510 (73) 123 (208)
--------- ---------- -------------- ----------- -------------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . (2,591) (3,210) (272) 60 (454)
--------- ---------- -------------- ----------- -------------
INVESTING ACTIVITIES:
Property, plant and equipment . . . . . (625) (585) (210) (91) (205)
Short-term investments-acquisitions. . . --- (968) (15,120) (10,290) (8,981)
Short-term investments-redemptions . . . --- 7,992 12,312 10,534 5,912
Other assets . . . . . . . . . . . . . . --- --- (98) 5 (98)
--------- ---------- -------------- ----------- -------------
Net cash provided by (used in)
investing activities . . . . . . . . . . (625) 6,439 (3,116) 158 (3,372)
--------- ---------- -------------- ----------- -------------
FINANCING ACTIVITIES:
Repayment of debt . . . . . . . . . . . (12) (13) (297) (169) (308)
Exercise of stock options . . . . . . . 46 18 --- --- ---
Exercise of warrants . . . . . . . . . . 1,403 --- 7,759 3,162 4,597
Proceeds from sale of common stock --- 17,566 --- --- ---
--------- ---------- -------------- ----------- -------------
Net cash provided by financing activities . 1,437 17,571 7,462 2,993 4,289
--------- ---------- -------------- ----------- -------------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . (1,779) 20,800 4,074 3,211 463
Cash and cash
equivalents--beginning . . . . . . . . . 25,294 4,494 420 820 4,031
--------- ---------- -------------- ----------- -------------
Cash and cash equivalents--ending. . . . . $ 23,515 $ 25,294 $ 4,494 $4,031 $ 4,494
========= ========== ============== =========== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . . . $ 5 $6 $ 35 $47 $ 48
========= ========== ============== =========== =============
</TABLE>

See accompanying notes to financial statements.

-23-
<PAGE> 25
NASTECH PHARMACEUTICAL COMPANY INC.
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 1998 and December 31, 1997 and
For the Six Months Ended December 1996 and the Year Ended June 30, 1996

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 years ended December 31, 1998 and 1997, the six month
transition period ended December 31, 1996 and the statement of operations,
changes in stockholders' equity and cash flows for the fiscal year ended June
30, 1996. The unaudited financial statements for the twelve months ended
December 31, 1996 are included for informational purposes only.

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-rated investment grade commercial paper and variable rate preferred
securities with maturities of three months or less when purchased. At December
31, 1998 and 1997, cash equivalents totaled $23.2 million and $25.2 million,
respectively.

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 legal life of the patents at acquisition or their useful life,
whichever is shorter. The Company has not acquired any patents to date. 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.

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

-24-
<PAGE> 26
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 licensing agreements with Bristol-Myers Squibb Company and Schwarz Pharma,
Inc.

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 potential
dilutive common shares such as stock options and warrants. A reconciliation
between the numerators and denominators of the basic and diluted net income
(loss) per common share is as follows:

<TABLE>
<CAPTION>
Year Ended Year Ended Six Months
December 31, June 30, Ended Dec. 31,
--------------------------------------- -------------- ---------------
1998 1997 1996 1996 1996
----------- ------------ --------- ------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net income (loss) (numerator for basic and
diluted net income (loss) per common share) $ (876) $ (4,546) $ (54) $ 118 $ (353)
=========== ============ ========= ============= ===============
Weighted average common shares
(denominator for basic net income (loss) per
common share) 6,296 5,978 3,707 3,221 4,192
Employee stock options --- --- --- 1,077 ---
----------- ------------ --------- ------------- ---------------
Effect of dilutive securities:
common shares outstanding (denominator for
diluted income (loss) per common share) 6,296 5,978 3,707 4,298 4,192
=========== ============ ========= ============= ===============
Net income (loss) per common share-basic $ (.14) $ (.76) $ (.01) $ .04 $ (.08)
=========== ============ ========= ============= ===============
Net income (loss) per common share-diluted $ (.14) $ (.76) $ (.01) $ .03 $ (.08)
=========== ============ ========= ============= ===============
</TABLE>
Income Taxes

Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Long-Lived Assets

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 as a result of the
adoption of SFAS No. 121.

Stock-Based Compensation

The Company accounts for stock-based compensation using the intrinsic
value method in accordance with APB No. 25, "Accounting for Stock Issued to
Employees." Effective July 1, 1996, the Company adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", which
requires 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).

-25-
<PAGE> 27
New Reporting Pronouncements

Effective January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 130 requires that all
items recognized under accounting standards as components of comprehensive
income be reported in an annual financial statement that is displayed with the
same prominence as other annual financial statements. Other comprehensive
income may include foreign currency translation adjustments, minimum pension
liability adjustments and unrealized gains and losses on marketable securities
classified as available-for-sale. SFAS No. 131 established standards to report
information about operating segments and related discussions about products and
services, geographic areas and major customers. The adoption of SFAS No. 130
and SFAS No. 131 had no impact on the Company's financial statements and
disclosures.

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.

NOTE 3 -- PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Furniture and fixtures . . . . . . . . . $ 131 $ 122
Machinery and equipment . . . . . . . . . 962 445
Computer equipment . . . . . . . . . . . 211 177
Leasehold improvements . . . . . . . . . 331 266
------- -------
1,635 1,010
Less accumulated depreciation
and amortization . . . . . . . . . . . . 602 302
------- -------
Net property and equipment . . . . . . . $ 1,033 $ 708
======= =======
</TABLE>

Property and equipment having a net book value of $23,000 at December
31, 1998 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. These underwriter's warrants were
exercised during 1998 resulting in proceeds to the Company of $1,403,000.

-26-
<PAGE> 28
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 amended Stock Option Plan (the "Plan") 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 Plan provides that options granted thereunder shall be exercisable
during a period of no more than ten years (five years in the case of 10%
shareholders) from the date of grant, depending upon the specific stock option
agreement, and that, with respect to incentive stock options, the option
exercise price shall be at least equal to 100% of the fair market value of the
common stock at the time of grant (110% in the case of 10% shareholders).
Pursuant to the provisions of the Plan, the aggregate fair market value
(determined on the date of grant) of the common stock with respect to which
incentive stock options are exercisable for the first time by an employee
during any calendar year shall not exceed $100,000. The Plan is administered
by the Company's Board of Directors. Options outstanding at December 31, 1998
are at prices ranging from $3.63 to $5.63 per share, the fair market value on
the date of grant, and expire at various dates to December 17, 2003. Options
to acquire 5,000 shares at $8.25 and 1,000 shares at $5.13, and 8,333 shares of
stock at $1.77 and 6,666 shares at $.51 were exercised in 1998 and 1997,
respectively.

In August 1998, the Company's Board of Directors approved a stock
option exchange program in which it offered all holders the right to exchange
their options for the same number of new options with a lower exercise price
but with a modified term of vesting. All outstanding options (786,350) with an
exercise price greater than $5.63 per share were eligible for this program and
were exchanged during 1998. No charge was recorded to earnings as the new
exercise price was in excess of the market value on the date of the exchange.

Data relating to these plans are as follows:

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
-------------------------- ----------------------------- --------------------------- ------------
Weighted Weighted Weighted
Average Average Average Year Ended
Exercise Exercise Exercise June 30,
Shares Price Shares Price Shares Price 1996
---------- ----------- --------- ----------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period . . 878,150 $ 10.47 459,299 $ 9.97 244,249 $ 5.47 214,749
Granted . . . . . . . . 903,650 5.91 461,902 10.94 225,800 14.67 34,500
Exercised . . . . . . . (6,000) 7.73 (14,999) 1.21 --- --- ---
Cancelled . . . . . . . (786,350) 11.18 (10,000) 22.75 --- --- ---
Terminated . . . . . . (3,700) 9.96 (18,052) 9.83 (10,750) 6.44 (5,000)
---------- ----------- --------- ----------- -------- ------------ ------------
Outstanding at end of
period . . . . . . . . 985,750 $ 5.49 878,150 $ 10.47 459,299 $ 9.97 244,249
========== =========== ========= =========== ======== ============ ============
</TABLE>

-27-
<PAGE> 29

The following table summarizes the information on stock options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- ----------------------------------------------
Weighted- Weighted-
average Weighted- exercisable
Range of Number remaining average Number price
exercise price outstanding contructual life exercise prices exercisable average
- ------------------ ------------- ----------------- ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
$3.63 - 5.00 40,400 1.26 $ 3.92 35,000 $ 3.92
$5.13 131,500 2.04 5.13 107,500 5.13
$5.63 813,850 4.69 5.63 589,004 5.63
------------- ---------------
985,750 731,504
============= ===============
</TABLE>

NOTE 6 -- INCOME TAXES

The Company's net deferred tax assets as of December 31, 1998 and
1997, are estimated as follows:

<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards . . . . . . . $ 3,546,000 $ 4,382,000
Research and development credits . . . . . . . 637,000 333,000
Depreciation . . . . . . . . . . . . . . . . . 56,000 70,000
Other . . . . . . . . . . . . . . . . . . . . . 59,000 ---
-------------- --------------

Total deferred tax assets . . . . . . . $ 4,298,000 $ 4,785,000
Deferred tax liabilities:
Depreciation and amortization . . . . . . . . . --- 8,000
-------------- --------------
Total deferred tax liabilities . . . . . $ --- $ 8,000
Net deferred tax assets . . . . . . . . . . . . $ 4,298,000 $ 4,777,000
-------------- --------------
Valuation allowance . . . . . . . . . . . . . . (4,298,000) (4,777,000)
Net deferred taxes . . . . . . . . . . . . . . $ --- $ ---
============== ==============
</TABLE>

A valuation allowance for 1998 and 1997 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, 1998, the Company has available net operating loss
carryforwards for federal and state income tax reporting purposes of
approximately $9,100,000, and has available research and development credit
carryforwards for federal income tax reporting purposes of approximately
$637,000, which are available to offset future taxable income, if any. These
carryforwards expire beginning in 2000 through 2018. The Company's ability to
use such net operating loss and research and development credit carryforwards
is limited by change of control provisions under Section 382 of the Internal
Revenue Code.

NOTE 7 -- COMMITMENTS

(a) Employment Agreements and Accrued Compensation

The Company's Chief Executive Officer has an employment agreement
expiring December 31, 2000, from which he 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 agreement with its President terminated January 1, 1999.
As part of the termination agreement the former President will receive a
severance payment of $107,500 which was accrued as of December 31, 1998 and a
monthly retainer of $10,000 for the initial six month term of a consulting
arrangement. Additionally, the agreement provides for certain incentive
payments relating to consulting services. Participation in the Company's stock
option plan will continue at least through December 31, 1999 and thereafter,
should the consulting arrangement be extended beyond June 30, 1999.

-28-
<PAGE> 30
As of December 31, 1998 and 1997, accrued expenses and sundry
liabilities include accrued compensation and benefits of $439,000 and $314,000,
respectively.

(b) Leases:

The Company leases space for its research and development activities
under a lease expiring October 31, 2009 and leases office and manufacturing
space under a lease expiring on May 31, 2000. Each lease has a 5 year renewal
option. The Company plans to exercise the renewal option for its office and
manufacturing space. The following is a schedule of future minimum lease
payments, including the renewal option for the office and manufacturing space:

<TABLE>
<S> <C>
1999................................................................ $ 210,000
2000................................................................ 297,000
2001................................................................ 313,000
2002................................................................ 333,000
2003................................................................ 361,000
Thereafter.......................................................... 2,242,000
---------
Total......................................................... $3,756,000
</TABLE>

Rental expense for the aforementioned space aggregated approximately
$173,000, $95,000, $83,000, $34,000, and $83,000 for the years ended December
31, 1998, 1997 and 1996, the six months ended December 31, 1996 and for the
year ended June 30, 1996, 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
concurrent 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 has negatively
affected sales by BMS and royalties to the Company.

In July 1997, the Company exclusively licensed to Schwarz the right to
market the Company's Nascobal(R) (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(R). 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 aggregate in excess of $5 million upon the achievement
of certain development milestones (note 11). In 1998 the Company received $3
million of such milestone payments by the Company.

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

In July 1998, the Company entered into an agreement with Cambridge
Laboratories ("Cambridge"), giving Cambridge the exclusive right to market
Nascobal in several European countries, Australia and New Zealand. Pursuant to
the agreement, the Company will receive revenue from the sale of Nascobal to
Cambridge.

-29-
<PAGE> 31

NOTE 9 -- STOCK-BASED COMPENSATION

The per share weighted average fair value of stock options granted
during the year ended December 31, 1998, 1997, the six months ended December
31, 1996 and the year ended June 30, 1996 was $3.82, $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 YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DEC. 31, 1998 DEC. 31, 1997 JUNE 30, 1996 DEC. 31, 1996
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Expected dividend yield - 0-% - 0-% - 0 -% - 0 -%
Risk free interest rate 4.75% 5.8% 6% 6%
Expected stock volatility 63% 65% 49% 54%
Expected option life 5 years 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 in 1997 with the amount of
$175,000 for options granted below market value), 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 (loss) would have
been reported as the pro forma amounts indicated below:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DEC. 31, 1998 DEC. 31, 1997 JUNE 30, 1996 DEC. 31, 1996
------------------- -------------------- -------------- --------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income (loss):
As reported . . . . . . . $ (876) $ (4,546) $ 118 $ (353)
Pro forma . . . . . . . . $ (2,322) $ (6,515) $ 69 $ (1,263)
Net earnings (loss) per share: $ (.14) $ (.76) $ .03 $ (.08)
As reported . . . . . . .
Pro forma . . . . . . . . $ (.37) $ (1.09) $ .02 $ (.30)
</TABLE>

Proforma net income (loss) reflects only options granted during the
years ended December 31, 1998 and 1997, and June 30, 1996 and for the six
months ended December 31, 1996. Therefore, the full impact of calculating
compensation cost for stock options under SFAS No. 123 is not reflected in the
pro forma 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, the date of adoption by the Company of SFAS No.
123, was not considered.

NOTE 10 -- RELATED PARTY TRANSACTIONS

A member of the Board of Directors provided legal services to the
Company in 1998. Fees earned by this director were $109,350. In addition, a
member of the Board of Directors owes the Company approximately $32,000
represented by a note payable on demand. The note bears interest at 8 % per
annum.

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.

NOTE 11 -- SUBSEQUENT EVENT

On March 26, 1999, the Company determined that it will be unable to
file a New Drug Application ("NDA") for intranasal scopolamine by June 30, 1999
and, therefore, may not be eligible to receive a milestone payment of $500,000
from Schwarz Pharma Inc. The Company is negotiating an extension of the NDA
filing date with Schwarz Pharma Inc., although there can be no assurance that
the Company will be successful in obtaining such extension.

-30-
<PAGE> 32
PART III

ITEM 8 - 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 32 Director
Dr. Vincent D. Romeo 42 President and Chief Executive
Officer
Dr. Charan R. Behl 47 Executive Vice President of Research
and Development
Andrew P. Zinzi 52 Chief Financial Officer
Joel Girsky 59 Director, Secretary, Treasurer
Bruce R. Thaw 46 Director
Grant W. Denison, Jr 49 Director
Dr. Ian R. Ferrier 55 Director
Alvin Katz 69 Director
John V. Pollock 60 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 served as Chairman of the Company's Board
of Directors from June 1991 to March 1999, and remains as a Director. Mr.
Wenig received a B.A. degree from Union College and a J.D. degree from Columbia
University School of Law. From May 1991 to May 1994, Mr. Wenig was with the
law firm of Cravath, Swaine and Moore. From 1994 until the present, Mr. Wenig
served in various management positions with Reuters Group PLC, and at present
serves as Executive Vice President of Reuters America Inc.

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

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

-31-
<PAGE> 33
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.

Bruce R. Thaw. Mr. Thaw has been a Director of the Company from June
1991 to January 1997 and was reappointed to the Board in January 1998. From
1984 to the present, Mr. Thaw has been a principal in a law firm, which serves
as general counsel to the Company. Mr. Thaw was admitted to the bar of the
State of New York in 1978 and the California State Bar in 1983. Mr. Thaw is
also a director of Information Resource Engineering, Inc. a publicly traded
company engaged in the computer network security industry and Amtech Systems,
Inc. a publicly traded company engaged in the semi-conductor industry.

Grant W. Denison, Jr. Mr. Denison, who was appointed to the Company's
Board of Directors in September 1996, is Chairman and CEO of BioMarin, a
biotechnology company based in Novato, California. He is also Chairman of Clubb
BioCapital, a London investment bank specializing in advising and financing
health care companies. Previously he 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 holds a Master of
Business Administration degree from Harvard Business School and received a
Bachelor's Degree from Colgate University.

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

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

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

-32-
<PAGE> 34
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 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

ITEM 10 - 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 11 - 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 12 - 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.

-33-
<PAGE> 35
PART IV

ITEM 13 - EXHIBITS, LISTS AND REPORTS ON FORM 8-K

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

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
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. (Filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 (Commission File No. 000-13789), and incorporated herein by reference.)

10.12 Employment Agreement with Robert H. Rosen. (Filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 (Commission File No. 000-13789), and incorporated herein by reference.)
</TABLE>

-34-
<PAGE> 36
<TABLE>
<S> <C>
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.)

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. (Filed as Exhibit 10.12 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 (Commission File No. 000-13789), and incorporated herein by
reference.)

10.17 License and Supply Agreement with Meda AB. (Filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 (Commission File No. 000-13789), and incorporated herein by reference.)

10.18 License and Supply Agreement with Tzamal Pharma Ltd.

10.19 International Distribution Agreement with Cambridge Selfcare Diagnostics Limited.

10.20 Employment Agreement with Dr. Charan Behl.
</TABLE>

-35-
<PAGE> 37
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 March 24, 1999.

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 24, 1999
- ------------------------------
Devin N. Wenig

/s/ Vincent D. Romeo President and Chief Executive Officer
- -------------------------------- (Principal Executive Officer) March 24, 1999
Vincent D. Romeo, Ph.D.

/s/ Andrew Zinzi Chief Financial Officer March 24, 1999
- -------------------------------- (Principal Financial and Accounting Officer)
Andrew Zinzi

/s/ Joel Girsky Director, Secretary/Treasurer March 24, 1999
- --------------------------------
Joel Girsky

/s/ Bruce R. Thaw Director March 24, 1999
- --------------------------------
Bruce R. Thaw

/s/ Grant W. Denison Director March 24, 1999
- --------------------------------
Grant W. Denison

/s/ Ian R. Ferrier Director March 24, 1999
- --------------------------------
Dr. Ian R. Ferrier

/s/ Alvin Katz Director March 24, 1999
- --------------------------------
Alvin Katz

/s/ John V. Pollock Director March 24, 1999
- --------------------------------
John V. Pollock
</TABLE>

-36-
<PAGE> 38
Index to Exhibits

<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.18 License and Supply Agreement with Tzamal Pharma Ltd.

10.19 International Distribution Agreement with Cambridge Selfcare Diagnostics Limited

10.20 Employment Agreement with Dr. Charan Behl
</TABLE>

-37-

<PAGE> 1
EXHIBIT 10.18

LICENSE AND SUPPLY AGREEMENT

This LICENSE AND SUPPLY AGREEMENT ("Agreement"), dated as of April 9th, 1998 ,
is by and between NASTECH PHARMACEUTICAL COMPANY INC., a Delaware corporation
("Nastech"), and TZAMAL PHARMA LTD., an Israeli corporation ("Tzamal").

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

WHEREAS, Nastech wishes to find a partner in the Israeli area for its
intranasal cyanocobalamine product and Tzamal 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 Tzamal and Tzamal 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 Israeli area comprising Israel, West Bank & Gaze,
Palestinian Autonomous Territory.

1.3 "Party", "Parties" mean Nastech, Tzamal, either Nastech or Tzamal or both as
the case may be.

1.4 "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.

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

<PAGE> 2

1.6 "Launch Date" shall mean the date when the Product is approved for marketing
by health authorities in Israel.

2.0 Marketing rights

2.1 Nastech hereby grants to Tzamal 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. If product will reach the Territory from sources other than Nastech
(parallel import) both sides will find jointly and amicably immediate ways to
solve the problem and compensate Tzamal.

2.2 Tzamal 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 Tzamal in the Territory solely for the term of this
Agreement. Tzamal 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 Tzamal without the
prior written consent of Nastech, except that Tzamal shall have the right to
sub-license its rights to its wholly owned subsidiaries in Israel.

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 Tzamal hereunder and otherwise fulfill its
obligations under this Agreement, (b) 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 Tzamal is furnished with necessary
regulatory documentation as to enable Tzamal to obtain required regulatory
approval prior to the introduction of any modified Product.

2.5 Tzamal shall use reasonable and adequate efforts to market the Product in
the Territory. Tzamal 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 country outside the Territory. Any
inquiries or orders received from customers outside the Territory, shall be
forwarded from Tzamal to Nastech, however solely for information purposes.

- 2 -
<PAGE> 3
3. Purchase of the Product; Other Obligations

3.1 During the term of this Agreement, Tzamal agrees to purchase from Nastech
and Nastech agrees to supply Tzamal with all of its requirements for the Product
for its subsequent use, sale, lease or transfer by Tzamal. Nastech assumes the
obligation to supply the Product to Tzamal upon firm orders given by Tzamal and
confirmed by Nastech.

3.2 Tzamal 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 Upon the written request of Nastech, Tzamal 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 Tzamal 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. Tzamal 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.

3.4 Nastech will make its best efforts to promptly make available to Tzamal 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 Tzamal for its
approval ("Approved Samples") and shall make available to Tzamal a certificate
of analysis for every Production batch of Product supplied to Tzamal. Nastech
warrants that the Product supplied to Tzamal 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. Tzamal'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 and to the registered quality of the product. For such
agreed cases the replacement or reimbursement of the rejected goods shall be
done at net costs +25%. In no event shall Nastech be liable to Tzamal 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

- 3 -
<PAGE> 4

WARRANTY OF MERCHANTABILITY OR WARRANTY THAT THE Product IS FIT FOR ANY SPECIFIC
PURPOSE.

4.2 Tzamal 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 it requests 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 Tzamal as an additional insured on product liability
insurance it may carry, if any, and shall provide Tzamal with a certificate of
insurance so naming Tzamal 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 Tzamal a 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
Tzamal 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 Tzamal 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 Tzamal to carry product liability insurance.

5.4 Tzamal 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 Tzamal's promotion,
distribution or sale of the Product, including without limitation any claim made
by Tzamal with respect to the effects of the Product in the marketing of the
Product or by reason of Tzamal's failure to properly store or handle the
Product.

- 4 -
<PAGE> 5

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 Nondisclosure

6.1 During the term of this Agreement and thereafter, for a period of three
years, Tzamal 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. Tzamal 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. Tzamal shall not sell,
disclose or otherwise make available the health registration documentation to
third parties and shall not use it outside the Territory.

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

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

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

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

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

6.2.5 information, which Tzamal develops independently of Nastech, as
evidenced in writing.

6.3 During the period of secrecy specified under Section 6.1. Tzamal shall not
undertake, either directly or indirectly, to develop the manufacture of the
Product based on Nastech's confidential information or otherwise.

7.0 Additional Covenants and Agreements of the Parties

7.1 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,

- 5 -
<PAGE> 6

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.

7.2 Tzamal 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.
Tzamal and Nastech shall each comply with the provisions of such written
procedures.

7.3 Tzamal 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
Tzamal 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 Tzamal each shall notify the other within twenty-four (24)
hours of receipt 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. Tzamal 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.

7.4 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.

7.5 Nastech and Tzamal 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.

- 6 -
<PAGE> 7
7.6 Nastech and Tzamal 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.

8.0 Duration and Termination

8.1 This Agreement shall commence on the Effective Date and shall thereafter
remain in force, unless terminated prematurely by mutual agreement, up to and
including December 31 of the third year following the receipt of license from
Israel Health Authorities. 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 third (3) year period or any subsequent
extension. Notwithstanding the foregoing, this Agreement may be terminated
prematurely as follows:

8.1.1 If either Nastech or Tzamal 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.

8.1.2 Nastech and Tzamal 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 8.1.2, 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.

8.1.3 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.

- 7 -
<PAGE> 8

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, 6.0, 7.0, 8.0 and 9.0
hereof, and such obligations shall survive any such termination.

9.0 General Provisions

9.1 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 Tzamal 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, Tzamal or Nastech, as the
case may be.

9.2 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 Tzamal, as follows:

Tzamal Pharma Ltd.
21 Gonen St.
Kiryat Matalon
Petah-Tikva
49130, Israel
Facsimile: 011 972 3 9240259
Attention: President

or in any case to such other address or addresses as hereafter shall be
furnished as provided in this Section 9.2 by any party hereto to the other
party.

- 8 -
<PAGE> 9
9.3 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 Tzamal 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 Tzamal 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.

9.4 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. Tzamal acknowledges that it does not have, and Tzamal shall
not make representations to any third party, either directly or indirectly,
indicating that Tzamal 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 Tzamal or to obligate Tzamal in any way whatsoever.

9.5 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.

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

9.7 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.

9.8 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.

9.9 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

- 9 -
<PAGE> 10

of whom shall be selected by Tzamal, 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.

9.10 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.

9.11 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.

9.12 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.

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

- 10 -
<PAGE> 11
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: Robert H. Rosen
Title: President

TZAMAL PHARMA LTD.

By:
--------------------------------
Name: Eddy Steinberg
Title: General Manager

- 11 -
<PAGE> 12
SCHEDULE 3.2

Purchase Price and Terms

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

Nascobal is available for supply in trade units of 5 ml bottles, equivalent to 8
doses, unlabeled on both the inner and outer package. There is no patient
information or package insert. Sample units will be labeled with labeling
provided by Tzamal and indicated as "Medical Samples - Not For Sale".

Firm orders shall be placed by Tzamal at least (3) months before required
delivery date and shall be subject to confirmation by Nastech. Minimum order
quantity of 1,000 units.

All costs, other than product manufacturing costs, to be incurred by Tzamal.

Pre-Payment: US $5,000 - payable upon submission of first order.

Unit Price: US $23.00 trade units, $6.50 sample units.

Launch Year Minimum Quantities: For the first twelve (12) months from Launch
Date (100%) percent of the volume forecast shall be guaranteed by Tzamal.

Marketing Support: Nastech agrees to provide Tzamal with US $4.00 per bottle
contribution for market materials to support the successful introduction and
on-going acceptance of Nascobal in the Israeli market.

Delivery Terms: FOB Nastech warehouse (common carrier).

Payment Terms: Invoices are payable net without discount in US $ within 90 days
after the date of invoice. 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.

- 12 -

<PAGE> 1
EXHIBIT 10.19
INTERNATIONAL DISTRIBUTOR AGREEMENT

EFFECTIVE DATE: ____________________________

PARTIES: Nastech Pharmaceuticals Inc.,
45 Davids Drive
Hauppauge
New York 11788
USA
Fax no: 00 1 516 273 0252 ("Company")

Cambridge Selfcare Diagnostics Limited
Richmond House
Old Brewery Court
Sandyford Road
Newcastle-upon-Tyne, NE2 1XG
England
Fax no: (191) 261 0568 ("Distributor")

RECITALS:

Company and Distributor desire to establish a relationship in which Company will
sell and Distributor will distribute in the Territory the Product manufactured
and/or distributed by Company as specified herein.

AGREEMENT:

In consideration of the mutual covenants contained herein and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:-

1 Appointment as Distributor

1.1 Appointment

1.1.1 Subject to the terms and conditions of this Agreement, Company hereby
grants to Distributor the exclusive right to distribute the product
described in Exhibit A attached hereto (the "Product") in the
geographic territory described in Exhibit B attached hereto (the
"Territory").

1.1.2 Company shall have the right to discontinue the Product, to make
improvements to the Product and to materially change the design of
the Product without incurring any liability to Distributor. If
Company proposes to make an improvement to or materially alter the
design of the Product and such improvement or change in design is
likely to result in a need for an alteration in the regulatory
approval for the sale of

1
<PAGE> 2

the Product in the Territory Company shall give Distributor at least
twelve (12) months prior written notice of such improvement to or
change in the design of the Product and shall provide Distributor
with copies of all correspondence with the FDA regarding the said
improvement or change in design. Company agrees to give Distributor
not less than six (6) months notice of discontinuance of the Product
or a change in the design or improvement of the Product which is not
likely to require a change in the regulatory approval for the sale of
the Product in the Territory.

1.1.3 If the future improvement or change in design necessitates a new
regulatory approval by a governmental agency in the Territory,
Company and Distributor shall each pay fifty per cent (50%) of the
cost to secure such new regulatory approval.

1.2 Sales Outside Territory

1.2.1 Distributor shall not (i) actively advertise, promote, market or
solicit customers for the Product outside the Territory; (ii)
establish an office outside the Territory through which orders for
the Product are solicited; or (iii) store any Product in a warehouse
or depot located outside the Territory.

1.2.2 If Distributor receives an unsolicited request from a customer
located in the European Community but outside the Territory for
supply of Product to that country, Distributor shall be entitled to
fulfill such a request.

1.2.3 If Distributor receives a request from a customer located outside the
European Community and outside the Territory for supply of the
Product Distributor shall forward such information to Company. If
Company has appointed a distributor for the country where the Product
will be delivered, the lead will be forwarded to such distributor. If
Company has not established a distributor in such country,
Distributor shall be allowed to finalise such sale, subject to the
provisions of sub-section 1.3 below.

1.3 Support Services for Supplementary Sales In the event Distributor
makes a sale to a customer located in the Territory for delivery
outside the Territory or to a customer located outside the Territory
in accordance with the terms and conditions of this Agreement,
Distributor will be required to provide support services to such
customer in relation to such sale. Such support services shall be the
provision of pharmacovigilance and drug information and the provision
of services as a "responsible party" as required by applicable
regulatory approval agencies. Distributor acknowledges that Company
may appoint a distributor in a country where Distributor has made
such supplementary sales and at such time Distributor shall be
required to forward future Product orders to such Company
distributor.

1.4 Exclusiveness The parties agree that the "exclusive" nature of the
foregoing appointment prohibits Company from itself selling the
Product in the Territory and from granting any third party the right
to sell the Product in the Territory. Company shall forward to
Distributor all requests and inquiries regarding sales of the Product
in the Territory.

2
<PAGE> 3

1.5 Regulatory Approval

1.5.1 Distributor acknowledges that Meda AB, the Company's distributor in
Sweden, Denmark, Norway, Finland, Iceland, Estonia, Lithuania, Latvia
and Russia, is in the process of applying for marketing approval for
the Product in Sweden under the Mutual Recognition Process (MRP).
Company acknowledges that Meda AB will be responsible for filing the
MRP application for approval of the sale of the Product in the
Territory and that Distributor will have no direct influence over the
timing or conduct of the application. Company shall ensure that Meda
AB makes the MRP application pertaining to the Territory as soon as
possible after the grant of the MRP application in Sweden.
Distributor shall remunerate Meda AB for the services provided by
Meda AB in relation to the MRP application in the manner set forth in
the agreement between Distributor and Meda AB dated the day of
1998. Subject to the foregoing, Distributor agrees to use all
reasonable endeavours to acquire the appropriate regulatory approval
certificates, in Distributor's name or the name of Distributor's
nominated sub-distributor, from the government agencies in the
Territory as are necessary to sell the Product in the Territory. Save
as provided below Distributor shall pay any and all expenses incurred
in securing such regulatory approval. Company shall, at its expense,
give Distributor and Meda AB all reasonable assistance to acquire the
regulatory approval certificates and shall provide to the
Distributor:-

1.5.1.1 a copy of the existing regulatory dossier regarding the Product in
the possession of the Company and/or Meda AB and all other data
pertaining to the MRP application in Sweden for the Product; and

1.5.1.2 a copy of the consolidated file created subsequent to MRP approval in
Sweden; and

1.5.1.3 a copy of all information requested by the governmental regulatory
authorities and such other information as reasonably requested by
Distributor to secure registration of the Product in the Territory.

1.5.2 The parties acknowledge and agree that such regulatory approval
certificates shall be the property of Company and shall remain
Company's property upon termination of this Agreement for whatever
reason. Upon expiration or termination of this Agreement for
whatever reason Distributor agrees to promptly execute and deliver
all documents reasonably requested by Company that may be appropriate
or necessary to change the reference of the authorised distributor of
the Product in the Territory on the regulatory approval to the person
designated by Company.

1.5.3 In the event of termination of this Agreement before the expiration
of a period of two (2) years from the date when price and regulatory
approvals for the Product had been obtained in all countries in the
Territory, Company shall pay to Distributor, within thirty (30) days
of the date of termination, a sum equal to the amount actually and
reasonably expended by the Distributor to third parties in obtaining
said regulatory approvals.

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1.5.4 In the event of termination of this Agreement after the expiration of
a period of two (2) years from the date when price and reimbursement
approvals for the Product had been obtained in all countries in the
Territory but before the expiration of a period of three (3) years
from the date when price and reimbursement approvals for the Product
had been obtained in all countries in the Territory, Company shall
pay to Distributor, within thirty (30) days of the date of
termination, a sum equal to fifty (50) per cent of the amount
actually and reasonably expended by the Distributor to third parties
in obtaining regulatory approvals for the Product in the Territory.

1.5.5 In the event of termination of this Agreement after the expiration of
a period of three (3) years from the date when price and
reimbursement approvals for the Product had been obtained in all
countries in the Territory but before the expiration of a period of
four (4) years from the date when price and reimbursement approvals
for the Product had been obtained in all countries in the Territory,
Company shall pay to Distributor, within thirty (30) days of the date
of termination, a sum equal to thirty (30) per cent of the amount
actually and reasonably expended by the Distributor to third parties
in obtaining regulatory approvals for the Product in the Territory.

1.5.6 In the event of termination of this Agreement after the expiration
of a period of four (4) years from the date when price and
reimbursement approvals for the Product had been obtained in all
countries in the Territory but before the expiration of a period of
five (5) years from the date when price and reimbursement approvals
for the Product had been obtained in all countries in the Territory,
Company shall pay to Distributor, within thirty (30) days of the date
of termination, a sum equal to fifteen (15) per cent of the amount
actually and reasonably expended by the Distributor to third parties
in obtaining regulatory approvals for the Product in the Territory.

1.5.7 Save as provided in this sub-clause, if, despite using reasonable
endeavours, the Distributor is unable to obtain regulatory approval
for the sale or distribution of the Product in any country or
countries in the Territory, the Distributor shall be entitled to
relinquish the rights to the Product for that country or those
countries and return those rights to the Company and Company shall
pay to the Distributor a sum equal to the amount actually and
reasonably expended by the Distributor in seeking regulatory
approvals for the sale of the Product in that country. Company shall
not be required to reimburse to Distributor, pursuant to this
sub-clause, the costs of any application for regulatory approval for
the sale of the Product in any country in the Territory other than
the first application for regulatory approval for the sale of the
Product in that country unless Company has given its approval to any
subsequent application being made.

1.6 Sub-distributors/Sub-licensees It is contemplated that Distributor
shall appoint or sublicense third party distributors in each country
Distributor shall notify the Company of the identity of its proposed
sub-distributor for approval by the Company, which approval shall not
be unreasonably withheld. In the event that the Distributor receives
an extraordinary payment from a sub-distributor in consideration of
the appointment of the sub-distributor as sub-distributor in any
country in the Territory (and specifically excluding any royalties or
payments made

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or to be made in the ordinary course of business between the
Distributor and the sub-distributor and any reimbursement received by
the Distributor from any sub-distributor of any expenditure made by
distributor in relation to the section of the Territory in which the
sub-distributor is appointed), the Distributor shall pay to Company
fifty per cent (50%) of such extraordinary payment within 30 days
from the receipt of such payment by the Distributor. In the event
Distributor fails to identify a sub-distributor in a given country in
the Territory within 30 days from the date of pricing and
reimbursement approval for the Product in that country, the Company
shall have the right to remove that country from the Territory
covered by this Agreement. Each sublicense/sub-distribution agreement
shall conform and be subject to the terms and conditions of this
Agreement.

2 Term Unless terminated earlier pursuant to the terms of clause 17,
this Agreement shall commence as of the Effective Date set forth on
the first page hereof and shall continue for a period of ten (10)
years for the Product after the Product has received regulatory
approval for resale in the Territory. This Agreement may be renewed
for a further period of five (5) years after the expiration of its
initial term by the mutual written agreement of the parties.

3 Purchase of Product

3.1 Forecasts/Placement of Orders Six (6) months prior to the Product
receiving pricing and reimbursement approval for sale in all
countries in the Territory, Distributor shall provide to Company a
twelve (12) month rolling forecast of its requirements of the
Product, which forecast will be updated quarterly. Such forecasts
shall be provided in good faith but shall not be legally binding, on
either party, either as a minimum or maximum purchase or sale
requirement and, while in no way limiting the generality of the
foregoing, the amount forecast as required for the period immediately
after the grant of pricing and reimbursement approval in all
countries in the Territory shall be indicative only and dependent on
the grant of said pricing and reimbursement approval proceeding as
scheduled.

3.2 Distributor shall order the Product by delivering a written purchase
order to Company by facsimile or by mail. Company shall inform
Distributor of its acceptance or rejection of any purchase order
within fourteen (14) days after receipt. Company shall not reject any
order submitted by Distributor so long as (1) Distributor submits the
purchase order at least ninety (90) days prior to any requested
delivery date, (2) the purchase order requests supply of a quantity
of the Product within +/- 50% of the quantity forecast as being
required for that period in the immediately preceding rolling
forecast submitted by Distributor. In the first year of this
Agreement after pricing and reimbursement approval has been obtained
in all countries in the Territory the Distributor shall order
quantities of the Product in full lots of 7,000 bottles. In the
second year of this Agreement and in each year thereafter after
pricing and reimbursement approval has been obtained in all countries
in the Territory the Distributor may, at its discretion, order
quantities of the Product in full lots of either 7,000 or 14,000
bottles or multiples thereof. If the

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above provisions are not met in the purchase order, the Company may
accept or reject such purchase order in its sole discretion.

3.3 Terms and Conditions This Agreement sets forth the sole contract
terms between the parties and shall apply to all orders. Company
rejects any terms in any Distributor order forms or other Distributor
documents which are different from or additional to the provisions
hereof and no such terms shall be binding upon Company
notwithstanding Company's acceptance and shipment of Product
specified in Distributor's order form containing such terms.

3.4 Distributor may order Product as and when required at the initial
price set forth in Exhibit C and Company shall supply such Product as
ordered prior to receipt of full marketing authorisation for all
countries in the Territory subject to Distributor complying with
relevant requirements of any relevant regulatory authorities in the
country. Any Product supplied under this clause shall comply with the
FDA approval in all respects save for requirements of packaging and
labelling.

4 Prices

4.1 Save as provided below Company shall sell the Product to Distributor
FOB Company's plant in New York, USA at the prices set forth on
Exhibit C attached hereto. The Distributor shall be responsible for
insurance and freight costs. Risk in any consignment of the Product
shall pass to the Distributor once said consignment is loaded onto
transportation in New York, USA.

4.2 Save as provided below, Company shall have the right to increase such
prices no more than once during each twelve (12) month period during
the term of this Agreement by an amount up to, but not exceeding, (1)
the amount of any increase in manufacturing cost of the Product
experienced by Company, including, without limitation, overhead
allocations or (b) the amount of any increase in the UK
Manufacturer's Prices "All Manufactured Product" Index published by
the Central Statistical Office of the United Kingdom, whichever is
the lesser. Company shall provide Distributor with at least one
hundred and eighty (180) days advance written notice of any such
price increase together with substantiation of the price increase.

4.3 If Distributor experiences direct competition in the Territory and
believes the prices established in this Agreement do not allow
Distributor a sufficient profit margin, Company agrees to discuss
with Distributor the potential for country specific pricing.

4.4 Save as provided in clause 4.7, in the event that either:-

4.4.1 the average price, over all countries in the Territory, at which the
Distributor or the sub-distributor sells the Product to third parties
other than sub-distributors (hereinafter "the Average Price") decreases
each year for three consecutive years; or

4.4.2 the Average Price decreases in any one year of the agreement by more than
ten

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percent (10%)

the price at which the Product is sold by the Company to the Distributor shall
be amended to (i) thirty two per cent (32%) of the Average Price if four
hundred and eighty thousand units (480,000) of the Product or more have
been ordered by the Distributor from the Company; or (ii) thirty six per
cent (36%) of the Average Price if less than four hundred and eighty
thousand units (480,000) but one hundred and twenty thousand (120,000) or
more units of the Product have been ordered by the Distributor from the
Company; or (iii) forty per cent (40%) of the Average Price if less than
one hundred and twenty thousand (120,000) units of the Product have been
ordered by the Distributor from the Company (said percentages hereinafter
referred to as "the Applicable Percentage"). During any year of the
Agreement Company shall sell the Product to the Distributor at the
Applicable Percentage of the Average Price from the previous year. At the
end of each year of the Agreement Distributor shall provide to Company a
report setting forth the Average Price for that year and the information
used in the calculation of such. If it transpires the Average Price for
the year is higher than the Average Price for the previous year Company
shall render to Distributor an invoice for the Applicable Percentage of
the difference between the Average Price for the year and the Average
Price for the previous year. Distributor shall pay such invoice within
thirty (30) days of receipt of such. If it transpires that the Average
Price for the year is lower than the Average Price for the previous year
Distributor shall render to Company an invoice for the Applicable
Percentage of the difference between the Average Price for the year and
the Average Price for the previous year. Company shall pay such invoice
within thirty (30) days of receipt of such

4.5 Distributor shall use reasonable endeavours to maximise the
Average Price.

4.6 Should Distributor determine that, in its opinion, it is economically
undesirable for it to continue to distribute the Product in a
particular country in the Territory it may, by written notice to the
Company relinquish the rights to the Product for that country or
those countries and return those rights to the Company without
incurring or being subject to any liability to the Company. In such
circumstances the Distributor will provide to Company a final
accounting for the country in the Territory so relinquished including
inventory units on hand for that country and an estimate as to the
likely on the Average Price and the Applicable Percentage for the
year.

4.7 In the event that thirty-two percent (32%) of the Average Price for
the Product in a country in the Territory is less than the equivalent
of thirteen US Dollars (US$13.00) per unit, Company may provide to
Distributor sixty (60) days' notice of its intention to withdraw the
rights of the Distributor to distribute the Product in that country.
At any time before expiry of that notice Distributor may, by written
notice, advise Company that either:-

4.7.1 it will hand back to Company the rights to distribute the Product in
that country in the Territory; or

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4.7.2 Distributor will pay to Company the difference between thirty-two
percent (32%) of the Average Price for the Product in that country
and the equivalent of thirteen US Dollars ($13.00) per unit for each
unit of the Products sold in that country in the Territory.

5 Payment

5.1 Payment Unless otherwise determined by the Company the Distributor
shall open a confirmed irrevocable documentary letter of credit in
favor of the Company for the amount of each shipment inclusive of all
costs. All amounts owing by Distributor to Company for the Product
shall be paid within ninety (90) days of the date of shipment of the
Product. Distributor shall make all payments to Company for the
Product in US dollars by transfer to such bank account as Company may
from time to time designate in writing.

5.2 Late Payment Fee/Collection Costs Any amounts not paid by Distributor
when due will be subject to a late payment fee computed daily at a
rate equal to one and one half percent (1.5%) per month or at the
highest rate permitted under applicable usury law, whichever is the
lower. In addition, Distributor shall be liable to Company for all
costs incurred by Company in its collection of any amounts owing by
Distributor which are not paid when due, including reasonable
attorneys' fees, regardless of whether actual suit is brought.

5.3 Change in Payment Terms If Distributor fails to make any payment at
the time required pursuant to the terms of this Agreement, Company
shall have the right to withhold shipment of Product until all late
payment has been made or to revoke or alter the above credit terms by
delivery of written notice to Distributor.

6 Delivery, Shipment and Inspection

6.1 Certificate of Analysis and Shipping Company shall include batch
documentation and a certificate of analysis with each batch of
Product shipped and shall ensure that any cartons in which the
Product is transported bear on the outside the batch number and the
expiry date of the Product.

6.2 Delivery Dates Company shall make deliveries of the Product on the
dates set forth in the Distributor's orders.

6.3 QC/QA Release. Distributor shall request that its third party Quality
Assurance contractor provide a similar service for Meda AB at
Nastech's request.

7 Quota

7.1 Save as provided below Distributor agrees to order, accept delivery
of and make payment in full for the number of units of the Product
during the period(s) set forth on Exhibit D attached hereto (the
"Quota"). The number of units set forth in the Quota for the first
three (3) years of this Agreement following the grant of pricing and
reimbursement approval for the sale of the Product in all EU
countries in the

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Territory shall be indications of likely sales only and there shall
be no liability or penalty under this contract for failure to order,
take delivery of and make payment in full for those units. In the
third year of the Agreement following the grant of pricing and
reimbursement approval for the sale of the Product in all EU
countries in the Territory the parties shall agree a binding quota
for the remaining years of this Agreement and the provisions of
clauses 7.2 and 17.3 shall apply in respect of the quotas for those
years of the Agreement.

7.2 Save as provided in clause 7.1 above, if Distributor fails to meet
the Quota for any specified period in any specified portion of the
Territory and fails to cure such breach as provided under Section
17.3 herein, Company shall have the right to delete such portion of
the Territory from Exhibit B of this Agreement or to terminate this
Agreement in the manner provided in Section 17.3 herein SAVE THAT if
the Distributor has achieved the overall Quota for the whole of the
Territory in the relevant specified period such rights to delete
some of the rights given or terminate this Agreement in accordance
with this clause shall not arise.

7.3 The parties agree to review and renegotiate the Quota in good faith,
if appropriate, for any Product based upon any discontinuance,
improvement or change in design of the Product, any changes in the
market which the Distributor feels should be considered with regard
to the Quota and the handing back to the company of the rights to
distribute the Product in any country in the Territory.

8 Laws Regulating Exports and Imports

8.1 Import Licences Distributor shall be responsible for securing and
paying for all import licences required for shipment of the Product
into the Territory. Company agrees to provide such reasonable
information as requested by Distributor to facilitate obtaining the
import licences.

8.2 Export Licences Company shall be responsible for securing and paying
for all export licenses required for shipment of the Product from the
United States to the Territory. Distributor agrees to provide such
reasonable information as requested by Company to facilitate
obtaining the required export licences, including information
regarding the intended country of resale. Company reserves the right,
on provision of reasonable notice to Distributor, to cancel orders
for, or to stop in transit, any Product for which Company reasonably
believes is about to be exported in violation of any applicable US
law or regulation. If such action is necessary due to the inaccuracy
of the information provided by Distributor or any breach of this
Agreement by Distributor, Company shall hold any Product stopped in
transit for Distributor's expenses and shall resell or otherwise
dispose of the same in a lawful manner in accordance with
Distributor's instructions.

9 Distributor's Responsibilities

9.1 Product Promotion Distributor shall use its commercially reasonable
efforts to promote and increase the distribution and sale of the
Product in the Territory and

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further agrees to promotional and launch budget set forth in Exhibit
F. Distributor and Distributor's employees, agents and
representatives will follow Company's reasonable recommendations
regarding the demonstration and use of the Product for promotional
purposes and subject to compliance with those requests being within
the agreed promotional and launch budget set forth in Exhibit F. All
expenses associated with the promotion and launch of the Product by
Distributor in the Territory and performance of the Distributor's
other obligations hereunder shall be borne solely by Distributor.

9.2 Noncompetition During the term of this Agreement, Distributor shall
not, directly or indirectly, sell, solicit the sale of or purchase
for resale any product that competes with the Product. Distributor
agrees to secure from each of Distributor's agents and
sub-distributors written noncompetition agreements in substantially
the form of this Section 9.2 and to deliver such written agreement to
Company before such agent or sub-distributor undertakes to perform
any of Distributor's obligations hereunder.

9.3 Written Reports and Records For the first six (6) months of this
Agreement Distributor agrees to supply to Company monthly written
sales reports, delivered on the tenth (10th) day of each calendar
month, which report the number of units and sales in U.S. $ of each
Product in each month sold by Distributor in each country in the
Territory. Thereafter, Distributor agrees to supply to Company
quarterly written sales reports, delivered within thirty (30) days
after the end of each calendar quarter , which report the number of
units and sales in U.S.$ of each Product in each month of the quarter
sold by Distributor in each country the Territory.

9.4 Compliance With Laws Distributor shall obtain all licences, permits
or certificates which are required under applicable law to conduct
its business and to resell the Product in the Territory and shall
comply with all laws applicable to its business. Distributor agrees
to not make any payment or gift directly or indirectly to any
employee, officer or representative of any government under
circumstances where such payment would constitute a bribe, kickback
or illegal payment under, or otherwise be in violation of, the
Foreign Corrupt Practices Act of the United States or any applicable
foreign laws. Distributor shall be responsible for ensuring
compliance with all applicable laws, rules and regulations regarding
post approval reports, licenses and registrations within the
Territory. Distributor shall provide to Company within thirty (30)
days of submission, copies of all reports.

9.5 Recall Distributor shall maintain complete and accurate records of
all Product sold by Distributor. If Company, any governmental agency
or other proper authority issues a product recall of any of the
Product, Distributor agrees to fully cooperate with Company (i) in
promptly contacting any purchasers which Company desires to be
contacted during the course of any such recall (ii) in promptly
communicating to such purchasers such information or instructions as
Company may desire be transmitted to such purchasers (iii) in
obtaining the removal of all such recalled Product from Distributor's
inventory and the inventory of its customers and (iv) in disposing of
such recalled Product as Company so directs. Company agrees to
reimburse Distributor for all direct out-of-pocket costs and expenses
actually

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incurred by Distributor as a result of securing the removal of and
disposing of such recalled Product as requested by Company including
but not limited to reimbursement to the Distributor of the cost of
the Product recalled. All costs associated with product recall, which
resulted from the action or in-action of the Distributor, shall be
the sole responsibility of the Distributor.

9.6 No Copying or Reproducing of Product Distributor agrees not to
modify, copy or otherwise reproduce the Product for whatever reason
without the prior written consent of Company.

10 Product Labelling and Promotional Materials

10.1 Product Labels

10.1.1 Distributor shall ensure that the Product is sold and advertised in
the form and with the labelling or marking required by the law of the
Territory.

10.2 Promotional Materials If Distributor desires to create promotional
materials, Distributor shall pay all expenses relating to the
creation of such new promotional materials SAVE THAT Company shall,
at Company's expense, provide to Distributor transparencies or discs
containing existing artwork for the US packaging, package inserts and
promotional materials. Distributor shall also be responsible for
ensuring that such promotional material complies with all applicable
laws, rules and regulations. Any new or translated promotional
materials shall be submitted to Company for its written approval
before their use or dissemination; however, such approval shall not
relieve Distributor of its responsibility for ensuring that such
promotional materials comply with all applicable laws, rules and
regulations in the Territory.

10.3 Company Representation Company represents and warrants to Distributor
that, to the best of its knowledge, the sale of the Product shall not
infringe any third party patent rights in the Territory and the use
of the Company's trademarks on the Product packaging, shall not
infringe on any third party's trademark rights in the Territory.

11 Product Warranty

11.1 Limited Warranty Company warrants to Distributor that, during the
shelf life of the Product, (a) the Product will conform with the
specifications developed by Company and approved by the product
regulatory authorities in the Territory, which specifications will be
attached to this Agreement as Exhibit E at the time the regulatory
approval is granted, (the "Specifications"), (b) the Product has been
manufactured in accordance with accepted manufacturing practices
approved by the regulatory authorities in the Territory with regard
to the manufacture of the Product, and (c) the Product has been
manufactured in accordance with applicable health, safety and
environmental rules, regulations and laws in effect in the United
States as of the date of manufacture.

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11.2 Notification of Defect

11.2.1 Distributor shall inspect and/or test the Product as soon as
practicable following delivery of such. If Distributor wishes to
reject any delivery, or part of delivery, of Product, it must notify
Company within 30 days of receipt of the Product and such
notification must be in writing and include a detailed indication of
the reasons for rejection. In the event of a latent defect coming to
the attention of the Distributor after the 30 day period, the notice
of defect shall be provided within 30 days of discovery of the
defect. Company shall notify Distributor within 30 days of receipt
of such notification of rejection whether it accepts Distributor's
claim. If Company accepts that the Product is defective it shall
reimburse Distributor for the reasonable shipping costs incurred by
Distributor in the return of the defective Product

11.2.2 If Company does not accept any claim by the Distributor that the
Product does not comply with Specification and Distributor still
insists the claim is correct, an independent laboratory, mutually
agreed upon by the parties or failing agreement the Medicines Control
Agency laboratory in Edinburgh, shall be requested to analyse an
appropriate amount of the Product from the batch or batches in
dispute. The samples shall be supplied by Distributor from the
batches in question and by Company from any samples that it has
retained.

11.2.3 Following receipt of the report from the independent laboratory, the
parties will discuss the findings. If Company accepts that the
Product does not conform to the Specification and that it is
responsible for such failure to comply with the Specification,
Company shall manufacture and deliver to Distributor a sufficient
quantity of the Product to replace the defective batch or batches and
pay for the return or destruction of the defective Product. If
Distributor accepts that the relevant batches of Product were
manufactured in accordance with the Specifications or that any defect
did not arise due to Company's negligence or default, Company shall
have no liability or obligation to Distributor in respect of such
batches. If the parties can not agree whether replacement Product
should be provided, either may commence arbitration proceedings in
accordance with clause 19.

11.2.4 The costs of the independent laboratory appointed pursuant to clause
11.2.2 above shall be paid by the Company unless it is found that the
Distributor was at fault in which case the said costs shall be paid
by the Distributor.

11.3 Limitation of Warranty The Warranty set forth in sub-paragraph 11.1
above shall not apply to any Product which has been abused, altered,
modified (other than labelling or packaging), used in a manner not
originally intended, or stored or maintained in a manner contrary to
Company's written instructions.

11.4 DISCLAIMER OF WARRANTIES EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION
11 AND IN SECTION 10.3, COMPANY HEREBY DISCLAIMS, AND DISTRIBUTOR
HEREBY EXPRESSLY WAIVES ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED,
WITH RESPECT TO THE PRODUCT

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SOLD HEREUNDER, INCLUDING, BUT NOT LIMITED TO, IMPLIED CONDITIONS OF
REASONABLE FITNESS FOR A PARTICULAR PURPOSE, MERCHANTABILITY,
NON-INFRINGEMENT, WARRANTIES ARISING FROM COURSE OF DEALING OR USAGE
OF TRADE OR ANY OTHER MATTER. NO AGENT, EMPLOYEE OR REPRESENTATIVE OF
COMPANY HAS ANY AUTHORITY TO BIND COMPANY TO ANY AFFIRMATION,
REPRESENTATION OR WARRANTY EXCEPT AS STATED IN THIS AGREEMENT.

12 Distributor's Indemnification Distributor shall indemnify and hold
Company harmless from any and all loss, damage or expense (including
reasonable attorney's fees) which Company may incur or suffer as a
result of any third party claim arising from (a) breach of warranty
given or purportedly given by Distributor, its employees, agents or
sub-distributors regarding the Product save where Distributor has
merely repeated a warranty provided to it by the Company herein or a
representation made by the Company with regard to the Product; or (b)
improper storage, handling or other act or omission by Distributor,
its employees, agents or sub-distributors; or (c) any trademark or
copyright infringement based on the use of any information contained
on the Product packaging provided by Distributor or on the use of any
promotional materials prepared by Distributor for use in selling the
Product (except to the extent of Company's indemnification obligation
in Section 13.1 below). Company shall notify Distributor of any third
party claim made against it within ten (10) days of knowledge of same
if Company intends to seek indemnity with respect to such claim under
this paragraph. Distributor shall have the right to undertake,
conduct and control the case, shall have the right to be represented
by counsel of its own choosing, but at its own expense. So long as
Distributor is contesting any such claim in good faith, Company shall
not pay or settle such claim.

13 Company Indemnification Company shall indemnify and hold Distributor
harmless from any and all loss, damage or expense (including
reasonable attorneys' fees)) which Distributor may suffer or incur as
a result of (a) any third party claim resulting from the Company's
breach of its representation in Section 10.3; and (b) any third party
claim arising out of (i) the failure of the Product to conform with
the Specifications, (ii) failure of the Product to have been
manufactured in accordance with accepted good manufacturing
processes, (iii) failure of the Product to have been manufactured in
accordance with applicable health, safety and environmental rules,
regulations and laws in effect in the United States at the date of
manufacture, (iv) proper use of the Product itself as approved by the
governing regulatory agency, or (v) the Product itself save where the
circumstances are such that an indemnity in favour of the Company
arises under clause 12; or (vi) any other manufacturing defect in the
Product. Distributor shall notify Company of any third party claim
made against it within ten (10) days of knowledge of same if
Distributor intends to seek indemnity with respect to such claim
under this paragraph. Company shall have the right to undertake,
conduct and control the case and shall have the right to be
represented by counsel of its own choosing, but at its own expense.
So long as

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Company is contesting any such claim in good faith, Distributor shall
not pay or settle such claim.

14 Independent Contractor Distributor is not an agent, employee, joint
venturer, partner, franchisee or legal representative of Company for
any purposes whatsoever. Distributor does not have any right or
authority to bind Company in any manner whatsoever. Distributor shall
be exclusively responsible for the manner in which it performs its
duties under this Agreement. Distributor shall be solely responsible
to its own employees for any compensation due to them and for
compliance with all applicable laws imposed by any governmental
authority regarding Distributor's employees.

15 Confidential Information

15.1 Definition The parties acknowledge that each party may acquire
knowledge of certain trade secrets and confidential information of
the other party during the term of this Agreement. The term
"Confidential Information" means any information or compilation of
information, not generally known, which is proprietary to a party
hereunder (the "Disclosing Party") and relates to the Product or a
party's other products or product research, including, without
limitation, information relating to manufacturing techniques,
marketing strategies, research data, product development, financial
information, customer lists, customer information and any other
information about the Disclosing Party's business which is normally
considered confidential or is indicated by Disclosing Party to be
confidential or proprietary. Confidential Information shall not
include any information (i) which is or becomes publicly available
through no fault of the party receiving it (the "Receiving Party"),
(ii) which is disclosed to the Receiving Party by a third party not
under an obligation of confidence; (iii) which is already known by
the Receiving Party at the time of disclosure to the Receiving Party
by the Disclosing Party existing prior to such disclosure; or (iv)
which is independently developed by the Receiving Party through
persons who have not had access to or knowledge of the Confidential
Information of the Disclosing Party, as evidenced by written
documentation of the Receiving Party.

15.2 Non-disclosure During the term of this Agreement and at all times
thereafter the Receiving Party shall hold in strictest of confidence
and never disclose, transfer, convey or make accessible to any person
any Confidential Information, whether oral or written. The Receiving
Party agrees not to use the Confidential Information for its own
personal benefit (except as permitted under this Agreement) or the
benefit of anyone other than the Disclosing Party. The Receiving
Party agrees to take reasonable precautions to prevent Distributor's
employees and others from disclosing or appropriating for their own
use any Confidential Information of the Disclosing Party. Distributor
agrees to secure from each of Distributor's agents and
sub-distributors insofar as is legally permissible written
confidentiality agreements in substantially the form of this Section
15 and to deliver such written agreement to

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<PAGE> 15

Company before such agent or sub-distributor undertakes to perform
any of Distributor's obligations hereunder.

16 Trademarks

16.1 Use and Registration of Trademarks Company hereby authorises
Distributor to use Company's trademarks and trade names for the
Product (the "Trademarks") (including but not limited to the right to
authorise sub-distributors to use the trade mark) solely in
connection with advertising, promoting or selling the Product in the
Territory during the term of this Agreement. Distributor shall
provide written notice of the countries in the Territory within which
it requires the Company to make any applications for registration of
the Trademarks and Company shall be responsible, at its expense, for
filing and maintaining all trademark registrations and/or equivalent
protections. Distributor agrees to provide Company, at Company's
expense, with all reasonable assistance requested by Company in the
registration of the Trademarks in the Territory. Distributor shall be
responsible for filing, at Company's expense, any registered user
application that may be required in the Territory relating to
Distributor's use of the Trademarks. Distributor may not use any of
the Trademarks in its corporate or business name, or in any other
manner which Company deems adverse to its interests. However,
Distributor may indicate that it is an authorised distributor of the
Product on Company approved letterhead, business cards or other
advertising

16.2 Unauthorised use of Trademarks Distributor agrees to notify Company
of any unauthorised use of the Trademarks by others as it comes to
Distributor's attention. If Company elects not to bring any
infringement, unfair competition or similar action based on such
unauthorised use or infringement in the Territory, Distributor shall
have the option of doing so at its own expense. If Distributor
exercises this option, it may join Company as a party only if
Distributor indemnifies Company against any damages or expenses
resulting therefrom. In any litigation against third parties relating
to the Trademarks, unless otherwise agreed, any proceeds or recovery
obtained in any such action shall be apportioned between the parties
according to how expenses of the litigation were borne.

17 Termination

17.1 Termination For Failure to Secure Regulatory Approval Subject to
clause 1.5, if Distributor is unable to secure regulatory approval
for the Product within two years of approval in Sweden, either party
may terminate this Agreement by delivery of written notice to the
other party; provided, however, if the terminating party is Company,
Distributor shall have a period of sixty (60) days from the delivery
of the notice to secure such regulatory approval or provide written
evidence to Company that such approval is imminent.

17.2 Termination for Breach Except as expressly provided in subsection
17.3 below, either party may terminate this Agreement effective upon
delivery of written notice to the other party, if the other party
breaches or otherwise fails to be in conformance

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<PAGE> 16

with any term or condition of this Agreement; provided however, if
such breach or non-performance is capable of remedy this Agreement
shall not terminate if such breach or non-performance is remedied
within sixty (60) days after delivery of the written notice of
termination, which notice shall specify the breach or failure.

17.3 Failure to Meet Quota or comply with Requirements set forth in
Exhibit F

17.3.1 Failure of Distributor to meet the Quota set forth in Exhibit D, or
failure of Distributor to execute the marketing plan set forth in
Exhibit F, or as later agreed between the parties in writing, shall,
save as provided below, be considered a material breach of this
Agreement. Within sixty (60) days of the end of each year of this
Agreement, the Company shall provide to Distributor a report setting
forth the amount of the Product ordered from the Company and the
Quota for that year. The Distributor shall within sixty (60) days of
the end of each year of this Agreement, provide to the Company a
report setting forth the marketing activities undertaken during such
year and the U.S. Dollar amount expended on marketing and promotional
activities for such period.

17.3.2 In the event that Distributor has failed to purchase the amount of
Product specified during any Quota period, Distributor may, at its
option:-

17.3.2.1 pay to Company the dollar amount equal to the order price for the
difference between Quota quantity and the actual quantity of Product
purchased by Distributor in the Quota period for such period (the
"Quota shortfall") within sixty (60) days of receipt from the Company
of the report to be provided pursuant to clause 17.3.1. If
Distributor has indicated that it wishes to exercise its option to
cure a failure to order the Quota for a year pursuant to this Clause
17.3.2.1 and Company has not received payment of the Quota shortfall
within such sixty (60) day period, Company shall have the right to
terminate this Agreement, or to delete from Exhibit B that portion of
the Territory to which the Quota applied, effective immediately upon
delivery of written notice to Distributor without further opportunity
for cure; and/or

17.3.2.2 make up the Quota shortfall in the following year of the Agreement by
ordering in that following year of the Agreement a quantity of the
Product equal to the sum of the Quota shortfall and the Quota for
that following year.

17.3.3 The Company shall have the right to conduct an audit through an
independent firm of certified public accountants to audit (not more
than once per year) the Distributor's marketing expenses related to
the Product, the Average Price and the Applicable Percentage. In the
event that the Distributor has failed to expend the sums committed to
the marketing budget as set forth in Exhibit F the Company shall have
the right to terminate this Agreement.

17.4 Insolvency Either party may terminate this Agreement effective
immediately upon delivery of written notice to the other party, if
the other party (i) becomes unable to pay its debts as they mature,
(ii) admits in writing its inability to pay its debts as they mature
(iii) makes a general assignment for the benefit of creditors, (iv)
files a

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<PAGE> 17

voluntary petition for bankruptcy, (v) has an involuntary petition of
bankruptcy filed against it, or (vi) applies for the appointment of a
trustee or receiver for any substantial portion of its property or
business or permits the appointment of any such trustee or receiver
who is not discharged within a period of thirty days after such
appointment.

18 Effect of Termination

18.1 Trademarks/Confidential Information Upon expiration or termination of
this Agreement for whatever reason, Distributor shall cease using
Company Trademarks or any name or description that relates or
pertains to the name Company or its products (except to the extent
provided in subsection 18.3 below), and shall return or destroy all
Confidential Information and destroy all sales literature, pamphlets,
and any information of any kind that relates or pertains to Company
or its products. Distributor shall take such steps as are necessary,
and Company agrees to co-operate as necessary, to procure the
cancellation of any registered user agreement entered into to allow
for Distributor to use the Trademarks in the Territory. Any filing
fees necessary to procure such cancellation shall be paid by the
Company.

18.2 Product Inventory Company shall have the option to repurchase from
Distributor all of the current Product in Distributor's inventory as
of the effective date of expiration or termination of this Agreement
for whatever reason, at a price equal to the original purchase price
for the Product paid by Distributor to Company plus the cost of
packaging and labelling the Product. Company may exercise its option
by delivery of written notice to Distributor within thirty (30) days
after the effective date of expiration or termination of this
Agreement. Distributor shall ship all such inventory of Product to
Company, at Company's expense, within ten (10) days after receipt of
Company's exercise of its option. Company shall pay the amount owing
to Distributor for such inventory within thirty (30) days after
receipt of the inventory. If Company elects not to purchase
Distributor's inventory of Product, Distributor shall have the right
to sell such inventory in the Territory for a period of six (6)
months following the effective date of termination or expiration of
this Agreement and shall have a limited right to continue to use
Company's Trademarks to effectuate such sales in accordance with the
provisions of Section 16.1 herein.

18.3 Payments Owing Termination of this Agreement shall not relieve or
release either party from any liability which either party may have
to the other party arising out of this Agreement, including any
obligation to make any payments which may be owing to the other party
under the terms of this Agreement as of the effective date of
expiration or termination. However, if either party terminates this
Agreement in accordance with the terms hereof, such party shall not
be liable to the terminated party for any claim for lost future
revenues of the other party.

18.4 Acceptance of Orders Acceptance of orders from Distributor by Company
after termination of this Agreement shall not constitute a renewal of
this Agreement or a waiver of the right to Company to treat this
Agreement as terminated.

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<PAGE> 18

19 General Provisions

19.1 Force Majeure Neither party shall be liable to the other party for
any delay or failure of delivery or other performance caused in whole
or in party by any contingency beyond such party's reasonable
control, including, without limitation, fire, flood, acts of god,
acts of any government or any agency or subdivision thereof or
shortage or inability to secure labour, fuel, energy, raw materials,
supplies or machinery at reasonable prices from regular sources.
Should the event of force majeure continue for a period of six (6)
months, either party may terminate this Agreement on the provision of
written notice.

19.2 Limitation of Remedy Except as expressly set forth in Section 9.5
regarding recalled Product and Section 13 regarding indemnification
for certain third party claims, Company shall have no liability to
Distributor for indirect, special, incidental, or consequential
damages of any description, whether arising out of warranty or other
contract, negligence or other tort, or otherwise. Distributor shall
have no liability to Company for indirect, special, incidental or
consequential damages of any description whether arising out of
warranty or other contract, negligence or other tort or otherwise.

19.3 Entire Agreement This Agreement, together with Schedule 1 and
Exhibits A, B, C, D, E, F, G and H attached hereto, contains the
entire agreement of the parties concerning the subject matter hereto,
and supersedes all prior communications, understandings, and
agreements between the parties with respect thereof.

19.4 Modification and Waiver No purported amendment, modification or
waiver or any provision hereof shall be binding unless set forth in a
writing in the English language signed by both parties (in the case
of amendments and modifications) or by the party to be charged
thereby (in the case of waivers). Any waiver shall be limited to the
circumstance or event specifically referenced in the written waiver
document and shall not be deemed a waiver of any other term of this
Agreement or of the same circumstance or event upon any recurrence
thereof. Only officers of either party holding the same title as
those who have signed this Agreement shall have the right to execute
any amendment, modification or waiver document on behalf of the
relevant party.

19.5 Notices All notices and other communications required or permitted to
be given hereunder shall be in writing in the English language and
shall be deemed to have been duly given (i) when received if
delivered by hand; (ii) the next business day if delivered by
facsimile (sender's copy of the facsimile must show a confirmation of
receipt from receiver's facsimile machine); (ii) three (3) business
days after placement with a reputable international overnight
carrier; or (iv) ten (10) business days after deposit, if placed in
the mail for delivery by airmail, postage pre-paid, and addressed to
the appropriate party using the address set forth on page one of this
Agreement. If either party should change its address and/or facsimile
number, such party shall give written notice of the other party of
the new address and/or facsimile

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<PAGE> 19

number in the manner set forth above, but any such notice shall not
be effective until actually received by the addressee.

19.6 Nonassignment Distributor shall not establish sub-distributors,
assign, transfer or sell all or any part of its rights or obligations
hereunder, by operation of law or otherwise, without the prior
written consent of Company which consent shall not be unreasonably
withheld. This Agreement shall be binding upon and inure to the
benefit of any successor or assignee of Company and of any permitted
successors and assigns of the Distributor as provided above.

19.7 Severability Should any part of this agreement, for any reason, be
declared invalid, such decision shall not affect the validity of any
remaining portions, and such remaining portion shall remain in full
force and effect as if this Agreement had been executed with the
invalid portion eliminated.

19.8 Injunctive Relief In addition to any other relief afforded by law,
each party shall have the right to enforce covenants contained in
this Agreement by specific performance and preliminary, temporary and
permanent injunctive relief against the other party or any other
person concerned thereby. Damages, specific performance and
injunctive relief shall be considered proper modes of relief and are
not to be considered alternative remedies.

19.9 Governing Law 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 reward rendered shall be final and conclusive upon the parties
and a judgement 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 the Distributor, one of whom shall be selected by the
Company, 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.

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<PAGE> 20

The parties hereto have caused this Agreement to be executed in the manner
appropriate to each to be effective as of the date entered on the first page
hereof.

CAMBRIDGE SELFCARE DIAGNOSTICS LIMITED

("Distributor")

By .......................................................

Its .......................................................

NASTECH PHARMACEUTICALS INC.

("Company")

By Dr Vincent D. Romeo

Its President and Chief Executive Officer

20
<PAGE> 21

List of Exhibits

Schedule 1 = Adverse Events Procedure

A = Product

B = Territory

C = Prices

D = Quota (by quarter) and Time Period to Secure Regulatory Approval

E = Specifications

F = Marketing Plans

G = Patents

H = Trade Marks

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<PAGE> 22

SCHEDULE 1

ADVERSE EVENTS PROCEDURE

A. For the purposes of this Schedule "Adverse Event" ("AE") shall have
the meaning ascribed to such term under applicable law, but in any
event shall include any reaction, side-effect or other undesirable
events (such as injuries, toxicity or sensitivity reaction, or any
other unexpected incident and the severity thereof) that is
associated with the use of the Product in humans, whether or not the
event is considered drug related, including, but not limited to, the
following: an AE occurring in the course of the use of the Product
in professional practice, including use in clinical studies; drug
overdose, whether accidental or intentional; an AE occurring from
drug abuse; an AE occurring from drug withdrawal; any significant
failure of expected pharmacological or biological actions and any AE
associated with the clinical use, study, investigation, testing and
marketing of the Product. In addition, when an AE is herein
referred to as "serious" it shall have the meaning ascribed to such
term under applicable law but in any event shall include any
occurring at any dosage that is fatal, life threatening, disabling,
incapacitating, results in or prolongs hospitalisation, necessitates
medical or surgical intervention to prevent permanent impairment or
damage, a congenital anomaly or in the opinion of a medical reviewer
is of major clinical significance.

B. The Company shall:-

(i) maintain a data base of AEs arising from the Product reported anywhere in
the world; and

(ii) notify the Distributor of all serious AEs within 3 days of receipt of
notice of such and all other AEs of which it receives notice within 10
days of receipt of notice of such;

(iii) provide to Distributor quarterly and annual summaries of AEs (as CIOMS I
forms/ CIOMS II line listings) within two months of the end of the quarter
or year and in addition provide, with the annual report, an estimate of
the number of people treated during the relevant 12 month period;

(iv) provide to Distributor cumulative summary reports of AEs on reasonable
demand (as CIOMS I forms/CIOMS II line listings) to cover the period from
the commencement of marketing of the Product;

(v) notify the Distributor of any change in the safety profile or clinical
particulars or other such information regarding the Product and make
recommendations for changes in the Product labelling when appropriate; and

(vi) prepare worldwide periodic safety update reports as required by the
regulators under the terms of the marketing authorisations.

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<PAGE> 23

C. Distributor shall:-

(i) forward to the Company information reported in the Territory and relating
to AEs or other data regarding the safety of the Product; and

(ii) inform the Company of any serious AEs occurring in the Territory within 3
days of receipt of information regarding such serious AE;

(iii) notify the Company of any non-serious AEs occurring in the Territory
within 10 days of receipt of information regarding such non-serious AE;

(iv) submit relevant reports to the regulatory authorities in the Territory
(which may be on the Company's behalf if Distributor is not the holder of
the regulatory approval regarding any AEs occurring in the Territory; and

(v) submit relevant reports to the regulatory authorities in the Territory
(which may be on the Company's behalf if Distributor is not the holder of
the regulatory approval) regarding any AEs concerning the Product
occurring outside the Territory which are being forwarded to Distributor
by the Company.

D. All information regarding all AEs, which is to be exchanged between the
parties, shall be in the English language.

E. All reasonable efforts should be made to ensure the following information
is provided in AE reports:

General

Local Identification number
Date of receipt
Source - health professional name, address and telephone number. If the report
is from a consumer, or a health professional who is not a physician, the name of
the attending physician.

Patient details

Identification (initials)
Date of birth or age if date of birth is not known or indication of age group
(Elderly, adult or child etc) if neither date of birth nor age are known.
Gender
Race
Hospital number if applicable
Relevant medical history
Relevant diagnostic tests

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<PAGE> 24

Adverse event

Description of event
Onset date (or time since onset if not known)
Time since onset if less than 24 hours
Outcome
Relationship to suspect product, in the opinion of the reporting physician
Treatment given, if any
Information on dechallenge/rechallenge (if applicable)

Suspect product

Name of Product
Date treatment started; date treatment stopped (or duration of treatment if
dates not known)
Dose
Reason for use
Route of administration
Batch number

Concomitant medication (or any medication given in previous month)

Name
Date treatment started; date treatment stopped (or duration of treatment and
temporal relationship to AE if dates not known)
Dose
Reason for use
Route of administration

F. In no instance should an initial report for any AE be delayed while
awaiting further information. The report of any AE should permit
identification of a discernible subject, suspect product, AE and source
report. If additional information is expected, this should be stated on
the initial report. A follow up report should be made as soon as the
additional information is available.

G. Each party will exercise due diligence and exert all reasonable efforts to
collect AE information from its affiliates in other related parties
worldwide.

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<PAGE> 25

Exhibit A

The Product shall mean a pharmaceutical preparation in intranasal form
containing cyanocobalamin as the active therapeutic ingredient as well as any
future developments thereof complying with the Specification. Any product
supplied prior to the grant of full marketing authorisation should comply with
the FDA approved specification save in respect of packaging and labelling
requirements.

The Product shall be supplied to Distributor in trade units of 5ml bottles,
equivalent to 8 doses, unlabeled on both the inner and outer package, including
nasal pump. The Company will not supply any patient information or package
insert, both of which shall be provided by the Distributor. Company shall
provide to Distributor, free of charge, transparencies of existing US artwork
for packaging and package inserts.

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<PAGE> 26

Exhibit B

The "Territory" shall include the United Kingdom, Eire, France, Greece, Germany,
Spain, Italy, Portugal, the Netherlands, Belgium, Austria, the Czech Republic,
Slovakia, Slovenia, Hungary, Poland, Australia and New Zealand.

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<PAGE> 27

Exhibit C

The initial price (in U.S. Dollars) per unit of Product shall be as follows:

For the first 119,999 Units the price to Distributor shall be $19.00;

For Units beginning with Unit 120,000 through Unit 479,999 the price to
Distributor shall be $17.00;

For Units beginning with Unit 480,000 and thereafter the price to
Distributor shall be $15.00;

The pricing calculations set forth above shall be cumulative from
inception. ie. beginning with the first purchase by the Distributor.

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<PAGE> 28

Exhibit D

The Distributor's reasonable estimate of the number of units for that it will
sell by the end of the first year following grant of pricing and reimbursement
approvals in all EU countries in the Territory and in the second and third years
of this Agreement following grant of pricing and reimbursement approvals in all
EU countries in the Territory is as follows:

Year No. 1 42,000 Units
Year No. 2 140,000 Units
Year No. 3 480,000 Units

If Distributor elects to withdraw an application for regulatory or pricing and
reimbursement approval for the Product in the last EU country in the Territory
for which regulatory or pricing and reimbursement approval for the Product is
required, pricing and reimbursement approval for the Product in all EU countries
in the Territory shall be deemed to have occurred on the date the said
application was withdrawn.

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<PAGE> 29

Exhibit E

The Specifications for the Product shall be as follows that which conforms with
the regulatory approvals granted in each country in the Territory copies of
which shall be inserted into this agreement once such approval has been granted.
Prior to such approvals being granted the Product will comply with the
specification set forth in the FDA approval save in respect of labelling and
regulatory requirements.

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<PAGE> 30

Exhibit F

The Distributor shall consult with the Company on the development and
particulars of its marketing plan. The Distributor shall commit to the following
promotional and launch budget for the Product in the Territory in each year of
this Agreement after the grant of pricing and reimbursement approval for the
Product in all EU countries in the Territory as follows:

Year No. 1 $US 1,595,200
Year No. 2 $US 2,970,560
Year No. 3 $US 5,226,240

Expenditure on the following items shall be considered expenditure made in
accordance with the promotional and launch budget:-

regulatory submissions

consultancy fees associated with preparation of regulatory submissions

the person hours of the sales and marketing persons involved in the sale
and marketing of the Product

promotion and marketing of the Product

packaging and distribution costs

legal costs associated with the appointment of sub-distributors, regulatory
matters and the promotion and launch of the Product

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<PAGE> 31

Exhibit G
---------

Patents
-------

Country Expiration
------- ----------

Australia April 2006
Belgium April 2006
France April 2006
Germany April 2006
Great Britain April 2006
Hungary April 2006
Ireland April 2006
Italy April 2006
Netherlands April 2006
Spain April 2006

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<PAGE> 32

Exhibit H

TRADE MARKS

NASCOBAL

<PAGE> 1
EXHIBIT 10.20

EMPLOYMENT AGREEMENT

AGREEMENT, dated this 1st day of November, 1998 between Nastech
Pharmaceutical Company, Inc. a Delaware corporation (the "Company") with offices
at 45 Davids Drive, Hauppauge, NY and Dr. Charan R. Behl (the "Executive").

WITNESSETH:

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 Executive Vice President of
Research and Development 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
management of research and development projects from the conception of the
project to final product approval by FDA, subject to the authority and control
of the Chief Executive Officer and Board of Directors of the Company. The
Executive shall also be responsible for the management of analytics and quality
control within research and development. The Executive shall not be responsible
for the administration and functional supervision of Clinical, Regulatory,
Quality Assurance, Compliance and Production. The Executive hereby accepts such
employment and agrees to devote his full time and best efforts to the duties
provided herein.

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 weekly installments, of $200,000 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 in the form of aggressive milestone
achievements as set forth in the

1
<PAGE> 2

Company's annual business plan are achieved. 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, Executive shall be issued
48,000 incentive stock options (subject to allowable limitations set forth in
the Internal Revenue Code of 1986, as amended, hereinafter "stock options) upon
the execution of this Agreement. The stock options shall be issued at the fair
market value of the Employer's common stock as of the date if this Agreement and
shall then be vested as follows: 15,000 shares to vest as of January 1, 1999 and
11,000 shares to vest each year for the three calendar years thereafter (and
shall not be vested for interim periods on a pro-rate 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.

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.

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,

2
<PAGE> 3

statements and other documents as may be required under the Securities and
Exchange Act of 1934 to keep 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 2 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 $200,000 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.

(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 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

4
<PAGE> 5

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 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.

(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 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

6
<PAGE> 7

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.

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 one year 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 ten percent (10%)
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 of 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 one year period following termination, to
refrain from directly or indirectly soliciting Company's vendors, collaborative
partners or employees.

7
<PAGE> 8

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 15 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 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. In consideration of the foregoing and as additional incentive
compensation Executive shall be paid $10,000 upon each patent filing (not
including provisional applications) in which he is the lead inventor and $35,000
upon the issuance of any patent in which he is the lead inventor.

8
<PAGE> 9

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 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.

9
<PAGE> 10

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:

(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 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

(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 for a period
of one year after such date.

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

(i) The acquisition, other than from the Company, by an
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

10
<PAGE> 11

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 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, 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

11
<PAGE> 12

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) sale or other disposition of all or substantially all of the
assets of the Company other than to 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.

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

12
<PAGE> 13

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 thereover. The arbitration shall
be held in Suffolk County, New York or in such other place as the parties hereto
may agree.

23. 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.

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

25. 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.

13
<PAGE> 14

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
------------------------------------------------
VINCENT D. ROMEO, Ph.D., Chief Executive Officer

------------------------------------------------
CHARAN R. BEHL, Ph.D.

<ARTICLE> 5

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