Document:

<PAGE>

                                                                    Exhibit 10.4
                                                                    ------------

Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as **. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.

                                                                    CONFIDENTIAL
                                                                  EXECUTION COPY

                               LICENSE AGREEMENT

                                    Between

                              ADOLOR CORPORATION

                                      And

                         SB PHARMACO PUERTO RICO INC.

                                 July 26, 1999

    This document is the confidential information of both parties hereto.
  It should be distributed on a need-to-know basis and kept in a secure area.
<PAGE>

                               LICENSE AGREEMENT
                               -----------------

     THIS LICENSE AGREEMENT (hereinafter "AGREEMENT"), made as of the ____ day
of ____ 1999, between Adolor Corporation, a corporation of the State of
Delaware, having a principal place of business at 371 Phoenixville Pike,
Malvern, Pennsylvania 19355 and SB Pharmco Puerto Rico Inc., a corporation of
the Commonwealth of Puerto Rico, having a principal place of business at Road
172, KM 9.1/Bo.Certenejas, Cidra, Puerto Rico 00639,

                               WITNESSETH THAT:
                               ---------------

     WHEREAS, ADOLOR, as defined below, is the owner of all right, title and
interest or otherwise has certain rights in certain patents, identified in
APPENDIX A hereto, and know-how relating to PRODUCT; and

     WHEREAS, SB, as defined below, desires to obtain certain licenses in
certain countries of the world from ADOLOR to develop and commercialize PRODUCT
in such countries under the aforesaid patents and know-how, and ADOLOR is
willing to grant to SB such licenses;

     NOW, THEREFORE, in consideration of the covenants and obligations expressed
herein, and intending to be legally bound, and otherwise to be bound by proper
and reasonable conduct, the parties agree as follows:

1.   DEFINITIONS
     -----------

     1.01.  "ADOLOR" shall mean Adolor Corporation, a corporation of the State
of Delaware, having a principal place of business at 371 Phoenixville Pike,
Malvern, Pennsylvania 19355.

     1.02.  "ADOLOR FIELD" shall mean all uses of COMPOUND for the prophylaxis,
treatment and/or palliation of any INDICATION in animals including humans, in
any delivery form, including, but not limited to, all transdermal delivery forms
and parenteral administration,

                                      -2-
<PAGE>

except that topical uses of COMPOUND in humans in the ADOLOR FIELD shall be
limited to those related to:

               (i)   any ophthalmic INDICATION;

               (ii)  treatment of pain following dermal peels, laser procedures,
          or any other dermatology procedure provided COMPOUND is used
          exclusively by a health-care professional during the course of such
          treatment in a health-care setting;

               (iii) any oral, nasal, or otic cavity INDICATION; and

               (iv)  treatment of burns, abrasions, wounds, other cutaneous
          injuries and cutaneous infections, provided that the COMPOUND is
          formulated in combination with an antiinfective, is a prescription
          product, and is exclusively promoted by or on behalf of ADOLOR in
          hospital/emergency room settings or hospital burn centers.

               COMPOUNDS employed for the treatments under Paragraphs 1.02(ii)
          and (iv) shall be referred to as ADOLOR Topical Dermal Products.

   1.03.  "AFFILIATES" shall mean any corporation, firm, partnership or other
entity, whether de jure or de facto, which directly or indirectly owns, is owned
by or is under common ownership with a party to this AGREEMENT to the extent of
at least fifty percent (50%) of the equity (or such lesser percentage which is
the maximum allowed to be owned by a foreign corporation in a particular
jurisdiction) having the power to vote on or direct the affairs of the entity
and any person, firm, partnership, corporation or other entity actually
controlled by, controlling or under common control with such party.

   1.04.  "COMPOUND" shall mean any compound which is the subject of a PATENT
owned or controlled by ADOLOR at any time up to the fifth (5/th/) anniversary of
the EFFECTIVE DATE which is a peripherally selective mu opiate receptor agonist
without

                                      -3-
<PAGE>

significant central nervous system effects, or a prodrug or metabolite thereof,
or a peripherally selective mu opiate receptor agonist compound which inhibits
the production or function of Tumor Necrosis Factor (TNF) or other cytokines, or
prodrug or metabolite thereof. Examples of such compounds include, without
limitation, loperamide, diphenoxin, diphenoxylate, desmethyl-loperamide and
loperamide N-oxide and all esters, salts, hydrates, solvates, polymorphs and
isomers thereof which are structurally related to the compounds disclosed in the
PATENTS. A 'peripherally selective mu opiate receptor agonist' as used in this
paragraph means any mu opiate receptor agonist compound that has a selectivity
ratio of at least 30 fold (expressed as Ki ratio) for the human mu opioid
receptor versus human delta or kappa opiod receptors in standard opioid receptor
binding assays such as the Chinese Hamster Ovary (CHO), cloned human opioid
receptor binding assay, and is equal to or greater than diphenoxylate in
peripheral selectivity.

     1.05.  "COPYRIGHTS" shall mean any and all material that may be subject
to copyright protection and/or registration, including, but not limited to,
designs, graphics, logos, colors, and text, and any combinations thereof.

     1.06.  "EFFECTIVE DATE" shall mean the date upon which this AGREEMENT is
effective and shall be the date of this AGREEMENT first written above.

     1.07.  "FIELD" shall mean all dermal topical uses of PRODUCT for the
prophylaxis, treatment and/or palliation of any INDICATION in humans except for
those topical uses within the ADOLOR FIELD.

     1.08.  "INDICATION" shall mean the specific treatment or prevention of a
disease or one or more symptoms for a PRODUCT as an RX PRODUCT or an OTC PRODUCT
for use in the FIELD in the TERRITORY.

     1.09.  "KNOW-HOW" shall mean all present and future ADOLOR technical
information and know-how for PRODUCT in the FIELD which is confidential or is
not in the public domain and shall include, without limitation, all biological,
chemical, pharmacological,

                                      -4-
<PAGE>

toxicological, clinical, assay, control and manufacturing data and any other
information for PRODUCT in the FIELD and useful for the development and
commercialization of PRODUCT in the FIELD.

     1.10.   "**" shall mean an RX PRODUCT or OTC PRODUCT, depending on context,
for the relief of **, such as, but not limited to, those ** associated with **.
The scope of the term ** shall not include any PRODUCT for the treatment of **
pain associated with ** or **. The scope of the term ** shall not include any
TOPICAL ITCH PRODUCT.

     1.11.   "NET SALES" shall mean the gross invoices representing sales of
PRODUCT in the FIELD in the TERRITORY under this AGREEMENT by SB, its
AFFILIATES, and sublicensees ("the Selling Party"): (a) in finished product form
(i.e., packaged and labeled for sale to the ultimate consumer); and (b) in any
product form other than finished product form (such as bulk stage material ready
for conversion to final form) to distributors who subsequently convert such
product into finished product form and sell to THIRD PARTIES who are not
AFFILIATES of SB, its AFFILIATES or its or their sublicensees (and such
distributors shall not be considered sublicensees for the purposes of this NET
SALES definition unless in fact sublicensees or, if SB, its AFFILIATES, or its
or their sublicensees, share in the proceeds of the sale by the distributor and,
further provided that, for the purposes of this Paragraph, such sales of PRODUCT
in final stage bulk material form shall only occur where such sales are due to
local country requirements as such requirements are determined by SB); less
deductions actually allowed or specifically allocated to PRODUCT by the Selling
Party using U.S. generally accepted accounting principles for:

               (i)   transportation charges, including insurance, for
          transporting PRODUCT;

               (ii)  sales and excise taxes and duties and any other
          governmental charges imposed upon the production, importation, use or
          sale of such PRODUCT;

               (iii) trade, quantity and cash discounts;

**=Certain information on this page has been omitted and filed separately with
   the Commission. Confidential treatment has been requested with respect to
   the omitted portions.

                                      -5-
<PAGE>

               (iv)  allowances or credits to customers on account of rejection
          or return of PRODUCT or on account of retroactive price reductions
          affecting PRODUCT;

               (v)   PRODUCT rebates and PRODUCT charge backs, including those
          granted to managed-care entities and government agencies; and

               (vi)  bad debt actually incurred.

Sales between SB, its AFFILIATES and its or their sublicensees shall be excluded
from the computation of NET SALES and no royalties will be payable on such sales
unless the PRODUCT is administered or used by the party.

    1.12. "OTC PRODUCT" shall mean a PRODUCT in the FIELD which is not an RX
PRODUCT.

    1.13. "PATENTS" shall mean all patents and patent applications in the FIELD
which are or become owned by ADOLOR, or to which ADOLOR otherwise has, now or in
the future, the right to grant licenses, which generically or specifically claim
PRODUCT, a process for manufacturing PRODUCT, an intermediate use in such
process or a use of PRODUCT. Included within the definition of PATENTS are all
continuations, continuations-in-part, divisions, patents of addition, reissues,
renewals or extensions thereof and all SPCs. Also included within the definition
of PATENTS are any patents or patent applications in the FIELD which generically
or specifically claim any improvements on PRODUCT or intermediates or
manufacturing processes required or useful for production of PRODUCT which are
developed by ADOLOR, or which ADOLOR otherwise has the right to grant licenses,
now or in the future, during the term of this AGREEMENT.

The current list of patent applications and patents encompassed within PATENTS
is set forth in APPENDIX A attached hereto.

    1.14. "PRODUCT" shall mean a composition or formulation containing
COMPOUND for use in the FIELD.

                                      -6-
<PAGE>

     1.15. "RX PRODUCT" shall mean a PRODUCT in the FIELD in respect of which,
as a matter of law and/or regulation, the regulatory authorities in the country
in which it is purchased require a prescription from a physician or other
health-care professional to enable the consumer to purchase the product in such
country.

     1.16. "SB" shall mean SB Pharmco Puerto Rico Inc., a corporation of the
Commonwealth of Puerto Rico, having a principal place of business at Road 172,
KM 9.1/Bo.Certenejas, Cidra, Puerto Rico 00639.

     1.17. "SPC" shall mean a right based upon a PATENT to exclude others
from making, using or selling PRODUCT, such as a Supplementary Protection
Certificate.

     1.18. "TERRITORY" shall mean all the countries and territories in the
world except for South Korea, People's Republic of North Korea, or any
subsequent unification of such two countries.

     1.19. "TOPICAL ITCH PRODUCT" shall mean an RX PRODUCT or OTC PRODUCT,
depending on context, for the relief of itching, such as, but not limited to,
itching associated with skin irritations and/or rashes due to eczema, psoriasis,
insect bites, poison ivy, poison oak, poison sumac, sunburn, soaps, detergents,
cosmetics, and jewelry, as well as external vaginal or rectal itch.  The scope
of the term TOPICAL ITCH PRODUCT shall not include any ** PRODUCT or ** PRODUCT.

     1.20. "TRADE DRESS" shall mean any and all designs, colors, graphics and
TRADEMARKS of the PRODUCT packaging, these elements either separately or
together in combination thereof.

     1.21. "TRADEMARK(S)" shall mean any and all words, phrases, slogans,
designs, logos and combinations thereof used as an indication of source of the
PRODUCT or associated services.

     1.22. "THIRD PARTY(IES)" shall mean any party other than SB and ADOLOR.

**=Certain information on this page has been omitted and filed separately with
   the Commission. Confidential treatment has been requested with respect to
   the omitted portions.

                                      -7-
<PAGE>

     1.23. "UNAFFILIATED EXPERT" shall mean an individual who (i) is not a
current employee or director of, or consultant to, one of the parties or of an
entity which currently has a commercial alliance with one of the parties, (ii)
has disclosed any previous affiliation with one of the parties of the type
described in clause (i) of this Paragraph, (iii) is mutually acceptable to the
parties, and (iv) has suitable expertise on the topic in question.

     1.24. "U.S.A." shall mean the United States of America and all of its
territories and possessions.

2.   GRANT
     -----

     2.01. Subject to Paragraph 2.03, ADOLOR hereby grants to SB an exclusive
license, with the right to grant sublicenses, under PATENTS and KNOW-HOW to
make, have made, use, sell, offer for sale, and import PRODUCT in the FIELD in
the TERRITORY subject to the other terms and conditions of this AGREEMENT. The
rights to make, have made, use and sell shall include all activities concerning
the subject matter of PATENTS and KNOW-HOW which activities would, but for the
license herein granted, infringe PATENTS and KNOW-HOW.

     2.02. In the event that SB determines that it needs a copromotion partner
for PRODUCT in the U.S.A. during the term of the AGREEMENT, SB shall notify
ADOLOR in writing, and ADOLOR shall have the first right to negotiate with SB
for the right to be such copromotion partner, but if SB and ADOLOR have failed
to agree to sign a binding agreement with respect to such copromotion within
ninety (90) days after ADOLOR's receipt of such notice, then SB shall thereafter
be free to negotiate and enter into such a copromotion agreement with a THIRD
PARTY.

     2.03. All AFFILIATES and sublicensees of SB shall be bound by SB to observe
and perform the relevant terms and conditions contained in this AGREEMENT. A
breach of this AGREEMENT by such AFFILIATE or sublicensee shall be deemed to be
a breach by SB.

                                      -8-
<PAGE>

     2.04. In the event that ADOLOR develops a formulation for COMPOUND which is
for a topical form of COMPOUND in the ADOLOR FIELD, and provided that:

           (a)  ADOLOR developed such formulation without any analysis of any
                PRODUCT independently developed by SB; and

           (b)  ADOLOR developed such formulation prior to the publication of
                any patent owned by SB, or literature authored or authorized by
                SB, which discloses such formulation,

then, in the event that SB subsequently owns any patents which cover such
formulation, ADOLOR will automatically have a royalty free exclusive license in
the ADOLOR FIELD with the right to grant sublicenses, under such patents, to
make, have made, use, sell, offer for sale, and import a topical form of
COMPOUND in such a formulation in the ADOLOR FIELD in the TERRITORY and South
and North Korea.  If ADOLOR has not carried out such independent formulation
development work as described in the preceding sentence but SB owns patents
which cover a formulation for COMPOUND which would have use as a topical form of
COMPOUND in the ADOLOR FIELD, and such patents arose as a result of SB's work
under this AGREEMENT, SB shall grant to ADOLOR an exclusive license in the
ADOLOR FIELD, with the right to grant sublicenses, under such patents, to make,
have made, use, sell, offer for sale, and import a topical form of COMPOUND in
such a formulation in the ADOLOR FIELD in the TERRITORY and South and North
Korea upon royalty terms to be negotiated and agreed in good faith by the
parties at the time.  ADOLOR warrants and represents that they will not
knowingly analyze any formulation of COMPOUND supplied by SB to any THIRD PARTY,
such as, without limitation, a clinician, during the course of this AGREEMENT.

3.   PAYMENTS AND ROYALTIES
     ----------------------

     3.01. In consideration for the license under PATENTS and KNOW-HOW granted
to SB in this AGREEMENT and subject to the provisions of this Agreement
including but not limited to Paragraph 3.11, SB shall make the following
milestone payments to ADOLOR, in the specified incremental amounts, within
thirty (30) days after the occurrence of the following milestones:

                                      -9-
<PAGE>

     (a)        EFFECTIVE DATE                                   $  500,000

     (b)        The first to occur of First Rx
                INDICATION or Direct OTC INDICATION

          (1)   **                                               $       **
          (2)   **                                               $       **
          (3)   **                                               $       **
          (4)   **                                               $       **
          (5)   **                                               $       **
          (6)   **                                               $       **
          (7)   **                                               $       **
          (8)   **                                               $       **

     (c)        Second Rx INDICATION

          (1)   **                                               $       **
          (2)   **                                               $       **
          (3)   **                                               $       **
          (4)   **                                               $       **
          (5)   **                                               $       **

     (d)        Each of Third and Fourth Rx INDICATIONs

          (1)   **                                               $       **
          (2)   **                                               $       **
          (3)   **                                               $       **
          (4)   **                                               $       **
          (5)   **                                               $       **

     (e)        Each of Fifth and Sixth Rx INDICATIONs

          (1)   **                                               $       **
          (2)   **                                               $       **
          (3)   **                                               $       **
          (4)   **                                               $       **
          (5)   **                                               $       **

     (f)        **                                               $       **

     (g)        **                                               $       **

     (h)        **                                               $       **

provided that:

**=Certain information on this page has been omitted and filed separately with
   the Commission. Confidential treatment has been requested with respect to
   the omitted portions.

                                      -10-
<PAGE>

     (1)  each such payment shall be made only one time based on the first time
          a milestone is achieved, regardless of how many times such milestone
          is achieved (except as otherwise provided by Paragraphs 3.01(f), and
          no payment shall be owed for a milestone which is not reached. For
          Paragraph 3.01(h), SB shall not be required to make more than ** (**)
          such payments totaling $ **;

     (2)  each such payment shall be non-refundable;

     (3)  the term "**" shall mean the earlier to occur of (i) SB's
          determination after the last patient has completed his/her last visit
          ** that such study was successful, or (ii) SB's decision to continue
          development of the PRODUCT **;

     (4)  the term "**" shall mean, with respect to the relevant INDICATION
          which is the subject of the study, the earlier to occur of (i) the
          date on which SB determines that ** was successful, or (ii) SB's
          decision to **.

     (5)  the term "**" shall mean with respect to the relevant INDICATION which
          is the subject of the study the earlier to occur of (i) the date on
          which SB determines that ** was successful, or (ii) SB's decision to
          **.

     (6)  the term "**" as used in this Paragraph shall mean the **.

     (7)  the term "**" as used in this Paragraph shall mean the ** required for
          the filing of a New Drug Application (hereinafter "NDA") with the U.S.
          Food and Drug Administration (hereinafter "FDA") or the corresponding
          regulatory agency in other countries for PRODUCT for the relevant
          INDICATION which is the subject of the study as defined in 21 CFR
          (S)312.21(c);

     (8)  the term "NDA Acceptance" shall mean, with respect to each INDICATION,
          the earlier of (i) written notice of acceptance from the FDA of the
          NDA filed by or on behalf of SB under this AGREEMENT necessary for
          commercialization of PRODUCT for the relevant, whichever is
          appropriate, or (ii) sixty (60) days

**=Certain information on this page has been omitted and filed separately with
   the Commission. Confidential treatment has been requested with respect to
   the omitted portions.

                                      -11-
<PAGE>

          following filing of such NDA with the FDA, assuming that SB has not
          received a "Notice of Refusal to File" from the FDA with respect to
          such NDA.

     (9)  the term "**", shall mean with respect to each INDICATION, the **.

     (10) the term "EU" shall mean the European Economic Union provided that in
          the event the relevant milestone occurs in a country which is within
          the EU at such time, but is not any of the United Kingdom, France or
          Germany, then SB shall owe only fifty percent (50%) of the relevant
          milestone payment, and the other fifty percent (50%) shall be owed at
          the time the relevant milestone occurs in the earliest of the United
          Kingdom, France or Germany.

     (11) the term "**" shall mean the first PRODUCT which meets the stated
          milestones **;

     (12) the term "**" shall mean a PRODUCT which is approved for ** in the
          relevant geographic area;

     (13) the terms "Second", "Third", "Fourth", "Fifth" and "Sixth" as applied
          to the term "Rx INDICATION" shall mean a PRODUCT which meets the
          stated milestones provided that such PRODUCT is either ** which has
          not already been subject to milestone payments under Paragraph 3.01 or
          is a ** for which another ** has not already been subject to milestone
          payments under Paragraph 3.01. The terms assume that the **.

     (14) the term "**" shall mean an RX PRODUCT which **;

     (15) the term "**" shall mean, with respect to the relevant INDICATION in
          the relevant geographical location, the FDA's (or relevant regulatory
          agency's) approval of an NDA (or its equivalent) filed by or on behalf
          of SB for marketing the relevant ** for such INDICATION.

     (16) The term "**" shall mean an OTC PRODUCT which **.

**=Certain information on this page has been omitted and filed separately with
   the Commission. Confidential treatment has been requested with respect to
   the omitted portions.

                                      -12-
<PAGE>

     (17)  TOPICAL ITCH PRODUCT and ** each constitute a single and separate
           INDICATION, unless if for the TOPICAL ITCH PRODUCT or the **, a
           different PRODUCT is sold for some of the INDICATIONS included within
           the definition of TOPICAL ITCH PRODUCT or ** using the same TRADEMARK
           in the same country as is used for the TOPICAL ITCH PRODUCT or **,
           then the different PRODUCT shall not be considered as a separate
           INDICATION unless the different PRODUCT is a Combination Rx PRODUCT
           or a Combination OTC PRODUCT.

     (18)  The term "NDA Approval" shall mean approval for marketing by the FDA
           or its equivalent in the particular geographic location, including
           all requisite manufacturing, pricing and reimbursement approvals for
           the relevant PRODUCT for the relevant INDICATION.

     (19)  The term "**" shall mean the earlier of **.

     (20)  **. For the avoidance of doubt, Exhibits One and Two of APPENDIX D to
           this AGREEMENT provide examples of how this Paragraph 3.01(19) shall
           operate.

     3.02. As further consideration for the license under PATENTS granted
to SB under this AGREEMENT, and subject to the provisions of this AGREEMENT
including but not limited to Paragraph 3.11, SB shall make the following royalty
payments to ADOLOR:

     ** % (** percent) of annual NET SALES of all RX PRODUCT up to and including
** U.S. dollars (less than or equal to U.S. $**); and

     ** % (** percent) of annual NET SALES of all RX PRODUCT in excess of **
U.S. dollars (greater than U.S. $**); provided that, for purposes of this
Paragraph 3.02, achievement of the NET SALES of RX PRODUCT thresholds recited
above shall be determined by adding the total annual NET SALES of all RX
PRODUCTS in all countries of the TERRITORY in which there is (a) a granted and
enforceable PATENT which claims the relevant RX PRODUCT at the time

**=Certain information on this page has been omitted and filed separately with
   the Commission. Confidential treatment has been requested with respect to
   the omitted portions.

                                      -13-
<PAGE>

such NET SALES occur, or (b) a pending PATENT which claims the relevant RX
PRODUCT at the time such NET SALES occur, provided that the national filing date
for such PATENT is not greater than five (5) years prior to the time such NET
SALES occur.

     3.03. As further consideration for the license to KNOW-HOW granted to SB
under this AGREEMENT, SB shall pay to ADOLOR **% (** percent) of annual NET
SALES of RX PRODUCT in those countries of the TERRITORY which are not subject to
the royalty obligation outlined in Paragraph 3.02.

     3.04. As further consideration for the license under PATENTS granted to SB
under this AGREEMENT, SB shall make the following royalty payments to ADOLOR:

     ** % (** percent) of annual NET SALES of all OTC PRODUCTS up to and
including ** U.S. dollars (less than or equal to U.S. $**);

     ** % (** percent) of annual NET SALES of all OTC PRODUCTS in excess of **
U.S. dollars (greater than U.S. $**) up to and including ** U.S. dollars
(less than or equal to U.S. $**); and

     ** % (** percent) of annual NET SALES of all OTC PRODUCTS in excess of **
U.S. dollars (greater than U.S. $**); provided that, for purposes of this
Paragraph, achievement of the NET SALES of OTC PRODUCT thresholds recited above
shall be determined by adding the total annual NET SALES of the particular OTC
PRODUCT in all countries of the TERRITORY in which there is (a) a granted and
enforceable PATENT which claims the relevant OTC PRODUCT at the time such NET
SALES occur, or (b) a pending PATENT which claims the relevant OTC PRODUCT at
the time such NET SALES occur, provided that the national filing date for such
PATENT is not greater than five (5) years prior to the time such NET SALES
occur.

     3.05. As further consideration for the license to KNOW-HOW granted to SB
under this AGREEMENT, and subject to the provisions of this AGREEMENT including
but not limited to Paragraph 3.11, SB shall pay to ADOLOR ** % (** percent) of
annual NET SALES of OTC

**=Certain information on this page has been omitted and filed separately with
   the Commission. Confidential treatment has been requested with respect to
   the omitted portions.

                                      -14-
<PAGE>

PRODUCT in those countries of the TERRITORY which are not subject to the royalty
obligation outlined in Paragraph 3.04.

     3.06. An appropriate downward adjustment of the royalties outlined in
Paragraphs 3.02 through 3.05, whichever are relevant, for NET SALES of OTC
PRODUCT formulated with a concentration of greater than ** percent (** %) of the
therapeutically active ingredient shall be mutually agreed upon, when
appropriate, in good faith, by the parties.

     3.07. An appropriate downward adjustment of the royalties outlined in
Paragraphs 3.02, 3.03, 3,04 and 3.05 for NET SALES of PRODUCT formulated in
combination with one or more additional therapeutically active ingredients shall
be mutually agreed upon, when appropriate, in good faith, by the parties.

     3.08. SB's royalty obligations under Paragraph 3.02 or 3.04, whichever is
relevant, shall become effective in each country in the TERRITORY at such time
as the relevant PRODUCT is commercially Launched in such country by SB, its
AFFILIATES, or its sublicensees. SB's royalty obligations under Paragraph 3.03
or 3.05, whichever is relevant, shall become effective in each country in the
TERRITORY at the Launch of the relevant PRODUCT in such country by SB, its
AFFILIATES or its sublicensees;

     3.09. (a) In the event that any person or party initiates any legal or
administrative proceeding challenging the validity, scope or enforceability of a
PATENT by opposing the grant of the PATENT in the European Patent Office then
the royalty obligation on NET SALES for such PRODUCT in any country governed by
such PATENT outlined in Paragraph 3.02 or 3.04, whichever is relevant, shall not
be applicable to NET SALES of such PRODUCT in such country during the pendency
of the proceeding provided there is Substantial Competition for the PRODUCT and
there are no other PATENTS covering the PRODUCT, and the royalty obligation in
Paragraph 3.03 or 3.05, whichever is relevant, shall be applicable to NET SALES
of such PRODUCT in such country during the pendency of the proceeding.

**=Certain information on this page has been omitted and filed separately with
   the Commission. Confidential treatment has been requested with respect to
   the omitted portions.

                                      -15-
<PAGE>

           (b)  ** .

           (c)  If the enforceability of at least one claim claiming PRODUCT in
the PATENT under challenge in accordance with Paragraph 3.09(a) is upheld by the
European Patent Office front which no appeal is or can be taken, then the
royalty obligation in Paragraph 3.02 or 3.04, whichever is relevant, shall
thereafter be applicable.

           (d)  If all claims in the PATENT claiming PRODUCT are held to be
invalid or otherwise unenforceable by the European Patent Office from which no
appeal is or can be taken, then no further royalties under Paragraph 3.02 or
3.04, whichever is relevant, shall be owed with respect to the sale of such
PRODUCT in such country, and the royalty obligation in Paragraph 3.03 or 3.05,
whichever is relevant, shall be applicable to NET SALES of such PRODUCT in such
country, and SB shall retain the licenses granted herein.

     3.10. SB and ADOLOR hereby acknowledge that if SB determines in good faith
that with respect to a particular PRODUCT, the amount of each of any of the
milestones and/or royalty payments to be made by SB to ADOLOR under this Article
3 would render the commercialization of such PRODUCT commercially unfeasible, SB
shall promptly notify ADOLOR in writing and the parties shall promptly negotiate
in good faith an appropriate downward adjustment to such milestone and/or
royalty payments that would still allow both parties to receive adequate
remuneration for such PRODUCT.

4.   COMPULSORY LICENSES AND THIRD PARTY LICENSES
     --------------------------------------------

     4.01. In the event that a governmental agency in any country or territory
grants or compels ADOLOR to grant a license to any THIRD PARTY for PRODUCT, SB
shall have the benefit in such country or territory of the terms granted to such
THIRD PARTY to the extent that such terms are more favorable than those of this
AGREEMENT.

     4.02. If, during the term of this AGREEMENT, SB, in its sole discretion,
deems it necessary to seek a license from any THIRD PARTY in order to avoid
infringement during the

**=Certain information on this page has been omitted and filed separately with
   the Commission. Confidential treatment has been requested with respect to
   the omitted portions.

                                     -16-
<PAGE>

exercise of the license herein granted, provided that such license is related to
the making, use, or sale of the COMPOUND and/or use of the COMPOUND which is
claimed in such THIRD PARTY'S patent in such country, then ** percent (** %) of
any royalties or other fees paid to such THIRD PARTY under such license may be
deducted from royalties otherwise due ADOLOR for the same PRODUCT covered by a
claim of a PATENT under Paragraphs 3.02 or 3.04 of this AGREEMENT, provided in
no event shall such deduction reduce the royalties otherwise payable to ADOLOR
during any calendar year by more than ** percent (** %) provided that any excess
deduction shall be carried over into subsequent years of the AGREEMENT until the
full deduction is taken.

5.   DEVELOPMENT AND SUPPLY OF PRODUCT
     ---------------------------------

     5.01. (a) As of the EFFECTIVE DATE, and during the term of the AGREEMENT,
SB shall have full control and authority, with full responsibility over
research, development, registration and commercialization of PRODUCT in the
FIELD in the TERRITORY. All such activity shall be undertaken at SB's expense.
SB will exercise its reasonable efforts and diligence in developing and
commercializing PRODUCT, and in undertaking investigations and actions required
to obtain appropriate governmental approvals to market PRODUCT in the TERRITORY,
using efforts and resources normally used by SB for a compound owned by it or to
which it has rights which is of similar market potential at a similar stage in
its product life, taking into account the competitiveness of the marketplace,
the proprietary position of the compound, the regulatory structure involved, the
profitability of the applicable products, and other relevant factors including,
without limitation, technical, legal, scientific or medical factors, provided
that SB's development of PRODUCT as a TOPICAL ITCH PRODUCT following the
respective relevant achievements of ** (as defined in Paragraph 3.01(3)) shall
be in accordance with the Outline Development Plan which is attached hereto as
APPENDIX C and fully incorporated into this AGREEMENT as though fully set out
herein. All regulatory timelines and

**=Certain information on this page has been omitted and filed separately with
   the Commission. Confidential treatment has been requested with respect to
   the omitted portions.

                                      -17-
<PAGE>

proposed studies contained in such Outline Development Plan may be amended by SB
as necessary to appropriately account for any medical, scientific or regulatory
factors and/or changes or delays which are beyond SB's reasonable direct control

           (b)  In the event that SB has not initiated the development of a
PRODUCT in the FIELD to be delivered either **, whichever is relevant, within **
(**) years after the flat commercial Launch in the TERRITORY of a TOPICAL ITCH
PRODUCT in the form of the first OTC PRODUCT (such non-developed PRODUCT(s)
hereinafter referred to in this Paragraph 5.01(b) as "non-developed
PRODUCT(s)"), then such non-developed PRODUCT(s) shall become part of the ADOLOR
FIELD.

           (c)  In the event that SB has not initiated the development of a
PRODUCT in the FIELD for the treatment of ** within ** years after the Launch
in the TERRITORY of the first OTC PRODUCT, then the scope of the FIELD shall
thereafter exclude all PRODUCTS for the treatment of ** and such PRODUCT shall
become part of the ADOLOR FIELD.

           (d)  If, in respect of a **, SB decides to cease development, or has
not initiated development within **, then SB shall communicate such decision to
ADOLOR and the parties shall then meet to discuss in good faith the excluding of
** from the scope of the FIELD and such ** then forming part of the ADOLOR
FIELD.

           (e)  For any PRODUCT in the FIELD for which NDA Approval has been
received for an INDICATION but which has not been the subject of a Launch within
the TERRITORY within one (1) year of such NDA Approval then, unless the delay
can be attributed to medical, scientific, regulatory or other changes or delays
which are beyond SB's reasonable control, such PRODUCT for said INDICATION shall
no longer be in the scope of the FIELD and shall become part of the ADOLOR
FIELD.

     5.02. (a)  SB shall provide ADOLOR with a brief summary in writing of SB's
progress in respect of the preclinical and clinical development of PRODUCT (but
not, for the

**=Certain information on this page has been omitted and filed separately with
   the Commission. Confidential treatment has been requested with respect to
   the omitted portions.

                                      -18-
<PAGE>

avoidance of doubt, any technical information on any formulation(s) of PRODUCT)
and SB's efforts to commercialize PRODUCT in the TERRITORY on a quarterly basis.

           (b)  Subject to ADOLOR's obligations to a THIRD PARTY, ADOLOR shall
provide SB with a brief summary in writing of ADOLOR's progress in respect of
the pre-clinical and clinical development and commercialization of PRODUCT
either in the FIELD outside of the TERRITORY or for ADOLOR's Topical Dermal
Products anywhere in the world (but not, for the avoidance of doubt, any
technical information on any formulation(s) of such PRODUCT) on a quarterly
basis.

     5.03. ADOLOR shall provide to SB, at SB's request, reasonable technical
assistance within its area of expertise concerning preclinical and clinical
development, registration, production and commercialization of PRODUCT in the
FIELD, including, without limitation, technical assistance related to PRODUCT
formulation and safety data integration. Provision of such technical assistance
shall include, but not be limited to, visits by ADOLOR. personnel to SB, at
ADOLOR's expense if such visits are within the Commonwealth of Pennsylvania, the
State of New Jersey and the State of Delaware, and at SB's expense everywhere
else, and visits by SB personnel to ADOLOR, at SB's expense, at times and for
periods of time upon which the parties will agree, and supply any KNOW-HOW that
SB may require.

     5.04. SB shall be responsible for supplying all of SB's, its AFFILIATES'
and its and their sublicensee's and distributor's requirements of PRODUCT in all
countries of the TERRITORY during the term of this AGREEMENT. SB shall have no
obligation to supply any of ADOLOR's, its AFFILIATES' or its sublicensee's or
distributor's requirements of PRODUCT anywhere in the world during or after the
term of this AGREEMENT.

     5.05. All PRODUCT in the FIELD sold by SB, its AFFILIATES and its or their
sublicensees or distributors in the TERRITORY under this AGREEMENT shall bear a
legend on

                                      -19-
<PAGE>

its packaging stating that such PRODUCT is sold under a license from ADOLOR, to
the extent such legend is legally permissible.

     5.06. SB and ADOLOR shall promptly, and in accordance with the relevant
regulatory requirements, inform the other party of any safety information,
including, but not limited to, any adverse drug reactions regarding COMPOUND or
PRODUCT.

6.   EXCHANGE OF INFORMATION AND CONFIDENTIALITY
     -------------------------------------------

     6.01. Promptly after the date of this AGREEMENT first written above, ADOLOR
shall disclose and supply to SB all KNOW-HOW. Thereafter, ADOLOR shall promptly
disclose and supply to SB any further KNOW-HOW which may become known to ADOLOR.
All KNOW-HOW disclosed to SB is confidential information and shall be governed
by the provisions of Paragraph 6.03.

     6.02. The responsibilities of the parties for reporting of adverse drug
experiences related to PRODUCT to regulatory authorities throughout the
TERRITORY shall be performed in accordance with the pharmacovigilance agreement
attached to this AGREEMENT as APPENDIX B.

     6.03. During the term of this AGREEMENT and for five (5) years thereafter,
irrespective of any termination earlier than the expiration of the term of this
AGREEMENT, ADOLOR and SB shall not use or reveal or disclose to THIRD PARTIES
any confidential information received from the other party without first
obtaining the written consent of the disclosing party, except as may be
otherwise provided herein (including, but not limited to, the grant of any
rights by SB to ADOLOR under Paragraph 10.4(b) in which case ADOLOR would be
entitled to use such confidential information if necessary to exercise such
rights and/or reveal or disclose such confidential information to any THIRD
PARTY subject to and in accordance with the same conditions of confidentiality
as are contained herein), or as may be required for the purposes of
investigating, developing, manufacturing or marketing PRODUCT or for securing

                                      -20-
<PAGE>

essential or desirable authorizations, privileges or rights from governmental
agencies, or is required to be disclosed to a governmental agency or is
necessary to file or prosecute patent applications concerning PRODUCT or to
carry out any litigation concerning PRODUCT. Prior to such disclosure, the party
obliged to disclose the other party's confidential information shall promptly
inform the other party of the potential disclosure and work diligently to avoid
such disclosure or to obtain confidential treatment of such confidential
information. This confidentiality obligation shall not apply to such information
which is or becomes a matter of public knowledge, or is already in the
possession of the receiving party, or is disclosed to the receiving party by a
THIRD PARTY having the right to do so, or is subsequently and independently
developed by employees of the receiving party or AFFILIATES thereof who had no
knowledge of the confidential information disclosed, or is required by law to be
disclosed. The parties shall take reasonable measures to assure that no
unauthorized use or disclosure is made by others to whom access to such
information is granted. Either party may disclose confidential information
received from the other party hereunder to THIRD PARTIES to the extent necessary
to perform its obligations under this AGREEMENT, provided such THIRD PARTIES
execute confidentiality agreements containing terms no less strict than those
contained herein.

     6.04. Nothing herein shall be construed as preventing SB from disclosing
any information received from ADOLOR hereunder to an AFFILIATE, sublicensee or
distributor of SB, provided, in the case of a sublicensee or distributor, such
sublicensee or distributor has undertaken a similar obligation of
confidentiality with respect to the confidential information.

     6.05. All confidential information disclosed by one party to the other
shall remain the intellectual property of the disclosing party. In the event
that a court or other legal or administrative tribunal, directly or through an
appointed master, trustee or receiver, assumes partial or complete control over
the assets of a party to this AGREEMENT based on the

                                      -21-
<PAGE>

insolvency or bankruptcy of such party, the bankrupt or insolvent party shall
promptly notify the court or other tribunal (i) that confidential information
received from the other party under this AGREEMENT remains the property of the
other party and (ii) of the confidentiality obligations under this AGREEMENT. In
addition, the bankrupt or insolvent party shall, to the extent permitted by law,
take all steps necessary or desirable to maintain the confidentiality of the
other party's confidential information and to ensure that the court, other
tribunal or appointee maintains such information in confidence in accordance
with the terms of this AGREEMENT.

     6.06.  No public announcement or other disclosure to THIRD PARTIES
concerning the terms of this AGREEMENT shall be made, either directly or
indirectly, by any party to this AGREEMENT, except as may be legally required or
as may be required for recording purposes, without first obtaining the approval
of the other party and agreement upon the nature and text of such announcement
or disclosure. Such approval shall not be unreasonably withheld or delayed. The
parties will agree to a press release which can be released by ADOLOR on or
after the EFFECTIVE DATE. The party desiring to make any such public
announcement or other disclosure shall inform the other party of the proposed
announcement or disclosure in reasonably sufficient time prior to public
release, and shall provide the other party with a written copy thereof, in order
to allow such other party to comment upon such announcement or disclosure. Each
party agrees that it shall cooperate fully with the other with respect to all
disclosures regarding this AGREEMENT to the Securities Exchange Commission and
any other governmental or regulatory agencies, including requests for
confidential treatment of proprietary information of either party included in
any such disclosure. Notwithstanding any other provision of this AGREEMENT, each
party may disclose the terms of this AGREEMENT to lenders, investment bankers
and other financial institutions ("THIRD PARTY Lender") of its choice solely for
purposes of financing the business operations of such party either (i) upon the
written consent of the other party or (ii) if the disclosing party obtains,
using reasonable commercial

                                      -22-
<PAGE>

efforts, a signed confidentiality agreement with such financial institution with
respect to such information, such agreement to contain the following:

            (a)  The THIRD PARTY Lender shall hold the information disclosed to
it by such party ("Loan Information") in strict confidence and shall use
diligent efforts, which shall not in any event be less than the THIRD PARTY
Lender uses to prevent unauthorized use or disclosure of its own valuable,
confidential information, to prevent any unauthorized use or disclosure of such
Loan Information.

            (b)  The THIRD PARTY Lender shall not, without the prior written
consent of such party, use the Loan Information disclosed to it for any purpose
of other than the use for which such Loan Information was disclosed by such
party.

            (c)  Upon completion of the authorized use by such THIRD PARTY
Lender and in the absence of any further agreement between the Parties, the
THIRD PARTY Lender shall cease all use and make no further use of the Loan
Information and shall, upon written request from such party, promptly return all
Loan Information to such party.

     6.07.  ADOLOR warrants and represents that it will not knowingly do
anything which will harm the development and/or commercialization of PRODUCT in
the FIELD as a result of ADOLOR's development and/or commercialization of
PRODUCT outside of the FIELD, or in the FIELD outside of the TERRITORY. The
contribution of each party shall be noted in all publications or presentations
by acknowledgment or coauthorship, whichever is appropriate.

     6.08.  Nothing in this AGREEMENT shall be construed as preventing or in any
way inhibiting either party from complying with statutory and regulatory
requirements governing the development, manufacture, use and sale or other
distribution of products containing COMPOUND in any manner which it reasonably
deems appropriate, including, for example, by disclosing to regulatory
authorities confidential or other information received from the other party or
THIRD PARTIES.

                                      -23-
<PAGE>

7.    PATENT PROSECUTION AND LITIGATION
      ---------------------------------

      7.01.  Each party shall have and retain sole and exclusive title to all
inventions or discoveries conceived by and know-how, including but not limited
to any KNOW-HOW, made or generated by, its employees, agents, or other persons
acting under its authority in the course of or as a result of this AGREEMENT.
Each party shall own a fifty percent (50%) undivided interest in all such
inventions, discoveries and know-how made, conceived, or generated jointly by
employees, agents, or other persons acting under the authority of both parties
in the course of or as a result of this AGREEMENT. However, for inventions,
discoveries and know-how jointly owned by the parties, ADOLOR shall have a
royalty-free exclusive license with the right to sublicense in the ADOLOR FIELD
and SB shall have a royalty-free exclusive license with the right to sublicense
in the FIELD. Except as expressly provided in this AGREEMENT, and to the extent
legally permitted, each joint owner may make, use, sell, keep, license, assign,
or mortgage such jointly owned inventions, discoveries and know-how, and
otherwise undertake all activities a sole owner might undertake with respect to
such inventions, discoveries and know-how, without the consent of and without
accounting to the other joint owner.

      7.02.  (a)  ADOLOR warrants and represents that it has disclosed to SB the
complete texts of all PATENTS filed by or otherwise controlled by ADOLOR as of
the EFFECTIVE DATE in the TERRITORY (including, but not limited to, method and
use claims relating to PRODUCT) as well as all information received as of the
EFFECTIVE DATE concerning the institution or possible institution of any
interference, opposition, re-examination, reissue, revocation, nullification or
any official proceeding involving a PATENT anywhere in the TERRITORY, ADOLOR
further warrants and represents that it will disclose to SB the complete texts
of all PATENTS filed by or otherwise controlled by ADOLOR after the EFFECTIVE
DATE in the TERRITORY as well as all information received after the EFFECTIVE
DATE concerning the institution or possible institution any interference,
opposition, re-examination,

                                      -24-
<PAGE>

reissue, revocation, nullification or any official proceeding involving a PATENT
(the "Administrative Proceedings") anywhere in the TERRITORY. SB shall have the
right to review all such PATENTS and other proceedings relating thereto and make
recommendations to ADOLOR concerning them and their conduct. ADOLOR agrees to
keep SB promptly and fully informed of the course of patent prosecution or other
proceedings including by providing SB with copies of substantive communications,
search reports and THIRD PARTY observations submitted to or received from patent
offices throughout the TERRITORY. SB shall provide such patent consultation to
ADOLOR at no cost to ADOLOR. SB shall hold all information disclosed to it under
this Paragraph 7.02 as the confidential information of ADOLOR subject to the
provisions of Paragraphs 6.03 and 6.04.

             (b)  On or after the date the milestone referred to in Paragraph
3.01 (b)(2) (`**') has been achieved in accordance with the terms of Paragraph
3.01(3), SB shall assist in the defraying of out of pocket costs incurred
thereafter by ADOLOR relating to the preparation, prosecution, Administrative
Proceeding and maintenance of PATENTS ("Patent Costs") subject to, and in
accordance with, the following terms:

                  (i)  the Patent Costs must first be approved by SB (such
             approval not to be unreasonably withheld) prior to being incurred;

                  (ii) subject to Paragraph 7.02(b)(iii), if such Patent Costs
             are approved in accordance with Paragraph 7.02(b)(i), then SB and
             ADOLOR shall each pay fifty percent (50%) of the total amount of
             such Patent Costs provided however that if PATENTS which are the
             subject matter of such Patent Costs are, or have been, licensed to
             one or more THIRD PARTIES outside of the FIELD, then SB's
             obligation under this Paragraph 7.02(b)(ii) to pay fifty percent
             (50%) of the total amount of such Patent Costs ("the SB Total
             Contribution") shall be reduced such that SB's amended contribution
             ("the SB Reduced Contribution") then equates to

**=Certain information on this page has been omitted and filed separately with
   the Commission. Confidential treatment has been requested with respect to
   the omitted portions.

                                      -25-
<PAGE>

               an amount equivalent to [the SB Total Contribution] divided by
               (the number of such THIRD PARTIES plus one].

For the avoidance of doubt, if any Patent Costs are not approved by SB under
Paragraph 7.02(b)(i) then this Paragraph 7.02(b) shall not apply and all such
Patent Costs shall be the sole responsibility of ADOLOR.

              (c)  Subject to any THIRD PARTY agreement, at SB's sole discretion
and option, SB can assume the preparation, prosecution, Administrative
Proceeding and maintenance of any PATENT not licensed by ADOLOR to a THIRD PARTY
and SB shall thereafter keep ADOLOR promptly and fully informed of the course of
patent prosecution or other proceedings including providing ADOLOR with copies
of substantial communications, search reports and THIRD PARTY observations
submitted to received from patent offices throughout the TERRITORY. SB shall
provide such patent services at no cost to ADOLOR. SB shall hold all information
disclosed to it under this Paragraph 7.02 as the confidential information of
ADOLOR subject to the provisions of Paragraphs 6.03 and 6.04. However, if ADOLOR
subsequently licenses to a THIRD PARTY one or more PATENTS for which SB has
assumed responsibility under this Paragraph 7.02(c), ADOLOR shall thereafter
assume responsibility for such newly licensed PATENTS, including, subject to
Paragraph 7.02(b), all costs relating thereto.

     7.03.    SB shall have the right, but not the obligation, to assume
responsibility for any PATENT or any part of a PATENT which ADOLOR intends to
abandon or otherwise cause or allow to be forfeited.  ADOLOR shall give SB
reasonable written notice prior to abandonment or other forfeiture of any PATENT
or any part of a PATENT so as to permit SB to exercise its rights under this
Paragraph and, further, for the avoidance of doubt, such PATENT or any part of a
PATENT, shall not thereafter be royalty bearing under this AGREEMENT.

                                      -26-
<PAGE>

     7.04.  In the event of the institution of any suit by a THIRD PARTY against
ADOLOR, SB or its AFFILIATES, sublicensees or distributors for patent
infringement involving the manufacture, use, sale, distribution or marketing of
PRODUCT in the FIELD by, or on behalf of, SB under this AGREEMENT anywhere in
the TERRITORY, the party sued shall promptly notify the other party in writing.
The conduct of the defense to any such suit shall be determined by SB and at its
own expense and the provisions of Paragraph 12.07 shall apply. ADOLOR shall
provide reasonable non-monetary assistance to SB and reasonably cooperate in any
such litigation at SB's request without expense to the requesting party.

     7.05.  In the event that ADOLOR or SB becomes aware of actual or threatened
infringement of a PATENT anywhere in the TERRITORY, that party shall promptly
notify the other party in writing. Subject to any THIRD PARTY agreement, SB
shall have the first right, but not the obligation, to bring, at its own
expense, an infringement action against any THIRD PARTY for a PRODUCT in the
FIELD and to use ADOLOR's name in connection therewith and to name ADOLOR as a
party thereto, but only to the extent that SB is not precluded from doing so by
an agreement between ADOLOR and a THIRD PARTY. If SB does not commence a
particular infringement action within ninety (90) days of receipt of the notice
of infringement, then ADOLOR, after noticing SB in writing, shall be entitled to
bring such infringement action at its own expense. The party conducting such
action shall have full control over its conduct, including settlement thereof
subject to Paragraph 7.07. SB and ADOLOR shall have the right but not the
obligation, to join in any such infringement action or in an action or claim of
PATENT invalidity or unenforceability in which event any recovery shall be
shared in proportion to the out-of-pocket THIRD PARTY litigation costs,
including attorneys fees, incurred by SB and ADOLOR. In any event, ADOLOR and SB
shall provide reasonable assistance to one another and shall reasonably
cooperate in any such litigation at the other's request without expense to the
requesting party.

                                      -27-
<PAGE>

     7.06.  ADOLOR and SB shall recover their respective actual out-of-pocket
expenses, or equitable proportions thereof, associated with any litigation or
settlement thereof from any recovery made by any party. In the event that SB was
the party which controlled the litigation or settlement, any excess amount shall
be shared equally between SB and ADOLOR, provided in no event shall ADOLOR's
share of the excess amount exceed the royalties which would otherwise be due
ADOLOR for the sales of PRODUCT that were the subject of the litigation had such
sales been made by SB, its AFFILIATES or its sublicensees under this AGREEMENT.
In the event that ADOLOR was the party which controlled the litigation or
settlement because SB was precluded from doing so by an agreement between ADOLOR
and a THIRD PARTY, any excess amount shall be shared equally between SB and
ADOLOR., provided in no event shall ADOLOR's share of the excess amount exceed
the royalties which would otherwise be due ADOLOR for the sales of PRODUCT that
were the subject of the litigation had such sales been made by SB, its
AFFILIATES or its sublicensees under this AGREEMENT. In the event that ADOLOR
was the party which controlled the litigation or settlement for any reason
except because SB was precluded from doing so by an agreement between ADOLOR and
a THIRD PARTY, any excess amount shall be retained by ADOLOR. In the event SB
and ADOLOR both joined in the litigation, the provisions of Paragraph 7.05 shall
apply.

     7.07.  The parties shall keep one another informed of the status of and of
their respective activities regarding any litigation or settlement thereof
concerning PATENTS, provided however that no settlement or consent judgment or
other voluntary final disposition of any suit defended or action brought by a
party pursuant to this Article 7 may be entered into without the consent of the
other party if such settlement would require the other party to be subject to an
injunction or to make a monetary payment or would otherwise adversely affect the
other party's rights under this AGREEMENT.

                                      -28-
<PAGE>

     7.08.  Notwithstanding ADOLOR's independent right to seek extensions of the
term of PATENTS in any country of the TERRITORY, ADOLOR shall be obliged to seek
extensions of the term of PATENTS, at SB's request and expense, in any country
of the TERRITORY and in this latter case SB shall provide to ADOLOR any
information necessary for such purpose; provided however that SB shall have the
right to extend the term of any of its own patents covering PRODUCT in any
country of the TERRITORY instead of extending the term of PATENTS.

     7.09.  Notwithstanding ADOLOR's independent right to obtain SPCs based on
PATENTS in any country of the TERRITORY, ADOLOR shall be obliged to seek to
obtain SPCs based on PATENTS, at SB's request and expense, in any country of the
TERRITORY, and, where necessary, SB shall provide to ADOLOR any information
necessary for such purpose; provided however that SB shall have the right to
seek to obtain SPCs based on any of its own patents covering PRODUCT in any
country of the TERRITORY instead of seeking to obtain SPCs based on PATENTS.

     7.10.  Notwithstanding ADOLOR'S independent right to obtain "pipeline"
protection for PATENTS, at SB's request and expense, ADOLOR shall cooperate with
SB to obtain "pipeline" protection for PATENTS which may be available under the
patent laws of countries in the TERRITORY in which the patent laws thereof are
amended to provide improved protection for PRODUCT.

8.   TRADEMARKS
     ----------

     8.01.  SB shall be responsible for the selection of all TRADEMARKS, TRADE
DRESS, packaging, selling marks (e.g., taglines and slogan marks), and
advertising which it employs in connection with PRODUCT in the FIELD in the
TERRITORY and shall own and control such TRADEMARKS, TRADE DRESS, packaging,
selling marks (e.g., taglines and slogan marks), and advertising. SB shall be
responsible for registration and maintenance of all such

                                      -29-
<PAGE>

TRADEMARKS. Nothing in this AGREEMENT shall be construed as a grant of rights,
by license or otherwise, to ADOLOR to use such TRADEMARKS or any other
TRADEMARKS owned by SB for any purpose or to use such packaging, selling marks
(e.g., taglines and slogan marks), or advertising for any purpose. SB shall own
such tradenames and TRADEMARKS, TRADE DRESS, packaging, selling marks (e.g.,
taglines and slogan marks), and advertising, and shall retain such ownership
upon termination or expiration of this AGREEMENT. ADOLOR acknowledges SB's
ownership of the TRADEMARKS, TRADE DRESS, packaging, selling marks (e.g.,
taglines and slogan marks), and advertising, as well as any COPYRIGHTS therein,
and agrees that it will do nothing inconsistent with such ownership, and agrees
that nothing in this AGREEMENT shall give ADOLOR any right, title or interest in
the TRADEMARKS, TRADE DRESS, packaging, selling marks (e.g., taglines and slogan
marks), and advertising. If SB's rights to PRODUCT in the FIELD are terminated
in accordance with this AGREEMENT in a particular country, ADOLOR shall not be
permitted to use SB's TRADEMARKS, TRADE DRESS, packaging, selling marks (e.g.,
taglines and slogan marks), or advertising with respect to PRODUCT in such
country, and shall not permit its subsequent licensees to use SB's TRADEMARKS,
TRADE DRESS, packaging, selling marks (e.g., taglines and slogan marks), or
advertising with respect to PRODUCT in such country.

     8.02.  With respect to the TRADEMARKS selected by SB under Paragraph 8.01
for PRODUCT in the FIELD in the TERRITORY, subsequent to adoption by SB by use
in commerce or by an application for an intent to use, ADOLOR, its AFFILIATES
and sublicensees shall not adopt, use, or register any acronym, trademark,
tradename, service mark or other marketing name or any confusingly similar mark
or symbol and/or design as part of ADOLOR's or its AFFILIATE's own trademark or
tradename for PRODUCT in the FIELD outside of the TERRITORY or for PRODUCT
outside of the FIELD in the TERRITORY. With respect to the packaging or selling
marks (e.g., taglines and slogan marks) selected by SB for

                                      -30-
<PAGE>

PRODUCT in the FIELD in the TERRITORY, ADOLOR, its AFFILIATES and its
sublicensees shall not adopt or use any confusingly similar TRADE DRESS
packaging or selling marks (e.g., taglines and slogan marks) as part of ADOLOR's
or its AFFILIATE's own TRADE DRESS packaging or selling marks (e.g., taglines
and slogan marks) for PRODUCT in the FIELD outside of the TERRITORY or for
PRODUCT outside of the FIELD.

9.   STATEMENTS AND REMITTANCES
     --------------------------

     9.01.  SB shall keep and require its AFFILIATES, sublicensees and
distributors to keep complete and accurate records of all sales of PRODUCT under
the licenses granted herein. ADOLOR shall have the right, at ADOLOR's expense,
through a certified public accountant or like person reasonably acceptable to
SB, to examine such records during regular business hours during the life of
this AGREEMENT and for six (6) months after its termination; provided, however,
that such examination shall not take place more often than once a year and shall
not cover such records for more than the preceding two (2) years, unless a
material discrepancy is found, and provided further that such accountant shall
report to ADOLOR only as to the accuracy of the royalty statements and payments.
In the event such audit reveals an underpayment of five percent (5%) or more of
the amount actually due, SB shall reimburse ADOLOR for the costs of such audit
in addition to promptly remitting to ADOLOR the amount of any underpayment along
with liquidated damages at the annual rate of the prime rate (as published in
the Wall Street Journal plus two percent (2%) pro rated for each month or
    -------------------
portion thereof for the period of such underpayment. In the event such audit
reveals an overpayment of five percent (5%) or more of the amount actually due,
ADOLOR shall promptly reimburse such amount to SB.

     9.02.  All royalties due under this AGREEMENT shall be payable in U.S.
Dollars. If governmental regulations prevent remittances from a foreign country
with respect to sales made in that country, ADOLOR shall receive payment in that
country in local currency.

                                      -31-
<PAGE>

     9.03.  Any tax, duty or other levy paid or required to be withheld by SB on
account of royalties payable to ADOLOR under this AGREEMENT shall be deducted
from the amount of royalties otherwise due.  SB shall secure and send to ADOLOR
proof of any such taxes, duties or other levies withheld and paid by SB or its
sublicensees for the benefit of ADOLOR.

     9.04.  Monetary conversions from the currency of a foreign country, in
which PRODUCT is sold, into U.S. dollars shall be made at the official exchange
rate in force in that country for financial transactions on the last business
day of the calendar quarter for which the royalties are being paid. If there is
no such official exchange rate, the conversion shall be made at the rate for
such remittances on that date as certified by Citibank, N.A., New York, New
York, U.S.A.

     9.05.  Royalty obligations due to SB under Paragraph 10.04(c) of this
AGREEMENT shall be treated as follows:

            (a)  royalty obligations due to SB under Paragraph 10.04(c) of this
AGREEMENT for each PRODUCT shall expire in each country of the TERRITORY upon
the later of the expiration of all patents licensed to ADOLOR under Paragraph
10.04(b) which cover such PRODUCT or ten (10) years from the date of first
marketing of any such PRODUCT by ADOLOR or it's licensee in any country.
Termination of royalty obligations to SB under Paragraph 10.04(c) of this
AGREEMENT shall not preclude ADOLOR or its permitted licensees from making,
having made, use or sale of such PRODUCT in the FIELD in such country and to use
the know-how licensed to ADOLOR under Paragraph 10.04(b) in such country without
further royalty payments or other compensation to SB.

            (b)  ADOLOR shall keep and require its licensees to keep complete
and accurate records of all sales of PRODUCT under Paragraph 10.04(c) of this
AGREEMENT. SB shall have the right, at SB's expense, through a certified public
accountant or like person reasonably acceptable to ADOLOR, to examine such
records during regular business hours

                                      -32-
<PAGE>

during the duration of ADOLOR's royalty obligation to SB under Paragraph
10.04(c) of this AGREEMENT and for six (6) months after its termination;
provided, however, that such examination shall not take place more often than
once a year and shall not cover such records for more than the preceding two (2)
years, unless a material discrepancy is found, and provided further that such
accountant shall report to SB only as to the accuracy of the royalty statements
and payments. In the event such audit reveals an underpayment of five percent
(5%) or more of the amount actually due, ADOLOR shall reimburse SB for the costs
of such audit in addition to promptly remitting to SB the amount of any
underpayment along with liquidated damages at the annual rate of the prime rate
as published in the Wall Street Journal plus two percent (2%) pro rated for each
                    -------------------
month or portion thereof for the period of such underpayment. In the event such
audit reveals an overpayment of five percent (5%) or more of the amount actually
due, SB shall promptly reimburse such amount to ADOLOR;

             (c)  Within sixty (60) days after the close of each calendar
quarter, ADOLOR shall deliver to SB a true accounting of all PRODUCT sold by
ADOLOR and its licensees under Paragraph 10.04(c) of this AGREEMENT during such
quarter and shall at the same time pay all royalties due. Such accounting shall
show sales on a country-by-country and PRODUCT-by-PRODUCT basis.

             (d)  Any tax, duty or other levy paid or required to be withheld by
ADOLOR on account of royalties payable to SB under Paragraph 10.04(c) of this
AGREEMENT shall be deducted from the amount of royalties otherwise due. ADOLOR
shall secure and send to SB written proof of any such taxes withheld and paid by
ADOLOR or its sublicensees for the benefit of SB.

             (e)  All royalties due under Paragraph 10.04(c) of this AGREEMENT
shall be payable in U.S. dollars. If governmental regulations prevent
remittances from a foreign country

                                      -33-
<PAGE>

with respect to sales made in that country. SB shall receive payment in that
country in local currency.

             (f)  Monetary conversions from the currency of a foreign country,
in which PRODUCT is sold, into U.S. dollars shall be made at the official
exchange rate in force in that country for financial transactions on the last
business day of the calendar quarter for which the royalties are being paid. If
there is no such official exchange rate, the conversion shall be made at the
rate for such remittances on that date as certified by Citibank, N.A., New York,
New York, U.S.A.

10.  TERM AND TERMINATION
     --------------------

     10.01.  (a)  Royalty obligations under Paragraph 3.02 or 3.04, whichever
is relevant, in each country of the TERRITORY shall expire upon the expiration
or invalidation of the last remaining licensed PATENT in such country which
claims the PRODUCT sold.  Expiration of SB's royalty obligations under Paragraph
3.02 or 3.04, whichever is relevant, for a particular PRODUCT under this
provision shall not preclude SB from continuing to market such PRODUCT and to
use KNOW-HOW in such country without further royalty payments or any other
remuneration to ADOLOR, except to the extent that Paragraph 3.03 or 3.05,
whichever is relevant, is still applicable to the NET SALES of the particular
PRODUCT in the particular country.

             (b)  (i)  Royalty obligations under Paragraph 3.03 in each country
shall expire upon the earlier of: (a) ten (10) years from the date of first
marketing in such country, or (b) in the European Economic Union only, when all
KNOW-HOW used by SB in the making, using or selling of PRODUCT has become
publicly known otherwise than through the fault of SB or an undertaking
connected therewith. Expiration of SB's royalty obligations for a particular
PRODUCT under this provision shall not preclude SB from continuing to market
such

                                      -34-
<PAGE>

PRODUCT and to use KNOW-HOW in such country without further royalty payments or
any other remuneration to ADOLOR

                  (ii) Royalty obligations under Paragraph 3.05 in each country
             shall expire upon the earlier of: (a) fifteen (15) years from the
             date of first marketing in such country, or (b) in the European
             Economic Union only, when all KNOW-HOW used by SB in the making,
             using or selling of PRODUCT has become publicly known otherwise
             than through the fault of SB or an undertaking connected therewith.
             Expiration of SB's royalty obligations for a particular PRODUCT
             under this provision shall not preclude SB from continuing to
             market such PRODUCT and to use KNOW-HOW in such country without
             further royalty payments or any other remuneration to ADOLOR.

     10.02.  Unless otherwise terminated, this AGREEMENT shall expire upon the
later of (a) the expiration, lapse or invalidation of the last remaining PATENT
in the TERRITORY which claims PRODUCT, or (b) SB's last obligation to pay
royalties under Paragraphs 3.03 or 3.05.  Expiration of this AGREEMENT under
this provision shall not preclude SB from continuing to make, have made, use and
sell PRODUCT and to use KNOW-HOW in the TERRITORY without further royalty
payments or any other remuneration to ADOLOR.

     10.03.  If either party materially fails or neglects to perform covenants
or provisions of this AGREEMENT and if such default is not corrected within
sixty (60) days after receiving written notice from the other party with respect
to such default, such other party shall have the right to terminate this
AGREEMENT by giving written notice to the party in default provided the notice
of termination is given within six (6) months of the default and prior to
correction of the default.

     10.04.  (a)  SB may terminate this AGREEMENT on a country by country basis,
in its entirety, or on a PRODUCT by PRODUCT basis, by giving ADOLOR at least
thirty (30) days

                                      -35-
<PAGE>

written notice thereof at any time before SB first markets PRODUCT in such
country based on a reasonable determination by SB, using the same standards SB
would use in assessing whether or not to continue development of a product of
its own making that the patent, medical/scientific, technical, regulatory or
commercial profile of PRODUCT does not justify continued development of PRODUCT
in such country. After marketing PRODUCT, SB may terminate this AGREEMENT on a
country by country basis, or in its entirety, or on a PRODUCT by PRODUCT basis
by giving ADOLOR at least six (6) months prior written notice thereof based on a
reasonable determination by SB, using the same standards SB would use in
assessing whether or not to continue marketing of a product of its own making,
that the patent, medical/scientific, technical, regulatory or commercial profile
of PRODUCT does not justify continued development of PRODUCT in such country.
Termination of this AGREEMENT for all PRODUCTS in all countries of the TERRITORY
shall constitute a termination of this AGREEMENT in its entirety.

             (b)  In the event that this AGREEMENT is terminated by SB under
Paragraph 10.04(a) in one or more countries of the TERRITORY, in its entirety,
or for one or more PRODUCTS, or SB's rights to certain PRODUCTS in the FIELD are
terminated in accordance with Paragraph 5.01, all rights granted to SB under
this AGREEMENT in such countries or for such PRODUCTS shall revert to ADOLOR and
shall become part of the ADOLOR FIELD, and ADOLOR shall automatically be
granted, subject to any prior license rights granted by a THIRD PARTY to SB, an
exclusive license, with a right to sublicense, under all patents and know-how
owned by SB at the time of termination in such countries to make, have made,
use, sell, offer for sale and import the PRODUCT in the FIELD in such countries,
but only to the extent that such patents and know-how arose as a result of work
done by SB in relation to such PRODUCT or PRODUCTS in the FIELD under this
AGREEMENT, and ADOLOR shall have no rights to any other patents or know-how
owned by SB, and provided that such exclusive license shall be

                                      -36-
<PAGE>

subject to SB's rights outlined in Paragraph 10.04(c). In addition, at ADOLOR's
election, either (i) SB will transfer to ADOLOR any regulatory filings made by
SB or its permitted sublicensees in such countries, or (ii) ADOLOR and/or its
THIRD PARTY licensees will have a right of reference to any regulatory filings
made by SB or its permitted sublicensees in such countries to the extent legally
permitted. ADOLOR shall thereafter be free to develop and commercialize the
PRODUCT without limitation or further obligation to SB in such countries,
subject to SB's rights outlined under Paragraph 10.04(c). In addition, SB shall
promptly provide ADOLOR, with the SB Transfer Documents (as defined below),
which ADOLOR may use as ADOLOR sees fit and which ADOLOR may provide to a THIRD
PARTY licensee for use in continuing development and commercialization of the
PRODUCT in the FIELD in such countries. ADOLOR shall reimburse SB for all out-
of-pocket expenses paid to THIRD PARTIES incurred by SB in the provision of such
Transfer Documents to ADOLOR within thirty (30) days after receipt of SB's
invoice therefor. For purposes of this Paragraph, "SB Transfer Documents" shall
mean: (i) a copy of all protocols prepared by or on behalf of SB and regulatory
filings made by or on behalf of SB under this AGREEMENT; (ii) a copy of all
reports on non-clinical and clinical studies sponsored by SB under this
AGREEMENT which have been filed or prepared for filing with the regulatory
authorities; (iii) the data underlying any non-clinical and clinical database
owned by SB in computer-readable form if readily available in a non-proprietary
format, and (iv) a copy of all case report forms for patients enrolled in
clinical studies sponsored by SB for which no report has been prepared at the
time of termination.

             (c)  In the event that, in accordance with Paragraph 10.04(b),
ADOLOR promotes PRODUCT in the FIELD in a country on its own, or grants such
right to a THIRD PARTY, as consideration for SB's investment in the development
of PRODUCT in the FIELD, ADOLOR will pay SB royalties on Adolor Net Sales as
follows on a PRODUCT by PRODUCT basis:

                                      -37-
<PAGE>

                  (i)    ** percent (**%) of Adolor Net Sales if, at the time of
             termination, there exists an ** by SB for PRODUCT in the FIELD;

                  (ii)   ** percent (**%) of Adolor Net Sales if, at the time of
             termination, ** have been completed by SB;

                  (iii)  ** percent (**%) of Adolor Net Sales if, at the time of
             termination, ** have been completed by SB;

                  (iv)   ** percent (**%) of Adolor Net Sales if, at the time of
             termination, ** have been completed by SB; or

                  (v)    ** percent (**%) of Adolor Net Sales if, at the time of
             termination, ** have been completed by SB;

provided that royalty obligations due to SB under this paragraph shall be made
in accordance with Paragraph 9.05 of this AGREEMENT.  The term "Adolor Net
Sales" as used in this provision shall have the same meaning as NET SALES except
that the gross receipts used in the calculation of Adolor Net Sales shall
represent sales of PRODUCT in the FIELD in such countries by ADOLOR, its
AFFILIATES and its sublicensees and the provisions of Paragraphs 3.06, 3.07,
3.09, 3.11, 4.01 and 4.02 shall apply as if such provisions related to PRODUCT
sold by ADOLOR, its AFFILIATES and sublicensees and not SB, its AFFILIATES and
sublicensees.  The royalties under Paragraph 10.04(c)(i)-(iv) shall not be owed
to SB for a milestone, if the milestone was achieved by ADOLOR as of the
EFFECTIVE DATE.

     10.05.  Either party may terminate this AGREEMENT if, at any time, the
other party shall file in any court or agency pursuant to any statute or
regulation of any state or country, a petition in bankruptcy or insolvency or
for reorganization or for an arrangement or for the appointment of a receiver or
trustee of the party or of its assets, or if the other party proposes a written
agreement of composition or extension of its debts, or if the other party shall
be served with an involuntary petition against it, filed in any insolvency
proceeding, and such petition shall

**=Certain information on this page has been omitted and filed separately with
   the Commission. Confidential treatment has been requested with respect to
   the omitted portions.

                                      -38-
<PAGE>

not be dismissed with sixty (60) days after the filing thereof, or if the other
party shall propose or be a party to any dissolution or liquidation, or if the
other party shall make an assignment for the benefit of creditors.

     10.06.  Notwithstanding the bankruptcy of ADOLOR, or the impairment of
performance by ADOLOR of its obligations under this AGREEMENT as a result of
bankruptcy or insolvency of ADOLOR, SB shall be entitled to retain the licenses
granted herein, subject to ADOLOR's rights to terminate ibis AGREEMENT for
reasons other than bankruptcy or insolvency as expressly provided in this
AGREEMENT.

     10.07.  All rights and distribution rights granted under or pursuant to
this AGREEMENT by ADOLOR to SB are, and shall otherwise be deemed to be, for
purposes of Section 365(n) of the U.S.  Bankruptcy Code, licenses of rights to
"intellectual property" as defined under Section 101(52) of the U.S.  Bankruptcy
Code.  The parties agree that SB, as a licensee of such rights under this
AGREEMENT, shall retain and may fully exercise all of its rights and elections
under the U.S.  Bankruptcy Code, subject to performance by SB of its preexisting
obligations under this AGREEMENT.  The parties further agree that, in the event
of the commencement of a bankruptcy proceeding by or against ADOLOR under the
U.S.  Bankruptcy Code, SB shall be entitled to a complete duplicate of (or
complete access to, as appropriate) any such intellectual property and all
embodiments of such intellectual property, and same, if not already in its
possession, shall be promptly delivered to SB (a) upon any such commencement of
a bankruptcy proceeding upon written request therefor by SB, unless ADOLOR
elects to continue to perform all of its obligations under this AGREEMENT, or
(b) if not delivered under (a) above, upon the rejection of this AGREEMENT by or
on behalf of ADOLOR upon written request therefor by SB, provided, however, that
upon ADOLOR's (or its successor's) written notification to SB that it is again
willing and able to perform all of its obligations under this AGREEMENT, SB
shall promptly return all such tangible materials to ADOLOR, but only to the
extent that SB does not

                                      -39-
<PAGE>

require continued access to such materials to enable SB to perform its
obligations under this AGREEMENT.

11.  RIGHTS AND DUTIES UPON TERMINATION
     ----------------------------------

     11.01.  Upon termination of this AGREEMENT, ADOLOR shall have the right to
retain any sums already paid by SB hereunder, and SB shall pay all sums accrued
hereunder which are then due.

     11.02.  Upon termination of this AGREEMENT, SB undertakes not to use any
KNOW-HOW provided to SB by ADOLOR under this AGREEMENT, except as may be
otherwise provided in this AGREEMENT. Furthermore, promptly after the effective
date of such termination, SB shall return all tangible KNOW-HOW to ADOLOR to the
extent that such is practicable. Nothing in this provision shall be construed as
superseding SB's rights to use KNOW-HOW upon the expiration of this AGREEMENT as
outlined in Paragraphs 10.01 and 10.02.

     11.03.  Upon termination of this AGREEMENT in its entirety or with respect
to any PRODUCT in any country under Paragraphs 10.03, 10.04, or 10.05, SB shall
notify ADOLOR of the amount of PRODUCT SB, its AFFILIATES, sublicensees and
distributors then have on hand, the sale of which would, but for the
termination, be subject to royalty, and SB, its AFFILIATES, sublicensees and
distributors shall thereupon be permitted to sell that amount of PRODUCT
provided that SB shall pay the royalty thereon at the time herein provided for.

     11.04.  Termination of this AGREEMENT shall terminate all outstanding
obligations and liabilities between the parties arising from this AGREEMENT
except those described in Articles 6, 9, 10, 11 and 14 and Paragraphs 7.04,
12.07, 12.08, 12.09 and 12.10, and any other obligations otherwise provided by
this AGREEMENT which have accrued. In addition, any other provision required to
interpret and enforce the parties' rights and obligations under this AGREEMENT

                                      -40-
<PAGE>

shall also survive, but only to the extent required for the full observation and
performance of this AGREEMENT.

     11.05.  Termination of the AGREEMENT in accordance with the provisions
hereof shall not limit remedies which may be otherwise available in law or
equity.

12.  WARRANTIES AND REPRESENTATIONS
     ------------------------------

     12.01.  ADOLOR warrants and represents that it owns or otherwise controls
the entire right, title and interest in the PATENTS listed in APPENDIX A, or
filed by or on behalf of ADOLOR pursuant to Section 7, and the KNOW-HOW provided
to SB under this AGREEMENT, and that it otherwise has the right to enter into
this AGREEMENT.  ADOLOR further warrants and represents that it will not
encumber any such PATENTS and KNOW-HOW with liens, mortgages, security interests
which impair SB's rights.  ADOLOR further warrants and represents that there is
nothing in any THIRD PARTY agreement ADOLOR has entered into as of the EFFECTIVE
DATE which, in any way, will limit ADOLOR's ability to perform all of the
obligations undertaken by ADOLOR hereunder, and that it will not enter into any
AGREEMENT after the EFFECTIVE DATE under which ADOLOR would incur any such
limitations.

     12.02.  Nothing in this AGREEMENT shall be construed as a warranty that
PATENTS are valid or enforceable as of the EFFECTIVE DATE, or that they will be
so during the effective term of this AGREEMENT.  ADOLOR hereby warrants and
represents that it has no present knowledge as of the EFFECTIVE DATE from which
it can be inferred that PATENTS are invalid or that their exercise would
infringe patent rights of THIRD PARTIES.

     12.03.  ADOLOR warrants and represents that it has not, up through and
including the EFFECTIVE DATE, omitted to furnish SB with any information in its
possession concerning PRODUCT in the FIELD or the transactions contemplated by
this AGREEMENT, which would

                                      -41-
<PAGE>

be material to SB's decision to enter into this AGREEMENT and to undertake the
commitments and obligations set forth herein.

     12.04.  ADOLOR warrants and represents that it has no present knowledge of
the existence of any pre-clinical or clinical data or information concerning the
PRODUCT which it has not provided to SB prior to the EFFECTIVE DATE which
suggests that there may exist quality, toxicity, safety and/or efficacy concerns
which may materially impair the utility and/or safety of the PRODUCT.

     12.05.  ADOLOR warrants and represents that it will not knowingly engage in
any activity regarding development of PRODUCT in the FIELD outside of the
TERRITORY or for ADOLOR's Topical Dermal Products, including, but not limited
to, publication of preclinical or clinical data for PRODUCT or ADOLOR's Topical
Dermal Product, which is or ought to be recognized by ADOLOR as posing a present
or potential harm to the development of PRODUCT in any country of the TERRITORY.
Subject to any agreements entered into prior to the EFFECTIVE DATE, ADOLOR
further warrants that it will use its reasonable commercial efforts to require
all of its AFFILIATES and sublicensees of PRODUCT in the FIELD outside of the
TERRITORY or ADOLOR's Topical Dermal Product to enter in a binding agreement
with ADOLOR which contains the same warranty and representation as outlined in
this Paragraph. ADOLOR further warrants and represents that neither it nor its
AFFILIATES, licensees or other agents shall promote the PRODUCT described in
Paragraph 1.02(iv) except in the manner expressly set forth in such Paragraph.
All gross receipts from the sale of PRODUCT described in Paragraph 1.02(iv)
which are attributable to a breach of this warranty or representation shall be
promptly paid by ADOLOR to SB after receipt by ADOLOR from SB of written
evidence of the amount of such sales.

     12.06.  ADOLOR warrants and represents that it:

                                      -42-
<PAGE>

             (a)  has received all necessary consents and waivers, in writing,
which ADOLOR requires from any other THIRD PARTY by virtue of the rights granted
to SB under this AGREEMENT;

             (b)  shall pay all royalties or other sums and other payments which
ADOLOR may owe to any THIRD PARTY by virtue of this AGREEMENT, and shall perform
and observe all of the other obligations outlined in all present and future
agreements between ADOLOR and any THIRD PARTY which are in any way related to
ADOLOR's ability to grant the rights granted to SB under this AGREEMENT or to
ADOLOR's ability to perform its obligations to SB under this AGREEMENT; and

             (c)  has received no notices that it is in breach of its
obligations under its agreements with any THIRD PARTY which are in any way
related to ADOLOR's ability to grant the rights granted to SB under this
AGREEMENT or to ADOLOR's ability to perform its obligations to SB under this
AGREEMENT. In the event that ADOLOR receives notice from any such THIRD PARTY
that ADOLOR has committed a breach of its obligations under any such agreement,
or if ADOLOR anticipates such breach, such as may give rise to a right by such
THIRD PARTY to terminate or otherwise diminish ADOLOR's rights to PATENTS and/or
KNOW-HOW and/or otherwise diminish ADOLOR's ability to perform its obligations
to SB under this AGREEMENT, ADOLOR shall immediately notify SB of such
situation, and ADOLOR shall promptly cure such breach. However, if ADOLOR is
unable to cure such breach, ADOLOR shall, to the extent possible, permit SB to
cure such breach and to negotiate directly with such THIRD PARTY.

     12.07.  SB hereby agrees to save, defend and hold ADOLOR, its AFFILIATES
and its and their respective officers, directors, shareholders, representatives,
agents, employees, successors and assigns harmless from and against any and all
suits, claims, actions, demands, liabilities, expenses and/or losses, including
reasonable legal expense and attorneys' fees

                                      -43-
<PAGE>

(collectively and individually, the "Losses"), brought by a THIRD PARTY or that
arise in connection with any claim brought by a THIRD PARTY with respect to the
PRODUCT in the FIELD in the TERRITORY or Losses which result from breach by SB,
its AFFILIATES, its and their sublicensees or distributors of any provision of
this AGREEMENT, including without limitation, the SB warranties and
representations set forth in this AGREEMENT, except to the extent such Losses
result from (i) the negligence or willful misconduct of ADOLOR or its
AFFILIATES, or (ii) breach by ADOLOR or its AFFILIATES of any provision of this
AGREEMENT, including without limitation, the ADOLOR warranties and
representations set forth in this AGREEMENT.

     12.08.  ADOLOR hereby agrees to save, defend and hold SB, its AFFILIATES
and its and their respective officers, directors, shareholders, representatives,
agents, employees, successors and assigns harmless from and against any and all
suits, claims, actions, demands, liabilities, expenses and/or losses, including
reasonable legal expense and attorneys' fees (collectively and individually, the
"Losses"), brought by a THIRD PARTY or that arise in connection with any claim
brought by a THIRD PARTY with respect to the COMPOUND in the FIELD outside of
the TERRITORY or COMPOUND outside of the FIELD or Losses which result from
breach by ADOLOR, its AFFILIATES, its and their sublicensees or distributor of
any provision of this AGREEMENT, including without limitation, the ADOLOR
warranties and representations set forth in this AGREEMENT, except to the extent
such Losses result from (i) the negligence or willful misconduct of SB, its
AFFILIATES, its or their sublicensees or distributors (ii) breach by SB, its
AFFILIATES, its or their sublicensees or distributors of any provision of this
AGREEMENT, including without limitation, the SB warranties and representations
set forth in this AGREEMENT.

     12.09.  In the event ADOLOR is seeking indemnification from SB under
Paragraph 12.07, SB shall have no such obligation unless ADOLOR:

                                      -44-
<PAGE>

             (a)  gives SB prompt notice of any claim or lawsuit or other action
for which it seeks to be indemnified under this AGREEMENT;

             (b)  cooperates fully with SB and its agents in defense of any such
claim, complaint, lawsuit or other cause of action; and

             (c)  SB is granted full authority and control over the defense,
including settlement or other disposition thereof, against such claim or lawsuit
or other action, provided that ADOLOR shall have the right to retain counsel of
its choice to participate in the defense of any such claim or lawsuit at
ADOLOR's own expense, provided that such counsel shall not interfere with SB's
full authority and control, and further provided that such settlement does not
impair the validity or enforceability of PATENTS.

     12.10.  In the event SB is seeking indemnification under Paragraph 12.08,
ADOLOR shall have no such obligation unless SB:

             (a)  gives ADOLOR prompt notice of any claim or lawsuit or other
action for which it seeks to be indemnified under this AGREEMENT;

             (b)  cooperates fully with ADOLOR and its agents in defenses of any
such claim, complaint, lawsuit or other cause of action; and

             (c)  ADOLOR is granted full authority and control over the defense,
including settlement or other disposition thereof, against such claim or lawsuit
or other action, provided that SB shall have the right to retain counsel of its
choice to participate in the defense of any such claim or lawsuit at SB's own
expense, provided that such counsel shall not interfere with ADOLOR's full
authority and control.

     12.11.  SB and ADOLOR represent and warrant that they are authorized to
enter into this AGREEMENT and have not as of the EFFECTIVE DATE and will not
enter into any agreement inconsistent with this AGREEMENT.

                                      -45-
<PAGE>

     12.12.  ADOLOR MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OR
CONDITIONS OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO THE PATENTS,
KNOW-HOW, COMPOUNDS, AND PRODUCTS INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF PATENTS AND KNOW-
HOW, PATENTED OR UNPATENTED, OR NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY
RIGHTS OF THIRD PARTIES.

13.  FORCE MAJEURE
     -------------

     13.01.  If the performance of any part of this AGREEMENT by either party,
or of any obligation under this AGREEMENT, is prevented, restricted, interfered
with or delayed by reason of any cause beyond the reasonable control of the
party liable to perform, unless conclusive evidence to the contrary is provided,
the party so affected shall, upon giving written notice to the other party, be
excused from such performance to the extent of such prevention, restriction,
interference or delay, provided that the affected party shall use its reasonable
best efforts to avoid or remove such causes of non-performance and shall
continue performance with the utmost dispatch whenever such causes are removed.
When such circumstances arise, the parties shall discuss what, if any,
modification of the terms of this AGREEMENT may be required in order to arrive
at an equitable solution.

14.  GOVERNING LAW AND DISPUTE RESOLUTION
     ------------------------------------

     14.01.  This AGREEMENT shall be deemed to have been made in the
Commonwealth of Pennsylvania and its form, execution, validity, construction and
effect shall be determined in accordance with the laws of the Commonwealth of
Pennsylvania.

     14.02.  Any dispute, controversy or claim arising out of or relating to
this AGREEMENT (hereinafter collectively referred to as "Dispute") shall be
attempted to be settled by the parties,

                                      -46-
<PAGE>

in good faith, by submitting each such Dispute to appropriate senior management
representatives of each PARTY in an effort to effect a mutually acceptable
resolution thereof.

     14.03.  In the event no mutually acceptable resolution is achieved as a
result of Paragraph 14.02 then, at either party's request, such Dispute may be
submitted to an UNAFFILIATED EXPERT for resolution.  In such event, the parties
shall select a single UNAFFILIATED EXPERT within twenty (20) days of the request
of the party invoking this Paragraph 14.03.  Each party shall have twenty (20)
days after selection of the UNAFFILIATED EXPERT to submit to such individual
such assumptions, methodology, data and information as such party believes
necessary to resolve the dispute in question.  The UNAFFILIATED EXPERT may then
hold a joint meeting with the parties (including any other experts that the
parties have engaged in respect of that matter) on the issues that need to be
resolved.  The UNAFFILIATED EXPERT shall promptly thereafter make a
recommendation as to the resolution of the dispute, which recommendation may
either adopt the proposal of either party or adopt an alternative approach.
Each party shall bear its own expenses in connection with a procedure under this
Paragraph 14.03, and the fees and expenses of the UNAFFILIATED EXPERT shall be
borne equally by the parties regardless of the ultimate recommendation of such
person.  The results of a procedure under this Paragraph 14.03 shall be used by
the parties to guide their own decisions, but shall not have legal effect.

     14.04.  In the event no mutually acceptable resolution of such Dispute is
achieved in accordance with Paragraph 14.03, then either party shall be entitled
to seek final settlement of such Dispute by any administrative or judicial
mechanism which may be available.

15.  WAIVER OF BREACH
     ----------------

     15.01.  The failure of either party at any time or times to require
performance of any provision hereof shall in no manner affect its rights at a
later time to enforce the same. No

                                      -47-
<PAGE>

waiver by either party of any condition or term in any one or more instances
shall be construed as a further or continuing waiver of such condition or term
or of another condition or term.

16.  SEPARABILITY
     ------------

     16.01.  In the event any portion of this AGREEMENT shall be held illegal,
void or ineffective, the remaining portions hereof shall remain in full force
and effect.

     16.02.  If any of the terms or provisions of this AGREEMENT are in conflict
with any applicable statute or rule of law, then such terms or provisions shall
be deemed inoperative to the extent that they may conflict therewith and shall
be deemed to be modified to conform with such statute or rule of law.

     16.03.  In the event that the terms and conditions of this AGREEMENT are
materially altered as a result of Paragraphs 16.01 or 16.02, the parties will
renegotiate the terms and conditions of this AGREEMENT to resolve any
inequities.

17.  ENTIRE AGREEMENT
     ----------------

     17.01.  This AGREEMENT, entered into as of the date written above,
constitutes the entire agreement between the parties relating to the subject
matter hereof and supersedes all previous writings and understandings. No terms
or provisions of this AGREEMENT shall be varied or modified by any prior or
subsequent statement, conduct or act of either of the parties, except that the
parties may amend this AGREEMENT by written instruments specifically referring
to and executed in the same manner as this AGREEMENT.

18.  NOTICES
     -------

     18.01.  Any notice required or permitted under this AGREEMENT shall be in
writing and sent to the following addresses of the parties by prepaid registered
or certified air mail or by overnight express mail (e.g., Federal Express), or
by facsimile confirmed by prepaid registered or certified air mail letter or by
overnight express mail (e.g., Federal Express), and shall be

                                      -48-
<PAGE>

deemed to have been properly served to the addressee upon receipt of such
written communication:

          If to ADOLOR:

          Adolor Corporation
          371 Phoenixville Pike
          Malvern, Pennsylvania 19355, U.S.A.
          Attention:  Dr. John J. Farrar, President and CEO

                copy to:                         or

               Dechert Price & Rhoads            Dechert Price & Rhoads
               Princeton Pike Corporate Center   Princeton Pike Corporate Center
               P.O. Box 5218                     997 Lenox Drive
               Princeton, NJ 08543-5218          Lawrenceville, NJ 08648
               Attn.: Allen Bloom                Attn.: Allen Bloom

          If to SB:

          SB Pharmco Puerto Rico Inc.
          Road 172
          KM 9.1/Bo.Certenejas
          CIDRA
          Puerto Rico, 00639
          Attention: Don Parman, Director

               copies to:

               SmithKline Beecham Corporation
               One Franklin Plaza (Mail Code FP1820)
               P.O.  Box 7929
               Philadelphia, Pennsylvania 19101, U.S.A.
               Attention:  Vice President and Director
                           SmithKline Beecham Consumer Healthcare
                           Worldwide Business Development

               SmithKline Beecham Corporation
               One Franklin Plaza (Mail Code FP2360)
               P.O. Box 7929
               Philadelphia, Pennsylvania 19101, U.S.A.
               Attention: Corporate Law-U.S.

19.  ASSIGNMENT
     ----------

     19.01.  This AGREEMENT and the licenses herein granted shall be binding
upon and inure to the benefit of the successors in interest of the respective
parties. Neither this

                                      -49-
<PAGE>

AGREEMENT nor any interest hereunder shall be assignable by either party without
the written consent of the other provided, however, that either party may assign
this AGREEMENT or any part of its rights and obligations hereunder, or any
PATENT owned by it, to any AFFILIATE or to any corporation (hereinafter
"Transferee") with which it may merge or consolidate, or to which it may sell or
otherwise transfer all or substantially all of its assets to which this
AGREEMENT relates, without obtaining the consent of the other party.
Notwithstanding the above, each party warrants and represents that any such
assignment by it to an AFFILIATE or Transferee shall only be valid and effective
if such AFFILIATE or Transferee is put on notice that it shall be bound by the
assigning party to observe and perform terms and conditions similar to those
contained in this AGREEMENT.

20.  RECORDING
     ---------

     20.01.  SB shall have the right, at any time, to record, register, or
otherwise notify this AGREEMENT in appropriate governmental or regulatory
offices anywhere in the TERRITORY, and ADOLOR shall provide reasonable
assistance to SB in effecting such recording, registering or notifying.

21.  EXECUTION IN COUNTERPARTS
     -------------------------

     21.01.  This AGREEMENT may be executed in any number of counterparts, each
of which shall be deemed an original but all of which together shall constitute
one and the same instrument.

22.  CONSTRUCTION
     ------------

     22.01.  The captions appearing in this AGREEMENT are for reference purposes
only and shall not be considered for the purpose of interpreting or construing
this AGREEMENT. References to either the singular or plural number can be
substituted with the other in any place in which the context may require such
substitution.

                                      -50-
<PAGE>

     IN WITNESS WHEREOF, the parties, through their authorized officers, have
executed this AGREEMENT as of the date first written above.

SB PHARMCO PUERTO RICO INC.

BY: /s/ [ILLEGIBLE]
    ------------------------------

TITLE: ___________________________

ADOLOR CORPORATION

BY: /s/  John J. Farrar
    ------------------------------

TITLE: President and Chief Executive Officer
       -------------------------------------

                                      -51-CIRCLE GROUP INTERNET, INC.
                       1999 STOCK OPTION PLAN, AS AMENDED

         1. Grant of Options; Generally. In accordance with the provisions
hereinafter set forth in this stock option plan, the name of which is the CIRCLE
GROUP INTERNET, INC. 1999 STOCK OPTION PLAN, AS AMENDED (the "Plan"), the Board
of Directors (the "Board") or, the Compensation Committee (the "Stock Option
Committee") of Circle Group Internet, Inc., an Illinois corporation, (the
"Corporation") is hereby authorized to issue from time to time on the
Corporation's behalf to any one or more Eligible Persons, as hereinafter
defined, options to acquire shares of the Corporation's Common Stock, $.0005 par
value (the "Stock").

         2. Type of Options. The Board or the Stock Option Committee is
authorized to issue Incentive Stock Options ("ISOs") which meet the requirements
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
which options are hereinafter referred to collectively as ISOs, or singularly as
an ISO. The Board or the Stock Option Committee is also, in its discretion,
authorized to issue options which are not ISOs, which options are hereinafter
referred to collectively as Non Statutory Options ("NSOs"), or singularly as an
NSO. The Board or the Stock Option Committee is also authorized to issue "Reload
Options" in accordance with Paragraph 8 herein, which options are hereinafter
referred to collectively as Reload Options, or singularly as a Reload Option.
Except where the context indicates to the contrary, the term "Option" or
"Options" means ISOs, NSOs and Reload Options.

         3. Amount of Stock. The aggregate number of shares of Stock which may
be purchased pursuant to the exercise of Options shall be Two Million
(2,000,000) shares. Of this amount, the Board or the Stock Option Committee
shall have the power and authority to designate whether any Options so issued
shall be ISOs or NSOs, subject to the restrictions on ISOs contained elsewhere
herein. If an Option ceases to be exercisable, in whole or in part, the shares
of Stock underlying such Option shall continue to be available under this Plan.
Further, if shares of Stock are delivered to the Corporation as payment for
shares of Stock purchased by the exercise of an Option granted under this Plan,
such shares of Stock shall also be available under this Plan. If there is any
change in the number of shares of Stock due to the declaration of stock
dividends, recapitalization resulting in stock split-ups, or combinations or
exchanges of shares of Stock, or otherwise, the number of shares of Stock
available for purchase upon the exercise of Options, the shares of Stock subject
to any Option and the exercise price of any outstanding Option shall be
appropriately adjusted by the Board or the Stock Option Committee. The Board or
the Stock Option Committee shall give notice of any adjustments to each Eligible
Person granted an Option under this Plan, and such adjustments shall be
effective and binding on all Eligible Persons. If because of one or more
recapitalizations, reorganizations or other corporate events, the holders of
outstanding Stock receive something other than shares of Stock then, upon
exercise of an Option, the Eligible Person will receive what the holder would
have owned if the holder had exercised the Option immediately before the first
such corporate event and not disposed of anything the holder received as a
result of the corporate event.

                                        1

<PAGE>

          4. Eligible Persons.

         (a) With respect to ISOs, an Eligible Person means any individual who
has been employed by the Corporation or by any subsidiary of the Corporation,
for a continuous period of at least six month.

         (b) With respect to NSOs, an Eligible Person means (i) any individual
who has been employed by the Corporation or by any subsidiary of the
Corporation, for a continuous period of at least six months, (ii) any director
of the Corporation or any subsidiary of the Corporation, or (iii) any consultant
of the Corporation or any subsidiary of the Corporation.

          5. Grant of Options. The Board or the Stock Option Committee has the
right to issue the Options established by this Plan to Eligible Persons. The
Board or the Stock Option Committee shall follow the procedures prescribed for
it elsewhere in this Plan. A grant of Options shall be set forth in writing
signed on behalf of the Corporation or by a majority of the members of the Stock
Option Committee. The writing shall identify whether the Option being granted is
an ISO or an NSO and shall set forth the terms which govern the Option. The
terms shall be determined by the Board or the Stock Option Committee, and may
include, among other terms, the number of shares of Stock that may be acquired
pursuant to the exercise of the Options, when the Options may be exercised, the
period for which the Option is granted and including the expiration date, the
effect on the Options if the Eligible Person terminates employment and whether
the Eligible Person may deliver shares of Stock or exchange the Option for a
cashless exercise to pay for the shares of Stock to be purchased by the exercise
of the Option. However, no term shall be set forth in the writing which is
inconsistent with any of the terms of this Plan. The terms of an Option granted
to an Eligible Person may differ from the terms of an Option granted to another
Eligible Person, and may differ from the terms of an earlier Option granted to
the same Eligible Person.

          6. Option Price. The option price per share shall be determined by the
Board or the Stock Option Committee at the time any Option is granted, and shall
be not less than (i) in the case of an ISO, the fair market value, (ii) in the
case of an ISO granted to a ten percent or greater stockholder, 110 percent of
the fair market value, or (iii) in the case of an NSO, not less than the fair
market value (but in no event less than the par value) of one share of Stock on
the date the Option is granted, as determined by the Board or the Stock Option
Committee. Fair market value as used herein shall be:

                  (a) If shares of Stock shall be traded on an exchange or
over-the-counter market, the mean between the high and low sales prices of Stock
on such exchange or over-the-counter market on which such shares shall be traded
on that date, or if such exchange or over-the-counter market is closed or if no
shares shall have traded on such date, on the last preceding date on which such
shares shall have traded.

                  (b) If shares of Stock shall not be traded on an exchange or
over-the-counter market, the value as determined by a recognized appraiser as
selected by the Board or the Stock Option Committee or pursuant to Section 12
herein.

                                        2

<PAGE>

          7. Purchase of Shares. An Option shall be exercised by the tender to
the Corporation of the full purchase price of the Stock with respect to which
the Option is exercised and written notice of the exercise. The purchase price
of the Stock shall be in United States dollars, payable in cash, check,
Promissory Note secured by the Shares issued through exercise of the related
Options, or in property, or Corporation stock or by Option exchange for a
cashless exercise, if so permitted by the Board or the Stock Option Committee in
accordance with the discretion granted in Paragraph 5 hereof, having a value
equal to such purchase price. The Corporation shall not be required to issue or
deliver any certificates for shares of Stock purchased upon the exercise of an
Option prior to (i) if requested by the Corporation, the filing with the
Corporation by the Eligible Person of a representation in writing that it is the
Eligible Person's then present intention to acquire the Stock being purchased
for investment and not for resale, and/or (ii) the completion of any
registration or other qualification of such shares under any government
regulatory body, which the Corporation shall determine to be necessary or
advisable.

          8. Grant of Reload Options. In granting an Option under this Plan, the
Board or the Stock Option Committee may include a Reload Option provision
therein, subject to the provisions set forth in Paragraphs 20 herein. A Reload
Option provision provides that if the Eligible Person pays the exercise price of
shares of Stock to be purchased by the exercise of an ISO, NSO or another Reload
Option (the "Original Option") by delivering to the Corporation shares of Stock
already owned by the Eligible Person (the "Tendered Shares"), the Eligible
Person shall receive a Reload Option which shall be a new Option to purchase
shares of Stock equal in number to the tendered shares. The terms of any Reload
Option shall be determined by the Board or the Stock Option Committee consistent
with the provisions of this Plan.

          9. Stock Option Committee. The Stock Option Committee may be appointed
from time to time by the Corporation's Board of Directors. The Board may from
time to time remove members from or add members to the Stock Option Committee.
The Stock Option Committee shall be constituted so as to permit the Plan to
comply in all respects with the provisions set forth in Paragraph 20 herein. The
members of the Stock Option Committee may elect one of its members as its
chairman. The Stock Option Committee shall hold its meetings at such times and
places as its chairman shall determine. A majority of the Stock Option
Committee's members present in person shall constitute a quorum for the
transaction of business. All determinations of the Stock Option Committee will
be made by the majority vote of the members constituting the quorum. The members
may participate in a meeting of the Stock Option Committee by conference
telephone or similar communications equipment by means of which all members
participating in the meeting can hear each other. Participation in a meeting in
that manner will constitute presence in person at the meeting. Any decision or
determination reduced to writing and signed by all members of the Stock Option
Committee will be effective as if it had been made by a majority vote of all
members of the Stock Option Committee at a meeting which is duly called and
held.

          10. Administration of Plan. In addition to granting Options and to
exercising the authority granted to it elsewhere in this Plan, the Board or the
Stock Option Committee is granted the full right and authority to interpret and
construe the provisions of this Plan, promulgate, amend and rescind rules and
procedures relating to the implementation of the Plan and to make all other

                                        3

<PAGE>

determinations necessary or advisable for the administration of the Plan,
consistent, however, with the intent of the Corporation that Options granted or
awarded pursuant to the Plan comply with the provisions of Paragraph 20 and 21
herein. All determinations made by the Board or the Stock Option Committee shall
be final, binding and conclusive on all persons including the Eligible Person,
the Corporation and its stockholders, employees, officers and directors and
consultants. No member of the Board or the Stock Option Committee will be liable
for any act or omission in connection with the administration of this Plan
unless it is attributable to that member's willful misconduct.

          11. Provisions Applicable to ISOs. The following provisions shall
apply to all ISOs granted by the Board or the Stock Option Committee and are
incorporated by reference into any writing granting an ISO:

                  (a) An ISO may only be granted within ten (10) years from the
date of this Plan, which is the date that this Plan was originally adopted by
the Corporation's Board of Directors.

                  (b) An ISO may not be exercised after the expiration of ten
(10) years from the date the ISO is granted.

                  (c) The option price may not be less than the fair market
value of the Stock at the time the ISO is granted.

                  (d) An ISO is not transferrable by the Eligible Person to whom
it is granted except by will, or the laws of descent and distribution, and is
exercisable during his or her lifetime only by the Eligible Person.

                  (e) If the Eligible Person receiving the ISO owns at the time
of the grant stock possessing more than ten (10%) percent of the total combined
voting power of all classes of stock of the employer corporation or of its
parent or subsidiary corporation (as those terms are defined in the Code), then
the option price shall be at least 110% of the fair market value of the Stock,
and the ISO shall not be exercisable after the expiration of five (5) years from
the date the ISO is granted.

                  (f) The aggregate fair market value (determined at the time
the ISO is granted) of the Stock with respect to which the ISO is first
exercisable by the Eligible Person during any calendar year (under this Plan and
any other incentive stock option plan of the Corporation) shall not exceed
$100,000.

                  (g) Even if the shares of Stock which are issued upon exercise
of an ISO are sold within one year following the exercise of such ISO so that
the sale constitutes a disqualifying disposition for ISO treatment under the
Code, no provision of this Plan shall be construed as prohibiting such a sale.

                                        4

<PAGE>

                  (h) This Plan was adopted by the Corporation on __________,
and amended on ________________, by virtue of its approval by the Corporation's
Board of Directors and the majority shareholders of the Corporation.

          12. Determination of Fair Market Value. In granting ISOs under this
Plan, the Board or the Stock Option Committee shall make a good faith
determination as to the fair market value of the Stock at the time of granting
the ISO.

          13. Restrictions on Issuance of Stock. The Corporation shall not be
obligated to sell or issue any shares of Stock pursuant to the exercise of an
Option unless the Stock with respect to which the Option is being exercised is
at that time effectively registered or exempt from registration under the
Securities Act of 1933, as amended, and any other applicable laws, rules and
regulations. The Corporation may condition the exercise of an Option granted in
accordance herewith upon receipt from the Eligible Person, or any other
purchaser thereof, of a written representation that at the time of such exercise
it is his or her then present intention to acquire the shares of Stock for
investment and not with a view to, or for sale in connection with, any
distribution thereof; except that, in the case of a legal representative of an
Eligible Person, "distribution" shall be defined to exclude distribution by will
or under the laws of descent and distribution. Prior to issuing any shares of
Stock pursuant to the exercise of an Option, the Corporation shall take such
steps as it deems necessary to satisfy any withholding tax obligations imposed
upon it by any level of government.

          14. Exercise in the Event of Death or Termination of Employment.

                  (a) If an optionee shall die (i) while an employee of the
Corporation or a Subsidiary; or (ii) within three months after termination of
his employment with the Corporation or a Subsidiary because of his disability or
retirement, his Options may be exercised, to the extent that the optionee shall
have been entitled to do so on the date of his death, by the person or persons
to whom the optionee's right under the Option pass by will or applicable law, or
if no such person has such right, by his executors or administrators, at any
time, or from time to time. In the event of termination of employment because of
his death while an employee or because of disability or retirement, his Options
may be exercised not later than the expiration date specified in Paragraph 5 or
one year after the optionee's death, whichever date is earlier.

                  (b) If an optionee's employment by the Corporation or a
Subsidiary shall terminate because of his disability and such optionee has not
died within the following three months, he may exercise his Options, to the
extent that he shall have been entitled to do so at the date of the termination
of his employment, at any time, or from time to time, but not later than the
expiration date specified in Paragraph 5 hereof or one year after termination of
employment, whichever date is earlier.

                  (c) If an optionee's employment shall terminate by reason of
his retirement in accordance with the terms of the Corporation's tax-qualified
retirement plans if any, or with the consent of the Board or the Stock Option
Committee or involuntarily other than by termination for cause, and such
optionee has not died within the following three months, he may exercise his
Option

                                        5

<PAGE>

to the extent he shall have been entitled to do so at the date of the
termination of his employment, at any time and from to time, but not later than
the expiration date specified in Paragraph 5 hereof or thirty (30) days after
termination of employment, whichever date is earlier. For purposes of this
Paragraph 14, termination for cause shall mean; (i) termination of employment
for cause as defined in the optionee's Employment Agreement; or (ii) in the
absence of an Employment Agreement for the optionee, termination of employment
by reason of the optionee's commission of a felony, fraud or willful misconduct
which has resulted, or is likely to result, in substantial and material damage
to the Corporation or a Subsidiary, all as the Board or the Stock Option
Committee in its sole discretion may determine.

                  (d) If an optionee's employment shall terminate for any
reason, voluntarily or otherwise, other than by death, disability or retirement,
all right to exercise his Option shall terminate at the date of such termination
of employment absent specific provisions in the optionee's Option Agreement.

          15. Corporate Events. In the event of the proposed dissolution or
liquidation of the Corporation, a proposed sale of all or substantially all of
the assets of the Corporation, a merger or tender for the Corporation's shares
of Common Stock, the Board of Directors may declare that each Option granted
under this Plan shall terminate as of a date to be fixed by the Board of
Directors; provided that not less than thirty (30) days written notice of the
date so fixed shall be given to each Eligible Person holding an Option, and each
such Eligible Person shall have the right, during the period of thirty (30) days
preceding such termination, to exercise his Option as to all or any part of the
shares of Stock covered thereby, including shares of Stock as to which such
Option would not otherwise be exercisable. Nothing set forth herein shall extend
the term set for purchasing the shares of Stock set forth in the Option.

          16. No Guarantee of Employment. Nothing in this Plan or in any writing
granting an Option will confer upon any Eligible Person the right to continue in
the employ of the Eligible Person's employer, or will interfere with or restrict
in any way the right of the Eligible Person's employer to discharge such
Eligible Person at any time for any reason whatsoever, with or without cause.

          17. Nontransferability. No Option granted under the Plan shall be
transferable other than by will or by the laws of descent and distribution.
During the lifetime of the optionee, an Option shall be exercisable only by him.

          18. No Rights as Stockholder. No optionee shall have any rights as a
stockholder with respect to any shares subject to his Option prior to the date
of issuance to him of a certificate or certificates for such shares.

          19. Amendment and Discontinuance of Plan. The Corporation's Board of
Directors may amend, suspend or discontinue this Plan at any time. However, no
such action may prejudice the rights of any Eligible Person who has prior
thereto been granted Options under this Plan. Further, no amendment to this Plan
which has the effect of (a) increasing the aggregate number of shares of

                                        6

<PAGE>

Stock subject to this Plan (except for adjustments pursuant to Paragraph 3
herein), or (b) changing the definition of Eligible Person under this Plan, may
be effective unless and until approval of the stockholders of the Corporation is
obtained in the same manner as approval of this Plan is required. The
Corporation's Board of Directors is authorized to seek the approval of the
Corporation's stockholders for any other changes it proposes to make to this
Plan which require such approval; however, the Board of Directors may modify the
Plan, as necessary, to effectuate the intent of the Plan as a result of any
changes in the tax, accounting or securities laws treatment of Eligible Persons
and the Plan, subject to the provisions set forth in this Paragraph 19, and
Paragraph 20.

          20. Compliance with Code. The aspects of this Plan on ISOs is intended
to comply in every respect with Section 422 of the Code and the regulations
promulgated thereunder. In the event any future statute or regulation shall
modify the existing statute, the aspects of this Plan on ISOs shall be deemed to
incorporate by reference such modification. Any stock option agreement relating
to any Option granted pursuant to this Plan outstanding and unexercised at the
time any modifying statute or regulation becomes effective shall also be deemed
to incorporate by reference such modification and no notice of such modification
need be given to optionee.

         If any provision of the aspects of this Plan on ISOs is determined to
disqualify the shares purchasable pursuant to the Options granted under this
Plan from the special tax treatment provided by Code Section 422, such provision
shall be deemed null and void and to incorporate by reference the modification
required to qualify the shares for said tax treatment.

          21. Compliance With Other Laws and Regulations. The Plan, the grant
and exercise of Options thereunder, and the obligation of the Corporation to
sell and deliver Stock under such Options, shall be subject to all applicable
federal and state laws, rules, and regulations and to such approvals by any
government or regulatory agency as may be required. The Corporation shall not be
required to issue or deliver any certificates for shares of Stock prior to (a)
the listing of such shares on any stock exchange or over-the-counter market on
which the Stock may then be listed, if applicable, and (b) the completion of any
registration or qualification of such shares under any federal or state law, or
any ruling or regulation of any government body which the Corporation shall, in
its sole discretion, determine to be necessary or advisable. Moreover, no Option
may be exercised if its exercise or the receipt of Stock pursuant thereto would
be contrary to applicable laws.

          22. Disposition of Shares. In the event any share of Stock acquired by
an exercise of an Option granted under the Plan shall be transferable other than
by will or by the laws of descent and distribution within two years of the date
such Option was granted or within one year after the transfer of such Stock
pursuant to such exercise, the optionee shall give prompt written notice thereof
to the Corporation or the Stock Option Committee.

          23. Name. The Plan shall be known as the "Circle Group Internet, Inc.
1999 Stock Option Plan, as amended."

          24. Notices. Any notice hereunder shall be in writing and sent by
certified mail, return receipt requested or by facsimile transmission (with
electronic or written confirmation of receipt)

                                        7

<PAGE>

and when addressed to the Corporation or the Committee shall be sent to it at
its office, 1011 Campus Drive, Mundelein, IL 60060, subject to the right of
either party to designate at any time hereafter in writing some other address,
facsimile number or person to whose attention such notice shall be sent.

          25. Headings. The headings preceding the text of Sections and
subparagraphs hereof are inserted solely for convenience of reference, and shall
not constitute a part of this Plan nor shall they affect its meaning,
construction or effect.

          26. Effective Date. This Plan, the Circle Group Internet, Inc. 1999
Stock Option Plan, as amended, was adopted by the Board of Directors of the
Corporation on __________________, 1999, and amended ______________. The
effective date of the Plan shall be _____________, 1999.

         Dated as of _________________, 1999.
         And amended ________________, 2000.

                                 CIRCLE GROUP INTERNET, INC.

                                 By:  ________________________________________
                                      Gregory Halpern, Chief Executive Officer

                                        8

<PAGE>

                                                                [NSO GRANT FORM]

                           CIRCLE GROUP INTERNET, INC.
                                1011 Campus Drive
                               Mundelein, IL 60060

                                                         Date:  ________________

______________________
______________________

Dear ______________:

         The Board of Directors of Circle Group Internet, Inc. (the
"Corporation") is pleased to award you an Option pursuant to the provisions of
the 1999 Stock Option Plan, as amended (the "Plan"). This letter will describe
the Option granted to you. Attached to this letter is a copy of the Plan. The
terms of the Plan also set forth provisions governing the Option granted to you.
Therefore, in addition to reading this letter you should also read the Plan.
Your signature on this letter is an acknowledgment to us that you have read and
under-stand the Plan and that you agree to abide by its terms. All terms not
defined in this letter shall have the same meaning as in the Plan.

          1. Type of Option. You are granted an NSO. Please see in particular
Section 11 of the Plan.

          2. Rights and Privileges. Subject to the conditions hereinafter set
forth, we grant you the right to purchase __________ shares of Common Stock
("Stock") at $__________ per share, the current fair market value of a share of
Stock. The right to purchase the shares of Stock accrues in __________
installments over the time periods described below:

         The right to acquire __________ shares accrues on __________.

         The right to acquire __________ shares accrues on __________.

          3. Time of Exercise. The Option may be exercised at any time and from
time to time beginning when the right to purchase the shares of Stock accrues
and ending when they terminate as provided in Section 5 of this letter.

          4. Method of Exercise. The Options shall be exercised by written
notice to the Chairman of the Board of Directors at the Corporation's principal
place of business. The notice shall set forth the number of shares of Stock to
be acquired and shall contain a check payable to the Corporation in full payment
for the Stock or that number of already owned shares of Stock equal in value to
the total Exercise Price of the Option. We shall make delivery of the shares of
Stock subject to the conditions described in Section 13 of the Plan.

                                        1

<PAGE>

          5. Termination of Option. To the extent not exercised, the Option
shall terminate upon the first to occur of the following dates:

                  (a) __________, 199___, being __________ years from the date
of grant pursuant to the provisions of Section 2 of this Agreement; or

                  (b) Except as otherwise provided for herein, upon the
termination of your employment with the Corporation and any of its subsidiaries
Plan for any reason.

                  (c) The expiration of 12 months following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan, if such employment termination occurs by reason of your death,
permanent disability (as defined herein) or retirement. As used herein,
"permanent disability" means your inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
which can be expected to result in death or which has lasted or can be expected
to last for a continuous period of not less than 12 months

          6. Securities Laws. The Option and the shares of Stock underlying the
Option have not been registered under the Securities Act of 1933, as amended
(the "Act"). The Corporation has no obligations to ever register the Option or
the shares of Stock underlying the Option. All shares of Stock acquired upon the
exercise of the Option shall be "restricted securities" as that term is defined
in Rule 144 promulgated under the Act. The certificate representing the shares
shall bear an appropriate legend restricting their transfer. Such shares cannot
be sold, transferred, assigned or otherwise hypothecated without registration
under the Act or unless a valid exemption from registration is then available
under applicable federal and state securities laws and the Corporation has been
furnished with an opinion of counsel satisfactory in form and substance to the
Corporation that such registration is not required.

          7. Binding Effect. The rights and obligations described in this letter
shall inure to the benefit of and be binding upon both of us, and our respective
heirs, personal representatives, successors and assigns.

          8. Date of Grant. The Option shall be treated as having been granted
to you on the date of this letter even though you may sign it at a later date.

                                    Very truly yours,

                                    By: ________________________________________
                                        Gregory Halpern, Chief Executive Officer
AGREED AND ACCEPTED:

-------------------------

                                        2

<PAGE>
                                                                [ISO GRANT FORM]

                           CIRCLE GROUP INTERNET, INC.
                                1011 Campus Drive
                               Mundelein, IL 60060

                                                        Date:  ________________

_________________________
_________________________

Dear _______________:

         The Board of Directors of Circle Group Internet, Inc. (the
"Corporation") is pleased to award you an Option pursuant to the provisions of
the 1999 Stock Option Plan, as amended (the "Plan"). This letter will describe
the Option granted to you. Attached to this letter is a copy of the Plan. The
terms of the Plan also set forth provisions governing the Option granted to you.
Therefore, in addition to reading this letter you should also read the Plan.
Your signature on this letter is an acknowledgment to us that you have read and
under-stand the Plan and that you agree to abide by its terms. All terms not
defined in this letter shall have the same meaning as in the Plan.

          1. Type of Option. You are granted an ISO. Please see in particular
Section 11 of the Plan.

          2. Rights and Privileges. Subject to the conditions hereinafter set
forth, we grant you the right to purchase __________ shares of Stock at
$__________ per share, the current fair market value of a share of Stock. The
right to purchase the shares of Stock accrues in __________ installments over
the time periods described below:

         The right to acquire __________ shares accrues on __________.

         The right to acquire __________ shares accrues on __________.

         The right to acquire __________ shares accrues on __________.

         The right to acquire __________ shares accrues on __________.

         The right to acquire __________ shares accrues on __________.

         The right to acquire __________ shares accrues on __________.

                                        1

<PAGE>

          3. Time of Exercise. The Option may be exercised at any time and from
time to time beginning when the right to purchase the shares of Stock accrues
and ending when they terminate as provided in Section 5 of this letter.

          4. Method of Exercise. The Options shall be exercised by written
notice to the Chairman of the Board of Directors at the Corporation's principal
place of business. The notice shall set forth the number of shares of Stock to
be acquired and shall contain a check payable to the Corporation in full payment
for the Stock or that number of already owned shares of Stock equal in value to
the total Exercise Price of the Option. We shall make delivery of the shares of
Stock subject to the conditions described in Section 13 of the Plan.

          5. Termination of Option. To the extent not exercised, the Option
shall terminate upon the first to occur of the following dates:

                  (a) _____________, 199___, being __________ years from the
date of grant pursuant to the provisions of Section 2 of this Agreement; or

                  (b) The expiration of thirty (30) days following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan for any reason, other than by reason of death or permanent
disability. As used herein, "permanent disability" means your inability to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than 12 months; or

                  (c) The expiration of 12 months following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan, if such employment termination occurs by reason of your death or by
reason of your permanent disability (as defined above).

          6. Securities Laws.

                  The Option and the shares of Stock underlying the Option have
not been registered under the Securities Act of 1933, as amended (the "Act").
The Corporation has no obligations to ever register the Option or the shares of
Stock underlying the Option. All shares of Stock acquired upon the exercise of
the Option shall be "restricted securities" as that term is defined in Rule 144
promulgated under the Act. The certificate representing the shares shall bear an
appropriate legend restricting their transfer. Such shares cannot be sold,
transferred, assigned or otherwise hypothecated without registration under the
Act or unless a valid exemption from registration is then available under
applicable federal and state securities laws and the Corporation has been
furnished with an opinion of counsel satisfactory in form and substance to the
Corporation that such registration is not required.

          7. Binding Effect. The rights and obligations described in this letter
shall inure to the benefit of and be binding upon both of us, and our respective
heirs, personal representatives, successors and assigns.

                                        2

<PAGE>

          8. Date of Grant. The Option shall be treated as having been granted
to you on the date of this letter even though you may sign it at a later date.

                                 Very truly yours,

                                 By:   ________________________________________
                                       Gregory Halpern, Chief Executive Officer

AGREED AND ACCEPTED:

-------------------------

                                        3

<PAGE>

                                                              [NSO GRANT FORM
                                                         WITH RELOAD OPTIONS]

                           CIRCLE GROUP INTERNET, INC.
                                1011 Campus Drive
                               Mundelein, IL 60060

                                                        Date:  ________________

_____________________
_____________________

Dear __________:

         The Board of Directors of Circle Group Internet, Inc. (the
"Corporation") is pleased to award you an Option pursuant to the provisions of
the 1999 Stock Option Plan, as amended (the "Plan"). This letter will describe
the Option granted to you. Attached to this letter is a copy of the Plan. The
terms of the Plan also set forth provisions governing the Option granted to you.
Therefore, in addition to reading this letter you should also read the Plan.
Your signature on this letter is an acknowledgment to us that you have read and
understand the Plan and that you agree to abide by its terms. All terms not
defined in this letter shall have the same meaning as in the Plan.

          1. Type of Option. You are granted an NSO. Please see in particular
Section 11 of the Plan.

          2. Rights and Privileges.

                  (a) Subject to the conditions hereinafter set forth, we grant
you the right to purchase __________ shares of Stock at $__________ per share,
the current fair market value of a share of Stock. The right to purchase the
shares of Stock accrues in __________ installments over the time periods
described below:

         The right to acquire __________ shares accrues on __________.

         The right to acquire __________ shares accrues on __________.

                  (b) In addition to the Option granted hereby (the "Underlying
Option"), the Corporation will grant you a reload option (the "Reload Option")
as hereinafter provided. A Reload Option is hereby granted to you if you acquire
shares of Stock pursuant to the exercise of the Underlying Option and pay for
such shares of Stock with shares of Common Stock already owned by you (the
"Tendered Shares"). The Reload Option grants you the right to purchase shares of
Stock equal in number to the number of Tendered Shares. The date on which the
Tendered Shares are tendered to the Corporation in full or partial payment of
the purchase price for the shares of Stock acquired pursuant to the exercise of
the Underlying Option is the Reload Grant Date. The exercise

                                        1

<PAGE>

price of the Reload Option is the fair market value of the Tendered Shares on
the Reload Grant Date. The fair market value of the Tendered Shares shall be the
low bid price per share of the Corporation's Common Stock on the Reload Grant
Date. The Reload Option shall vest equally over a period of __________ (___)
years, commencing on the first anniversary of the Reload Grant Date, and on each
anniversary of the Reload Grant Date thereafter; however, no Reload Option shall
vest in any calendar year if it would allow you to purchase for the first time
in that calendar year shares of Stock with a fair market value in excess of
$100,000, taking into account ISOs previously granted to you. The Reload Option
shall expire on the earlier of (i) __________ (___) years from the Reload Grant
Date, or (ii) in accordance with Paragraph 5(b), or (iii) in accordance with
Paragraph 5(c) as set forth herein. If vesting of the Reload Option is deferred,
then the Reload Option shall vest in the next calendar year, subject, however,
to the deferral of vesting previously provided. Except as provided herein the
Reload Option is subject to all of the other terms and provisions of this
Agreement governing Options.

          3. Time of Exercise. The Option may be exercised at any time and from
time to time beginning when the right to purchase the shares of Stock accrues
and ending when they terminate as provided in Section 5 of this letter.

          4. Method of Exercise. The Options shall be exercised by written
notice to the Chairman of the Board of Directors at the Corporation's principal
place of business. The notice shall set forth the number of shares of Stock to
be acquired and shall contain a check payable to the Corporation in full payment
for the Stock or that number of already owned shares of Stock equal in value to
the total Exercise Price of the Option. We shall make delivery of the shares of
Stock subject to the conditions described in Section 13 of the Plan.

          5. Termination of Option. To the extent not exercised, the Option
shall terminate upon the first to occur of the following dates:

                  (a) __________, 199_, being __________ years from the date of
grant pursuant to the provisions of Section 2 of this Agreement; or

                  (b) The expiration of three months following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan for any reason, other than by reason of death or permanent
disability. As used herein, "permanent disability" means your inability to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than 12 months; or

                  (c) The expiration of 12 months following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan, if such employment termination occurs by reason of your death or by
reason of your permanent disability (as defined above).

          6. Securities Laws.

                  The Option and the shares of Stock underlying the Option have
not been registered under the Securities Act of 1933, as amended (the "Act").
The Corporation has no obligations to ever register the Option or the shares of
Stock underlying the Option. All shares of Stock acquired

                                        2

<PAGE>

upon the exercise of the Option shall be "restricted securities" as that term is
defined in Rule 144 promulgated under the Act. The certificate representing the
shares shall bear an appropriate legend restricting their transfer. Such shares
cannot be sold, transferred, assigned or otherwise hypothecated without
registration under the Act or unless a valid exemption from registration is then
available under applicable federal and state securities laws and the Corporation
has been furnished with an opinion of counsel satisfactory in form and substance
to the Corporation that such registration is not required.

          7. Binding Effect. The rights and obligations described in this letter
shall inure to the benefit of and be binding upon both of us, and our respective
heirs, personal representatives, successors and assigns.

          8. Date of Grant. The Option shall be treated as having been granted
to you on the date of this letter even though you may sign it at a later date.

                              Very truly yours,

                              By:________________________________________
                                 Gregory Halpern, Chief Executive Officer

AGREED AND ACCEPTED:

-------------------------

                                        3

<PAGE>

                                                             [ISO GRANT FORM
                                                        WITH RELOAD OPTIONS]

                           CIRCLE GROUP INTERNET, INC.
                                1011 Campus Drive
                               Mundelein, IL 60060

                                                      Date:  ________________

_____________________
_____________________

Dear __________:

         The Board of Directors of Circle Group Internet, Inc. (the
"Corporation") is pleased to award you an Option pursuant to the provisions of
the 1999 Stock Option Plan, as amended (the "Plan"). This letter will describe
the Option granted to you. Attached to this letter is a copy of the Plan. The
terms of the Plan also set forth provisions governing the Option granted to you.
Therefore, in addition to reading this letter you should also read the Plan.
Your signature on this letter is an acknowledgment to us that you have read and
understand the Plan and that you agree to abide by its terms. All terms not
defined in this letter shall have the same meaning as in the Plan.

          1. Type of Option. You are granted an ISO. Please see in particular
Section 11 of the Plan.

          2. Rights and Privileges.

                  (a) Subject to the conditions hereinafter set forth, we grant
you the right to purchase __________ shares of Stock at $__________ per share,
the current fair market value of a share of Stock. The right to purchase the
shares of Stock accrues in __________ installments over the time periods
described below:

         The right to acquire __________ shares accrues on __________.

         The right to acquire __________ shares accrues on __________.

                  (b) In addition to the Option granted hereby (the "Underlying
Option"), the Corporation will grant you a reload option (the "Reload Option")
as hereinafter provided. A Reload Option is hereby granted to you if you acquire
shares of Stock pursuant to the exercise of the Underlying Option and pay for
such shares of Stock with shares of Common Stock already owned by you (the
"Tendered Shares"). The Reload Option grants you the right to purchase shares of
Stock equal in number to the number of Tendered Shares. The date on which the
Tendered Shares are tendered to the Corporation in full or partial payment of
the purchase price for the shares of Stock acquired pursuant to the exercise of
the Underlying Option is the Reload Grant Date. The exercise

                                        1

<PAGE>

price of the Reload Option is the fair market value of the Tendered Shares on
the Reload Grant Date. The fair market value of the Tendered Shares shall be the
low bid price per share of the Corporation's Common Stock on the Reload Grant
Date. The Reload Option shall vest equally over a period of __________ (___)
years, commencing on the first anniversary of the Reload Grant Date, and on each
anniversary of the Reload Grant Date thereafter; however, no Reload Option shall
vest in any calendar year if it would allow you to purchase for the first time
in that calendar year shares of Stock with a fair market value in excess of
$100,000, taking into account ISOs previously granted to you. The Reload Option
shall expire on the earlier of (i) __________ (___) years from the Reload Grant
Date, or (ii) in accordance with Paragraph 5(b), or (iii) in accordance with
Paragraph 5(c) as set forth herein. If vesting of the Reload Option is deferred,
then the Reload Option shall vest in the next calendar year, subject, however,
to the deferral of vesting previously provided. Except as provided herein the
Reload Option is subject to all of the other terms and provisions of this
Agreement governing Options.

          3. Time of Exercise. The Option may be exercised at any time and from
time to time beginning when the right to purchase the shares of Stock accrues
and ending when they terminate as provided in Section 5 of this letter.

          4. Method of Exercise. The Options shall be exercised by written
notice to the Chairman of the Board of Directors at the Corporation's principal
place of business. The notice shall set forth the number of shares of Stock to
be acquired and shall contain a check payable to the Corporation in full payment
for the Stock or that number of already owned shares of Stock equal in value to
the total Exercise Price of the Option. We shall make delivery of the shares of
Stock subject to the conditions described in Section 13 of the Plan.

          5. Termination of Option. To the extent not exercised, the Option
shall terminate upon the first to occur of the following dates:

                  (a) __________, 199_, being __________ years from the date of
grant pursuant to the provisions of Section 2 of this Agreement; or

                  (b) The expiration of three months following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan for any reason, other than by reason of death or permanent
disability. As used herein, "permanent disability" means your inability to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than 12 months; or

                  (c) The expiration of 12 months following the date your
employment terminates with the Corporation and any of its subsidiaries included
in the Plan, if such employment termination occurs by reason of your death or by
reason of your permanent disability (as defined above).

          6. Securities Laws.

                  The Option and the shares of Stock underlying the Option have
not been registered under the Securities Act of 1933, as amended (the "Act").
The Corporation has no obligations to ever register the Option or the shares of
Stock underlying the Option. All shares of Stock acquired

                                        2

<PAGE>

upon the exercise of the Option shall be "restricted securities" as that term is
defined in Rule 144 promulgated under the Act. The certificate representing the
shares shall bear an appropriate legend restricting their transfer. Such shares
cannot be sold, transferred, assigned or otherwise hypothecated without
registration under the Act or unless a valid exemption from registration is then
available under applicable federal and state securities laws and the Corporation
has been furnished with an opinion of counsel satisfactory in form and substance
to the Corporation that such registration is not required.

          7. Binding Effect. The rights and obligations described in this letter
shall inure to the benefit of and be binding upon both of us, and our respective
heirs, personal representatives, successors and assigns.

          8. Date of Grant. The Option shall be treated as having been granted
to you on the date of this letter even though you may sign it at a later date.

                                      Very truly yours,

                                      By:      __________________________
                                               Gregory Halpern, President

AGREED AND ACCEPTED:

-------------------------

                                        3

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