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                                  CYGNUS, INC.

                            1999 STOCK INCENTIVE PLAN

                     (AS AMENDED AND RESTATED MARCH 1, 2000)


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                                TABLE OF CONTENTS

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SECTION 1.  INTRODUCTION...................................................................................1

SECTION 2.  DEFINITIONS....................................................................................1

SECTION 3.  ADMINISTRATION.................................................................................4

                     (a)      Committee Composition........................................................4

                     (b)      Authority of the Committee...................................................5

SECTION 4.  ELIGIBILITY....................................................................................5

                     (a)      General Rules................................................................5

                     (b)      Incentive Stock Options......................................................5

SECTION 5.  SHARES SUBJECT TO PLAN.........................................................................5

                     (a)      Basic Limitations............................................................5

                     (b)      Additional Shares............................................................5

                     (c)      Dividend Equivalents.........................................................6

SECTION 6.  TERMS AND CONDITIONS FOR AWARDS OF RESTRICTED STOCK AND STOCK UNITS............................6

                     (a)      Time, Amount and Form of Awards..............................................6

                     (b)      Payment for Awards...........................................................6

                     (c)      Vesting Conditions...........................................................6

                     (d)      Form and Time of Settlement of Stock Units...................................6

                     (e)      Death of Recipient...........................................................6

                     (f)      Creditors' Rights............................................................7

                     (g)      Effect of a Change in Control................................................7

SECTION 7.  TERMS AND CONDITIONS OF OPTIONS................................................................7

                     (a)      Stock Option Agreement.......................................................7

                     (b)      Number of Shares.............................................................7

                     (c)      Exercise Price...............................................................7

                     (d)      Exercisability and Term......................................................7

                     (e)      Effect of a Change in Control................................................8

                     (f)      Modifications or Assumption of Options.......................................8

                     (g)      Transferability of Options...................................................8

                     (h)      No Rights as a Stockholder...................................................8

                     (i)      Restrictions on Transfer.....................................................8

                     (j)      Automatic Option Grants to Non-Employee Directors............................8


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SECTION 8.  PAYMENT FOR OPTION SHARES......................................................................9

                     (a)      General Rule.................................................................9

                     (b)      Surrender of Stock..........................................................10

                     (c)      Promissory Note.............................................................10

                     (d)      Cashless Exercise...........................................................10

                     (e)      Other Forms of Payment......................................................10

SECTION 9.  STOCK APPRECIATION RIGHTS.....................................................................10

                     (a)      SAR Agreement...............................................................10

                     (b)      Number of Shares............................................................10

                     (c)      Exercise Price..............................................................10

                     (d)      Exercisability and Term.....................................................10

                     (e)      Effect of Change in Control.................................................11

                     (f)      Exercise of SARs............................................................11

                     (g)      Modification or Assumption of SARs..........................................11

SECTION 10. PROTECTION AGAINST DILUTION...................................................................11

                     (a)      Adjustments.................................................................11

                     (b)      Reorganizations.............................................................12

SECTION 11. VOTING AND DIVIDEND RIGHTS....................................................................12

                     (a)      Restricted Stock............................................................12

                     (b)      Stock Units.................................................................12

SECTION 12. AWARDS UNDER OTHER PLANS......................................................................12

SECTION 13. LIMITATIONS ON RIGHTS.........................................................................12

                     (a)      Retention Rights............................................................12

                     (b)      Stockholders' Rights........................................................13

                     (c)      Regulatory Requirements.....................................................13

SECTION 14. WITHHOLDING TAXES.............................................................................13

                     (a)      General.....................................................................13

                     (b)      Share Withholding...........................................................13

SECTION 15. ASSIGNMENT OR TRANSFER OF AWARDS..............................................................13

                     (a)      General.....................................................................13

                     (b)      Trusts......................................................................13

SECTION 16. DURATION AND AMENDMENTS.......................................................................14


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                     (a)      Term of the Plan............................................................14

                     (b)      Right to Amend or Terminate the Plan........................................14

SECTION 17. EXECUTION.....................................................................................14
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                                      -iii-
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                                  CYGNUS, INC.
                            1999 STOCK INCENTIVE PLAN
                      AS AMENDED AND RESTATED MARCH 1, 2000

SECTION 1. INTRODUCTION.

         The Cygnus, Inc. 1999 Stock Incentive Plan amended and restated the
Company's 1994 Stock Option/Award Plan effective February 1, 1999. Effective
March 1, 2000, the Plan was further amended and restated to increase the number
of shares available for Award by 2,000,000 shares subject to stockholder
approval.

         The purpose of the Plan is to promote the long-term success of the
Company and the creation of stockholder value by offering Key Employees an
opportunity to acquire a proprietary interest in the success of the Company, or
to increase such interest, and to encourage such selected persons to continue to
provide services to the Company or its Subsidiaries and to attract new
individuals with outstanding qualifications.

         The Plan seeks to achieve this purpose by providing for Awards in the
form of Restricted Stock, Stock Units, Options (which may constitute Incentive
Stock Options or Nonstatutory Stock Options) or Stock Appreciation Rights.

         The Plan shall be governed by, and construed in accordance with, the
laws of the State of California (except its choice-of-law provisions).
Capitalized terms shall have the meaning provided in Section 2 unless otherwise
provided in this Plan, or in the applicable Stock Award Agreement, SAR Agreement
or Stock Option Agreement.

SECTION 2. DEFINITIONS.

         (a) "AWARD" means any award of an Option, SAR, Restricted Stock or
         Stock Unit under the Plan.

         (b) "BOARD" means the Board of Directors of the Company, as constituted
         from time to time.

         (c) "CHANGE IN CONTROL" means a change in control of a nature that
         would be required to be reported (assuming such event has not been
         "previously reported") in response to Item 1(a) of the Current Report
         on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or
         15(d) of the Exchange Act; provided that, without limitation, such a
         change in control shall be deemed to have occurred at such time as (a)
         any person is or becomes the "beneficial owner" (as defined in Rule
         13d-3 under the Exchange Act), directly or indirectly, of 50% or more
         of the combined voting power of the Company's voting securities; or (b)
         individuals who constitute the Board on the date hereof (the "Incumbent
         Board") cease for any reason to constitute at least a majority thereof,
         provided that any person becoming a director subsequent to the date
         hereof whose election, or nomination for election by the Company's
         stockholders, was approved by a vote of at least three quarters of the
         directors comprising the Incumbent Board (either by

<PAGE>

         a specific vote or by approval of the proxy statement of the Company in
         which such person is named as a nominee for director, without objection
         to such nomination) shall be, for purposes of this clause (b),
         considered as though such person were a member of the Incumbent Board.

         A transaction shall not constitute a Change in Control if its sole
         purpose is to change the state of the Company's incorporation or to
         create a holding company that will be owned in substantially the same
         proportions by the persons who held the Company's securities
         immediately before such transaction.

         (d) "CODE" means the Internal Revenue Code of 1986, as amended.

         (e) "COMMITTEE" means a committee consisting of one or more members of
         the Board that is appointed by the Board (as described in Section 3) to
         administer the Plan.

         (f) "COMMON STOCK" means the Company's common stock.

         (g) "COMPANY" means Cygnus, Inc. a Delaware corporation.

         (h) "CONSULTANT" means an individual who performs bona fide services to
         the Company or a Subsidiary other than as an Employee or Director or
         Non-Employee Director.

         (i) "DIRECTOR" means a member of the Board who is also a common-law
         employee of the Company or Subsidiary.

         (j) "DISABILITY" means that the Key Employee is unable to engage in any
         substantial gainful activity by reason of any medically determinable
         physical or mental impairment which can be expected to result in death
         or which has lasted or can be expected to last for a continuous period
         of not less than 12 months.

         (k) "EMPLOYEE" means any individual who is a common-law employee of the
         Company or Subsidiary.

         (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
         amended.

         (m) "EXERCISE PRICE" in the case of an Option, means the amount for
         which a Share may be purchased upon exercise of such Option, as
         specified in the applicable Stock Option Agreement. "Exercise Price,"
         in the case of a SAR, means an amount, as specified in the applicable
         SAR Agreement, which is subtracted from the Fair Market Value of a
         Share in determining the amount payable upon exercise of such SAR.

         (n) "FAIR MARKET VALUE" means the market price of Shares, determined by
         the Committee as follows:

                  (i) If the Shares were traded over-the-counter on the date in
         question but were not classified as a national market issue, then the
         Fair Market Value shall be equal to the


                                       2
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         mean between the last reported representative bid and asked prices
         quoted by the NASDAQ system for such date;

                  (ii) If the Shares were traded over-the-counter on the date in
         question and were classified as a national market issue, then the Fair
         Market Value shall be equal to the last-transaction price quoted by the
         NASDAQ system for such date;

                  (iii) If the Shares were traded on a stock exchange on the
         date in question, then the Fair Market Value shall be equal to the
         closing price reported by the applicable composite transactions report
         for such date; and

                  (iv) If none of the foregoing provisions is applicable, then
         the Fair Market Value shall be determined by the Committee in good
         faith or by an independent third party valuation on such basis as it
         deems appropriate.

         Whenever possible, the determination of Fair Market Value by the
         Committee shall be based on the prices reported in the Western Edition
         of THE WALL STREET JOURNAL. Such determination shall be conclusive and
         binding on all persons.

         (o) "GRANT" means any grant of an Option under the Plan.

         (p) "INCENTIVE STOCK OPTION" or "ISO" means an incentive stock option
         described in Code section 422(b).

         (q) "KEY EMPLOYEE" means an Employee, Director, Non-Employee Director
         or Consultant who has been selected by the Committee to receive an
         Award under the Plan.

         (r) "NON-EMPLOYEE DIRECTOR" means a member of the Board who is not a
         common-law employee of the Company or Subsidiary.

         (s) "NONSTATUTORY STOCK OPTION" or "NSO" means a stock option that is
         not an ISO.

         (t) "OPTION" means an ISO or NSO granted under the Plan entitling the
         Optionee to purchase Shares.

         (u) "OPTIONEE" means an individual or estate or other entity that holds
         an Option or SAR.

         (v) "PARTICIPANT" means an individual or estate or other entity that
         holds an Award.

         (w) "PLAN" means this Cygnus, Inc. 1999 Stock Incentive Plan as it may
         be amended from time to time.

         (x) "RESTRICTED STOCK" means a Share awarded under the Plan.

         (y) "SAR AGREEMENT" means the agreement between the Company and an
         Optionee which contains the terms, conditions and restrictions
         pertaining to his or her SAR.

         (z) "SECURITIES ACT" means the Securities Act of 1933, as amended.


                                       3
<PAGE>

         (aa) "SERVICE" means service as an Employee, Director, Non-Employee
         Director or Consultant.

         (bb) "SHARE" means one share of Common Stock.

         (cc) "STOCK APPRECIATION RIGHT" or "SAR" means a stock appreciation
         right awarded under the Plan.

         (dd) "STOCK AWARD AGREEMENT" means the agreement between the Company
         and the recipient of a Restricted Stock or Stock Unit award which
         contains the terms, conditions and restrictions pertaining to such
         Restricted Stock or Stock Unit Award.

         (ee) "STOCK OPTION AGREEMENT" means the agreement between the Company
         and an Optionee that contains the terms, conditions and restrictions
         pertaining to his or her Option.

         (ff) "STOCK UNIT" means a bookkeeping entry representing the equivalent
         of a Share, as awarded under the Plan.

         (gg) "SUBSIDIARY" means any corporation (other than the Company) in an
         unbroken chain of corporations beginning with the Company, if each of
         the corporations other than the last corporation in the unbroken chain
         owns stock possessing fifty percent (50%) or more of the total combined
         voting power of all classes of stock in one of the other corporations
         in such chain. A corporation that attains the status of a Subsidiary on
         a date after the adoption of the Plan shall be considered a Subsidiary
         commencing as of such date.

         (hh) "10-PERCENT SHAREHOLDER" means an individual who owns more than
         ten percent (10%) of the total combined voting power of all classes of
         outstanding stock of the Company, its parent or any of its
         subsidiaries. In determining stock ownership, the attribution rules of
         section 424(d) of the Code shall be applied.

SECTION 3. ADMINISTRATION.

         (a) COMMITTEE COMPOSITION. The Plan shall be administered by a
Committee appointed by the Board. The Board shall designate one of the members
of the Committee as chairperson. If no Committee has been appointed, the entire
Board shall constitute the Committee. Members of the Committee shall serve for
such period of time as the Board may determine and shall be subject to removal
by the Board at any time. The Board may also at any time terminate the functions
of the Committee and reassume all powers and authority previously delegated to
the Committee.

         The Committee shall consist of two or more directors of the Company who
shall satisfy the requirements of Rule 16b-3 (or its successor) under the
Exchange Act with respect to Awards to Key Employees who are officers or
directors of the Company under section 16 of the Exchange Act.


                                       4
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         The Board may also appoint one or more separate committees of the
Board, each composed of one or more directors of the Company who need not
qualify under Rule 16b-3, who may administer the Plan with respect to Key
Employees who are not considered officers or directors of the Company under
Section 16 of the Exchange Act, may grant Awards under the Plan to such Key
Employees and may determine all terms of such Awards.

         With respect to any matter, the term "Committee", when used in this
Plan, shall refer to the Committee that has been delegated authority with
respect to such matter.

         (b) AUTHORITY OF THE COMMITTEE. Subject to the provisions of the Plan,
the Committee shall have full authority and discretion to take any actions it
deems necessary or advisable for the administration of the Plan. Such actions
shall include:

                  (i) selecting Key Employees who are to receive Awards under
         the Plan;

                  (ii) determining the type, number, vesting requirements and
         other features and conditions of such Awards (with the exception of the
         Section 7(j) Automatic Option Grants);

                  (iii) interpreting the Plan; and

                  (iv) making all other decisions relating to the operation of
         the Plan.

         The Committee may adopt such rules or guidelines as it deems
appropriate to implement the Plan. The Committee's determinations under the Plan
shall be final and binding on all persons.

SECTION 4. ELIGIBILITY.

         (a) GENERAL RULES. Only Employees, Directors, Non-Employee Directors
and Consultants shall be eligible for designation as Key Employees by the
Committee.

         (b) INCENTIVE STOCK OPTIONS. Only Key Employees who are common-law
employees of the Company or a Subsidiary shall be eligible for the grant of
ISOs. In addition, a Key Employee who is a 10-Percent Shareholder shall not be
eligible for the grant of an ISO unless the requirements set forth in section
422(c)(5) of the Code are satisfied.

SECTION 5. SHARES SUBJECT TO PLAN.

         (a) BASIC LIMITATIONS. The stock issuable under the Plan shall be
authorized but unissued Shares or treasury Shares. The aggregate number of
Shares reserved for Awards under the Plan shall not exceed 9,916,385 Shares on a
fully diluted basis, subject to adjustment pursuant to Section 10. In addition,
the total number of Shares underlying Awards of Restricted Stock, Stock
Appreciation Rights and Stock Units shall not exceed 1,200,000 Shares.

         (b) ADDITIONAL SHARES. If Stock Units, Options or SARs are forfeited or
if Options or SARs terminate for any other reason before being exercised, then
such Stock Units, Options or


                                       5
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SARs shall again become available for Awards under the Plan. If SARs are
exercised, then only the number of Shares (if any) actually issued in settlement
of such SARs shall reduce the number available under Section 5(a) and the
balance shall again become available for Awards under the Plan. If Restricted
Stock is forfeited, then such Restricted Stock shall again become available for
Awards under the Plan.

         (c) DIVIDEND EQUIVALENTS. Any dividend equivalents distributed under
the Plan shall not be applied against the number of Restricted Stock, Stock
Units, Options or SARs available for Awards, whether or not such dividend
equivalents are converted into Stock Units.

SECTION 6. TERMS AND CONDITIONS FOR AWARDS OF RESTRICTED STOCK AND STOCK UNITS.

         (a) TIME, AMOUNT AND FORM OF AWARDS. Awards under the Plan may be
granted in the form of Restricted Stock, in the form of Stock Units, or in any
combination of both. Restricted Stock or Stock Units may also be awarded in
combination with NSOs or SARs, and such an Award may provide that the Restricted
Stock or Stock Units will be forfeited in the event that the related NSOs or
SARs are exercised.

         (b) PAYMENT FOR AWARDS. No cash consideration shall be required of the
recipients of Restricted Stock or Stock Units under this Section 6.

         (c) VESTING CONDITIONS. Each Award of Restricted Stock or Stock Units
shall become vested, in full or in installments, upon satisfaction of the
conditions specified in the Stock Award Agreement. A Stock Award Agreement may
provide for accelerated vesting in the event of the Participant's death,
Disability, retirement, Change in Control or other events.

         (d) FORM AND TIME OF SETTLEMENT OF STOCK UNITS. Settlement of vested
Stock Units may be made in the form of (i) cash, (ii) Shares or (iii) any
combination of both. The actual number of Stock Units eligible for settlement
may be larger or smaller than the number included in the original Award, based
on predetermined performance factors. Methods of converting Stock Units into
cash may include (without limitation) a method based on the average Fair Market
Value of Shares over a series of trading days. Vested Stock Units may be settled
in a lump sum or in installments. The distribution may occur or commence when
all vesting conditions applicable to the Stock Units have been satisfied or have
lapsed, or it may be deferred to any later date. The amount of a deferred
distribution may be increased by an interest factor or by dividend equivalents.
Until an Award of Stock Units is settled, the number of such Stock Units shall
be subject to adjustment pursuant to Section 10.

         (e) DEATH OF RECIPIENT. Any Stock Units Award that becomes payable
after the Award recipient's death shall be distributed to the recipient's
beneficiary or beneficiaries. Each recipient of a Stock Units Award under the
Plan shall designate one or more beneficiaries for this purpose by filing the
prescribed form with the Company. A beneficiary designation may be changed by
filing the prescribed form with the Company at any time before the recipient's
death. If no beneficiary was designated or if no designated beneficiary survives
the recipient, then any Stock Units Award that becomes payable after the
recipient's death shall be distributed to the recipient's estate.


                                       6
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         (f) CREDITORS' RIGHTS. A holder of Stock Units shall have no rights
other than those of a general creditor of the Company. Stock Units represent an
unfunded and unsecured obligation of the Company, subject to the terms and
conditions of the applicable Stock Award Agreement.

         (g) EFFECT OF A CHANGE IN CONTROL. The Committee may determine, at the
time of making an Award or thereafter, that such Award shall become fully vested
in the event that a Change in Control occurs with respect to the Company. If the
Committee finds that there is a reasonable possibility that, within the
succeeding six (6) months, a Change in Control will occur with respect to the
Company, then the Committee at its sole discretion may determine that any or all
outstanding Awards shall become fully exercisable as to all Shares subject to
such Awards.

SECTION 7. TERMS AND CONDITIONS OF OPTIONS.

         (a) STOCK OPTION AGREEMENT. Each Grant under the Plan shall be
evidenced by a Stock Option Agreement between the Optionee and the Company. Such
Option shall be subject to all applicable terms and conditions of the Plan and
may be subject to any other terms and conditions that are not inconsistent with
the Plan and that the Committee deems appropriate for inclusion in a Stock
Option Agreement. The provisions of the various Stock Option Agreements entered
into under the Plan need not be identical. A Stock Option Agreement may provide
that new Options will be granted automatically to the Optionee when he or she
exercises the prior Options. The Stock Option Agreement shall also specify
whether the Option is an ISO or an NSO.

         (b) NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Section 10. Options granted to any
Optionee in a particular calendar year shall in no event exceed 25% of the
Shares authorized for Award under this Plan subject to adjustment in accordance
with Section 10.

         (c) EXERCISE PRICE. An Option's Exercise Price shall be established by
the Committee and set forth in a Stock Option Agreement. An Option's Exercise
Price shall not be less than 100% of the Fair Market Value (110% for 10-Percent
Shareholders) of a Share on the date of Grant. In the case of an NSO, a Stock
Option Agreement may specify an Exercise Price that varies in accordance with a
predetermined formula while the NSO is outstanding.

         (d) EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become exercisable. The
Stock Option Agreement shall also specify the term of the Option; provided that
the term of an ISO, and to the extent required by applicable law a NSO, shall in
no event exceed ten (10) years from the date of Grant (five (5) years for ISO
Grants to 10-Percent Shareholders). A Stock Option Agreement may provide for
accelerated exercisability in the event of the Optionee's death, Disability,
retirement, Change in Control or other events and may provide for expiration
prior to the end of its term in the event of the termination of the Optionee's
Service. Options may be awarded in combination with SARs, and such an Award may
provide that the Options will not be exercisable unless the related SARs are
forfeited. NSOs may also be awarded in combination with


                                        7
<PAGE>

Restricted Stock or Stock Units, and such an Award may provide that the NSOs
will not be exercisable unless the related Restricted Stock or Stock Units are
forfeited. In no event shall the Company be required to issue fractional Shares
upon the exercise of an Option.

         (e) EFFECT OF A CHANGE IN CONTROL. The Committee may determine, at the
time of granting an Option or thereafter, that such Option shall become fully
exercisable as to all Shares subject to such Option in the event that a Change
in Control occurs with respect to the Company. If the Committee finds that there
is a reasonable possibility that, within the succeeding six (6) months, a Change
in Control will occur with respect to the Company, then the Committee at its
sole discretion may determine that any or all outstanding Options shall become
fully exercisable as to all Shares subject to such Options.

         (f) MODIFICATIONS OR ASSUMPTION OF OPTIONS. Within the limitations of
the Plan, the Committee may modify, extend or assume outstanding Options or may
accept the cancellation of outstanding options (whether granted by the Company
or by another issuer) in return for the grant of new Options for the same or a
different number of Shares and at the same Exercise Price. The foregoing
notwithstanding, no modification of an Option shall, without the consent of the
Optionee, alter or impair his or her rights or obligations under such Option.

         (g) TRANSFERABILITY OF OPTIONS. Except as otherwise provided in the
applicable Stock Option Agreement and then only to the extent permitted by
applicable law, no Option shall be transferable by the Optionee other than by
will or by the laws of descent and distribution. Except as otherwise provided in
the applicable Stock Option Agreement, an Option may be exercised during the
lifetime of the Optionee only by the Optionee or by the guardian or legal
representative of the Optionee. No Option or interest therein may be assigned,
pledged or hypothecated by the Optionee during his lifetime, whether by
operation of law or otherwise, or be made subject to execution, attachment or
similar process.

         (h) NO RIGHTS AS A STOCKHOLDER. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by an Option until such person becomes entitled to receive such Shares
by filing a notice of exercise and paying the Exercise Price pursuant to the
terms of such Option.

         (i) RESTRICTIONS ON TRANSFER. Any Shares issued upon exercise of an
Option shall be subject to such rights of repurchase, rights of first refusal
and other transfer restrictions as the Committee may determine. Such
restrictions shall apply in addition to any restrictions that may apply to
holders of Shares generally and shall also comply to the extent necessary with
applicable law.

         (j) AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS. Non-Employee
Directors shall automatically be Granted NSOs ("Automatic Option Grants") as set
forth in this Section 7(j) (subject to adjustment under Section 10).

                  (i) Each Non-Employee Director shall receive an Automatic
         Option Grant for 6,000 Shares on the first trading day in June on or
         after his or her initial election or appointment. However, any
         Non-Employee Director who is first elected or appointed after May 31 of
         any year (and who is not already serving on the Board at that time)
         shall


                                       8
<PAGE>

         receive an Automatic Option Grant on the date of such initial election
         or appointment for the number of Shares he or she would have received
         on the first trading day in June of that year had he or she then been
         eligible. In addition, on each anniversary of each Non-Employee
         Director's initial Automatic Option Grant, each such continuing
         Non-Employee Director shall receive an additional Automatic Option
         Grant for an amount of Shares that is equal to 110% of the number of
         Shares (rounded down to the nearest whole number) he or she received
         under the previous year's Automatic Option Grant.

                  (ii) The terms and conditions applicable to each Automatic
         Option Grant shall be as contained in this Section 7(j)(ii). The Option
         Exercise Price shall be equal to one hundred percent (100%) of the Fair
         Market Value of one Share on the date of Grant. Each Automatic Option
         Grant shall have a term of ten (10) years measured from the date of
         Grant. Fully vested Shares shall be exercisable at any time beginning
         twelve (12) months after the date of Grant. No Options Granted under
         this Plan may be exercised prior to Plan approval by the Company's
         stockholders. Upon exercise of the Option, the Exercise Price shall be
         payable immediately in cash or in Shares that the Optionee has held for
         at least six (6) months. Payment may also be made by delivery of a
         properly executed exercise notice together with irrevocable
         instructions to a broker to promptly deliver to the Company the amount
         of sale or loan proceeds to pay the Exercise Price. In the event the
         Optionee ceases to provide Services as a Non-Employee Director,
         outstanding vested Options may be exercised, within the term of such
         Options, for a period of three (3) months after the date of such
         cessation of Board service. However, the post-Service Option exercise
         period shall be twelve (12) months in the case of cessation by reason
         of the Optionee's Disability or death. In the case of death, the Option
         may be exercised within such twelve (12) month period by the estate or
         heirs of the Optionee.

                  (iii) This Automatic Option Grant program for the Non-Employee
         Directors shall be self-executing in accordance with its terms as
         provided for under the Plan, and neither the Board or Committee shall
         exercise any discretionary functions with respect to any Option Grants
         made under this program. Notwithstanding the preceding sentence, the
         full Board in its sole discretion may make additional NSO Grants to one
         or more Non-Employee Directors on such terms and conditions as the
         Board determines.

SECTION 8. PAYMENT FOR OPTION SHARES.

         (a) GENERAL RULE. The entire Exercise Price of Shares issued upon
exercise of Options shall be payable in cash at the time when such Shares are
purchased, except as follows:

                  (i) In the case of an ISO granted under the Plan, payment
         shall be made only pursuant to the express provisions of the applicable
         Stock Option Agreement. The Stock Option Agreement may specify that
         payment may be made in any form(s) described in this Section 8.

                  (ii) In the case of an NSO granted under the Plan, the
         Committee may at any time accept payment in any form(s) described in
         this Section 8.


                                       9
<PAGE>

         (b) SURRENDER OF STOCK. To the extent that this Section 8(b) is
applicable, payment for all or any part of the Exercise Price may be made with
Shares which have already been owned by the Optionee for such duration as shall
be specified by the Committee. Such Shares shall be valued at their Fair Market
Value on the date when the new Shares are purchased under the Plan.

         (c) PROMISSORY NOTE. To the extent that this Section 8(c) is
applicable, payment for all or any part of the Exercise Price may be made with a
full-recourse promissory note.

         (d) CASHLESS EXERCISE. To the extent that this Section 8(d) is
applicable, payment for all or any part of the Exercise Price may be made by
delivery (on a form prescribed by the Company) of an irrevocable direction to a
securities broker to sell Shares and to deliver all or part of the sale proceeds
to the Company.

         (e) OTHER FORMS OF PAYMENT. To the extent that this Section 8(e) is
applicable, and with Committee approval, payment may be made in any other form
that is consistent with applicable laws, regulations and rules.

SECTION 9. STOCK APPRECIATION RIGHTS.

         (a) SAR AGREEMENT. Each Award of a SAR under the Plan shall be
evidenced by a SAR Agreement between the Optionee and the Company. Such SAR
shall be subject to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The provisions of the
various SAR Agreements entered into under the Plan need not be identical. SARs
may be granted in consideration of a reduction in the Optionee's other
compensation.

         (b) NUMBER OF SHARES. Each SAR Agreement shall specify the number of
Shares to which the SAR pertains and shall provide for the adjustment of such
number in accordance with Section 10.

         (c) EXERCISE PRICE. Each SAR Agreement shall specify the Exercise
Price. A SAR Agreement may specify an Exercise Price that varies in accordance
with a predetermined formula while the SAR is outstanding.

         (d) EXERCISABILITY AND TERM. Each SAR Agreement shall specify the date
when all or any installment of the SAR is to become exercisable. The SAR
Agreement shall also specify the term of the SAR. A SAR Agreement may provide
for accelerated exercisability in the event of the Optionee's death, Disability,
retirement, Change in Control or other events and may provide for expiration
prior to the end of its term in the event of the termination of the Optionee's
Service. SARs may also be awarded in combination with Options, Restricted Stock
or Stock Units, and such an Award may provide that the SARs will not be
exercisable unless the related Options, Restricted Stock or Stock Units are
forfeited. A SAR may be included in an ISO only at the time of Grant but may be
included in an NSO at the time of Grant or at any subsequent time, but not later
than six (6) months before the expiration of such NSO. A SAR granted under the
Plan may provide that it will be exercisable only in the event of a Change in
Control.


                                       10
<PAGE>

         (e) EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the
time of awarding a SAR or thereafter, that such SAR shall become fully
exercisable as to all Shares subject to such SAR in the event that a Change in
Control occurs with respect to the Company. If the Committee finds that there is
a reasonable possibility that, within the succeeding six months, a Change in
Control will occur with respect to the Company, then the Committee at its sole
discretion may determine that any or all outstanding SARs shall become fully
exercisable as to all Shares subject to such SARs.

         (f) EXERCISE OF SARS. If, on the date when a SAR expires, the Exercise
Price under such SAR is less than the Fair Market Value on such date but any
portion of such SAR has not been exercised or surrendered, then such SAR shall
automatically be deemed to be exercised as of such date with respect to such
portion. Upon exercise of a SAR, the Optionee (or any person having the right to
exercise the SAR after his or her death) shall receive from the Company (i)
Shares, (ii) cash or (iii) a combination of Shares and cash, as the Committee
shall determine. The amount of cash and/or the Fair Market Value of Shares
received upon exercise of SARs shall, in the aggregate, be equal to the amount
by which the Fair Market Value (on the date of surrender) of the Shares subject
to the SARs exceeds the Exercise Price.

         (g) MODIFICATION OR ASSUMPTION OF SARS. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding SARs or may accept
the cancellation of outstanding SARs (whether granted by the Company or by
another issuer) in return for the Award of new SARs for the same or a different
number of Shares and at the same or a different Exercise Price. The foregoing
notwithstanding, no modification of a SAR shall, without the consent of the
Optionee, alter or impair his or her rights or obligations under such SAR.

SECTION 10. PROTECTION AGAINST DILUTION.

         (a) ADJUSTMENTS. In the event of a subdivision of the outstanding
Shares, a declaration of a dividend payable in Shares, a declaration of a
dividend payable in a form other than Shares in an amount that has a material
effect on the price of Shares, a combination or consolidation of the outstanding
Shares (by reclassification or otherwise) into a lesser number of Shares, a
recapitalization, a spin-off or a similar occurrence, the Committee shall make
such adjustments as it, in its sole discretion, deems appropriate in one or more
of:

                  (i) the number of Options, SARs, Restricted Stock and Stock
         Units available for future Awards under Section 5;

                  (ii) the number of Stock Units included in any prior Award
         which has not yet been settled;

                  (iii) the number of Shares covered by each outstanding Option
         and SAR; or

                  (iv) the Exercise Price under each outstanding Option and SAR.

Except as provided in this Section 10, a Participant shall have no rights by
reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any


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<PAGE>

subdivision or consolidation of shares of stock of any class, the payment of any
stock dividend or any other increase or decrease in the number of shares of
stock of any class.

         (b) REORGANIZATIONS. In the event that the Company is a party to a
merger or other reorganization, outstanding Options, SARs, Restricted Stock and
Stock Units shall be subject to the agreement of merger or reorganization. Such
agreement may provide, without limitation, for the assumption of outstanding
Awards by the surviving corporation or its parent, for their continuation by the
Company (if the Company is a surviving corporation), for accelerated vesting and
accelerated expiration, or for settlement in cash or for cancellation.

SECTION 11. VOTING AND DIVIDEND RIGHTS.

         (a) RESTRICTED STOCK. The holders of Restricted Stock awarded under the
Plan shall have the same voting, dividend and other rights as the Company's
other stockholders. A Stock Award Agreement, however, may require that the
holders of Restricted Stock invest any cash dividends received in additional
Restricted Stock. Such additional Restricted Stock shall be subject to the same
conditions and restrictions as the Award with respect to which the dividends
were paid. Such additional Restricted Stock shall not reduce the number of
Shares available under Section 5.

         (b) STOCK UNITS. The holders of Stock Units shall have no voting
rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan
may, at the Committee's discretion, carry with it a right to dividend
equivalents. Such right entitles the holder to be credited with an amount equal
to all cash dividends paid on one Share while the Stock Unit is outstanding.
Dividend equivalents may be converted into additional Stock Units. Settlement of
dividend equivalents may be made in the form of cash, in the form of Shares, or
in a combination of both. Prior to distribution, any dividend equivalents which
are not paid shall be subject to the same conditions and restrictions as the
Stock Units to which they attach.

SECTION 12. AWARDS UNDER OTHER PLANS.

         The Company may grant awards under other plans or programs. Such awards
may be settled in the form of Shares issued under this Plan. Such Shares shall
be treated for all purposes under the Plan like Shares issued in settlement of
Stock Units and shall, when issued, reduce the number of Shares available under
Section 5.

SECTION 13. LIMITATIONS ON RIGHTS.

         (a) RETENTION RIGHTS. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain an employee,
consultant or director of the Company or a Subsidiary. The Company and its
Subsidiaries reserve the right to terminate the Service of any person at any
time, and for any reason, subject to applicable laws, the Company's certificate
of incorporation and by-laws and a written employment agreement (if any).


                                       12
<PAGE>

         (b) STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Shares
covered by his or her Award prior to the issuance of a stock certificate for
such Shares. No adjustment shall be made for cash dividends or other rights for
which the record date is prior to the date when such certificate is issued,
except as expressly provided in Sections 6, 10 and 11.

         (c) REGULATORY REQUIREMENTS. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Shares under the Plan
shall be subject to all applicable laws, rules and regulations and such approval
by any regulatory body as may be required. The Company reserves the right to
restrict, in whole or in part, the delivery of Shares pursuant to any Award
prior to the satisfaction of all legal requirements relating to the issuance of
such Shares, to their registration, qualification or listing or to an exemption
from registration, qualification or listing.

SECTION 14. WITHHOLDING TAXES.

         (a) GENERAL. To the extent required by applicable federal, state, local
or foreign law, a Participant or his or her successor shall make arrangements
satisfactory to the Company for the satisfaction of any withholding tax
obligations that arise in connection with the Plan. The Company shall not be
required to issue any Shares or make any cash payment under the Plan until such
obligations are satisfied.

         (b) SHARE WITHHOLDING. The Committee may permit a Participant to
satisfy all or part of his or her withholding or income tax obligations by
having the Company withhold all or a portion of any Shares that otherwise would
be issued to him or her or by surrendering all or a portion of any Shares that
he or she previously acquired. Such Shares shall be valued at their Fair Market
Value on the date when taxes otherwise would be withheld in cash. Any payment of
taxes by assigning Shares to the Company may be subject to restrictions,
including any restrictions required by rules of the Securities and Exchange
Commission.

SECTION 15. ASSIGNMENT OR TRANSFER OF AWARDS.

         (a) GENERAL. Except as provided in Section 14, or in an applicable
agreement, or as required by applicable law, an Award granted under the Plan
shall not be anticipated, assigned, attached, garnished, optioned, transferred
or made subject to any creditor's process, whether voluntarily, involuntarily or
by operation of law. An Option or SAR may be exercised during the lifetime of
the Optionee only by him or her or by his or her guardian or legal
representative. Any act in violation of this Section 15 shall be void. However,
this Section 15 shall not preclude a Participant from designating a beneficiary
who will receive any outstanding Awards in the event of the Participant's death,
nor shall it preclude a transfer of Awards by will or by the laws of descent and
distribution.

         (b) TRUSTS. Neither this Section 15 nor any other provision of the Plan
shall preclude a Participant from transferring or assigning Restricted Stock or
Stock Units to (a) the trustee of a trust that is revocable by such Participant
alone, both at the time of the transfer or assignment and at all times
thereafter prior to such Participant's death, or (b) the trustee of any other
trust to


                                       13
<PAGE>

the extent approved in advance by the Committee in writing. A transfer or
assignment of Restricted Stock or Stock Units from such trustee to any person
other than such Participant shall be permitted only to the extent approved in
advance by the Committee in writing, and Restricted Stock or Stock Units held by
such trustee shall be subject to all of the conditions and restrictions set
forth in the Plan and in the applicable Stock Award Agreement, as if such
trustee were a party to such Agreement.

SECTION 16. DURATION AND AMENDMENTS.

         (a) TERM OF THE PLAN. The Plan, as set forth herein, shall terminate,
subject to Section 16(b), no later than January 1, 2004.

         (b) RIGHT TO AMEND OR TERMINATE THE PLAN. The Board may amend or
terminate the Plan at any time and for any reason. The termination of the Plan,
or any amendment thereof, shall not affect any Award previously granted under
the Plan. No Awards shall be granted under the Plan after the Plan's
termination. The Board may not, without the approval of the Company's
stockholders (i) materially increase the number of Shares subject to Awards
under the Plan (unless necessary to effect the adjustments required under
Section 10)), (ii) materially modify the eligibility requirements for Awards
under the Plan, or (iii) make any other change with respect to which the Board
determines that Company stockholder approval is required by applicable law or
regulatory standards.

SECTION 17. EXECUTION.

         To record the adoption of the Plan by the Board, the Company has caused
its duly authorized officer to execute this Plan.

                                  Cygnus, Inc.

                                  By /s/ John C Hodgman
                                     -----------------------------------------

                                  Title Chairman, President and CEO
                                        --------------------------------------


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