<PAGE>
                                                                 EXHIBIT 10.206
                                SUPPLY AGREEMENT


         This Supply Agreement ("Agreement") is entered as of December 31, 1999
("Effective Date") by and between Cygnus, Inc., a Delaware corporation, with its
principal place of business at 400 Penobscot Drive, Redwood City, California
94063 ("Cygnus"), and Hydrogel Design Systems Inc., a Delaware corporation, with
its principal place of business at 2150 Cabot Boulevard West, Langhorne,
Pennsylvania 19047 ("HDS").

         Whereas, Cygnus is in the business of making and selling medical
devices to be used in conjunction with the monitoring of blood glucose levels in
the human body (hereinafter referred to as "Medical Devices");

         Whereas, a component of these Medical Devices is a material known as
Hydrogel Laminate (as defined below);

         Whereas, HDS is in the business of providing services for producing
Hydrogel Laminate;

         Whereas, Cygnus wishes to purchase from HDS the specific Hydrogel
Laminate produced in strict compliance with specifications created by Cygnus and
set forth in Exhibit A, attached hereto and hereby made part of this Agreement
to be used by Cygnus in the manufacture of said Medical Devices;

                  NOW THEREFORE, in consideration of the above premises and the
mutual covenants contained herein, the Parties hereto agree as follows:

1.       DEFINITIONS. When used in this Agreement, each of the following terms
shall have the meaning provided below:

         a.       "Affiliate" means, with respect to a Party hereto, any
corporation, partnership, joint venture or other business arrangement which is
controlled by, controlling or under common control with such Party, and shall
include without limitation any direct or indirect beneficial ownership of fifty
percent (50%) or more of the voting stock or participating profit interest of
such corporation or other business entity.

         b.       "Parties" means HDS and Cygnus and when used in the singular
means either of them.

         c.       "Hydrogel Laminate" means the hydrogel materials only for
glucose monitoring produced by HDS under this Agreement and as more specifically
set forth in Exhibit A attached hereto, including without limitation all
improvements made by HDS during the term of this Agreement.

         d.       "Specifications" means the performance specifications for the
Hydrogel Laminate as set forth in Exhibit A attached hereto including any
amendments thereto. It is agreed that the Specifications for the Hydrogel
Laminate may only be amended by Cygnus, and that HDS will


                                       1
<PAGE>

strictly follow the specifications until advised of a change by Cygnus in
writing, such change being mutually agreed upon by Cygnus and HDS.

         e.       "HDS Technology" means all Technology relating solely to the
[CONFIDENTIAL TREATMENT REQUESTED] process for the manufacture of hydrogel
materials which was proprietary to, owned or developed by or for HDS prior to
the Effective Date and all improvements thereto and all such Technology and all
improvements invented solely by HDS during the term of this agreement. As
between the parties, HDS shall own all such HDS Technology.

         f.       "Cygnus Technology" means all Technology other than "HDS
Technology" owned or developed by or for Cygnus prior to the Effective Date
(including but not limited to the Hydrogel Laminate and the Specifications) and
all Technology and improvements thereto, which are invented by the Parties
either solely or jointly in connection with this Agreement. As between the
parties, Cygnus shall own all such Cygnus Technology.

         g.       "Technology" means all foreign and domestic patents, patent
applications, patent rights, know-how, trade secrets, copyrights, technical
data, inventions (whether patentable or not), discoveries, designs,
specifications, ideas, plans, works of authorship, techniques, methods,
procedures, processes, test procedures, trademarks, trade names, service marks
and all other scientific or technical information or materials, in whatever
form.

         h.       "Raw Materials" means those materials required to manufacture
Hydrogel Laminate.

2.       SUPPLY OF PRODUCTS.

                  a. SUPPLY TO CYGNUS. During the first [CONFIDENTIAL TREATMENT
REQUESTED] years of the term of this Agreement HDS agrees to supply
[CONFIDENTIAL TREATMENT REQUESTED] of Cygnus' total worldwide commercial
requirements of Hydrogel Laminate solely to Cygnus and Cygnus agrees to
purchase [CONFIDENTIAL TREATMENT REQUESTED] of Cygnus' total worldwide
commercial requirements of Hydrogel Laminate from HDS in accordance with this
Section 2 and pursuant to the terms and conditions of this agreement.
Thereafter, HDS agrees to supply [CONFIDENTIAL TREATMENT REQUESTED] of
Cygnus' total worldwide commercial requirements of Hydrogel Laminate solely
to Cygnus and Cygnus agrees to purchase [CONFIDENTIAL TREATMENT REQUESTED] of
Cygnus' total worldwide commercial requirements of Hydrogel Laminate from HDS
in accordance with this Section 2 and pursuant to the terms and conditions of
this agreement. In the event that HDS is unwilling or unable to supply the
required amount of Product (pursuant to conditions in this Section above) in
the aggregate for [CONFIDENTIAL TREATMENT REQUESTED], the Parties shall
consult with each other within [CONFIDENTIAL TREATMENT REQUESTED] in order to
resolve the problem. HDS shall have [CONFIDENTIAL TREATMENT REQUESTED] from
the scheduled delivery date for the [CONFIDENTIAL TREATMENT REQUESTED] to
resolve the problem. If after this [CONFIDENTIAL TREATMENT REQUESTED] cure
period HDS is unwilling or unable to resolve the problem, Cygnus shall be
free to terminate this Agreement in its entirety as described in Section 7
hereto and/or shall be free to purchase

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<PAGE>

Product from a third-party during said period of supply deficiency,
notwithstanding this Section 2.a. of this Agreement..

         b.       SUPPLY TO CYGNUS SUBCONTRACTORS. In the event that Cygnus
should choose to have its Affiliates or subcontractors purchase the Hydrogel
Laminate directly from HDS, HDS agrees to accept purchase orders directly from
Cygnus' Affiliates or subcontractors, provided however, that the terms and
conditions of this Agreement shall apply to those purchase orders and Cygnus
shall guarantee the performance of its Affiliates or subcontractors under such
purchase orders.




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<PAGE>

         c.       FORECASTS. Cygnus shall send HDS by [CONFIDENTIAL TREATMENT
REQUESTED] of each year a non-binding, written estimate of the delivery
quantities and dates of Hydrogel Laminate to be purchased in the following
calendar year. Cygnus shall provide HDS with quarterly rolling written updates
on the non-binding forecasts for the following three months, during the term of
this Agreement. HDS shall not be obligated to supply Hydrogel Laminate in
accordance with Cygnus' non-binding quarterly forecasts until HDS has provided
written acknowledgment of Cygnus' non-binding quarterly forecasts to Cygnus,
such written acknowledgment to be provided within ten (10) days of receipt of
the forecasts. Based on the foregoing forecasts, HDS shall order Raw Materials
to meet up to two quarters of such forecasts.

         d.       ORDERS.

        i.      ORDERING AND ACKNOWLEDGMENT. In ordering Hydrogel Laminate from
                HDS, Cygnus, its Affiliates or subcontractors shall issue
                written purchase orders referencing and incorporating this
                Agreement. Minimum order quantities, if any, are set forth in
                Exhibit B attached hereto. Cygnus, its Affiliates or
                subcontractors will provide HDS with a purchase order at least
                forty-five (45) days prior to a requested delivery date for
                Hydrogel Laminate. HDS will provide Cygnus, within three working
                (3) days after receipt of an order, a firm shipment schedule and
                an order acknowledgment. All orders shall be subject to
                acceptance by HDS at its headquarters. HDS shall accept Cygnus',
                its Affiliates' or subcontractors' purchase orders to the extent
                that the purchase orders are in accordance with the most recent
                non-binding quarterly forecast acknowledged by HDS pursuant to
                Section 2(c) above. HDS shall accept purchase orders otherwise
                in accordance with the provisions of this Agreement, provided
                such purchase orders are for quantities of Hydrogel Laminate
                which are not more or less than [CONFIDENTIAL TREATMENT
                REQUESTED] of the most recent acknowledged non-binding quarterly
                forecast. HDS shall use its best efforts to manufacture and ship
                quantities of Hydrogel Laminate that exceed the most recent
                acknowledged non-binding forecast by more than [CONFIDENTIAL
                TREATMENT REQUESTED].

        ii.     SHIPMENT. HDS will use reasonable commercial efforts to ship
                ordered Hydrogel Laminate on or five working days before the
                date requested. HDS will be solely responsible for the costs of
                expediting Hydrogel Laminate in order to meet the scheduled
                shipment dates for each firm order (including, without
                limitation, overtime charges, fees required to expedite Hydrogel
                Laminate or services used in manufacturing), provided that
                Cygnus has complied with the terms of this Agreement in placing
                such order. HDS will use reasonable commercial efforts to meet
                Cygnus' reasonable requests for orders of Hydrogel Laminate
                which require short lead time or expedited shipment dates.


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<PAGE>

        iii.    CHANGES. Except with respect to Raw Materials, Cygnus, its
                Affiliates or subcontractors may, without being subject to a
                cancellation fee, modification fee or any other fee or charge,
                (1) cancel in whole or in part, or (2) extend the shipment
                schedule set forth in any purchase order of Hydrogel Laminate,
                provided that the ordering party provides HDS with written
                notice of such cancellation or modification at least three (3)
                weeks prior to the shipment date for such order. HDS will only
                use reasonable efforts to accommodate cancellations or
                modifications within three (3) weeks of shipment. Any
                cancellation or extension permitted hereunder which, if accepted
                by HDS, would result in any charge or cost associated with Raw
                Materials shall be the sole responsibility of Cygnus. HDS
                reserves the right to use any Raw Materials rendered surplus
                pursuant to the terms of this Section 2(d).

e.       PRICING AND PAYMENTS.

        i.      Pricing for units of Hydrogel Laminate sold to Cygnus is set
                forth in Exhibit B and shall remain fixed for the term of this
                agreement subject to changes in raw material costs as follows.
                In the event that raw material costs change by [CONFIDENTIAL
                TREATMENT REQUESTED] or more (either an increase or decrease)
                from the cost identified on the Effective Date, HDS will adjust
                the pricing by the amount of such cost change. Such price
                changes will occur no more than once per three (3) month period
                and shall be documented in writing by HDS. Raw material cost
                changes of less than [CONFIDENTIAL TREATMENT REQUESTED] (either
                an increase or decrease) shall be absorbed by HDS.

                All prices are exclusive of any sales, use or other applicable
                taxes, which shall be paid or reimbursed by Cygnus, its
                Affiliates or subcontractors. If Cygnus claims such sales are
                exempt from such taxes, then Cygnus, its Affiliates or
                subcontractors shall furnish HDS with satisfactory evidence of
                such exemption from such taxes.

        ii.     Payment terms will be net thirty (30) days after delivery of a
                shipper's bill of lading to Cygnus for a shipment of Hydrogel
                Laminate. HDS reserves the right to charge interest on overdue
                balances in the amount of [CONFIDENTIAL TREATMENT REQUESTED] per
                month.

        iii.    All Hydrogel Laminate is to be shipped F.O.B. HDS' Facility,
                Langhorne, Pennsylvania, freight pre-paid and billed. Risk of
                loss shall pass at the F.O.B. point.

         f.       CONFLICTING TERMS. In ordering and delivering Hydrogel
Laminate, HDS and its Affiliates and Cygnus, its Affiliates and subcontractors
may use their standard forms, however, nothing in such forms shall be construed
to amend or modify the terms of this Agreement. If Cygnus', its Affiliates' or
subcontractors' purchase order forms or HDS' order acknowledgement forms contain
terms that contradict or vary any terms contained in this Agreement, then the
terms of this Agreement shall prevail and control.

         g.       ACCEPTANCE PROCEDURES. Cygnus, its Affiliates or
subcontractors, shall inspect the Hydrogel Laminate within twenty (20) days of
its receipt. If Cygnus finds that the Hydrogel Laminate has a defect ("Defect"
meaning that such Hydrogel Laminate fails to conform to the applicable
Specifications or otherwise fail to conform to the warranties given by HDS under
this


                                       5
<PAGE>

Agreement), Cygnus will notify HDS in writing. HDS agrees to promptly
investigate such reported defect and promptly provide to Cygnus, in writing the
findings of their investigation. If it is found that HDS is responsible for the
reported defect, HDS agrees to remedy such reported defect by supplying
replacement Hydrogel Laminate within a reasonable time period. If HDS fails to
remedy such reported defects within two months from the date of receipt of such
a report, then HDS agrees to issue a credit for the face amount of the affected
purchase order.

         h.       EXCLUSIVITY. During the term of this Agreement, HDS shall not
develop, manufacture, produce, or supply to any third parties any Hydrogel
Laminate. HDS shall not assign or delegate all or any portion of its obligations
under the terms of this Agreement without prior written consent of Cygnus at
Cygnus' sole discretion. HDS shall at all times remain fully responsible for all
obligations and commitments hereunder.

3.       MANUFACTURING; TESTING

         a.       MANUFACTURING.

                  i. HDS will manufacture the Hydrogel Laminate such that it
meets the Specifications set forth in Exhibit A attached hereto.

                  ii. HDS shall at all times comply with all applicable current
FDA and other applicable government, regulatory and administrative agency
requirements for the manufacture of the Hydrogel Laminate for use in connection
with Medical Devices, including, without limitation, manufacturing all Hydrogel
Laminate in a facility which meets all applicable current Good Manufacturing
Practices ("cGMP") requirements. HDS shall permit Cygnus to audit and inspect
HDS's records (including, without limitation, copies of relevant licenses and
approvals) and facility from time to time for purposes of confirming the
foregoing compliance, and HDS shall promptly correct issues reasonably
identified by Cygnus as a result of such audit and inspection. HDS shall
indemnify, defend and hold Cygnus and its directors, officers, employees and
agents harmless from any liability, damages, claims, settlements, costs and
expenses for its failure to obtain and maintain relevant approvals and licenses
and for its failure to comply with any relevant government, regulatory or
administrative requirements relating to the manufacture of the Hydrogel
Laminate.

         b.       QUALITY CONTROL; TESTING. Prior to each shipment of Hydrogel
Laminate, HDS shall perform or cause to be performed quality control procedures,
as set forth the Quality Agreement Between HDS and Cygnus attached in Exhibit C
hereto. Each shipment of Hydrogel Laminate shall be accompanied by a
certificate, which contains the information as required by the Specification.

         c.       LATENT DEFECTS. It is recognized that it is possible for
Hydrogel Laminate to have defects which would not be discoverable upon
reasonable physical inspection or testing ("Latent Defects"). As soon as either
Party becomes aware of a Latent Defect in any lot or batch of Hydrogel Laminate,
it shall immediately notify the other Party in writing of the lot or batch
involved. HDS agrees to promptly investigate such reported defect and promptly
provide to Cygnus, in writing the findings of their investigation. If it is
found that HDS is responsible for the reported defect found after the inspection
described in Section 2(g) and within


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[CONFIDENTIAL TREATMENT REQUESTED] after receipt by Cygnus, its Affiliates or
subcontractors, then HDS will reimburse Cygnus for the total cost of the failed
materials plus all other costs incurred, including, but not limited to the costs
of other materials, subsequent processing costs, transportation costs, and the
costs of product recalls as are attributable to HDS' failure to provide
conforming Hydrogel Laminate. Such reimbursement in any [CONFIDENTIAL TREATMENT
REQUESTED] period is limited to the total value of the Hydrogel Laminate
purchased by Cygnus from HDS within the [CONFIDENTIAL TREATMENT REQUESTED]
period prior to the written notification of the defect.

4.       CONFIDENTIALITY.

         Each Party agrees that all inventions (whether or not patentable),
trade secrets, ideas, processes, formulas, materials, chemicals, technology,
know-how and all other business, technical and financial information it obtains
from the other are the confidential property of the disclosing Party
("Proprietary Information" of the disclosing Party). Except as expressly allowed
in this Agreement, (i) the receiving Party will hold in confidence and not use
or disclose any Proprietary Information of the disclosing Party during the term
of this Agreement and for a period of five (5) years after termination of this
Agreement, and its employees shall be similarly bound, and (ii) in addition,
with respect to HDS's obligations hereunder, HDS shall not allow the disclosure
or use of Cygnus Proprietary Information outside of HDS. The receiving Party
shall not be obligated under this Section 5 with respect to any information the
receiving Party can document:

                  a. is or has become readily publicly available through no
fault of the receiving Party or its employees or agents; or

                  b. is received from a third party lawfully in possession of
such information and lawfully empowered to disclose such information and
provided the receiving Party abides by all restrictions, if any, imposed by such
third party; or

                  c. was rightfully in the possession of the receiving Party
prior to its disclosure by the other Party as shown by the receiving Party's
written records provided the receiving Party abides by all restrictions, if any,
imposed on its possession of such information; or
                  d. was independently developed by employees or consultants of
the receiving Party as shown by the receiving Party's written records without
use of or access to Proprietary Information of the disclosing Party.

Notwithstanding the foregoing, the receiving Party may disclose Proprietary
Information to the extent it is required to be disclosed to a governmental
entity or agency in connection with seeking any governmental or regulatory
registration, approval or license, or pursuant to the lawful requirement or
request of a governmental entity or agency, provided that reasonable measures
are taken to obtain confidential treatment thereof and to guard against further
disclosure.

5.       PRODUCT WARRANTY.


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<PAGE>

         HDS hereby covenants, represents and warrants to Cygnus that:

         a. On the date of shipment, all Hydrogel Laminate sold by HDS to Cygnus
hereunder will comply with the Specifications set forth in Exhibit A or then
current Specification and conform with the information shown on the Certificate
of Conformance or Certificate of Analysis provided for the particular shipment
according to Section 3(b) above;

         b. All Hydrogel Laminate sold hereunder shall have been manufactured,
packaged and stored in conformance with all applicable current Good
Manufacturing Practices which are in force or hereinafter adopted by the FDA or
any successor agency thereto;

         c. Title to all Hydrogel Laminate sold hereunder shall pass to Cygnus
as provided herein free and clear of any security interest, lien, or other
encumbrance; and

         d. The Hydrogel Laminate sold hereunder shall have been manufactured,
packaged and stored in facilities which meet the requirements set forth in the
Quality Agreement between HDS and Cygnus attached here to as Exhibit C. HDS has
no other obligation or duty other than the manufacture and supply of the
Hydrogel Laminate in accordance with the terms and conditions of this Agreement.
EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION, HDS MAKES NO REPRESENTATION OR
WARRANTY, EXPRESS OR IMPLIED, AS TO THE HYDROGEL LAMINATE, AND HDS HEREBY
EXPRESSLY DISCLAIMS ANY AND ALL IMPLIED OR STATUTORY WARRANTIES, INCLUDING
WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE.

6. LIMITATION OF LIABILITY.

         EXCEPT FOR A BREACH OF SECTION 4 (CONFIDENTIALITY), NOTWITHSTANDING
ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, NEITHER PARTY WILL BE LIABLE TO
THE OTHER WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY
CONTRACT, TORT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY
INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, EXCEPT IN THE CASE OF GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT.

         THE PARTIES ACKNOWLEDGE THAT THE HYDROGEL LAMINATE ITSELF IS NOT A
MEDICAL DEVICE. THE PARTIES FURTHER ACKNOWLEDGE THAT THE HYDROGEL LAMINATE WILL
BE USED, PROCESSED OR INCORPORATED INTO OTHER GOODS BY CYGNUS AND ITS AFFILIATES
WHICH ARE MEDICAL DEVICES, WHICH MEDICAL DEVICES WILL BE SUBJECT TO REGULATION
BY THE UNITED STATES FOOD AND DRUG ADMINISTRATION (FDA). HDS SHALL NOT BE LIABLE
TO CYGNUS, ITS AFFILIATES, OR ANY THIRD PARTIES FOR ANY USE, PROCESS,
APPLICATION OR INCORPORATION INTO OTHER GOODS OF THE HYDROGEL LAMINATE AFTER IT
HAS BEEN ACCEPTED BY CYGNUS OR ITS AFFILIATES PURSUANT TO THE PROVISIONS OF THIS
AGREEMENT, WITH THE EXCEPTION OF THE PROVISIONS SET FORTH IN SECTIONS 3(c) AND
5(a)-(d) OF THIS AGREEMENT. HDS SHALL NOT BE LIABLE FOR ANY LIABILITY WHATSOEVER
RELATED TO THE


                                       8
<PAGE>

ENFORCEMENT OF FDA REGULATIONS CONCERNING THE HYDROGEL LAMINATE AFTER ACCEPTANCE
BY CYGNUS OR ITS AFFILIATES.

         THE FOREGOING PARAGRAPH IS A SEPARATE ESSENTIAL PROVISION OF THIS
AGREEMENT.

7.       TERM AND TERMINATION.

         a. TERM. This Agreement will commence as of the Effective Date and,
unless terminated as provided below, shall continue in effect for a period of
five (5) years. Thereafter, this Agreement shall automatically renew for
successive one (1) year terms, unless terminated as provided below, and provided
that either Party may elect not to renew this Agreement by providing the other
Party with six (6) months written notice prior to the corresponding renewal
period.

         b.       TERMINATION.

                  i. This Agreement may be terminated in its entirety by a Party
upon the occurrence of any of the following events:

                           (1)      By a Party upon thirty (30) days' written
notice if there has been a material breach of any representation, warranty,
product warranty, covenant or obligation contained in this Agreement on the part
of the other Party provided the non-breaching Party has given written notice to
the breaching Party and afforded a thirty (30) day cure period and the breaching
Party has failed to cure the alleged breach within the thirty (30) days.

                           (2)      If the other ceases to do business, or
otherwise terminates its business operations;

                           (3) If the other shall fail to promptly secure or
renew any license, registration, permit, authorization or approval necessary for
the conduct of its business in the manner contemplated by this Agreement, or if
any such license, registration, permit, authorization or approval is revoked or
suspended and not reinstated within sixty (60) days or if reinstatement is not
possible within sixty (60) days, diligent efforts are not being made to effect
such reinstatement, and any such failure shall have a material adverse affect on
that Party's performance under this Agreement; or

                           (4) If the other shall seek protection under any
bankruptcy, receivership, trust deed, creditors arrangement, composition or
comparable proceeding, or if any such proceeding is instituted against the other
(and not dismissed within one hundred and twenty (120) days).

         c.       NO LIABILITY FOR TERMINATION. Except as otherwise provided in
this Agreement, neither Party shall incur any liability whatsoever for any
damage, loss or expenses of any kind suffered or incurred by the other (or for
any compensation to the other) arising from or incident to any termination of
this Agreement by such Party which complies with the terms of this Agreement,
whether or not such Party is aware of any such damage, loss or expenses.


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<PAGE>

         d.       EFFECT OF TERMINATION. In addition to provisions that by their
terms survive termination, the following provisions shall survive the
termination of this Agreement: Sections 3(c), 4, 5, 6, 7, 8 and 9 and accrued
payment obligations. Remedies for all breaches hereunder will also survive. Each
Party will promptly return all Proprietary Information of the other (and all
copies and abstracts thereof, except that one (1) copy may be retained and shall
be kept in its legal archives for legal record keeping purposes only) that it is
not entitled to under the surviving terms of this Agreement. Upon termination by
either Party pursuant to Section 7(b) i (1), Cygnus shall have the right to
purchase HDS' existing inventory of Hydrogel Laminate at the then applicable
prices. Further, within sixty (60) days after termination, Cygnus shall have the
right place purchase orders for Product, delivery of such Product to be within
nine (9) months of termination, pursuant to the terms of this agreement. HDS
shall, in good faith, use reasonable commercial efforts to assist Cygnus in
securing a replacement supplier of the Hydrogel Laminate.

8.       INDEMNIFICATION AND INSURANCE.

         a.       INDEMNIFICATION. Cygnus agrees to indemnify and hold harmless
HDS, its officers, directors, shareholders, employees, parents and subsidiaries,
successors and assigns from any loss, judgment, liability, damage, claim,
demand, lawsuit, or injury whether to person or property, arising out of any
claim, lawsuit or legal proceeding, and regardless of the legal theory asserted,
involving the sale, use or other disposition by Cygnus of the Hydrogel Laminate
either directly or as a component in any product or good; provided however,
Cygnus shall have no obligation under this Section 8(a) for any claim arising
from the gross negligence or willful misconduct of HDS, infringement of any
third party rights by any aspect of the Hydrogel Laminate that relates solely to
Hydrogel Technology, any aspect of the Hydrogel Laminate based upon manufacture
by HDS and provided further, Cygnus' obligations hereunder are conditioned upon
and subject to (i) prompt receipt of notice from HDS of any claim, threatened
claim or action, (ii) Cygnus having sole control of any litigation or settlement
of such claim or action, and (iii) HDS' reasonable cooperation in the defense of
such claim or action.

        b.        INSURANCE. HDS shall procure and maintain policies of
insurance to cover any and all claims that may arise from or in connection with
HDS' use, manufacture, sale or distribution of the Hydrogel Laminate to Cygnus
or its Affiliates. Cygnus and its Affiliates shall procure and maintain policies
of insurance to cover any and all claims that may arise from or in connection
with Cygnus' and its Affiliates' use, processing, sale, or distribution of
Hydrogel Laminate and/or goods produced or distributed by Cygnus or its
Affiliates which incorporate the Hydrogel Laminate. Such insurance coverage
under this Section 8(b) shall be in the amount of not less than [CONFIDENTIAL
TREATMENT REQUESTED]. The parties shall furnish each other with a certificate of
insurance evidencing such insurance coverage.

9.       GENERAL.

         a.       AMENDMENT AND WAIVER. Except as otherwise expressly provided
herein, any provision of this Agreement may be amended and the observance of any
provision of this Agreement may be waived (either generally or in any particular
instance and either retroactively or prospectively) only with the written
consent of both Parties. However, it is the intention of the Parties that this
Agreement be controlling over additional or different terms of any purchase


                                       10
<PAGE>

order, confirmation, invoice or similar document, even if accepted in writing by
both Parties, and that waivers and amendments of any provision of this Agreement
shall be effective only if made by non-pre-printed agreements signed by both
Parties and clearly understood by both Parties to be an amendment or waiver. The
failure of either Party to enforce its rights under this Agreement at any time
for any period shall not be construed as a waiver of such rights.

         b.       GOVERNING LAW AND LEGAL ACTIONS. This Agreement shall be
governed by and construed under the laws of the State of Delaware and the United
States without regard to conflicts of laws provisions thereof.

         c.       HEADINGS. Headings and captions are for convenience only and
are not to be used in the interpretation of this Agreement.

         d.       NOTICES. Any notice or other communication required or
permitted to be made or given to either Party under this Agreement shall be
deemed sufficiently made or given on the date of delivery if delivered in person
or by overnight commercial courier service with tracking capabilities with costs
prepaid, or three (3) days after the date of mailing if sent by certified first
class U.S. mail, return receipt requested and postage prepaid, at the address of
the Parties set forth below or such other address as may be given from time to
time under the terms of this notice provision:

              If to HDS:                HDS
                                        2150 Cabot Boulevard. West
                                        Langhorne, PA 19047


                                        Attention:  President and CEO


              If to Cygnus:             Cygnus, Inc.
                                        400 Penobscot Drive
                                        Redwood City, California 94063

                                        Attention: President and CEO

         e.       ENTIRE AGREEMENT. This Agreement (and all Exhibits hereto)
constitutes the entire understanding and agreement with respect to the subject
matter hereof and supersedes all proposals, oral or written, all negotiations,
conversations, or discussions, with the exception of the Confidential Disclosure
Agreement, effective January 1, 1997, the Extension Letter thereto, dated
February 5, 1997 and Amendment #1 to the Confidential Disclosure Agreement,
dated February 8, 1999, shall remain in full force and effect, between or among
Parties relating to the subject matter of this Agreement and all past dealing or
industry custom. No other rights or licenses, except those rights set forth in
this Agreement, have been granted or implied to be granted.

         f.       SEVERABILITY. If any provision of this Agreement is held to be
illegal or unenforceable, that provision shall be limited or eliminated to the
minimum extent necessary so


                                       11
<PAGE>

that this Agreement shall otherwise remain in full force and effect and
enforceable.

         g.       RELATIONSHIP OF PARTIES. The Parties hereto expressly
understand and agree that the other is an independent contractor in the
performance of each and every part of this Agreement, is solely responsible for
all of its employees and agents and its labor costs and expenses arising in
connection therewith.

         h.       ASSIGNMENT. This Agreement and the rights hereunder are not
transferable or assignable without the prior written consent of the Parties
hereto.

         i.       PUBLICITY AND PRESS RELEASES. Except to the extent necessary
under applicable laws or for ordinary marketing purposes, the Parties agree that
no press releases or other publicity relating to the substance of the matters
contained herein will be made without approval by both Parties.

         j.       FORCE MAJEURE. No liability or loss of rights hereunder shall
result to either Party from delay or failure in performance caused by an event
of force majeure (that is, circumstances beyond the reasonable control of the
Party affected thereby, including, without limitation, acts of God, fire, flood,
war, government action, compliance with laws or regulations (including, without
limitation, those related to infringement), strikes, lockouts or other serious
labor disputes) for so long as such event of force majeure continues in effect;
provided that if such force majeure event continues and affects or delays a
Party's performance hereunder for more than sixty (60) days, the other Party may
terminate this Agreement pursuant to Section 8(b).

         k.       REMEDIES. Except as otherwise expressly stated in this
Agreement, the rights and remedies of a Party set forth herein with respect to
failure of the other to comply with the terms of this Agreement (including,
without limitation, rights of full termination of this Agreement) are not
exclusive, the exercise thereof shall not constitute an election of remedies and
the aggrieved Party shall in all events be entitled to seek whatever additional
remedies may be available in law or in equity.

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
Effective Date.


CYGNUS, INC.                                   HYDROGEL DESIGN SYSTEMS INC.



By:      /s/ Barbara G. McClung                By:      /s/ Matthew Harriton
   ------------------------------------           ----------------------------
Name:    Barbara G. McClung                    Name:    Matthew Harriton
     ----------------------------------             --------------------------
Title:   Sr. VP & General Counsel              Title:   CEO
      ---------------------------------              -------------------------


                                       12
<PAGE>

                                    EXHIBIT A
                                 SPECIFICATIONS
                       [CONFIDENTIAL TREATMENT REQUESTED]


                                       13
<PAGE>

                                    EXHIBIT B



                          PRICING FOR HYDROGEL LAMINATE
                       [CONFIDENTIAL TREATMENT REQUESTED]




                                       14
<PAGE>

                                    EXHIBIT C

                    QUALITY AGREEMENT BETWEEN HDS AND CYGNUS


                                       15