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                                  TABLE OF CONTENTS

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RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1

       1.      DEFINITIONS   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1

       2.      DEVELOPMENT OF THE PRODUCTS.. . . . . . . . . . . . . . . . . . . . . . . . . . .   6

               2.1    DEVELOPMENT OF THE PRODUCT . . . . . . . . . . . . . . . . . . . . . . . .   6
               2.2    PAYMENT FOR DEVELOPMENT. . . . . . . . . . . . . . . . . . . . . . . . . .   7

       3.      TERMINATION DURING DEVELOPMENT. . . . . . . . . . . . . . . . . . . . . . . . . .   7

               3.1    DEVELOPMENT TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . .   7
               3.2    WIND DOWN/PAYMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . .   7
               3.3    CONSEQUENCE OF TERMINATION . . . . . . . . . . . . . . . . . . . . . . . .   7

       4.      [CONFIDENTIAL TREATMENT REQUESTED]'S OBLIGATIONS. . . . . . . . . . . . . . . . .   8

               4.1    REGULATORY FILINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8
               4.2    CYGNUS PARTICIPATION IN REGULATORY PROCESS . . . . . . . . . . . . . . . .   8
               4.3    COMMERCIALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8

       5.      [CONFIDENTIAL TREATMENT REQUESTED].   . . . . . . . . . . . . . . . . . . . . . .  10

               5.1    [CONFIDENTIAL TREATMENT REQUESTED] . . . . . . . . . . . . . . . . . . . .  10
               5.2    [CONFIDENTIAL TREATMENT REQUESTED] . . . . . . . . . . . . . . . . . . . .  11
               5.3    [CONFIDENTIAL TREATMENT REQUESTED] FINAL PRODUCT 
                      RIGHTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11
               5.4    CYGNUS COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11
               5.5    PRIOR AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12

       6.      SUPPLY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12

               6.1    [CONFIDENTIAL TREATMENT REQUESTED] MANUFACTURING AND 
                      SUPPLY RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12
               6.2    ROLLING ORDERS AND FORECASTS . . . . . . . . . . . . . . . . . . . . . . .  12
               6.3    DELIVERY DATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14
               6.4    PACKAGING AND SHIPMENT; RISK OF LOSS . . . . . . . . . . . . . . . . . . .  15
               6.5    SHIPMENT AND CLAIM EXPENSES. . . . . . . . . . . . . . . . . . . . . . . .  15
               6.6    CYGNUS' FAILURE TO SUPPLY. . . . . . . . . . . . . . . . . . . . . . . . .  15

       7.      ACCEPTANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16


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               7.1    INITIAL ACCEPTANCE OF THE PRODUCTS.. . . . . . . . . . . . . . . . . . . .  16
               7.2    INSPECTION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16
               7.3    RETURN PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16
               7.4    [CONFIDENTIAL TREATMENT REQUESTED] RECALLS . . . . . . . . . . . . . . . .  17

       8.      PURCHASE PRICE PAYMENT FOR SHIPPING PRODUCT . . . . . . . . . . . . . . . . . . .  17

               8.1    BASE PURCHASE PRICE FOR PRODUCT SHIPPED. . . . . . . . . . . . . . . . . .  17
               8.2    INVOICE; PAYMENT FOR PRODUCT SHIPPED . . . . . . . . . . . . . . . . . . .  17
               8.3    ADDITIONAL PURCHASE PRICE. . . . . . . . . . . . . . . . . . . . . . . . .  17
               8.4    MANNER OF PAYMENT; CURRENCY. . . . . . . . . . . . . . . . . . . . . . . .  18
               8.5    AUDIT RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18

       9.      LONG RANGE FORECASTS AND PERFORMANCE MEASURES . . . . . . . . . . . . . . . . . .  19

               9.1    [CONFIDENTIAL TREATMENT REQUESTED] PREPARATION AND 
                      SUBMISSION OF LONG RANGE FORECAST. . . . . . . . . . . . . . . . . . . . .  19
               9.2    CYGNUS ACCEPTANCE OF LONG RANGE FORECASTS; DISPUTES. . . . . . . . . . . .  20
               9.3    FAILURE TO MEET FORECASTS. . . . . . . . . . . . . . . . . . . . . . . . .  21

       10.     INTELLECTUAL PROPERTY OWNERSHIP . . . . . . . . . . . . . . . . . . . . . . . . .  22

       11.     CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22

       12.     TERM AND TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23

               12.1   TERM.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23
               12.2   TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23

                      12.2.1  TERMINATION FOR CAUSE. . . . . . . . . . . . . . . . . . . . . . .  23
                      12.2.2  TERMINATION BY AGREEMENT . . . . . . . . . . . . . . . . . . . . .  24

               12.3   LIABILITY DISCLAIMER.. . . . . . . . . . . . . . . . . . . . . . . . . . .  24
               12.4   GENERAL EFFECTS OF TERMINATION . . . . . . . . . . . . . . . . . . . . . .  24
               12.5   TRANSFER OF CUSTOMER AND MARKETING INFORMATION . . . . . . . . . . . . . .  25
               12.6   TERMINATION NOT SOLE REMEDY. . . . . . . . . . . . . . . . . . . . . . . .  25

       13.     PRODUCT WARRANTY AND WARRANTY DISCLAIMERS . . . . . . . . . . . . . . . . . . . .  25

       14.     PATENT AND TRADEMARK CLAIMS AGAINST THE PARTIES . . . . . . . . . . . . . . . . .  26

               14.1   PATENT CLAIMS AGAINST [CONFIDENTIAL TREATMENT REQUESTED] . . . . . . . . .  26
               14.3   TRADEMARK CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  27

       15.     INFRINGEMENT BY THIRD PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . .  27



                                        ii
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       16.     REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . . .  28

               16.1   CYGNUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  28
               16.2   [CONFIDENTIAL TREATMENT REQUESTED] . . . . . . . . . . . . . . . . . . . .  29
               16.3   MUTUAL DISCLAIMER. . . . . . . . . . . . . . . . . . . . . . . . . . . . .  29

       17.     GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  29

               17.1   AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . .  29
               17.2   GOVERNING LAW AND LEGAL ACTIONS. . . . . . . . . . . . . . . . . . . . . .  30
               17.3   HEADINGS.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  30
               17.4   NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  30
               17.5   ENTIRE AGREEMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .  31
               17.6   SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  31
               17.7   BASIS OF BARGAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  31
               17.8   RELATIONSHIP OF PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . .  31
               17.9   ASSIGNMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  31
               17.10  PUBLICITY AND PRESS RELEASES.. . . . . . . . . . . . . . . . . . . . . . .  32
               17.11  FORCE MAJEURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  32
               17.12  REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  32
               17.13  LIMITATION OF CYGNUS' LIABILITY. . . . . . . . . . . . . . . . . . . . . .  32
               17.14  CONSULTATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  33
               17.15  TIME OF ESSENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  33
               17.16  LETTER OF INTENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  33
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                                        iii
<PAGE>

                                      AGREEMENT

          THIS AGREEMENT is made this 21 day of May, 1998 by and between Cygnus
Inc. ("Cygnus"), a Delaware corporation having its principal place of business
at 400 Penobscot Drive, Redwood City, California 94063, and [Confidential
Treatment Requested] Limited ("[Confidential Treatment Requested]"), a
corporation incorporated pursuant to the laws of the Province of [Confidential
Treatment Requested] and having its principal place of business at [Confidential
Treatment Requested]

                                       RECITALS

          A.   Cygnus and [Confidential Treatment Requested] have executed a
Letter of Intent dated February 10, 1998 (the "LOI").  The parties desire to
enter into a definitive agreement for the development, clinical development,
regulatory approval, supply and commercialization of a nicotine transdermal
system to be sold as a [Confidential Treatment Requested] product or under the
[Confidential Treatment Requested]and, on a [Confidential Treatment Requested]
basis and subject to Section 5.4 herein, bearing [Confidential Treatment
Requested] other than those of [Confidential Treatment].

          B.   The parties intend that by reason of the negotiation of this
Agreement, Paragraph 2 of the LOI shall no longer be in force with respect to
any nicotine transdermal system.

          WHEREFORE, the parties hereby agree as follows:

     1.   DEFINITIONS.   Terms in this Paragraph 1 shall for all purposes
of this Agreement have the meaning specified herein.

          1.1    "Affiliate" means a corporation or any other entity that 
directly or 



                                      1.
<PAGE>

indirectly, through stock ownership or though other arrangements, controls, 
is controlled by, or is under common control with, the designated party, but 
only for so long as the relationship exists.

          1.2    "Effective Date" means the date first written above.

          1.3    "Fully Burdened Development Cost" includes the following (as 
determined in accordance with generally accepted accounting principles 
consistently applied by Cygnus: [Confidential Treatment Requested].  Direct 
costs are [Confidential Treatment Requested].  Indirect costs are 
[Confidential Treatment Requested].

          1.4    "Fully Burdened Manufacturing Cost" means the following (as 
determined in accordance with generally accepted accounting principles 
consistently applied by Cygnus: [Confidential Treatment Requested].  Direct 
costs are [Confidential Treatment Requested].  Indirect costs are 
[Confidential Treatment Requested].

          1.5    "Long Range Forecast or LRF" shall have the meaning set 
forth in Paragraph 4.6 of this Agreement.

          1.6    "Major European Country" means [Confidential Treatment
Requested].

          1.7    "Net Sales" for a period and country means the gross revenues
in that period with respect to Products sold by [Confidential Treatment
Requested] to a customer not an Affiliate of [Confidential Treatment Requested]
(excluding free samples) in such country, less (to the extent included in the
gross amount):

          [Confidential Treatment Requested]

          If a unit of Product is distributed in combination or bundled with 
one or more other items or services, [Confidential Treatment Requested].

          1.8    "Patents" means any and all issued patents in the Territory 
and any and all 



                                      2.
<PAGE>

applications for letters patent pending in the Territory (until such time as 
such applications or any of them are denied, abandoned, or issued into 
patents) any patents issuing from such applications, all divisions, 
continuations, continuations-in-part and all patents granted thereon, as well 
as all other patents in the Territory, including any re-issues, 
re-examinations, renewals, or extensions thereof, which are owned by Cygnus, 
or under which Cygnus shall have the right to grant rights, and which claim a 
Product, the use of a Product, or which claim a process which is part of 
Manufacturing Information. 

          1.9     "Final Product" means [Confidential Treatment Requested].

          1.10    "Product" means [Confidential Treatment Requested].  

          1.11    "Target Specifications" means those specifications set 
forth on Exhibit A which represent a goal and do not represent a binding 
commitment by either party.

          1.12    "Territory" shall mean the [Confidential Treatment Requested].

          1.13    "Territory Group" shall mean any of the following countries
singly or grouped as listed: [Confidential Treatment Requested].

     2.   DEVELOPMENT OF THE PRODUCTS.   Cygnus shall perform development 
activities as provided below in this Paragraph 2.  The parties agree to work 
closely with one another in connection with Cygnus' development activities.  
The parties expressly understand that it may not be practicable or possible 
with commercially reasonable efforts herein to develop prototypes meeting the 
Target Specifications for Products and that Cygnus makes no warranty that it 
will successfully complete development.

          2.1    DEVELOPMENT OF THE PRODUCT.   Cygnus shall devote reasonable 
efforts to perform the activities set forth in Exhibit B to develop Product 
meeting the Target Specifications 

                                      3.
<PAGE>

and to conduct all clinical trials necessary to obtain regulatory approval 
for the [Confidential Treatment Requested] for the Product.  Exhibit B shall 
also set forth Cygnus' estimates for its costs to conduct all activities 
except clinical trials.  Cygnus shall present the protocols, estimated time 
schedule and the estimated costs for all clinical trials ("Clinical 
Proposal") to [Confidential Treatment Requested] in writing for its approval 
which shall not be unreasonably withheld.  [Confidential Treatment Requested].
Any rejection by [Confidential Treatment Requested] of the Clinical 
Proposal must be accompanied by a firm proposal from a contract research 
organization, fully qualified to conduct all necessary clinical trials 
[Confidential Treatment Requested]  In the event [Confidential Treatment
Requested] fails to provide timely such a firm proposal, Cygnus' Clinical
Proposal shall be deemed accepted.

          2.2    PAYMENT FOR DEVELOPMENT.  [Confidential Treatment Requested]
shall be obligated to pay Cygnus' Fully Burdened Development Cost for its
activities set forth in paragraph 2.1 above.  Cygnus may bill [Confidential
Treatment Requested] monthly and [Confidential Treatment Requested].  Cygnus
shall supply copies of any third-party invoices together with its invoice.  All
payments are non-refundable and [Confidential Treatment Requested]'s obligation
under this subparagraph may not be asserted as an offset against any claims by
[Confidential Treatment Requested] against Cygnus.  

    3.    TERMINATION DURING DEVELOPMENT.

          3.1    DEVELOPMENT TERMINATION.   At any time [Confidential Treatment
Requested] after completion of the first clinical study, [Confidential Treatment
Requested].

          3.2    WIND DOWN/PAYMENT.   Following the giving of notice of
Development Termination pursuant to Paragraph 3.1, [Confidential Treatment
Requested] shall be obligated to 


                                      4.
<PAGE>

pay Cygnus for its [Confidential Treatment Requested] for all development 
activities through the date of the notice plus Cygnus' [Confidential Treatment 
Requested] reasonably incurred in the wind down of the development project 
including, but not limited to, those costs incurred in the completion of any 
studies, trials or tests commenced but not concluded; contract commitments in 
existence for goods and services, reallocation and reassignment of equipment 
and personnel.  Cygnus shall submit copies of any third-party invoices 
together with its invoice.

          3.3    CONSEQUENCE OF TERMINATION.   Upon giving of notice of 
Development Termination, [Confidential Treatment Requested] shall relinquish 
all rights under Paragraphs 5.1 and 5.2.  

     4.   [CONFIDENTIAL TREATMENT REQUESTED]'S OBLIGATIONS

          4.1    REGULATORY FILINGS.  [Confidential Treatment Requested] at its
own expense shall devote reasonable efforts (i) to undertake and complete, as
soon as reasonably practicable, all regulatory filings for the Product for all
countries in the Territory and (ii) obtain regulatory approval for all countries
in the Territory.  [Confidential Treatment Requested] may make all regulatory
filings for the Territory in its name.

          4.2    CYGNUS PARTICIPATION IN REGULATORY PROCESS.  Cygnus shall be
entitled to participate in all regulatory activities undertaken by [Confidential
Treatment Requested] pursuant to Section 4.1, above, including attendance at any
meetings with regulatory bodies or experts, review all material regulatory
submissions prior to filing, and receive copies of all material communications
with regulatory bodies.  The parties agree to consult with each other concerning
all material aspects and events of the process of obtaining regulatory approval
for the [Confidential Treatment Requested].  Provided, however, such information
and submission shall 


                                      5.
<PAGE>

be regarded as Proprietary Information of [Confidential Treatment Requested] 
under Section 11 and shall not be used by Cygnus other than as provided 
pursuant to the terms and conditions of this Agreement.

          4.3    COMMERCIALIZATION.

                 (a)  [Confidential Treatment Requested] shall devote diligent
efforts to launch the Final Product as soon as reasonably practicable in the
[Confidential Treatment Requested].  In no event shall launch occur later than
[Confidential Treatment Requested] after receipt of regulatory approval which
permits commercial sale for any of the [Confidential Treatment Requested].  At
any time more than [Confidential Treatment Requested] after the earlier of (i)
receipt of regulatory approval for a Product in the [Confidential Treatment
Requested]. or (ii) [Confidential Treatment Requested] may give notice in
writing to Cygnus of its intent to seek regulatory approval for and
commercialization of the Final Product in a country outside the Territory
("Territory Addition Notice").  Upon the giving of such Territory Addition
Notice, which must identify the country or countries, such country or countries
shall become part of the Territory and [Confidential Treatment Requested] shall
become obligated to use diligent efforts to obtain regulatory approval and
launch the product and all provisions of this Agreement shall govern such Final
Product in the country or countries.  At any time after the commencement of the
period for [Confidential Treatment Requested] to give a Territory Addition
Notice, if no such notice has been given for a particular country outside the
Territory, Cygnus may give notice in writing to [Confidential Treatment
Requested] of intent to seek regulatory approval for and commercialization of
the Final Product for sale under terms described in Paragraph 5.1 in such
country outside the Territory.  Upon receipt of such notice, 

                                      6.
<PAGE>

[Confidential Treatment Requested] shall have [Confidential Treatment 
Requested] to give notice in writing to Cygnus accepting or rejecting the 
country.  If [Confidential Treatment Requested] elects to give notice 
accepting the country, the country shall become included in the Territory and 
it shall promptly undertake such clinical trials (as may be required), obtain 
regulatory approval and launch the Final Product, as provided in this Agreement 
and all provisions of this Agreement shall govern such Final Product in the 
country.  If [Confidential Treatment Requested] shall give notice rejecting 
the country or fail to timely respond to the notice, Cygnus shall be free 
itself or with a third party to develop and commercialize the Final Product 
in such country as a [Confidential Treatment Requested] product without a 
[Confidential Treatment Requested] or bearing the [Confidential Treatment 
Requested].

               (b)    use diligent efforts to market, distribute and support 
the Final Product on a continuing basis;

               (c)    comply with good business practices and all laws and 
regulations of the Regulatory Authorities applicable to it in each country 
where Final Product is sold;

               (d)    notify Cygnus of any problems encountered with the 
Final Product and any suggested resolutions for those problems;

               (e)    not make any claims, representations, warranties or 
guarantees to any third party with respect to the Specifications, features or 
capabilities of Final Product that are inconsistent with the literature 
provided by Cygnus;

               (f)    promptly notify Cygnus of any adverse reaction or 
results or any actual or potential government action relevant to Final 
Product and the parties will discuss with each other measures to be 
undertaken necessary to resolve the problem;



                                      7.
<PAGE>

               (g)    keep for [Confidential Treatment Requested] after
termination of this Agreement records of all Final Product sales and customers
sufficient to adequately administer a recall of any Final Product and to fully
cooperate in any decision by Cygnus to recall, retrieve and/or replace any Final
Product.

     5.   [CONFIDENTIAL TREATMENT REQUESTED].  

          5.1    [CONFIDENTIAL TREATMENT REQUESTED].  After the expiration of
the period specified in Paragraph 3.1 for the giving of a notice of Development
Termination, if no such notice of Development Termination has been given,
[Confidential Treatment Requested] shall have an [Confidential Treatment
Requested] for the term of this Agreement in the Territory to distribute and
sell such particular packages of the Final Product which are (i) [Confidential
Treatment Requested] Nicotine product and [Confidential Treatment Requested] or
(ii) which [Confidential Treatment Requested] offering the Final Product for
sale to the ultimate consumer.

          5.2    [CONFIDENTIAL TREATMENT REQUESTED].  Commencing on the
effective date hereof and ending upon the earlier of (i) the giving of notice of
Development Termination under Paragraph 3.1 or (ii) the commencement of Product
[CONFIDENTIAL TREATMENT REQUESTED] under Paragraph 5.1 above, Cygnus shall not
enter into any agreement with any third party (which agreement was not in
existence as of the effective date hereof) to develop, manufacture or supply any
transdermal system for the delivery of nicotine which is to be offered for sale
or sold in the Territory (i) [Confidential Treatment Requested] nicotine product
and [Confidential Treatment Requested] offering the product for sale to the
ultimate consumer.  

          5.3    [CONFIDENTIAL TREATMENT REQUESTED] FINAL PRODUCT RIGHTS

          After the expiration of the period specified in Paragraph 3.1 for 
the giving of a 

                                      8.
<PAGE>

notice of Development Termination, if no such notice of Development 
Termination has been given, [Confidential Treatment Requested], subject to 
Section 5.4, shall have a [Confidential Treatment Requested] right for the 
term of this Agreement in the Territory to distribute and sell the Final 
Product bearing [Confidential Treatment Requested] other than of the 
[Confidential Treatment Requested] offering the product for sale.

          5.4    CYGNUS COMPETITION.  Nothing in Paragraphs 5.1 or 5.2 shall
prevent Cygnus itself or in conjunction with or pursuant to an agreement with a
third party from  developing, manufacturing, supplying, offering for sale or
selling nicotine transdermal systems, of any formulation whether or not
identical to the Final Product, which would be sold bearing prominent
[Confidential Treatment Requested] other than the [Confidential Treatment
Requested] offering the product for sale to the ultimate consumer.  Provided,
however, Cygnus agrees that it will refrain from licensing for sale in the
Territory or selling in the Territory any nicotine transdermal system identical
to Final Product in dosages of 7, 14 or 21 mg/day unless such transdermal system
is also offered with a dosage greater than 21 mg/day.

          5.5    PRIOR AGREEMENTS.  [Confidential Treatment Requested]'s rights 
under Paragraphs 5.1 and 5.2 shall be subject to the rights arising under 
contracts by Cygnus with third parties, which contracts were in existence as 
of the Effective Date relating to that particular nicotine patch formulation 
known as "Nicotrol."

     6.   SUPPLY.  

          6.1    [Confidential Treatment Requested] MANUFACTURING AND SUPPLY 
RIGHTS.  Cygnus shall have the [Confidential Treatment Requested] to make, 
have made, and supply the Final Product to [Confidential Treatment Requested] 
and [Confidential Treatment Requested]

                                       9.
<PAGE>

shall have no license express or implied to make itself or have made by a 
third party Final Product.  [Confidential Treatment Requested] shall fulfill 
all of its requirements for the Final Product solely by placing orders 
hereunder with Cygnus.

          6.2    ROLLING ORDERS AND FORECASTS

                 6.2.1.   With respect to Final Product to be sold in any
Territory Group in the Territory, [Confidential Treatment Requested] shall
deliver to Cygnus, on a Territory Group basis, (i) at least four (4) full
calendar quarters prior to the calendar quarter in which the first commercial
sale of such Final Product in such Territory Group is projected to occur, a
forecast of [Confidential Treatment Requested]'s quantity requirements for
such Final Product for such country for the calendar quarter in which the first
commercial sale of such Final Product is projected to occur and (ii) at least
one (1) full calendar quarter prior to the calendar quarter in which the first
commercial sale of such Final Product in such Territory Group is projected to
occur, [Confidential Treatment Requested]'s firm order and requested delivery
dates ("Delivery Dates") for such Final Product for such Territory Group for
such calendar quarter and a forecast of its quantity requirements for such
Product for such Territory Group for the subsequent three (3) calendar quarters.
Thereafter, [Confidential Treatment Requested] shall deliver to Cygnus within
ten (10) days after the beginning of each calendar quarter, [Confidential
Treatment Requested]'s firm order and Delivery Dates for such Final Product for
such Territory Group for the next calendar quarter and a forecast of its
quantity requirements for such Final Product for such Territory Group for the
subsequent three (3) calendar quarters.  If a required forecast or order for a
quarter is not timely submitted for a Final Product for a Territory Group, the
immediately preceding forecast for that quarter shall become the new forecast or
order; if there is

                                     10.

<PAGE>

no preceding forecast for a quarter, the forecast or order for the 
immediately preceding quarter shall become the forecast or order.

                 6.2.2    For each forecast for a Territory Group, the amount
of Final Product forecasted for delivery in the first of the three quarters
forecasted shall be not less than fifty percent (50%) or more than one hundred
fifty percent (150%) of the most recent forecast for such quarter for such
country.  If [Confidential Treatment Requested]'s purchases of Final Products
from one quarter to another vary substantially, Cygnus may experience difficulty
in adjusting efficiently its manufacturing capacity and operations. 
Accordingly, [Confidential Treatment Requested] shall act in a commercially
reasonable manner to schedule orders so as to attempt to avoid creating over or
under capacity problems for Cygnus.

                 6.2.3.   The total amount of Final Product ordered by
[Confidential Treatment Requested] for delivery in any calendar quarter in any
Territory Group may not be less than seventy-five percent (75%) of [Confidential
Treatment Requested]'s most recent required forecast for such Final Product for
such Territory Group for such quarter.  Cygnus shall use reasonable efforts to
supply products properly ordered pursuant to the ordering mechanism set forth in
this Section 6.  Cygnus's supply obligation will not extend to more than one
hundred twenty-five percent (125%) of [Confidential Treatment Requested]'s most
recent forecast for such Product for such country for such quarter.  If a
[Confidential Treatment Requested] product requirement for any quarter exceeds
125% of [Confidential Treatment Requested]'s most recent forecast for such Final
Product for such Territory Group for such calendar quarter, Cygnus and
[Confidential Treatment Requested] will discuss in good faith the additional
amount, if any, that Cygnus is willing to supply consistent with its other
obligations and [Confidential Treatment

                                     11.

<PAGE>

Requested] will adjust its order accordingly.  [Confidential Treatment
Requested] shall indemnify Cygnus and reimburse it promptly upon request for
all reasonable out of pocket costs and expenses, (including the cost of
carrying increased inventory if requested by [Confidential Treatment Requested]
to do so, but excluding any such costs and expenses that are reimbursable as
Manufacturing Cost), to the extent caused by any deviation in order quantities
from the limits imposed by the preceding sentence, and Cygnus will act
reasonably to mitigate any such costs and expenses.

          6.3    DELIVERY DATE 

                 6.3.1.   Cygnus will provide a firm scheduled delivery date and
an order acknowledgment promptly after receipt of [Confidential Treatment
Requested]'s firm order.  Cygnus will use reasonable efforts to meet each firm
scheduled delivery date, but will not be liable for failure to do so due to a
Force Majeure Act.  In the event of a Force Majeure Act, Cygnus may not reduce
production or shipment of Products for [Confidential Treatment Requested] by a
percentage exceeding the amount of reduction caused by the Force Majeure Act. 
Cygnus will not be responsible for any delay after tender to the carrier for
delivery. 

          6.4    PACKAGING AND SHIPMENT; RISK OF LOSS.  Cygnus will package and
ship all items in Cygnus's customary manner, which shall be consistent with
industry practices, CGMP and FDA regulations, as applicable.  The risk of loss
of or damage to all the Products ordered by [Confidential Treatment Requested]
will pass to [Confidential Treatment Requested] upon Cygnus's tender of delivery
to the carrier for shipment.

          6.5    SHIPMENT AND CLAIM EXPENSES  [Confidential Treatment Requested]
of transportation, insurance, taxes, export and import fees, customs brokerage
and similar charges.

                                     12.

<PAGE>

[Confidential Treatment Requested] will make and negotiate any claims against 
any carrier, insurer, customs broker, freight forwarder or customs collector. 

          6.6    CYGNUS' FAILURE TO SUPPLY.   In the event Cygnus for reasons
other than force majeure fails to meet its supply obligations by more than
[Confidential Treatment Requested] per month for each of six consecutive months
or by more than [Confidential Treatment Requested] per month for each of any
nine months of any twelve month period, [Confidential Treatment Requested] shall
be entitled to a [Confidential Treatment Requested] to have made Final Product
solely for sale pursuant to and subject to the other terms and limitations of
this Agreement except Section 8.1.  [Confidential Treatment Requested] and
Cygnus shall jointly select and negotiate with any proposed [Confidential
Treatment Requested].  Cygnus shall be entitled to reject as a [Confidential
Treatment Requested].  Cygnus, [Confidential Treatment Requested], shall supply
such assistance in transferring know-how as is reasonably required to enable the
[Confidential Treatment Requested] to manufacture the Final Product.  The
[Confidential Treatment Requested] shall execute an agreement in writing binding
it to the confidentiality provisions of Section 11, hereof, and [Confidential
Treatment Requested] shall be jointly and severally liable for such
confidentiality obligations.  In the event Cygnus determines that it is able
once again to supply, it may give notice thereof in writing to [Confidential
Treatment Requested] and may resume supply one hundred and twenty days (120)
days after such notice at which time the [Confidential Treatment Requested] have
made [Confidential Treatment Requested] set forth above shall terminate and
[Confidential Treatment Requested] shall cease.  In the event that the
third-party manufacturing agreement requires a payment to permit commencement of
manufacturing, Cygnus and [Confidential Treatment Requested] shall

                                     13.

<PAGE>

negotiate in good faith whether or not there shall be any [Confidential
Treatment Requested] due under Section 8.3 as a result.  Provided, however, in
no event shall [Confidential Treatment Requested] seek Cygnus' agreement to
[Confidential Treatment Requested] under Section 8.3 by more than [Confidential
Treatment Requested].

     7.   ACCEPTANCE

          7.1    INITIAL ACCEPTANCE OF THE PRODUCTS  [Confidential Treatment
Requested], with the input of Cygnus, and using generally accepted standards for
products of like kind, will develop criteria for acceptance of the Final
Product, subject to approval of such criteria by Cygnus, which approval will not
be unreasonably delayed or withheld.  

          7.2    INSPECTION  [Confidential Treatment Requested] will have a
period of thirty (30) days after delivery to [Confidential Treatment Requested]
of each item of the Final Product in which to review and inspect.  If
[Confidential Treatment Requested] gives Cygnus written notice of a defect or
nonconformity with specifications, [Confidential Treatment Requested] shall
return the defective or nonconforming item to Cygnus. If [Confidential Treatment
Requested] does not give Cygnus written notice of the defect or nonconformity
before expiration of that period, the item of Final Product will be accepted.

          7.3    RETURN PROCEDURE.  Before returning any item to Cygnus,
[Confidential Treatment Requested] will contact Cygnus and obtain a return
authorization (which shall not be delayed or withheld).

          7.4    [CONFIDENTIAL TREATMENT REQUESTED] RECALLS.   [Confidential
Treatment Requested] shall have the right, at any time, to recall Final Product.
[Confidential Treatment Requested] shall maintain at all times in written or
recorded form, an effective system for the

                                     14.

<PAGE>

recall of Final Product from the market.  [Confidential Treatment Requested]
shall notify Cygnus prior to commencing any recall.  Notwithstanding any recall,
[Confidential Treatment Requested] shall be liable for performance of its
obligations under this Agreement including all payments under Section 8 of this
Agreement.  Any recall hereunder shall be at [Confidential Treatment
Requested]'s sole expense, unless it can establish that Cygnus was negligent in
the design or manufacture of the Final Product and that there was an absence of
any negligence on the part of [Confidential Treatment Requested] and/or its
customers with respect to the acceptance, inspection, storage, shipping and
distribution of the Final Product.

     8.   PURCHASE PRICE PAYMENT FOR SHIPPING PRODUCT

          8.1    BASE PURCHASE PRICE FOR PRODUCT SHIPPED.  The base purchase 
price for Final Product shall be equal to  Cygnus' [Confidential Treatment
Requested].

          8.2    INVOICE; PAYMENT FOR PRODUCT SHIPPED.  Upon shipment Cygnus may
invoice [Confidential Treatment Requested] for the amount determined by Section
8.1 for such shipment.  [Confidential Treatment Requested]'s payment shall be
due forty-five (45) days after the date of Cygnus' invoice.

          8.3    ADDITIONAL PURCHASE PRICE.   As an additional purchase price,
[Confidential Treatment Requested] shall pay Cygnus an amount equal to the
percentages set forth below of Net Sales, computed on a Territory Group basis
for the Final Product.  Such additional purchase price payment, together with a
report showing the calculation of Net Sales, the data showing the basis for the
existence of competition above[Confidential Treatment Requested], and currency
conversions on a county-by-country basis, shall be made quarterly and shall be
due forty-five (45) days after the commencement of each calendar quarter.

                                     15.

<PAGE>

  If no [Confidential Treatment Requested]    [Confidential Treatment Requested]
  in the Territory Group

  [Confidential Treatment Requested]          [Confidential Treatment Requested]
  in the Territory Group

  [Confidential Treatment Requested]          [Confidential Treatment Requested]
  in the Territory Group

For purposes of this paragraph, a [Confidential Treatment Requested] in a
Territory Group is a competitor whose sales, on a unit basis, of a nicotine
transdermal system which is sold as a [Confidential Treatment Requested] without
[Confidential Treatment Requested] are reported by IMS to be equal to or greater
than [Confidential Treatment Requested] of the total number of unit sales for
all nicotine transdermal products in that Territory Group.  The determination of
whether there is a [Confidential Treatment Requested] or the number of such
[Confidential Treatment Requested] shall be made on a Territory Group basis.  

          8.4    MANNER OF PAYMENT; CURRENCY.  All payment to Cygnus under this
Paragraph 8 shall be in U.S. dollars.  Late payments shall bear interest at the
lower of (i) the prime rate announced from time to time by the Bank of America
plus 3% (three percent) or (ii) the maximum rate allowed by law.  Conversions
from foreign currency to U.S. dollars will be determined on the last business
day of the month for which the payment is due based on the rate at which U.S.
dollars may be purchased from such other currency at the close of business in
new York as stated in the WALL STREET JOURNAL for that day.

          8.5    AUDIT RIGHTS.  Both parties shall keep complete and accurate
books and records reflecting all information necessary or useful in verifying
the accuracy of all reports delivered and payments made under this Agreement. 
Each party shall have the right to cause its independent certified public
accountant to audit, the books and records of the other as they relate

                                     16.

<PAGE>

to such forecasts, reports and payments, PROVIDED, that such audit: (i) is
conducted during normal business hours, (ii) is conducted no more often than
twice per year (unless a discrepancy greater than [Confidential Treatment
Requested] is discovered in favor of the auditing party, and (iii) is conducted
only after it has given ten days' prior written notice to the other.  The
auditing party shall bear the [Confidential Treatment Requested] of such audit,
unless a discrepancy in excess of [Confidential Treatment Requested] in favor of
the auditing party is discovered, in which event the other party shall bear
[Confidential Treatment Requested] of such audit.  Regardless of the amount of
discrepancy discovered, all discrepancies (and interest thereon) shall be
immediately due and payable by the party found to have caused the discrepancy.
All books and records relating to either party's obligations under this
Agreement shall be retained by such party for five years after the Term has
expired.

     9.   LONG RANGE FORECASTS AND PERFORMANCE MEASURES.

          9.1    [CONFIDENTIAL TREATMENT REQUESTED] PREPARATION AND SUBMISSION
OF LONG RANGE FORECAST.   [Confidential Treatment Requested] after the first
filing anywhere in the Territory of an ANDA or NDA or their equivalent,
[Confidential Treatment Requested] will supply Cygnus with a preliminary
[Confidential Treatment Requested] Product unit sales forecast for the Territory
broken down by the Territory Group. [Confidential Treatment Requested] after the
filing of any Regulatory Submission for the Territory Group, [Confidential
Treatment Requested] will supply Cygnus with a [Confidential Treatment
Requested] Product unit and dollar sales forecast for each Territory Group.  For
a Product Launch in the Territory Group occurring in any year prior to
[Confidential Treatment Requested], no later than [Confidential Treatment
Requested] of the year of Product Launch, [Confidential Treatment

                                     17.

<PAGE>

Requested] will submit for Cygnus' approval, a binding one [Confidential
Treatment Requested] product unit and dollar sales forecast for the Product 
for that Territory Group, such forecast covering the [Confidential Treatment
Requested] commencing on [Confidential Treatment Requested] of the year
following the year of Product Launch; for Product Launch occurring in any year
on [Confidential Treatment Requested] or later, no later than [Confidential
Treatment Requested] of the year following Product Launch, [Confidential
Treatment Requested] will submit for Cygnus' approval a binding one
[Confidential Treatment Requested] Product unit and dollar sales forecast for
the Product for such Territory Group, such forecast covering the [Confidential
Treatment Requested] commencing [Confidential Treatment Requested] of the
second year following the year of Product Launch (the "First Long Range
Forecast").  Thereafter for each Territory Group, on a Territory Group basis
three (3) months before the end of the period covered by the First Long Range
Forecast (and thereafter each Long Range Forecast) [Confidential Treatment
Requested] will submit for Cygnus' approval a new [Confidential Treatment
Requested] forecast for the Territory Group (the Long Range Forecast").  The
First Long Range Forecast and each Long Range Forecast thereafter shall set
forth the forecast of the number of units of each type of Product to be sold
and the Net Sales for a Territory Group for the year of the forecast.  The
First Long Range Forecast and each Long Range Forecast for a Territory Group
shall be accompanied by data and a report prepared according to accepted
pharmaceutical marketing research methods.

          9.2    CYGNUS ACCEPTANCE OF LONG RANGE FORECASTS; DISPUTES.  Within
[Confidential Treatment Requested] of receipt of any Long Range Forecast or
First Long Range Forecast, as the case may be, Cygnus shall notify [Confidential
Treatment Requested] of its

                                     18.

<PAGE>

acceptance or rejection of the forecast.  If Cygnus fails to give such notice,
it shall be deemed to have accepted the forecast.  In the event Cygnus rejects
the forecast, Cygnus may choose an independent market research organization.
Cygnus and [Confidential Treatment Requested] shall thereupon submit all
marketing data developed to date and the proposed [Confidential Treatment
Requested] Long Range Forecast in dispute and request the retained research
organization to prepare a long range forecast which adopts neither best case
assumptions nor conservative assumptions, but adopts the mid-point between the
two categories of assumptions.  The forecast prepared by the marketing research
organization shall thereupon be deemed adopted as the Long Range Forecast as of
the applicable commencement date provided in Section 9.1.

          9.3    FAILURE TO MEET FORECASTS.  If on a Territory Group basis for
any Territory Group at the end of [Confidential Treatment Requested] of any Long
Range Forecast or First Long Range Forecast, Net Sales of Products were less
than [Confidential Treatment Requested] of the amount forecast for such
[Confidential Treatment Requested] for that Territory Group, Cygnus may elect to
convert [Confidential Treatment Requested]'s rights under Paragraph 5.1 to
[Confidential Treatment Requested] rights for that Territory Group.  In the
event that [Confidential Treatment Requested]'s Net Sales at the end of any year
of any Long Range Forecast or First Long Range Forecast were less than
[Confidential Treatment Requested] of the amount forecast for such year for that
Territory Group, Cygnus may elect to [Confidential Treatment Requested] for that
Territory Group.  In the event Cygnus has obtained the right hereunder to
[Confidential Treatment Requested] for two or more Territory Groups, Cygnus may
[Confidential Treatment Requested] in its entirety.  Any election by Cygnus
pursuant to this Paragraph shall be signified by notice in writing given to
[Confidential Treatment Requested].

                                     19.

<PAGE>

Provided, further, Cygnus shall not be entitled to elect to convert rights to a
[Confidential Treatment Requested] basis or [Confidential Treatment Requested]
pursuant to this Paragraph if [Confidential Treatment Requested]'s failure to
achieve the required level of Net Sales was primarily attributable to a failure
to supply on the part of Cygnus and but for such failure [Confidential Treatment
Requested] would reasonably have been expected to and been able to satisfy such
Net Sales requirements.

     10.  INTELLECTUAL PROPERTY OWNERSHIP.  Cygnus shall be the sole owner
of all intellectual property created, developed or invented in connection with
the Product and its development and the development of its manufacturing methods
and processes, regardless of the identity of the inventor.  Any assignments
necessary to accomplish the foregoing are hereby made and [Confidential
Treatment Requested] will execute such further documents as may be reasonably
requested by Cygnus with respect thereto.

     11.  CONFIDENTIALITY.  Each party agrees that all inventions,
processes, materials, chemicals, know-how and ideas and all other business,
technical and financial information they obtain from the other are the
confidential property of the disclosing party ("Proprietary Information" of the
disclosing party).  Except as expressly allowed in this Agreement, the receiving
party will hold in confidence and not use itself or disclose to any third party
any Proprietary Information of the disclosing party and shall similarly bind its
employees in writing.  The receiving party shall not be obligated under this
Paragraph 11 beyond five (5) years after termination or expiration of this
Agreement or with respect to information the receiving party can document:

          (i)    is or has become readily publicly available through no fault 
of the

                                     20.

<PAGE>

receiving party or its employees or agents; or

          (ii)   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 imposed by such third party; or

          (iii)  was rightfully in the possession of the receiving party 
prior to its disclosure by the other party provided the receiving party 
abides by all restrictions imposed on its possession of such information; or

          (iv)   was independently developed by employees or consultants of 
the receiving party without access to such Proprietary Information.

     12.  TERM AND TERMINATION.

          12.1   TERM  Unless terminated earlier as provided herein, this
Agreement will have an initial term ending upon the later of (i) expiration of
the last to expire of any Cygnus Patents directed specifically to the Product
(including its production) or (ii) [Confidential Treatment Requested].  At any
time during the last six months of the term hereof, either party may request a
meeting with the other to discuss and negotiate contractual terms and conditions
for extending the term, and/or transferring of technology and/or a license for
manufacture and/or transferring of the regulatory package.

          12.2   TERMINATION. 

                 12.2.1   TERMINATION FOR CAUSE.  This Agreement may be 
terminated in its entirety by either party for cause immediately upon the 
occurrence of any of the following events:

          (i)    If the other ceases to do business, or otherwise terminates 
its business

                                      21.

<PAGE>

operations;

          (ii)   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 in the 
U.S., or if any such license, registration, permit, authorization or approval 
is revoked or suspended and not reinstated within 60 days or diligent efforts 
are not being made to effect such reinstatement; or

          (iii)  If the other materially breaches any material provision of 
this Agreement and fails to cure such breach within sixty (60) days (fifteen 
(15) days in the case of a failure to pay) of written notice describing the 
breach.

          12.2.2  TERMINATION BY AGREEMENT.  In the event the parties mutually
agree to terminate this Agreement, the parties agree that the negotiations
concerning termination will include discussion and negotiations of the
possibility of and terms for (i) transfer of all Regulatory Filings made
anywhere in the world and all market research data concerning Final Product by
[Confidential Treatment Requested] to Cygnus, and (ii) a license by Cygnus to
[Confidential Treatment Requested] to such patents and know-how as is necessary
to make and have made Final Product and a license to use and sell such Final
Product.  

          12.3   LIABILITY DISCLAIMER  The terminating party shall not incur 
any liability whatsoever to the other party 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 the 
terminating party which complies with the terms of the Agreement whether or 
not such party is aware of any such damage, loss or expenses.

          12.4   GENERAL EFFECTS OF TERMINATION.  The following provisions 
shall survive

                                      22.

<PAGE>

the termination of this Agreement:  Paragraphs 8.5, 10, 11, 12.5, 13, and 17. 
Obligations of the parties to make any payments under Paragraph 2 and under 
firm orders for purchase and delivery of Products at the time of such 
termination and with regard to sales of Products occurring prior to the 
termination shall remain in effect.  Remedies for breaches will also survive. 
Each party will promptly return all Proprietary Information of the other (and 
all copies and abstracts thereof) that it is not entitled to use under the 
surviving terms of this Agreement.  

          12.5   TRANSFER OF CUSTOMER AND MARKETING INFORMATION.  In the 
event of any termination by either party before the expiration of the term 
provided in Paragraph 12.1, [Confidential Treatment Requested] will as soon 
as practicable transfer to Cygnus title to all Regulatory Filings made 
anywhere in the world and execute all necessary documents and reasonably 
cooperate with Cygnus to effect a prompt transfer of ownership and rights in 
the filings to Cygnus and, in addition, transfer any and all market research 
data related to the Product. Cygnus, in its discretion, may elect to direct 
[Confidential Treatment Requested] to transfer less than all of the foregoing 
records.  The parties shall negotiate a reasonable royalty payable to 
[Confidential Treatment Requested] for such transfer to Cygnus which royalty 
shall not exceed [Confidential Treatment Requested] of Net Sales.

          12.6   TERMINATION NOT SOLE REMEDY  Termination is not the sole 
remedy under this Agreement and, whether or not termination is effected, all 
other remedies will remain available.

     13.  PRODUCT WARRANTY AND WARRANTY DISCLAIMERS.  Cygnus warrants only
to [Confidential Treatment Requested] that the Product, when shipped to
[Confidential Treatment Requested] by Cygnus, will conform to the applicable
Specifications, as then in effect, and

                                     23.

<PAGE>

CGMP and FDA regulations, as applicable. Such warranty does not apply to 
Product that has been mishandled, mistreated or used or maintained or stored 
subsequent to their dispatch by Cygnus other than in conformity with Cygnus' 
instructions.

[CONFIDENTIAL TREATMENT REQUESTED]'S SOLE AND EXCLUSIVE REMEDY FOR ANY BREACH OF
THE FOREGOING WARRANTY SHALL BE REPLACEMENT BY CYGNUS  OF RETURNED
NON-CONFORMING UNITS OF PRODUCT FOR WHICH FULL DOCUMENTATION AND NOTICE OF
NON-CONFORMITY IS PROVIDED TO CYGNUS WITHIN THE PERIOD OF THE FINAL PRODUCT
SHELF-LIFE ESTABLISHED BY CYGNUS AFTER THE ORIGINAL NON-CONFORMING UNITS ARE
SHIPPED BY CYGNUS OR, AT CYGNUS' OPTION, REFUND TO [CONFIDENTIAL TREATMENT
REQUESTED] OF THE FULL PURCHASE COSTS OF THE RETURNED NON-CONFORMING UNITS OF
THE PRODUCT.  EXCEPT FOR THE FOREGOING WARRANTIES AND THE PROVISIONS OF SECTION
14, CYGNUS DOES NOT WARRANT THE MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OF THE PRODUCTS OR PERFORMANCE OF THE PRODUCTS OR NONINFRINGEMENT BY THE
PRODUCTS; DOES NOT MAKE ANY WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO
PRODUCTS, SPECIFICATIONS, SUPPORT, SERVICE OR ANYTHING ELSE AND DOES NOT MAKE
ANY WARRANTY TO [CONFIDENTIAL TREATMENT REQUESTED]'S CUSTOMERS OR AGENTS. 
CYGNUS HAS NOT AUTHORIZED ANYONE TO MAKE ANY REPRESENTATION OR WARRANTY OTHER
THAN AS PROVIDED ABOVE.

     14.  PATENT AND TRADEMARK CLAIMS AGAINST THE PARTIES.  

                                     24.

<PAGE>

          14.1   PATENT CLAIMS AGAINST [CONFIDENTIAL TREATMENT REQUESTED.  If
[Confidential Treatment Requested] receives a claim that the Product infringes
upon a valid patent, [Confidential Treatment Requested] will notify Cygnus
promptly in writing and give Cygnus all necessary information and assistance and
the exclusive authority to evaluate such claim.  If Cygnus receives a claim that
the Product infringes upon a valid patent, Cygnus will notify [Confidential
Treatment Requested] promptly in writing of the claim.  Cygnus shall have the
sole right at its cost to defend and/or settle any such claim, including but not
limited to, the right and options to (i) settle or defend against the claim,
(ii) procure the right to the intellectual property being asserted or pay a
royalty thereon; (iii) replace or modify the Product to avoid infringement; (iv)
recall the Product or (v) do any combination of the foregoing.  Provided such
timely notice has been given by [Confidential Treatment Requested], should any
court of competent jurisdiction hold the Product to be infringing, Cygnus will
pay any final judgment against [Confidential Treatment Requested] arising from
such infringement and, if the use of such Product is enjoined, Cygnus will take
at its option, one or more of the actions described in (ii), (iii) or (iv)
above.

          14.2   THE FOREGOING IS GIVEN TO [CONFIDENTIAL TREATMENT REQUESTED]
SOLELY FOR ITS BENEFIT AND IN LIEU OF, AND CYGNUS DISCLAIMS ALL OTHER WARRANTIES
OF NONINFRINGEMENT WITH RESPECT TO THE PRODUCTS.

          14.3   TRADEMARK CLAIMS.  If either party receives a claim that the
Product infringes a valid trademark, it shall notify the other of such claim. 
[Confidential Treatment Requested] shall have the sole right at its cost to
defend and/or settle any such claim, including,

                                     25.

<PAGE>

but not limited to, the right and option to (i) settle or defend against the
claim, (ii) procure a license or pay a royalty, (iii) relabel the Product to
avoid infringement, and (iv) do any combination of the foregoing.  Provided
Cygnus has given timely notice of any claim against it, [Confidential Treatment
Requested] will defend any such claim and indemnify Cygnus from and against any
and all damages, settlements or judgments rendered.

     15.  INFRINGEMENT BY THIRD PARTIES

          15.1   Cygnus shall have the initial right and option, at its sole and
absolute discretion and expense, to file and maintain lawsuits in its own name
for infringement by third parties of any intellectual property right related to
any Product.  [Confidential Treatment Requested] shall, at the request of
Cygnus, give Cygnus all reasonable assistance and cooperation in any such
proceedings.  Cygnus shall bear all expenses, including attorneys' fees,
incurred in the prosecution of any such proceeding and shall have the sole right
to any judgment or settlement obtained therein.  

          15.2   Notwithstanding Cygnus' elections hereunder, or the results or
outcome thereof, [Confidential Treatment Requested]'s obligation to make
payments to Cygnus under this Agreement shall be unaffected.  

     16.  REPRESENTATIONS AND WARRANTIES.

          16.1.  CYGNUS.  Cygnus hereby represents and warrants to [Confidential
Treatment Requested] as follows:

          (i)    Its execution and delivery of this Agreement and performance 
of its obligations under this Agreement will not violate any (a) any federal, 
state or municipal statute or regulation or any order of any court or other 
governmental department, authority, agency or

                                     26.

<PAGE>

instrumentality, or (b) any agreements with or rights of third parties.

          (ii)   All corporate action on the part of Cygnus necessary for the 
authorization, execution and delivery of this Agreement has been taken.  
Cygnus has the requisite corporate power and authority to enter into this 
Agreement and perform its obligations under the terms of this Agreement. This 
Agreement has been duly authorized, executed and delivered by Cygnus, and 
upon due execution and delivery by [Confidential Treatment Requested], this 
Agreement will be a valid and binding agreement of Cygnus, except as 
enforceability may be limited by bankruptcy, insolvency, reorganization, 
moratorium or similar laws affecting creditors' rights generally or by 
equitable principles.

          16.2   [CONFIDENTIAL TREATMENT REQUESTED].  [Confidential Treatment
Requested] hereby represents and warrants to Cygnus as follows:

          (i)    Its execution and delivery of this Agreement and performance 
of its obligations under this Agreement will not violate any (a) any federal, 
state or municipal statute or regulation or any order of any court or other 
governmental department, authority, agency or instrumentality, or (b) any 
agreements with or rights of third parties.

          (ii)   All corporate action on the part of [Confidential Treatment
Requested] necessary for the authorization, execution and delivery of this
Agreement has been taken.  [Confidential Treatment Requested] has the requisite
corporate power and authority to enter into this Agreement and perform its
obligations under the terms of this Agreement.  This Agreement has been duly
authorized, executed and delivered by [Confidential Treatment Requested], and
upon due execution and delivery by Cygnus, this Agreement will be a valid and
binding agreement of the many, except as enforceability may be limited by
bankruptcy, insolvency,

                                     27.

<PAGE>

reorganization, moratorium or similar laws affecting creditors' rights 
generally or by equitable principles.

          16.3   MUTUAL DISCLAIMER  Each party disclaims any and all
representations or warranties other than those expressly set forth in this
Section 16.

     17.  GENERAL

          17.1   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 the parties.  However, it is the intention of the parties that this
Agreement be controlling over additional or different terms of any purchase
order, confirmation, invoice or similar document, even if accepted in writing by
both parties, and that waivers and amendments shall be effective only if made by
non-pre-printed agreements 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.

          17.2   GOVERNING LAW AND LEGAL ACTIONS  This Agreement shall be 
governed by and construed under the laws of the State of North Carolina and 
the United States without regard to conflicts of laws provisions thereof and 
without regard to the United Nations Convention on Contracts for the 
International Sale of Goods.  Unless otherwise elected by Cygnus in writing 
for a particular instance (which Cygnus may do at its option), the sole 
jurisdiction and venue for actions related to the subject matter hereof shall 
be the California state and U.S. federal courts located in San Jose, 
California.  Both parties consent to the jurisdiction of

                                     28.

<PAGE>

such courts and agree that process may be served in the manner provided 
herein for giving of notices or otherwise as allowed by California state or 
U.S. federal law.  In any action or proceeding to enforce rights under this 
Agreement, the prevailing party shall be entitled to recover costs and 
attorneys' fees.

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

          17.4   NOTICES  Notices under this Agreement shall be sufficient 
only if personally delivered, delivered by a major commercial rapid delivery 
courier service or mailed by certified or registered mail, return receipt 
requested to a party at its addresses first set forth herein or as amended by 
notice pursuant to this subparagraph, to the attention of the President in 
the case of Cygnus and to the attention of the Office of General Counsel in 
the case of [Confidential Treatment Requested].  If not received sooner, 
notice by mail shall be deemed received 5 days after deposit in the U.S. or 
Canadian mails.

          17.5   ENTIRE AGREEMENT  This Agreement supersedes all proposals, 
oral or written, all negotiations, conversations, or discussions between or 
among parties relating to the subject matter of this Agreement and all past 
dealing or industry custom.

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

          17.7   BASIS OF BARGAIN.  Each party recognizes and agrees that the 
warranty disclaimers and liability and remedy limitations in this Agreement 
are material bargained for bases of this Agreement and that they have been 
taken into account and reflected in determining

                                     29.

<PAGE>

the consideration to be given by each party under this Agreement and in the 
decision by each party to enter into this Agreement.

          17.8.  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.

          17.9   ASSIGNMENT  This Agreement and the rights hereunder are not
transferable or assignable without the prior written consent of the parties
hereto; provided however that either party may assign this Agreement to any
wholly-owned subsidiary or to any successor by merger, sale or otherwise of all
or substantially all of the business or assets of the business unit to which
this Agreement relates.

          17.10  PUBLICITY AND PRESS RELEASES  Except to the extent necessary
under applicable laws or for ordinary marketing purposes, the parties agree to
devote reasonable efforts to agree upon the timing or content of press releases
or other public statements relating to the terms of this Agreement or events or
performance hereunder.  A press release announcing this Agreement will be
jointly developed and released by the parties.

          17.11  FORCE MAJEURE. No liability or loss of rights hereunder shall
result to either party from delay or failure in performance (other than payment)
caused by 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, or shortage of or inability to obtain material or
equipment.

                                     30.

<PAGE>

          17.12  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.

          17.13  LIMITATION OF CYGNUS' LIABILITY.  IN NO EVENT WILL EITHER 
PARTY BE LIABLE FOR ANY INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE 
DAMAGES IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT (INCLUDING LOSS 
OF PROFITS, USE OR OTHER ECONOMIC ADVANTAGE) NO MATTER WHAT THEORY OF 
LIABILITY, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH 
DAMAGES.

          17.14  CONSULTATION  In the event of a material change in 
circumstances which affects performance of obligations hereunder which could 
not have reasonably been foreseen by one of the parties hereto, the party 
affected may give notice in writing to the other.  The parties will endeavor 
during a twenty (20) day period thereafter to engage in negotiations and 
discussions concerning possible mutual agreement as to the response thereto.

          17.15  TIME OF ESSENCE  Time is of the essence.  

          17.16  LETTER OF INTENT.  All provisions of the LOI related to 
Nicotine are hereby deemed cancelled and rescinded.

CYGNUS, INC.                            [CONFIDENTIAL TREATMENT
                                        REQUESTED]

                                      31.

<PAGE>

By:    Stephen N. Kirnon                By   [Confidential Treatment Requested]

Name   Stephen N. Kirnon                Name [Confidential Treatment Requested]

Title  President, Drug Delivery         Title   Chairman and CEO
       Division

                                      32.

<PAGE>

                                      
                        Cygnus, Inc. - Confidential
                                      
                                 Exhibit A
                                      
                          Nicotine Product Profile
                         And Target Specifications


Drug:          Nicotine

Indication:    Smoking Cessation

[Confidential Treatment Requested] [Confidential Treatment Requested]

[Confidential Treatment Requested] [Confidential Treatment Requested]

[Confidential Treatment Requested] [Confidential Treatment Requested]

[Confidential Treatment Requested] [Confidential Treatment Requested]

[Confidential Treatment Requested] [Confidential Treatment Requested]

[Confidential Treatment Requested] [Confidential Treatment Requested]

[Confidential Treatment Requested] [Confidential Treatment Requested]

[Confidential Treatment Requested] [Confidential Treatment Requested]

[Confidential Treatment Requested] [Confidential Treatment Requested]


                                       i

<PAGE>

                        Cygnus, Inc. - Confidential
                                      
                                 Exhibit B
                                      
                          Product Development Plan

<TABLE>
<CAPTION>
                                    Estimated          Estimated Cost
                                    ---------          --------------
             Activities            Completion              ($000s)
             ----------            ----------
<S>                                <C>                 <C>

</TABLE>





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