Document:

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                                                                   Exhibit 10.31

                           THIRD AMENDED AND RESTATED

                   DEVELOPMENT AND COMMERCIALIZATION AGREEMENT

                                     between

                                ALZA CORPORATION

                                       and

                               DURECT CORPORATION

**Material has been omitted pursuant to a request for confidential treatment and
such material has been filed separately with the SEC

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                           THIRD AMENDED AND RESTATED
                   DEVELOPMENT AND COMMERCIALIZATION AGREEMENT

     This Third Amended and Restated Development and Commercialization Agreement
(the "Agreement") is effective as of October 1, 2002 between ALZA Corporation, a
Delaware corporation ("ALZA"), and Durect Corporation, a Delaware corporation
("Durect").

                                    RECITALS

     A. ALZA and Durect have previously entered into that certain Development
and Commercialization Agreement with an effective date of April 21, 1998 and
subsequently entered into an Amended and Restated Development and
Commercialization Agreement and a Second Amended and Restated Development and
Commercialization Agreement, each with an effective date of April 28, 1999
(collectively, the "Previous Agreement") for the development, manufacture and
marketing of pharmaceutical products utilizing proprietary technology of ALZA
relating to the DUROS(R) System for the controlled delivery of drugs in certain
fields, as set forth herein.

     B. The parties wish to amend such Previous Agreement and restate their
understandings herein.

     NOW THEREFORE, in consideration of the mutual covenants and agreements
provided herein, the parties hereby agree as follows:

                             SECTION 1 - DEFINITIONS

     For purposes of this Agreement, the following terms shall have the
respective meanings set forth below:

               1.1 "Affiliate" shall mean a corporation or any other entity that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, the designated party, but only
for so long as the relationship exists. "Control" shall mean ownership of shares
of stock having at least 50% of the voting power entitled to vote for the
election of directors in the case of a corporation, and at least 50% of the
interests in profits in the case of a business entity other than a corporation.

               1.2 "ALZA Compound" shall mean any active pharmaceutical agent
for which ALZA or an ALZA Affiliate holds exclusive rights (by ownership or
license) to a United States patent which claims the composition of such
pharmaceutical agent, or its manufacture or use, which but for a license from
ALZA or an ALZA Affiliate would preclude Durect from Commercialization of a
Product incorporating such pharmaceutical agent.

                                                                    CONFIDENTIAL
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**Material has been omitted pursuant to a request for confidential treatment and
such material has been filed separately with the SEC

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               1.3 "Catheter" shall mean a device for transporting Drug from the
System to a specific anatomical site for delivery, which device is selected,
identified or developed by Durect (and not by ALZA) for use in a Product.

               1.4 "Commercialization" shall mean the ongoing process and
activities generally engaged in by a company marketing life-science products to
establish and maintain a nationwide presence for a product, including, but not
limited to offering for sale, selling, marketing, promoting, distributing and
importing such product.

               1.5 "Confidential Information" shall mean all non-public
Technical Information, whether in oral, written or other tangible form that one
party discloses to the other under this Agreement and designates as confidential
at the time of disclosure or within 30 days thereafter.

               1.6 "Development Costs" shall mean a party's fully-allocated
costs of performing development activities included in approved Work Plans, as
calculated in accordance with Exhibit E.

               1.7 "Drug" shall mean an active pharmaceutical agent, in its pure
form or in a formulation, that is incorporated in a System to create a Product
under the terms and conditions of this Agreement.

               1.8 "Drug Class" shall mean the general therapeutic and
pharmacological classification scheme for drug products reported to FDA under
the provisions of the Drug Listing Act, available at
www.fda.gov/cder/ndc/tbldclas.txt.

               1.9 "Durect Field" shall mean, subject to modification under the
terms of this Agreement, one of the following fields of use, and no others:

                   (a) "CNS Field" shall mean delivery of drugs for the
               treatment of pain, [ * * * ] directly into a component of the
               central nervous system from an implantable pump via a catheter;
               provided, however, solely with respect to a Product using
               Sufentanil as the Drug, there shall be no requirement that the
               Drug be delivered via a catheter.

                   (b) "Middle/Inner Ear Field" shall mean delivery of drugs
               directly into the middle and/or inner ear from an implantable or
               external pump via a catheter.

                   (c) "Pericardium Field" shall mean delivery of drugs directly
               into the pericardial sac from an implantable pump via a catheter.

                   (d) "Vascular Graft Field" shall mean delivery of drugs
               consisting of and limited to [ * * * ] directly into vascular
               grafts from an implantable pump via a catheter.

                   (e) "Cancer Antigen Field" shall mean delivery from an
               implantable pump of an anti-cancer antigen from the list of
               anti-cancer antigens attached hereto as Exhibit A or a
               combination of such anti-cancer antigens, solely for treatment by
               immunization therapy. Such list of anti-cancer antigens may be
               reviewed for additions or deletions from time to time by
               representatives of ALZA and Durect, such determination to be made
               by mutual written agreement at the discretion of each party.

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         To provide further clarification, the Durect Fields shall not include
applications of any ALZA drug delivery technology other than applications of
DUROS(R) Technology as set forth in this Agreement.

               1.10 "DUROS(R) Technology" shall mean all Technical Information
relating to the System.

               1.11 "FDA" shall mean the United States Food and Drug
Administration or any successor United States governmental agency performing
similar functions with respect to pharmaceutical products.

               1.12 "IND" shall mean the application for Investigation of a New
Drug submitted to the FDA.

               1.13 "Intellectual Property Rights" shall mean trade secrets,
patents, copyrights, know-how and similar rights of any type under the laws of
any governmental authority, domestic or foreign, including all applications and
registrations relating to any of the foregoing.

               1.14 "Major Market Country" shall mean each one of Canada,
France, Germany, Italy, Japan, the United Kingdom and the United States.

               1.15 "Minimum Payments" shall have the meaning set forth in
Section 6.2 hereof.

               1.16 "Minimum Payment Year" shall mean a period of four
consecutive Payment Computation Periods beginning with the first day of the
Payment Computation Period following the Payment Computation Period during which
all necessary regulatory approvals to market the Product in the first Major
Market Country have been received, and each successive four Payment Computation
Periods thereafter. The first four Payment Computation Periods shall be the
First Minimum Payment Year; the next four Payment Computation Periods shall be
the Second Minimum Payment Year; etc.

               1.17 "NDA" shall mean a "New Drug Application," "Product License
Application," or other application for approval to market a product submitted to
the FDA, as amended or supplemented from time to time.

               1.18 "Net Sales" shall mean the amounts invoiced on sales of a
Product by Durect and its Affiliates and Subcontractors to independent,
unrelated third parties in bona fide arms-length transactions, less the
following deductions actually allowed by Durect, its Affiliates and
Subcontractors and taken by such third parties and not otherwise recovered by or
reimbursed to Durect, or its Affiliates or Subcontractors: (i) trade, cash and
quantity discounts; (ii) taxes or government charges levied on the sale of
Product to the extent added to the sales price and set forth separately as such
in the amount invoiced; (iii) amounts repaid or credited by reason of
rejections, defects or returns or because of rebates or retroactive price
reductions; and (iv) delivery charges (including transportation and insurance
costs) actually included in the Net Sales invoiced. Net sales shall not include
the prices charged (at fair market value) for separate products such as catheter
access devices, syringes, gloves, and gauze pads, that may be either sold
separately from the Product or bundled with the Product in the form of a kit;
provided, however, that any Net Sales shall be deemed to include the amount or
fair market value of any

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such material has been filed separately with the SEC

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consideration (other than consideration described in Section 6.1(b)) received by
Durect or its Affiliates or Subcontractors that can be attributable to a
Product, whether such consideration is in cash or payments in kind. Net Sales
shall not include sales of a Product between or among Durect and its Affiliates
and Subcontractors.

                  1.19 "Payment Computation Period" shall mean each three month
period, or any portion thereof, ending March 31, June 30, September 30, or
December 31 of each year during the term of this Agreement.

                  1.20 "Primary Field" shall mean the [ * * * ].

                  1.21 "Product" shall mean at any time: (i) any human
pharmaceutical product consisting of a Drug incorporated in or combined with a
System and (except in cases where the Durect Field definition does not require a
catheter) a Catheter, which product is: (A) designed for use in a Durect Field;
and (B) selected as a Product under Section 2.1; or (ii) another product that is
substantially similar to the Product described in clause (i), for example, a
different strength (i.e., a different amount of active ingredient delivered in
the same pattern and by the same route of administration), or having only
cosmetic changes such as size, color, shape, etc., or similar nontherapeutic
changes.

                  1.22 "Product Candidate" shall mean any human pharmaceutical
product consisting of a Drug incorporated in or combined with a System and
(except in cases where the Durect Field definition does not require a catheter)
a Catheter, which product is designed for use in a Durect Field and which enters
the Screening Stage of development (as described in Exhibit C). Product
Candidates shall be listed on Schedule 1, which Schedule shall be amended from
time to time as required by adding those Product Candidates in accordance with
Section 2.1 and deleting those Product Candidates that have become Products or
are no longer being developed as provided hereunder. A Product Candidate shall
become a Product when it enters the Feasibility Stage of development (as
described in Exhibit C).

                  1.23 "Product Payments" shall mean the payments described
in Section 6.1.

                  1.24 "Program" shall mean all activities for developing and
obtaining regulatory approval to Commercialize Product(s) developed under this
Agreement in the Durect Fields in the Territory.

                  1.25 "Program Information" shall mean any Technical
Information developed or acquired by either party and/or a Subcontractor under
or in connection with the Program, and any Technical Information developed by
one party using any other Program Information or any of the other party's
Confidential Information.

                  1.26 "Regulatory Data" shall mean the medical, toxicological,
pharmacological and clinical data included within Technical Information to the
extent necessary to, required for, or included in any governmental regulatory
filing to obtain or maintain regulatory approval to market a Product.

                  1.27 "Secondary Fields" shall mean the [ * * * ].

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               1.28 "Subcontractors" shall mean any third party persons or
entities (other than wholesalers) to which Durect or any Durect Affiliate
directly or indirectly grants any right to Commercialize a Product as provided
for hereunder.

               1.29 "Supply Agreement" shall mean an agreement for the supply
of Durect's, its Affiliates' and Subcontractors' total requirements of each
Product by ALZA, referenced in Section 5.6.

               1.30 "Subterritory" shall mean each one of the following:
                    Subterritory A - The United States, Canada and Mexico
                    Subterritory B - European Community (as described in
                                     Exhibit D)
                    Subterritory C - Japan and the Far East(as described in
                                     Exhibit D)
                    Subterritory D - All other countries of the Territory

               1.31 "System" shall mean a drug delivery system which includes
and is contained within an implantable (or externally worn) osmotic pump
intended to function by releasing the active agent or agents on a controlled
basis. The term "System" shall include all materials, technology and attributes
contained within, or incorporated in the osmotic pump (other than the Drug
itself) and shall include the formulation and stabilization of a therapeutic
agent (such as the Drug) in the System. The System shall not include a Catheter
as defined in Section 1.2, or (except to the extent agreed upon in writing by
the parties) any docking mechanism or other components used to connect a
Catheter to the osmotic pump, and shall not include by way of example, any
delivery system that is ingested in the gastrointestinal tract or that delivers
drug through substantially intact skin.

               1.32 "Technical Information" shall mean know-how, trade
secrets, formulations, inventions, data (including Regulatory Data), technology,
processes and information necessary or useful to the Products and/or the
Program, which a party hereto has the lawful and contractual right to disclose
to the other party, and any and all Intellectual Property Rights therein and
thereto. "Technical Information" shall include, without limitation, processes
and analytical methodology used in development, testing, analysis and
manufacture, and medical, clinical, toxicological and other scientific data.
Notwithstanding the foregoing, "Technical Information" shall not include
trademarks. Subject to the foregoing, ALZA Technical Information shall include:
(A) DUROS Technology (including but not limited to all information relating to
manufacture of Systems) and any other Technical Information owned by or licensed
to ALZA prior to April 21, 1998; (B) ALZA's Program Information (as set forth in
Section 8.1); and (C) Technical Information developed by ALZA outside the
Program after April 21, 1998 ("ALZA Technical Information"); and Durect
Technical Information shall include: (a) Technical Information owned by or
licensed to Durect prior to April 21, 1998; (b) Durect's Program Information (as
set forth in Section 8.1); and (c) Technical Information developed by Durect
outside the Program after April 21, 1998 ("Durect Technical Information").

               1.33 "Territory" shall mean all of the countries of the world,
but shall exclude, for any Product: (i) countries or Subterritorities which may
be eliminated from the Territory from time to time in accordance with this
Agreement, and (ii) any countries for which Durect does not have rights to

                                                                    CONFIDENTIAL
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**Material has been omitted pursuant to a request for confidential treatment and
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commercialize the Drug incorporated in such Product. The Territory shall be
divided into Subterritories A, B, C and D as set forth in Section 1.29.

                  1.34  "Work Plan" and "Cost Estimate" shall have the
meanings set forth in Section 2.3.

                         SECTION 2 - DEVELOPMENT PROGRAM

                  2.1   Product Development. Subject to the terms and conditions
herein, Durect shall diligently develop Products under the Program in accordance
with this Agreement, including making available such of its personnel, and
taking such steps as are reasonably necessary, in order to carry out its
obligations. In the event Durect desires to initiate development work on a new
product, it shall send to ALZA a written notice setting forth a description of
the proposed new product and projected target dates for the filing of an IND,
start of Phase III clinical trials and filing of an NDA (each a "Milestone"),
which target dates shall be reasonable by industry standards and shall be
consistent with the timeline used by Durect for internal planning and
presentation to investors. Upon ALZA's written approval of the target dates for
the Milestones, which approval shall not be unreasonably withheld, the proposed
new product shall be added as a Product Candidate to Schedule 1. From time to
time, the parties will review the target dates for the Milestones in good faith
and, by mutual written agreement, revise and update the target dates if
necessary. Durect shall notify ALZA in writing when a Product Candidate is ready
to pass into the clinical development stage as outlined in Exhibit C, in which
event it shall be added as a Product to Schedule 2. Subject to the terms and
conditions of this Agreement, the addition or deletion of a Product Candidate or
Product to Schedule 1 or Schedule 2 shall be determined based on the reasonable,
good faith judgment of Durect, provided that any proposed Product Candidate or
proposed Product will not be added in the event that: (i) such proposed Product
Candidate or Product incorporates the same Drug or analog thereof that is
incorporated in a Product or Product Candidate that ALZA has notified Durect
that ALZA is developing pursuant to Section 2.5, or (ii) the proposed Product
Candidate or proposed Product incorporates an ALZA Compound and ALZA notifies
Durect that it does not want such proposed Product Candidate or proposed Product
added or (iii) ALZA determines, reasonably and in good faith, based on medical
or technical reasons, that the proposed Product Candidate or proposed Product is
not suitable for development because development or Commercialization of such
proposed Product or Product Candidate would be likely to be harmful to the
reputation of ALZA and/or DUROS Technology, provided, however, that: (a) ALZA's
determination pursuant to this clause (iii) shall be subject to review by a
mutually acceptable third party expert in the event of disagreement by the
parties as to such determination, and (b) ALZA shall not initiate development of
such proposed Product Candidate (or proposed Product), pursuant to Section 5.3
or otherwise, for its own account or with a third party for a period of [* * *]
years from the date of ALZA's determination without first proposing such
proposed Product Candidate (or proposed Product) to Durect for development and
providing Durect with a period of [ * * * ] days in which to accept or reject
such proposed Product Candidate (or Proposed Product) in writing and diligently
initiate development under the terms of this Agreement. Durect will

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provide to ALZA updated versions of Schedule 1 and Schedule 2 within [ * * * ]
days after the end of each calendar quarter in which there are any changes to
such Schedules.

         2.2   Sharing of Information.

               During the term of this Agreement, representatives of ALZA and
Durect shall meet within 30 days after the end of each calendar quarter, unless
mutually agreed to by the parties, to discuss and provide information regarding
the status of development, clinical programs, regulatory applications and
development costs and expenses incurred for the Products and Product Candidates
listed on Schedules 1 and 2 including without limitation progress against
diligence obligations. Upon request by ALZA or Durect, the parties shall also
meet from time to time to discuss improvements made to the System by each party.
In addition, each party shall promptly provide any information as reasonably
requested by the other party from time to time regarding its activities and
progress with respect to the Program. The information exchanged by the parties
pursuant to this Section 2.2 shall be in confidence subject to the terms of
Section 4.1.

         2.3   Work Plans and System Development.

               (a) In the event that Durect desires that ALZA provide certain
development services relating to any Product or Product Candidate being
developed by Durect under this Agreement, and ALZA agrees to provide such
services to Durect, Durect and ALZA shall develop a mutually acceptable
development plan ("Work Plan") for each Product Candidate (or Product) which
shall set forth: (i) the development activities to be performed by ALZA and
estimated time schedule therefor; (ii) and the estimated Development Costs
therefor ("Cost Estimates"); which Work Plans and Cost Estimates shall be signed
by an authorized officer of each party. ALZA shall diligently perform those
development activities assigned to it under the Work Plan and shall use diligent
efforts to complete tasks in the Work Plan in an expeditious and cost-effective
manner.

               (b) Development work for the System may be performed by Durect or
ALZA (to the extent agreed upon in the Work Plans). Durect shall have the right
to subcontract to third parties development of System components (but not System
design). The subcontracting of all other System development work will be subject
to the prior written consent of ALZA. If Durect desires to subcontract out the
development of System components as permitted herein to any third party, prior
to providing any information relating to Systems to such third party, Durect
shall notify ALZA of the identity of such third party, and Durect shall enter
into a confidentiality and invention assignment agreement with such third party
in a form previously approved by ALZA which expressly makes ALZA a third-party
beneficiary of such agreement and permits ALZA to directly enforce its terms.
Unless agreed to in writing by ALZA, the rights granted to Durect to perform
development work for the System pursuant to this Section 2.3 shall terminate
after a change in control of Durect in which Durect becomes controlled by a
third party company, in which event ALZA shall have the right to elect to
perform all development work relating to the System and ALZA and Durect shall
enter into a Work Plan for such System development work which shall

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provide for the continued diligent performance of such System development work
so as to minimize disruption of Product timelines. If ALZA elects not to perform
development work relating to the System after such change in control, then
Durect shall continue to have the right to perform development work relating to
the System as set forth in this Section 2.3. For the purposes of this Section
2.3, "control" shall have the same meaning as set forth in Section 1.1. All
other Product development activities may be performed by Durect, ALZA (to the
extent agreed upon in Work Plans) or subcontracted to third parties.

         2.4   Development Payments. In consideration for ALZA's work on
the Program, Durect shall pay to ALZA its Development Costs, provided that
Durect shall not be obligated to pay Development Costs in excess of those
provided for in approved Work Plans and Cost Estimates, and ALZA shall not be
obligated to perform work which would result in Development Costs exceeding such
approved Cost Estimates.

         2.5   ALZA's Right to Develop Products.

               (a) Notwithstanding Section 5.3 below, from time to time during
the term of this Agreement, ALZA may propose to Durect in writing that it wishes
to commence development of a Product in a Durect Field for its own account or
for an Affiliate. Such proposal shall set forth a description of the proposed
new product and projected target dates for the filing of an IND, start of Phase
III clinical trials and filing of an NDA. Provided that such Product proposed by
ALZA: (A) does not incorporate a Drug that could reasonably be classified in the
same Drug Class and (B) is not intended for the same therapeutic indication as a
Product or Product Candidate for which Durect at that time: (i) has commitments
to a third party ([ * * * ]) or (ii) is developing or Commercializing itself
(i.e., is included on Schedule 1 or Schedule 2), Durect shall exclusively grant
to ALZA, or to an ALZA Affiliate as directed by ALZA, the right to develop and
Commercialize such Product, including a license, with the right to sublicense,
to all Intellectual Property Rights and Technical Information owned by or
licensed to Durect, and to which Durect has the right to disclose, license or
sublicense to ALZA, solely to the extent necessary for ALZA to develop or
Commercialize such Product.

               (b) In the event that ALZA requests that Durect provide certain
development services relating to any Product being developed by ALZA as
described in this Section 2.5, and Durect agrees to provide such development
services, Durect and ALZA shall develop a mutually acceptable Work Plan and Cost
Estimate for Durect's work which shall be signed by an authorized officer of
each party. Durect shall diligently perform those development activities
assigned to it under any such Work Plan and shall use diligent efforts to
complete the tasks in the Work Plan in an expeditious and cost-effective manner.
ALZA will pay to Durect [ * * * ]. Such payments shall be made [ * * * ] within
[ * * * ] days after the date of receipt by ALZA of Durect's invoice.

               (c) If ALZA or its Affiliate Commercializes any Product under
this Section 2.5 in a Durect Field, ALZA or its Affiliate shall make payments to
Durect on each such Product on the

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financial terms described in Exhibit F attached hereto and on other terms as may
be agreed to in good faith by the parties in writing.

         2.6   Regulatory Activities for Durect Products.

               (a) Durect shall diligently take all steps necessary to obtain
regulatory approval to market each Product developed by Durect hereunder in each
Major Market Country of the Territory, so long as Durect retains
Commercialization rights for such Product under this Agreement, including
promptly preparing and filing necessary applications for regulatory approval to
market the Product in each such country (including the IND and NDA and
corresponding regulatory filings outside the United States) and shall work
diligently to obtain such approvals as expeditiously as possible. Durect shall
use reasonable commercial diligence to obtain such regulatory approvals in other
countries of the Territory. ALZA may be delegated certain duties relating to
clinical and regulatory activities under the Program on a Product-by-Product
basis by mutual agreement as set forth in Work Plans. The CMC Section of any
regulatory filing, to the extent it relates to the System, may be maintained by
ALZA, in one or more of ALZA's Drug Master Files to the extent permissible under
applicable laws and regulations, for which Durect shall have the right of
reference for each Product hereunder. Durect shall prepare the CMC Section
subject to ALZA's review and decision-making authority under Section 2.6(b).

               (b) Notwithstanding the allocation of regulatory responsibilities
in this Section 2.6, the representatives of each party shall have the right to
review and comment upon all regulatory filings proposed to be made with respect
to any Product for each country of the Territory as to which Durect maintains
rights hereunder, provided that for any such comments to be considered, the
comments shall be provided within [ * * * ] business days after the receipt of
any draft filings for review. To the extent ALZA performs review of regulatory
filings or attends meetings with regulatory agencies as to matters beyond the
requirements of its activities under the Program (and not at Durect's request),
it shall do so at its cost and expense. Durect shall have the right to make
final decisions with regard to any regulatory filings relating to any Product
developed by Durect under this Agreement, provided that notwithstanding anything
to the contrary herein, due to ALZA's continuing interest in development and
production of Systems for multiple applications, ALZA shall have the right to
approve regulatory matters relating to the System or its function, manufacture
or safety, including manufacturing specifications and the relevant portions of
the CMC Section of an NDA or its equivalent. Each party shall with reasonable
promptness provide the other party with copies of all correspondence from or to
such regulatory authorities concerning each such Product. ALZA shall have the
right to participate in any conference or meeting with regulatory authorities
with respect to each Product. Durect shall notify ALZA in writing of its receipt
of regulatory approval to market each Product developed by Durect in any country
of the Territory within [ * * * ] days after receipt of any such approval.

               (c) Representatives of each party shall have the right to review
and comment on all proposed protocols for any clinical studies to be conducted
by either party with respect to

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any Product being developed by Durect, and each party shall make such changes in
such protocols as may be reasonably requested by the other in writing within
[ * * * ] business days after receiving the proposed protocols, provided that
Durect shall make final decisions on the protocols and their implementation. To
the extent ALZA conducts review of protocols as to matters beyond the
requirements of its activities in the Program (and not at Durect's request),
ALZA shall do so at its cost and expense.

               (d) From time to time during the term of this Agreement, ALZA may
wish to include certain patent information in the patent certification of an NDA
filed or which may be filed by or on behalf of Durect under this Agreement
relating to a Product. If ALZA advises Durect in writing of the patent number
and expiration date, or such other information as the FDA may from time to time
require, of patents to be included in the NDA patent certification or any
amendment thereof, Durect shall include such information in the NDA, or amend
the NDA, within the applicable time limits required by law.

               (e) Nothing contained in this Section 2.6 or elsewhere in this
Agreement is intended to conflict with any applicable regulations and laws
relating to procuring and maintaining regulatory approval for the Products in
all countries of the Territory where the Products will be developed and
Commercialized, and in the event of any conflict with the terms of this
Agreement and applicable laws, the applicable laws will control.

                      SECTION 3 - DISCLOSURE OF INFORMATION

           3.1 Disclosure. Upon execution of this Agreement, and thereafter
during the term hereof, at such times as the parties shall mutually agree, each
party shall disclose to the other, in confidence subject to Section 4.1 hereof,
relevant Confidential Information and Program Information necessary or useful to
the Program. Each party may use such Confidential Information and Program
Information disclosed by the other party for the purposes permitted by this
Agreement, but for no other purpose. Each party shall, at the request of the
other and on a confidential basis subject to Section 4.1, allow personnel of the
other party to consult with its staff at mutually agreeable times, to discuss
and review such Confidential Information and Program Information. All
Confidential Information and Program Information heretofore or hereafter
disclosed by either party to the other relating to the subject matter hereof
shall be deemed to have been disclosed pursuant to this Agreement and shall be
subject to the provisions of this Agreement including, but not limited to,
Section 4.1.

                      SECTION 4 - CONFIDENTIALITY OF INFORMATION

           4.1 Confidentiality. Except as specifically authorized by this
Agreement, each party shall, for the term of this Agreement and for [ * * * ]
years after its expiration or termination for any reason, keep confidential, not
disclose to others and use only for the purposes authorized herein, all of the
other party's Confidential Information and Program Information, except as
permitted by this Agreement; provided, however that the foregoing obligation
shall not apply to the extent that any such information is

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(i) already known to the recipient at the time of disclosure, as evidenced by
its prior written records (but not including information known to Durect
personnel as a result of prior association with ALZA), (ii) publicly known prior
to or after disclosure other than through unauthorized acts or omissions of the
recipient, or (iii) disclosed in good faith to the recipient by a third party
lawfully entitled to make such disclosure, or (iv) independently developed by
the recipient without use of the disclosing party's Confidential Information as
evidenced by written records of the recipient; provided, however, that the
exception in clause (iv) shall not apply with respect to any alleged independent
development by Durect of information relating to Systems or DUROS Technology
(including the manufacture thereof), and provided further that ALZA shall have
no obligations of confidentiality or non-use respecting any information provided
by Durect relating to Systems or DUROS Technology. Notwithstanding the
foregoing, any Confidential Information may be (A) disclosed to governmental
agencies and to others where such information may be required to be included in
patent applications or regulatory filings permitted under the terms of this
Agreement; (B) provided to third parties under appropriate terms and conditions
including confidentiality provisions substantially equivalent to those in this
Agreement for consulting, manufacturing, development, external testing and
marketing trials with respect to the Product; (C) published, if and to the
extent such publication has been approved in writing by ALZA, to the extent it
relates to ALZA Confidential Information, or Durect, to the extent it relates to
Durect Confidential Information; or (D) disclosed to the extent required by
applicable laws or regulations or as ordered by a court or other regulatory body
having competent jurisdiction. In each of the foregoing cases, the recipient
will use its reasonable efforts to limit the disclosure and maintain
confidentiality to the extent possible. In addition, ALZA may disclose
Confidential Information and Program Information of Durect to any Affiliate
solely for the purposes set forth in this Agreement, and any such Affiliate
shall comply with the obligations of confidentiality and non-use set forth
herein.

                      SECTION 5 - COMMERCIALIZATION RIGHTS

         5.1   Grant of Rights.

               (a) On the terms and conditions of this Agreement and subject to
ALZA's rights set forth in Sections 2.5, 5.3(c), 5.4 and 5.5: (i) Durect shall
have the exclusive right to Commercialize each of the Products in the Territory,
with the right to record sales for its own account; (ii) on a Product-by-Product
basis, Durect shall have the right to appoint an Affiliate or Affiliates of
Durect to Commercialize Products in any country or countries of the Territory;
(iii) Durect shall also have the right, on a Product-by-Product basis, to
appoint and/or enter into agreements with Subcontractor(s) to Commercialize,
sell and distribute such Product in any country or countries of the Territory;
and (iv) Durect shall have the exclusive right (subject to the rights and
obligations under this Agreement respecting the development of the Systems
including the provisions of Section 2.3) to develop the Products and to appoint
and/or enter into agreements with Subcontractors to perform such development

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pursuant to this Agreement. In the case of such appointment in any country by
Durect of a non-Affiliate: (i) such Subcontractor shall be subject to the terms
and conditions of this Agreement; (ii) if the Subcontractor will not be
restricted from developing or commercializing products (other than the Products
for which the Subcontractor is appointed under this Agreement) in the same
Durect Field as the Product(s) for which the Subcontractor is appointed,
[* * *]; and (iii) the rights of ALZA under this Agreement shall not be
prejudiced or in any other way reduced or limited by such subcontracting
arrangement. Subject to the terms and conditions of this Agreement, ALZA hereby
grants to Durect and its Affiliates a license under Intellectual Property
Rights covering ALZA Confidential Information (including information owned by
ALZA as of April 21, 1998 relating to catheters and mechanisms for docking
catheters to the Systems) ALZA Program Information, and the Systems solely to
the extent necessary for Durect to Commercialize and Manufacture (subject to
Section 5.6 hereof) Products, to perform development activities as contemplated
herein, and to otherwise perform its obligations in accordance with this
Agreement.

               (b) Subject to the terms and conditions of this Agreement,
including but not limited to Section 5.3, Durect shall have the exclusive right
to Commercialize each Product on Schedule 2: (A) in Subterritories A, B and C
for a period of 20 years from the date of first commercial sale of such Product
to an independent third party in a Major Market Country in such Subterritory;
(B) in Subterritory D for a period of 20 years from the date of first commercial
sale of such Product in any Major Market Country.

               (c) Subject to the terms and conditions of this Agreement, Durect
shall have an option to extend year-by-year the period of Commercialization
rights granted under Section 5.1(a) on a Product-by-Product,
Subterritory-by-Subterritory (or if applicable, country-by-country) basis (with
respect to the Products, Subterritories and countries for which Durect has
retained rights), by written notice to ALZA given at least [ * * * ] prior to
the expiration of Durect's rights under Section 5.1(b) for such Product in such
Subterritory or country.

               (d) If the option to extend Commercialization rights is exercised
in accordance with Section 5.1(c) for any Product in any Subterritory or
country, Durect shall commence making payments automatically under the
provisions of Section 6.3 for such Product with respect to such Subterritory or
country as the obligations to make Product Payments for such Product in such
Subterritory or country under Section 6.1 expire. In the event that Durect
exercises its option to extend its rights described in Section 5.1(c), the
Commercialization rights granted under Section 5.1(a) for such Product in such
Subterritory or country shall continue for the extension term(s) and under the
conditions set forth in Section 6.3.

               (e) From time to time during the term of this Agreement, Durect
may propose to ALZA in writing additional components to be added to the CNS
Field, consisting of a specific drug, drug class or clinical indication. Such
proposal shall include Durect's summary development plan

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and budget for developing Products in such additional component for each of the
five years following such proposal. Provided that such additional component is
not in an area in which ALZA or any ALZA Affiliate at that time has commitments
to a third party or has an active development program of its own, and Durect and
ALZA agree upon reasonable diligence provisions for such additional component
(which agreement the parties shall in good faith attempt to reach within [ * * *
] days after ALZA's receipt of Durect's summary development plan), the parties
shall add such component to the CNS Field definition.

                  5.2 Commercial Diligence. Within 30 days after the filing for
regulatory approval in the first Major Market Country for each Product, Durect
shall notify ALZA in writing as to its plans for Commercializing such Product in
the Territory. Durect shall diligently pursue regulatory approval and
Commercialization of the Products in the Territory. Promptly after obtaining the
necessary regulatory approvals (and pricing approval where applicable) in any
country of the Territory (and in any event within [ * * * ] months after such
approvals) Durect (or its Affiliates or Subcontractors) shall commence and shall
continue diligently to Commercialize the Product on a nationwide basis in such
country using the same efforts that an established pharmaceutical company
normally devotes to its own comparable products, so long as Durect retains
Commercialization rights under this Agreement. Without limiting the foregoing,
to maintain Commercialization rights to a Product in each Subterritory, Durect
must diligently Commercialize such Product in such Subterritory in accordance
with the Commercialization requirements applicable to such Subterritory as set
forth in the chart below; provided, however, that Durect shall retain
Commercialization rights in the entire Territory and it shall be deemed to have
met the Commercialization requirements in all Subterritories if it has
introduced such Product and has met the Commercialization requirements in each
Major Market Country (including the obligation to make Product Payments pursuant
to Section 6).

          Subterritory               Commercialization Requirements

               A             Durect must Commercialize the Product in [ * * * ]

               B             Durect must Commercialize the Product in [ * * * ]

               C             Durect must Commercialize the Product in [ * * * ]

               D             Durect must Commercialize the Product in [ * * * ]

If any time after the [ * * * ], Durect has not met the Commercialization
requirements for any Subterritory as set forth above, ALZA may, upon [ * * * ]
days prior written notice to Durect, identify any Major Market

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Country in such Subterritory listed in the chart above in which a Product is not
being commercially sold by Durect, its Affiliates or Subcontractors and for
which neither Durect or its Affiliates or Subcontractors are, nor have been for
at least the preceding [ * * * ], diligently seeking regulatory approval to
Commercialize the Product in such Major Market Country (the "Identified
Country"). ALZA and Durect shall attempt in good faith, for up to [ * * * ] from
the date of such notice, to seek a mutually acceptable means of Commercializing
the Product in such Identified Country, which may include both ALZA and Durect
negotiating an agreement with a third party. If after such [ * * * ] period no
such means has been agreed upon, then ALZA may, by written notice to Durect,
terminate the rights of Durect hereunder to Commercialize such Product in such
Subterritory. Notwithstanding the foregoing, Durect shall maintain its sole
commercialization rights in any country in such terminated Subterritory where
the Product has been introduced for so long as Durect continues diligently to
commercialize the Product in such country and to make Product Payments under
Section 6 as applicable. For each Product with respect to which Durect does not
retain Commercialization rights in the particular countries of the Subterritory
("Terminated Countries"), ALZA shall have the rights to such Product in such
Terminated Countries in accordance with Section 11.6.

         5.3   Durect Field Exclusivity.

               (a) Subject to the terms and conditions of this Agreement and
except as provided in Section 5.3(c), Section 5.4 and Section 2.5, ALZA shall
not: (i) develop for its own account a product using the System that is designed
for use in any Durect Field, or (ii) grant to a third party any rights to
develop, manufacture or Commercialize products using the System (or license
Intellectual Property Rights covering ALZA Technical Information) that ALZA
knows or has reason to know, at the time such third party arrangement is entered
into, would be a product designed for use in a Durect Field. Nothing herein
shall be deemed to restrict ALZA from developing or granting rights with respect
to any products that are not designed and developed for use in a Durect Field,
subject to the following:

               (A) ALZA may not itself develop or Commercialize, nor grant
rights to a third party to develop or Commercialize any product using the System
which incorporates Sufentanil so long as Durect and/or a Subcontractor
(including ALZA) is diligently developing or Commercializing the
non-catheterized Product using Sufentanil as the Drug ("Sufentanil Product") in
accordance with the terms of this Agreement.

               (B) In the event ALZA (or a third party to whom ALZA has granted
rights) Commercializes a product using the System which incorporates an opioid
compound (other than Sufentanil) as the active ingredient, then starting upon
the FDA approval for such other product and during such period as Durect and/or
a Subcontractor is diligently developing or Commercializing the Sufentanil
Product in accordance with the terms of this Agreement, the payments due to ALZA
under Section 6 for the Sufentanil Product shall be reduced by [ * * * ].

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         If Durect can reasonably show that a third party contractor of ALZA is
manufacturing or Commercializing products using the System, which products are
being used in the Durect Fields (other than products to which ALZA has rights
under this Agreement, including but not limited to pursuant to Section 2.5),
Section 5.3(c) and Section 5.4), then ALZA agrees to notify such third party
contractor of Durect's rights in the Durect Fields and, to the extent it has the
legal right to do so, to use its reasonable commercial efforts to stop such
third party from manufacturing or Commercializing such products in the Durect
Fields. However, Durect acknowledges that ALZA may not have the right to limit
uses of products that are not designed for use in a Durect Field. The
obligations of ALZA under Section 5.3 shall continue for the term of this
Agreement.

               (b) From time to time during the term of this Agreement, Durect
and ALZA may, at their discretion, discuss opportunities to add either
additional products or additional fields of products to the definition of Durect
Fields under this Agreement, by written agreement of the parties; provided that
neither party shall be obligated to enter into negotiations or into such an
agreement, or to reserve for the other party rights to any additional products
or fields until such time as an agreement is made to that effect. In addition,
if any such additional Products, or Products in such additional fields, involves
clinical applications in the areas of [ * * * ], or delivery of drugs to the [ *
* * ] and subject to the exception provided in the next sentence below, then
ALZA shall have an option to obtain exclusive Commercialization rights to such
Products as set forth in Section 5.5(a). The foregoing option to ALZA shall not
apply to any Product which Durect Commercializes through a Subcontractor who
holds exclusive rights (by ownership or exclusive license) to a United States
patent which: (i) covers the Drug incorporated into such Product, or the Drug's
manufacture or use which but for a license from the Subcontractor would preclude
Durect from the development, Commercialization or manufacture of such Product
incorporating such Drug, and (ii) will provide at least [ * * * ] years of
market exclusivity from the time Durect and the Subcontractor enter into an
agreement for the development and/or Commercialization of such Product (any such
Product shall herein be referred to as "Proprietary Product").

               (c) Notwithstanding Section 5.3(a), if ALZA is requested by a
third party to develop a product using the System without a catheter, which
product is designed for use in the Cancer Antigen Field, then ALZA shall notify
Durect in writing of such opportunity. Durect shall notify ALZA within [ * * * ]
days after the receipt of such notice from ALZA as to whether or not Durect
wishes to pursue such opportunity as a Product under this Agreement with such
third party. If Durect and such third party enter into a written agreement
providing for the development and Commercialization of the product within [ * *
* ] days after Durect's receipt of the notice from ALZA described in the first
sentence of this Section 5.3(c), then such product shall be developed as a
Product under this Agreement, and if such condition has not been met, then ALZA
shall be free to pursue such opportunity using the System without a catheter
with such third party; provided, however, that ALZA may not develop or grant
rights to a third party to develop

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or Commercialize any such product using the System in the Cancer Antigen Field
which product incorporates the same Drug as a Product which is then being
developed or Commercialized diligently by Durect or a Subcontractor under this
Agreement in the Cancer Antigen Field. Subject to the foregoing, if ALZA
develops or Commercializes with a third party a product using the System without
a catheter designed for use in the Cancer Antigen Field pursuant to the terms of
this Section 5.3(c), and such product is designed for the same clinical use as a
product for which development of a Durect Product (the "Prior Durect Product")
has commenced under this Agreement prior to ALZA's entering into the agreement
with the third party, then if the basis on which ALZA is licensing, developing
or supplying such third party's product is more favorable to the third party
than the basis on which ALZA is licensing, developing or supplying the Prior
Durect Product hereunder, and there are no other terms or factors in the third
party arrangement that compensate for such more favorable terms, then ALZA will
offer the more favorable terms to Durect solely with respect to the Prior Durect
Product.

         5.4 Other Technologies; Conversion of Rights. The parties acknowledge
that ALZA is relying on Durect's commitment to utilizing DUROS Technology in
development of its products. Accordingly, the Commercialization rights for
Products granted to Durect under this Agreement shall become non-exclusive
rights, and the restrictions on ALZA provided for in Section 5.3 will terminate
upon written notice from ALZA, if at any time during the term of this Agreement
Durect develops or Commercializes any drug delivery technology for use in any of
the Durect Fields and that would be used in a manner similar to the DUROS
Technology. In such event, no additional Product Candidates or Products shall be
added to Schedules 1 or 2 (but Durect shall retain exclusive rights only to
those Products already included in Schedule 2 and only for so long as Durect
continues to meet its obligations for such Products and does not develop any
product using such other drug delivery technology that contains the same Drug
for use in the same Durect Field as any of such Products). Nothing in this
Section 5.4 shall be deemed to restrict Durect from developing and
Commercializing any type of drug delivery technology in any fields of use
outside of the Durect Fields. During the term of this Agreement, Durect shall
have the right to delete any Durect Field(s) from the "Durect Fields" definition
by written notice to ALZA effective [ * * * ] days after such notice is received
by ALZA, in which event, all rights of Durect in such Durect Field shall
terminate; provided, however, such deletion of any Durect Field by Durect shall
not affect the rights and obligations of the parties with respect to any: (i)
Products in such deleted Durect Fields already included in Schedule 2 as of the
date such field is deleted so long as Durect continues to meet its obligations
hereunder for such Products and (ii) other Durect Fields not deleted in
accordance with this Section 5.4.

         5.5      ALZA Commercialization Rights.

               (a) Durect hereby grants to ALZA options to obtain exclusive
worldwide Commercialization rights to each Product in the Cancer Antigen Field
which is not a Proprietary Product (as defined in Section 5.3(b) above) and each
additional Product for which ALZA has option rights under

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Section 5.3(b) (each an "Option Product") . At the time that Durect has received
data from [ * * * ], Durect may deliver written notice thereof to ALZA, along
with the data and a report summarizing such data regarding such Product,
provided that Durect must deliver such notice to ALZA by [ * * * ]unless
mutually agreed to in writing by the parties. No later than [ * * * ] days after
such notice from Durect ("Option Period"), ALZA shall notify Durect in writing
whether it elects to:

               (i) enter into an agreement with Durect to develop and
Commercialize such Product, in which case the parties shall negotiate in good
faith an agreement for the development and Commercialization of such Product,
which agreement shall require ALZA to Commercialize such Product with the same
degree of diligence as required of Durect under Section 5.2; or

               (ii) not obtain Commercialization rights to such Product, in
which event Durect shall be entitled to enter into an agreement with a third
party to develop and Commercialize such Product; or

               (iii) solely with respect to an Option Product, extend the Option
Period by increments of [ * * * ] months until such time as [ * * * ] and
thereafter by increments of [ * * * ] year until such time [ * * * ] (each
increment an "Extension Period"), provided that ALZA shall be required to fund
development work for such Product during each such Extension Period, but
provided further that ALZA shall not be required to fund development work on
more than [ * * * ] at a time in the Cancer Antigen Field or any additional
field under Section 5.3(b) in order to extend its options for all Products in
such Durect Field. ALZA may not extend the Option Period past [ * * * ] for such
Product unless mutually agreed to in writing by the parties.

         If ALZA elects to exercise its option to any Option Product subject
to this Section 5.5(a) at any time during the Option Period or any Extension
Period, and the parties are unable to agree on terms for such Commercialization
rights within [ * * * ] days after such exercise, either party may elect to
submit the determination of such terms to special arbitration in accordance with
Section 15, provided that judgment must be rendered no later than [ * * * ] days
after the commencement of arbitration (as defined in Section 15). In such
arbitration, the arbitrators shall be instructed to make a determination as to
the fair market value of the rights granted to the Product in question as
between two independent companies negotiating at arms' length and shall
determine appropriate terms, including reasonable diligence provisions, taking
into account, among other things, evidence presented concerning the terms agreed
upon by other parties in arms' length negotiations for products at a similar
stage of development and with similar market potential. Upon such decision by
the arbitrators, the decision shall become a binding agreement of the parties.

               (b) In addition, with respect to any Products in all Durect
Fields not subject to the application of Section 5.5(a), except for those
Products for which Durect either obtains funding or access to a proprietary Drug
from a third party and has granted Commercialization rights to the third party
providing such funding or Drug prior to the commencement of human clinical
trials for such Product, if

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Durect seeks a third party to Commercialize a Product other than such excepted
Products (including by Subterritory), Durect shall deliver written notice
thereof to ALZA. Upon receipt of such notice by ALZA, if ALZA is interested in
such opportunity, the parties shall attempt to negotiate in good faith the terms
of an agreement for ALZA to Commercialize such Product for a period of [ * * * ]
days ("Negotiation Period"). If, despite such good faith negotiations, ALZA and
Durect are unable to agree upon binding written terms for such an arrangement
within the Negotiation Period, then Durect will thereafter be free to enter into
agreement(s) with other parties for the Commercialization of such Product.

         5.6 Manufacture of Product.

             (a) Subject to the terms and conditions of this Agreement,
including those set forth in this Section 5.6: (i) Durect shall have the
exclusive right, in the Territory, to manufacture, assemble and finish
commercial and clinical supplies of Products, including the right to make
Systems and fill Systems solely and specifically for incorporation into Products
and not for any other purpose (collectively "Manufacture"); (ii) on a
Product-by-Product basis, Durect shall have the right to appoint such Affiliates
for which Durect possesses, directly or indirectly, the power to direct or cause
the direction of the management or policies of such Affiliates to Manufacture
Products in [ * * * ] and such other countries as shall be agreed upon by the
parties from time to time; and (iii) on a Product-by-Product basis, Durect shall
also have the right to subcontract out to third parties who normally engage in
such subcontract assembly work for others the manufacture of production and
process equipment, System components, the filling of Systems, and sterilization
and final assembly of Product for commercial and clinical supplies of Products,
provided that System subassembly may not be subcontracted to any third party
other than [ * * * ] without ALZA's written approval. Other than subcontracting
as specifically set forth in Section 5.6(a)(ii)-(iii) above, the Manufacture of
Product shall be performed only by Durect and may not be subcontracted to any
parties other than ALZA without the prior written consent of ALZA. Unless agreed
to in writing by ALZA, the rights granted to Durect pursuant to this Section 5.6
or manufacturing rights granted elsewhere in this Agreement shall terminate upon
a change in control of Durect in which Durect becomes controlled by a third
party company, in which event, ALZA shall have the right to elect to supply all
of Durect's and its Affiliates and Subcontractor's clinical and commercial
requirements for Product (excluding any Catheter or other components as agreed
upon by the parties which are external to the System), at [ * * * ]; provided
however, that the price charged by ALZA shall not exceed [ * * * ]. ALZA and
Durect shall enter into a written supply agreement for such manufacture and
supply to Durect, its Affiliates and Subcontractors which shall include such
provisions for interim supply to ensure uninterrupted supply of Products
[ * * * ] provided that the price charged by ALZA shall not exceed [ * * * ]
until ALZA is able to fully meet Durect and its Affiliates and Subcontractor's
requirements after such a change in control. If ALZA elects not to supply
Durect and its Affiliates and Subcontractor's requirements after such a change
in control, then Durect shall continue to have the right to Manufacture Product
as set forth in this Section 5.6. For the purposes of this Section 5.6(a),
"control" shall have the same meaning as set forth in Section 1.1.

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               (b) The parties acknowledge that ALZA has provided Durect with
reasonable assistance (including making available scientific, engineering and
manufacturing and other personnel) and transferred to Durect appropriate
documentation relating to Systems manufacture in accordance with a work plan
agreed upon by the Parties. All such materials and information shall remain the
sole property of ALZA. At the request of ALZA, Durect shall promptly transfer
back to ALZA any and all improvements, documentation or other Technical
Information that may be developed by Durect or its subcontractors relating to
Manufacture of Systems. To the extent such transfer requires technical
assistance from Durect, ALZA shall reimburse Durect for the cost of such
assistance as determined in accordance with Exhibit E.

               (c) All Manufacture of Product by Durect hereunder shall be in
strict accordance with all applicable laws and regulations, including the
"current good manufacturing practices" regulations of the U.S. Food and Drug
Administration. If Durect desires to subcontract any part of manufacturing of
Systems as permitted herein to any third party, prior to providing any
manufacturing information relating to Systems to such third party, Durect shall
notify ALZA of the identity of such third party, and Durect shall enter into a
confidentiality and invention assignment agreement in a form previously approved
by ALZA with such third party which expressly makes ALZA a third-party
beneficiary of such agreement and permits ALZA to directly enforce its terms.

               5.7 Identification of ALZA. At ALZA's request, Durect shall cause
each Product and its packaging to display prominently, in a manner reasonably
acceptable to ALZA, an ALZA name and logo, and to identify ALZA as a developer
of such Product. All uses of the ALZA name and marks shall be subject to prior
review and approval by ALZA within 30 days.

                         SECTION 6 - PAYMENTS

               6.1 Product Payments. In consideration of the rights granted to
Durect hereunder, the performance of the Program by ALZA and ALZA's other
obligations under this Agreement, Durect shall make Product Payments to ALZA on
Net Sales of the Product for the term of the Commercialization rights set forth
in Section 5.1. The payments to be made under this Section 6.1 are in
recognition of the unusual nature of the arrangements between the parties,
pursuant to which ALZA will provide access to technology over several years,
without profit, in anticipation of possible future payments under this section
6.1. By the payments under this Section 6.1, it is the intent of the parties
that ALZA's efforts and expenditures in creating DUROS Technology to be utilized
in the Program be recognized by a long-term financial sharing in Durect's
Product revenues.

                   (a)      Product Payments on Net Sales of Product due under
this Section 6.1 for any calendar year shall be based on the prior calendar
year's total Net Sales of Product in the Territory, with payment rates for such
calendar year to be the applicable percentages set forth herein. The

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applicable payment rate shall be calculated by [ * * * ], but shall not be less
than 2.5% nor more than 5%. During the first calendar year of Product sales, the
payment rate will be 2.5%.

    Examples:
                Sales in Year X-1*                 Payment Rate
                  ($ Million)                      For Year X**

                  $[ * * * ]                       [ * * * ]
                  [ * * * ]                        [ * * * ]
                  [ * * * ]                        [ * * * ]
                  [ * * * ]                        [ * * * ]
                  [ * * * ]                        [ * * * ]
                  [ * * * ]                        [ * * * ]

* Net Sales in the Territory by Durect, its Affiliates and Subcontractors for
  the prior calendar year.
**The applicable payment rate for the current calendar year.

             (b) In addition to Product Payments under Section 6.1(a), Durect
shall make payments to ALZA equal to 5% of any upfront, milestone or any special
fees, payments or other consideration received by Durect, its Affiliates or
Subcontractors with respect to Products after deducting from such consideration:
(i) any tax or other government charge (other than income tax) levied on such
consideration to the extent borne by Durect, its Affiliates and Subcontractors
and (ii) any payments (or portions thereof) that constitute reimbursement of
(and are determined based upon) genuine research, development and/or
manufacturing costs incurred by Durect, its Affiliates and Subcontractors
including but not limited to reimbursement of expenses for reagents, materials,
equipment, salaries, testing, clinical trials, insurance and any overhead
reasonably attributable to such research, development or manufacture.

         6.2 Minimum Payments. Durect shall make Minimum Payments to ALZA, of
a Subterritory by Subterritory basis for Subterritories A, B and C, as follows:
With respect to each Product, periodically during the Program, commencing in the
calendar quarter when a Product first becomes a Product, Durect shall provide
ALZA with good faith projections of Net Sales for each of the first [ * * * ]
years of marketing such Product in each Subterritory. At least [ * * * ] in each
calendar year, Durect shall update such projections, with one update to be
delivered no later than [ * * * ] days after NDA filing (or if earlier, the
first filing for regulatory clearance to market the Product in a Major Market
Country), and a final update to be delivered within [ * * * ] days after the
first regulatory clearance to market the Product in a Major Market Country. Such
projections shall be consistent with those provided for purposes of forecasting
amounts to be manufactured by Durect or supplied by ALZA pursuant to the Supply
Agreement. Minimum Payments shall commence and shall be paid as follows:

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     Subterritory              Minimum Payment Commences With

     A or B*                   First Minimum Payment Year
     A or B**                  Second Minimum Payment Year
     C                         Third Minimum Payment Year

*  Whichever of Subterritory A or B in which the Product is first approved in a
   Major Market Country.
** The other of Subterritory A or B.

Once commenced in accordance with the above table, quarterly Minimum Payments
for each of Subterritories A, B and C shall be 0.375% of the total final
projection for each of the first [ * * * ] years of marketing of the Product for
such Subterritory (1.5% of projected Net Sales of Product on an annual basis),
and Minimum Payments for each such Subterritory shall continue thereafter at the
[ * * * ] year level. Minimum Payments paid to ALZA by Durect shall be fully
creditable against Product Payments on Net Sales under Section 6.1 for the
Minimum Payment Year for which the Minimum Payments are made. No Minimum
Payments will be payable in Subterritory D.

               6.3 Optional Payments to Extend Commercialization Rights; Payment
Adjustments. If Durect exercises its option to extend its sole Commercialization
rights under Section 5.1 in accordance with Section 5.1(c) hereof for any
Subterritory or country, Durect shall pay to ALZA, for each such country ,
beginning on the date when the obligation to make Product Payments under Section
6.1 has terminated for such Subterritory or country and for as long as Durect
elects to continue its sole Commercialization rights under Section 5.1(c) hereof
for such Subterritory or country the same Product Payments as set forth in
Section 6.1(a) and (b) for the initial Commercialization term of Net Sales of
Product in such Subterritory or country. Payments by Durect under this Section
6.3 for each Subterritory or country shall continue until such time as Durect
provides written notice to ALZA, not less than [ * * * ] days before the
beginning of any calendar year, that payments under this Section 6.3 will cease
as to such Subterritory or country at the beginning of the calendar year set
forth in such notice, at which time the rights under Section 5.1 shall terminate
for such Product for such Subterritory or country.

               6.4 Compulsory License. During the period that Durect retains the
sole Commercialization rights to a Product in any country, if in such country
any third party tries to obtain from ALZA or Durect or any Affiliate or
Subcontractor thereof a compulsory license or rights pursuant to governmental
authority to market the Product in such country, ALZA and Durect will use all
reasonable efforts to oppose the grant of such license or rights and to obtain
the highest royalty or payment rate possible if such compulsory license cannot
be avoided. In the event that a third party obtains such compulsory license in
such country, Durect shall have the benefit of any more favorable payment terms
with respect to such Product in such country as is granted under such compulsory
license or right, from the date of first commercial sale by the third party of
the Product in such country.

               6.5 Payment Estimates. Within [ * * * ] days after the end of
each Payment Computation Period, beginning with the Payment Computation Period
as to which payments are first due

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to ALZA under this Section 6, Durect shall provide ALZA with a written estimate
of Product sales as to which payments will be due in respect of the Payment
Computation Period in question.

                         SECTION 7 - PAYMENT PROCEDURES

               7.1 Development Cost Payments. Payments due under Sections 2.4
and 2.6 hereof shall be made quarterly within 30 days after the date of receipt
by Durect of ALZA's invoice.

               7.2 Product-Based Payments. Payments to ALZA from Durect due
under Sections 6.1 and 6.3 hereof shall be made within 60 days after the end of
each Payment Computation Period with respect to Net Sales of the applicable
Products during such Payment Computation Period. Payments to ALZA from Durect
due under Section 6.2 shall be made within 60 days after the end of each Payment
Computation Period as to which payments are due. Each payment under this Section
7.2 shall be accompanied by a report setting forth the calculations of the
amounts payable to ALZA on a Product-by-Product and Subterritory-by-Subterritory
basis.

               7.3 Manner of Payment. All payments due hereunder shall be made
in United States dollars and, unless otherwise agreed in writing, shall be made
by wire transfer to such bank as ALZA may designate in writing without set-off
and free and clear of, and without any deduction or withholding for or on
account of, any taxes, duties, levies, fees or charges except those taxes or
duties levied against ALZA which are legally required to be withheld by Durect.
Payments due on Net Sales made in currency other than United States dollars
shall first be calculated in the foreign currency and then converted to United
States dollars on the basis of the exchange rate in effect for the purchase of
United States dollars with such foreign currency as quoted in the Wall Street
Journal (or comparable publication if not quoted in the Wall Street Journal)
with respect to the currency of the country of origin of such payment on the
last business day of the Payment Computation Period for which the payment is
being made. If restrictions on the transfer of currency exist in any country
such as to prevent Durect from making payments in the United States, Durect
shall take all reasonable steps to obtain a waiver of such restrictions or
otherwise to enable Durect to make such payments, failing which Durect shall, or
shall cause a United States Affiliate to, pay the amounts due upon sales in such
country in United States dollars.

               7.4 Books of Account. Each party shall maintain true and complete
books of account containing an accurate record of all data necessary for the
proper computation of payments due from it or charges made by it under this
Agreement. Each party shall have the right, through the independent certified
public accountant employed by the other party to conduct its regular annual
audit, or through a firm of independent public accountants selected by mutual
agreement of the parties, to examine the books of account of the other party at
any time within two years after the date of the payment or charges to which they
relate (but not more than once in each calendar year) for the purpose of
verifying the amount of such payments or charges and the accuracy of such books
of account. Such examination

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shall be made during normal business hours at the place of business of the party
being audited. The parties agree that information furnished as a result of any
such examination shall be limited to a written statement by such certified
public accountants to the effect that they have reviewed the books of account of
the party being audited and either (i) the amounts of the payments due or
charges made under this Agreement are in conformity with such books of account
and the applicable provisions of this Agreement or (ii) setting forth any
required adjustments. The fees and expenses of the accountants performing such
verification shall be borne by the party requesting the audit. If any such audit
shows any underpayment or overcharge, a correcting payment or refund shall be
made within 30 days after receipt of the written statement described above.
Notwithstanding the foregoing, if any such audit results in any underpayment or
overcharge with respect to any Payment Computation Period of more than the
greater of (i) $10,000 or (ii) 5% of the payment or charge actually due, then
the party being audited shall bear all costs of the audit.

               7.5 Late Payments. All payments not made when due hereunder shall
bear interest at the maximum rate permitted - by applicable law.

                SECTION 8 - OWNERSHIP AND USE OF PROGRAM INFORMATION

               8.1 Ownership. All Program Information, including but not limited
to Program Information relating to the site specific administration of drugs
(e.g. pharmaco-kinetics and pharmaco-distribution) and/or relating to any Drug
as such, or any Catheter as such, except for any Program Information that is the
property of ALZA as set forth herein, shall be the sole property of Durect (and
shall be included in Durect Technical Information for purposes of this
Agreement). ALZA shall promptly disclose to Durect any such Program Information,
and ALZA and its personnel and subcontractors working on the Program shall
execute and deliver such assignments, confirmations of assignments, or other
written instruments as are necessary to vest in Durect clear and marketable
title to Program Information assigned to Durect hereunder. Notwithstanding the
foregoing, all Program Information relating to any ALZA Compound or any Drug
incorporated in a Product developed by ALZA pursuant to Section 2.5 or the
System or its manufacture or to any combination of Systems with other
components, active agents, features or processes and any Technical Information
developed by Durect (whether or not pursuant to the Program) that relates to
DUROS Technology shall be the sole property of ALZA (and shall be included in
ALZA Technical Information for purposes of this Agreement). Durect shall
promptly disclose to ALZA any such Program Information and Technical
Information, and Durect and its personnel and Subcontractors working on the
Program shall execute and deliver such assignments, confirmations of
assignments, or other written instruments as are necessary to vest in ALZA clear
and marketable title to Program Information assigned to ALZA hereunder. In
addition to the foregoing, to the extent Durect develops any Technical
Information relating to a means of connecting or "docking" a catheter to a
System and subject to ALZA abiding by the terms and conditions of the Amended
and Restated Market Stand-Off

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Agreement entered into between Durect and ALZA dated June 19, 1998 and attached
hereto as Exhibit H, Durect grants to ALZA a worldwide, royalty free,
nonexclusive license, with the right to grant sublicenses, to any such Technical
Information.

                  8.2 Use. Each party shall have the right to use, disclose and
license to any third party all Program Information owned by such party under
Section 8.1, provided such use, disclosure or license does not conflict with the
rights granted to the other party under this Agreement.

                  8.3 Patents. Each party shall be responsible, at its own
expense, for filing and prosecuting patent applications as it deems appropriate
and for paying maintenance fees on patents issued therefrom, for the term of
this Agreement, with respect to Technical Information owned by it. Each party
shall promptly render all necessary assistance reasonably requested by the other
party in applying for and prosecuting patent applications based on Technical
Information owned by the other party under this Agreement.

           SECTION 9 - INTELLECTUAL PROPERTY INDEMNITY AND ENFORCEMENT

                  9.1 Claims by Third Parties. If a claim, suit or proceeding
("Claim") is brought by a third party against Durect and/or ALZA alleging that
the making, using, selling, offering for sale or importing of Product developed
by Durect infringes an Intellectual Property Right of such third party (except
for any patent which covers a manufacturing process used by Durect and not by
ALZA), then each party will give prompt written notice to the other of such
Claim. If such alleged infringement of such third party's Intellectual Property
Right arises from or relates to DUROS Technology, the System or ALZA Technical
Information, then ALZA shall have the right to conduct the defense of any suit
resulting from such Claim. ALZA shall advise Durect in writing, within 30 days
after Durect's notice, whether it intends to defend at its own expense such
Claim. If ALZA elects not to so defend or to otherwise dispose of such Claim,
Durect may, subject to Section 9.2 below, defend at its own expense such Claim.
Except as specifically provided above, Durect shall indemnify and hold harmless
ALZA from and against any claims of infringement by a third party with respect
to Products developed by Durect.

                  9.2 Infringement by Third Parties. If, at any time during the
term of this Agreement, either party shall become aware of any third party who
is infringing or suspected to be infringing any patent owned by ALZA by the
manufacture, use or sale of any product that is substantially similar to a
Product developed by Durect and contains the same Drug as such Product (an
"Infringing Product"), the following provisions shall apply:

                        (a) The party becoming so aware shall forthwith give
written notice to the other ("Notice"). If there is disagreement as to whether
the act complained of is in fact an infringement of an ALZA patent, the parties
shall refer such issue to a mutually acceptable independent patent counsel. The
costs incurred in this regard shall be shared equally.

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               (b) If, with or without the advice of independent counsel, ALZA
desires to litigate such alleged third party infringement, ALZA shall bear all
costs thereof and shall be entitled to all recoveries. ALZA shall have the right
to join Durect in such suit at ALZA's cost and expense. ALZA shall notify Durect
within 90 days after the delivery of Notice by one party to the other above
whether it intends to so litigate.

               (c) If ALZA determines not to litigate in accordance with
paragraph (b) above, the parties will promptly confer, and if both parties
jointly desire to litigate such third party infringement, they shall share any
costs thereof and any recovery therein equally, unless otherwise agreed by the
parties.

               (d) With respect to alleged infringement of such patents, the
claims of which are limited to applications of DUROS Technology in the Durect
Fields, and which do not include claims for other applications, if no action is
taken or agreed to be taken under paragraph (b) or (c) above within 90 days
after the Notice and (i) the unit sales volume of the Infringing Product in any
country is equal to or exceeds [ * * * ] of the unit sales volume by Durect and
its Affiliates and Subcontractors of the Product that is substantially similar
to the Infringing Product in such country, and (ii) the patent counsel described
in paragraph (a) above has opined that the act complained of is, or most likely
is, an infringement in such country, then Durect may, in its sole discretion,
and at its sole cost and expense, bring suit in its name (or, if ALZA is an
indispensable party, in the name of and on behalf of ALZA) to restrain such
third party infringement in such country, and in such instance, Durect shall be
entitled to receive and retain, for its own use and benefit, any recovery
awarded in such suit.

             9.3 Cooperation. Each party shall cooperate with the other party,
to the extent reasonably requested, in any legal action brought by or against
the other party or both of them and relating to the subject matter of this
Agreement, provided that such cooperation shall be at the expense of the party
bringing the action, and each party shall have the right to participate at its
own expense in any defense, compromise or settlement of any such legal action,
to the extent that in its judgment it may be prejudiced thereby. Neither party
shall settle any claim or suit in any manner that may adversely affect any
patent of the other party or that would require any payment or grant of license
or other rights by the other party, without the prior written consent of the
other party, to be given or withheld in the other party's sole discretion.

                 SECTION 10 - REPORTS OF ADVERSE REACTION

             10.1 Reports. During the term of this Agreement, each party shall
promptly inform the other party of any information that it obtains or develops
regarding the efficacy or safety of any Product and shall promptly report to the
other party any information or notice of adverse or unexpected reactions
or side effects related to the utilization or medical administration of any
Product (and, in the case of ALZA, the System, and in case of Durect, the Drug,
Catheter or other part of the Product, but in each case, only

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if such adverse reaction appears to be potentially relevant to the Product).
Each party shall comply, and shall cooperate with the other party in complying,
with the adverse reaction reporting requirements of the Food, Drug and Cosmetic
Act, 21 USC 321 et seq., and regulations thereunder with respect to the Product.
Each party shall provide the other party with copies of Adverse Drug Experience
Reports filed with the FDA as to the Product. Each party's obligations under
this Section 10.1 shall be subject to its legal and contractual obligations
prohibiting the disclosure of such information. Durect agrees and acknowledges
that ALZA may provide information it obtains under this Section 10.1 to ALZA's
other clients developing and/or marketing products incorporating the System.

             SECTION 11 - TERM AND TERMINATION; MODIFICATION OF RIGHTS

             11.1 Term. This Agreement shall remain in effect for as long as
Durect is obligated to make payments to ALZA under this Agreement, unless
earlier terminated pursuant to this Section 11.

             11.2 Termination for Breach; Insolvency.

                  (a) In addition to the rights and remedies provided elsewhere
in this Agreement, if either party breaches or defaults in the performance or
observance of any of its material obligations under this Agreement, and such
breach or default is not cured within [ * * * ] days after receipt by such party
of a written notice from the nonbreaching party specifying the breach or default
(or such longer period as is reasonably necessary if the breach is of such a
nature that it cannot reasonably be cured within [ * * * ] days), the
nonbreaching party shall have the right to terminate this Agreement upon an
additional 30 days' written notice to the breaching or defaulting party. Failure
to pay any amounts due under this Agreement within [ * * * ] days after notice
that such amounts are overdue shall be deemed a material breach of this
Agreement.

                  (b) Either party may terminate this Agreement and the rights
granted hereunder, effective upon giving written notice of such termination to
the other party, if such other party is liquidated or dissolved, or enters into
any proceeding, whether voluntary or otherwise, in bankruptcy, reorganization,
or arrangement for the appointment of a receiver or trustee to take possession
of such other party's assets or any other proceeding under any law for the
relief of creditors, or makes an assignment for the benefit of creditors.

             11.3 Termination by Durect. Durect may terminate this Agreement at
any time upon not less than [ * * * ] days' prior written notice to ALZA. In
such event, this Agreement shall terminate as of the effective date of such
notice.

             11.4 Effect of Termination.  Except as provided in Section 16.8,
all rights and obligations of the Parties shall cease upon expiration or
termination of this Agreement. The expiration or termination of this Agreement
for whatever reason shall not affect: (i) Durect's obligation to pay ALZA,
within [ * * * ] days after the receipt of ALZA's invoice, for all Development
Costs incurred up to the effective date of the termination and for all
uncancellable obligations of ALZA incurred in connection with

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the Program prior to the date of termination pursuant to approved Work Plans;
and (ii) the parties' obligations to pay to each other all other amounts due
under this Agreement accruing prior to and up to the effective date of such
expiration or termination.

               11.5 ALZA Termination. If, at any time prior to July 1, 2006,
Durect or any of its Affiliates solicits for employment or hires, without ALZA's
prior written consent, a person who is an ALZA employee in the DUROS Technology
group or has been an ALZA employee in the DUROS Technology group within 180 days
prior to such hiring, then ALZA shall have the right to terminate this Agreement
on 60 days written notice, unless during such 60 days Durect ceases such
solicitation and such person remains employed by ALZA and confirms his or her
intent to remain an employee of ALZA. The provisions of this Section 11.5 shall
be of no further force or effect if, as a result of a change in control of ALZA,
the employees working in the DUROS Technology group are not generally retained
as employees. The parties agree and acknowledge that the provisions of this
Section 11.5 are necessary to induce ALZA to participate in the formation of
Durect and to agree with the terms and conditions hereof, and form an essential
part of this Agreement.

               11.6 Certain Program Information and Other Rights. Solely with
respect to (i) any country or Subterritory for which the Commercialization
rights granted to Durect under Section 5.1 have expired, or have been terminated
pursuant to this Agreement with respect to any Product or (ii) upon the
expiration or termination of this Agreement (except for termination by Durect
due to a breach by ALZA under Section 11.2); and in each case solely to the
extent required by ALZA to develop, make, have made, use and sell the Product to
which such termination or elimination relates in the relevant Subterritory or
country, Durect hereby grants to ALZA the exclusive right and license, with the
right to sublicense, solely to use any and all data, rights and information
necessary for such purpose, including but not limited to regulatory filings and
Program Information to which ALZA does not already have rights hereunder, and
the right to cross-reference any and all regulatory filings with respect to the
Product. (To the extent possible, regulatory filings for those countries for
which ALZA obtains commercialization rights shall be transferred to ALZA.) If
and when ALZA Commercializes a Product pursuant to this Section, in order to
compensate Durect for its investment in developing such filings and information,
ALZA shall make payments to Durect at a rate as set forth in Section 6.1 (but
determined based on ALZA's net sales of Product), but only until the aggregate
of such payments is equal [ * * * ] with respect to the applicable Product (or
with respect to the Product in such applicable country if ALZA obtains rights
only as to a specified country or countries). Notwithstanding the foregoing, in
the event of the elimination of a Product under this Agreement, if Durect has
developed and successfully filed an NDA covering such Product prior to such
elimination, then in consideration of the rights granted ALZA respecting such
Product, ALZA shall pay Durect continuing royalties of [ * * * ] percent of its
Net Sales after the obligation to make payments under the preceding sentence has
expired, provided that the obligations to pay royalties shall expire for the
Territory [ * * * ]. In each case, such

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payments by ALZA will be subject to adjustments under the same terms as are
applicable to Durect's Product Payment obligations under this Agreement.

                           SECTION 12 - FORCE MAJEURE

               12.1 Force Majeure. Neither party to this Agreement shall be
liable for failure or delay in the performance of any of its obligations
hereunder, if such failure or delay is due to causes beyond its reasonable
control, including, without limitation, acts of God, earthquakes, fires,
strikes, acts of war, or intervention of any governmental authority, but any
such delay or failure shall be remedied by such party as soon as possible after
the removal of the cause of such failure or delay.

                           SECTION 13 - ASSIGNMENT

               13.1 Assignment. This Agreement shall not be assigned by either
party without the prior written consent of the other party, except that either
party may assign this Agreement, in whole or in part, to an Affiliate of such
party or to the successor (including the surviving company in any consolidation,
reorganization or merger) or assignee of all or substantially all of its
business. This Agreement will be binding upon any permitted assignee of either
party. No assignment shall have the effect of relieving any party to this
Agreement of any of its obligations hereunder.

                           SECTION 14 - INDEMNIFICATION

               14.1 Durect Indemnity. Durect shall defend, indemnify and hold
harmless ALZA and its Affiliates, and their officers, directors, employees and
agents (collectively, "ALZA Indemnitees") from and against any and all losses,
liabilities, claims, obligations, costs and expenses (including without
limitation reasonable attorneys' fees) (collectively, "Losses") arising out of
the Program relating to the Products developed by Durect (including the use,
storage and handling of the Drug hereunder) or the use, design, labeling or
manufacture, processing or packaging (subject to the terms of the Supply
Agreement) or sale or Commercialization of Products by Durect, its Affiliates
and Subcontractors, including without limitation any product liability claims
with respect to any such Products, except for Losses arising from the gross
negligence or willful misconduct of ALZA, material breach of this Agreement by
ALZA, or breach by ALZA of any product warranty in the Supply Agreement;
provided that such ALZA Indemnitee: (i) provides reasonable notice to Durect of
such Loss and permits Durect to control, in a manner not adverse to such ALZA
Indemnitee, the defense, settlement, adjustment or compromise of any such Claim
using counsel reasonably acceptable to such ALZA Indemnitee; and (ii) reasonably
cooperates with Durect in the defense of any such Claim, subject to Durect's
payment of all reasonable costs and expenses associated with such cooperation,
and further provided that Durect shall not be liable for any such costs or
expenses incurred without its prior written authorization. Durect shall not
enter into any settlement that affects an ALZA Indemnitee's rights or interest
without prior written

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approval by the ALZA Indemnitee. The ALZA Indemnitee shall have no authority to
settle any claim for Losses on behalf of Durect. The ALZA Indemnitee shall have
the right to participate, at its own expense, in the defense of any such claim
or demand to the extent it so desires.

                  14.2 ALZA Indemnity. ALZA shall defend, indemnify and hold
harmless Durect and its Affiliates, and their officers, directors, employees and
agents (collectively, "Durect Indemnitees") from and against any Losses arising
from the gross negligence or willful misconduct of ALZA, material breach of this
Agreement by ALZA, or breach by ALZA of any product warranty in the Supply
Agreement; provided that such Durect Indemnitee: (i) provides reasonable notice
to ALZA of such Loss and permits ALZA to control, in a manner not adverse to
such Durect Indemnitee, the defense, settlement, adjustment or compromise of any
such Claim using counsel reasonably acceptable to such Durect Indemnitee; and
(ii) reasonably cooperates with ALZA in the defense of any such Claim, subject
to ALZA's payment of all reasonable costs and expenses associated with such
cooperation, and further provided that ALZA shall not be liable for any such
costs or expenses incurred without its prior written authorization. ALZA shall
not enter into any settlement that affects a Durect Indemnitee's rights or
interest without prior written approval by the Durect Indemnitee. The Durect
Indemnitee shall have no authority to settle any claim for Losses on behalf of
ALZA. The Durect Indemnitee shall have the right to participate, at its own
expense, in the defense of any such claim or demand to the extent it so desires.

                  14.3 Disclaimer of Consequential Damages. IN NO EVENT WILL
EITHER DURECT OR ALZA BE LIABLE TO THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL,
INCIDENTAL, OR PUNITIVE DAMAGES INCURRED BY A PARTY ARISING UNDER OR AS A RESULT
OF THIS AGREEMENT (OR THE TERMINATION HEREOF) INCLUDING, BUT NOT LIMITED TO, THE
LOSS OF PROSPECTIVE PROFITS OR ANTICIPATED SALES, OR ON ACCOUNT OF EXPENSES,
INVESTMENTS, OR COMMITMENTS IN CONNECTION WITH THE BUSINESS OR GOODWILL OF ALZA
OR DURECT OR OTHERWISE.

                  14.4 Insurance. Durect shall obtain and maintain in full force
and effect during the term of this Agreement a policy of products liability
insurance covering liabilities that may arise from the Products developed by
Durect and naming ALZA as an additional named insured, in such amounts as are
reasonable in view of the development and Commercialization status of the
Products. Durect shall provide ALZA a certificate of such insurance within 15
days after request by ALZA.

                            SECTION 15 - ARBITRATION

                  15.1 Arbitration. All disputes which may arise under, out of,
in connection with, or relating to this Agreement shall be settled by
arbitration conducted in Santa Clara County, California, in accordance with the
then existing rules of the American Arbitration Association, and judgment upon
the award rendered by the arbitrators may be entered in any court having
jurisdiction thereof.  The parties

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hereby agree that service of any notices in the course of such arbitration at
their respective addresses as provided for in Section 16.4 of this Agreement
shall be valid and sufficient.

                  15.2 Arbitrators. In any arbitration pursuant to this Section
15, the award shall be rendered by a majority of the members of a board of
arbitration consisting of three members who shall be appointed by the parties
jointly, or if the parties cannot agree as to three arbitrators within 30 days
after the commencement of the arbitration proceeding, then one arbitrator shall
be appointed by ALZA and one arbitrator shall be appointed by Durect within 60
days after the commencement of the arbitration proceeding. The third arbitrator
shall be appointed by mutual agreement of such two arbitrators. In the event of
failure of the two arbitrators to agree within 75 days after commencement of the
arbitration proceeding upon the appointment of the third arbitrator, the third
arbitrator shall be appointed by the American Arbitration Association in
accordance with its then existing rules. Notwithstanding the foregoing, in the
event that any party shall fail to appoint an arbitrator it is required to
appoint within the specified time period, such arbitrator and the third
arbitrator shall be appointed by the American Arbitration Association in
accordance with its then existing rules. For purposes of this Section 15, the
"commencement of the arbitration proceeding" shall be deemed to be the date upon
which a written demand for arbitration is received by the American Arbitration
Association from one of the parties.

                           SECTION 16 - MISCELLANEOUS

                  16.1 Amendment. Any waiver by any party hereto of a breach of
any provisions of this Agreement shall not be implied and shall not be valid
unless such waiver is recited in writing and signed by such party. Failure of
any party to require, in one or more instances, performance by the other party
in strict accordance with the terms and conditions of this Agreement shall not
be deemed a waiver or relinquishment of the future performance of any such terms
or conditions or of any other terms and conditions of this Agreement. A waiver
by either party of any term or condition of this Agreement shall not be deemed
or construed to be a waiver of such term or condition for any other term. All
rights, remedies, undertakings, obligations and agreements contained in this
Agreement shall be cumulative and none of them shall be a limitation of any
other remedy, right, undertaking, obligation or agreement of either party. This
Agreement may not be amended except in a writing signed by both parties.

                  16.2 Relationship of the Parties. For all purposes of this
Agreement, Durect and ALZA shall be deemed to be independent entities and
anything in this Agreement to the contrary notwithstanding, nothing herein shall
be deemed to constitute Durect and ALZA as partners, joint venturers, co-owners,
an association or any entity separate and apart from each party itself, nor
shall this Agreement constitute any party hereto an employee or agent, legal or
otherwise, of the other party for any purposes whatsoever. Neither party hereto
is authorized to make any statements or representations on behalf of the other
party or in any way obligate the other party, except as expressly authorized in
writing by the other party. Anything in this Agreement to the contrary
notwithstanding, no party hereto shall

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<PAGE>

assume nor shall be liable for any liabilities or obligations of the other
party, whether past, present or future.

               16.3 Governing Law. This Agreement shall be governed by the laws
of the State of California, excluding any - choice of law rules which may direct
the application of the laws of another jurisdiction.

               16.4 Notices. Notices required under this Agreement shall be in
writing and sent by registered or certified mail, postage prepaid, or by telex
or facsimile and confirmed by registered or certified mail and addressed as
follows:

               If to ALZA:               ALZA Corporation
                                         1900 Charleston Rd.
                                         Mountain View, CA  94309
                                         Attention: Law Department

               If to Durect:             Durect Corporation
                                         10240 Bubb Road
                                         Cupertino, CA  95014
                                         Attention: Chief Executive Officer

All notices shall be deemed to be effective five days after the date of mailing
or upon receipt if sent by facsimile (but only if followed by certified or
registered confirmation). Either party may change the address at which notice is
to be received by written notice pursuant to this Section 16.4.

               16.5 Severability. If any provision of this Agreement is held by
a court of competent jurisdiction to be invalid or unenforceable, it shall be
modified, if possible, to the minimum extent necessary to make it valid and
enforceable or, if such modification is not possible, it shall be stricken and
the remaining provisions shall remain in full force and effect; provided,
however, that if a provision is stricken so as to significantly alter the
economic arrangements of this Agreement, the party adversely affected may
terminate this Agreement upon 60 days' prior written notice to the other party.

               16.6 Headings. The headings set forth at the beginning of the
various sections of this Agreement are for reference and convenience and shall
not affect the meanings of the provisions of this Agreement.

               16.7 Public Disclosure.

                    (a)      Neither party shall, without the prior written
consent of the other party, disclose to third parties, nor originate any
publicity, news release or public announcement, written or oral, whether to the
public, the press, stockholders or otherwise, referring to the existence or
terms of this Agreement, including its existence, the subject matter to which it
relates, the performance under it or any of its specific terms and conditions,
except such announcements or disclosures as, in the opinion of the counsel for
the party making such announcement, are required by law, including United States
securities laws, and each party may disclose the existence of this Agreement and
the material terms and conditions hereof under circumstances that reasonably
ensure the confidentiality thereof to: (i) any government or

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<PAGE>

regulatory authorities, including without limitation the United States
Securities and Exchange Commission to the extent required by applicable law,
(ii) its legal representatives, advisors and prospective investors, and (iii) to
prospective Subcontractors to the extent required for entering into agreements
with such Subcontractors. If a party decides to make an announcement it believes
to be required by law with respect to this Agreement, it will give the other
party such notice as is reasonably practicable and an opportunity to comment
upon the announcement.

                   (b) Durect shall submit for review to ALZA, and obtain ALZA's
prior written consent for any reference to or description of ALZA or its
technology, proprietary rights or products that is to be disseminated to third
parties.

               16.8 Survival. The provisions of Sections 1, 4, 8, 11, 15, 16.3,
16.4, 16.5, 16.6, 16.7 and this Section 16.8, (and Sections 2.5, 6.1, 6.2, 6.3,
6.6, 7, 9, 10, and 14 with respect to events occurring prior to termination),
shall survive the termination for any reason of this Agreement. Neither party
shall be liable to the other due to the termination of this Agreement as
provided herein, whether in loss of goodwill, anticipated profits or otherwise.

               16.9 No Conflict. Each party represents that neither this
Agreement nor any of its obligations hereunder will conflict or result in a
breach of any arrangement or agreement between such party and any third party.
Each party represents that it has not been debarred and has not been the subject
of debarment proceedings by the FDA.

               16.10 Entire Agreement. This Agreement, including the exhibits
hereto set forth the entire understanding between the parties hereto as to the
subject matter hereof and, as of October 1, 2002, supersedes the Previous
Agreement. Prior to the execution of this Agreement, the parties have had
numerous discussions, conversations and negotiations, and have generated
correspondence, writings and other memoranda with respect to the subject matter
hereof. Notwithstanding all of such activities, this Agreement (including the
exhibits hereto) is intended to define the full extent of the parties'
respective agreements, arrangements and obligations with respect to the subject
matter hereof, and each party represents that it is not relying on any such
other discussions, conversations, negotiations, correspondence, writings and
memoranda in executing and delivering this Agreement or performing its
respective obligations hereunder. With the exception of the Previous Agreement,
all written agreements between the parties remain in full force and effect
according to their terms.

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<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first written above by their duly authorized representatives.

DURECT
CORPORATION                                          ALZA CORPORATION

By:      __________________________         By:      __________________________

Title:   __________________________         Title:   __________________________

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<PAGE>

                  EXHIBIT A - Specified Anticancer Antigens for
                              Immunization Therapy

             NAME AND/OR
             ABBREVIATION                                  REFERENCE

===============================================================================
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -
-- -
              [ * * * ]                                    [ * * * ]
-- -

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<PAGE>

                      EXHIBIT B - intentionally left blank

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                         EXHIBIT C - Development Stages

Screening of Proposed Product Candidates

The Screening Stage may consist of the following:

[ * * * ]

[ * * * ]

[ * * * ]

Feasibility and Prototype Development

[ * * * ]

[ * * * ]

PRODUCT DEVELOPMENT

[ * * * ]

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<PAGE>

                EXHIBIT D - Countries of Sub-Territories B and C

Subterritory B:   European Community

Austria*                   Italy*                             Slovakia
Belgium*                   Latvia                             Slovenia
Bulgaria                   Lithuania                          Spain*
Croatia                    Luxembourg*                        Sweden*
Cyprus                     Malta                              Switzerland
Czech Republic             Netherlands*                       Turkey
Denmark*                   Norway                             United Kingdom*
Estonia                    Poland                             Yugoslavia
Finland*                   Portugal*
Ireland*                   Romania

* = Current members of the European Community

Subterritory C:   Japan and the Far East

Australia                  Malaysia
Bangladesh                 New Zealand
Brunei                     North Korea
Burma                      Pakistan
Cambodia                   Philippines
China, People's Republic   Singapore
India                      South Korea
Indonesia                  Sri Lanka
Japan                      Taiwan
Laos                       Thailand
Macao                      Vietnam

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<PAGE>

                          EXHIBIT E - Development Costs

Development Costs are equal to the sum of (i) research expenses, (ii) general
and administrative expenses and (iii) capital asset expenditures.

  (i)      Research expenses include both direct expenses and indirect expenses.

           (a)      Direct expenses include direct research salaries
                    (including project management and temporary labor),
                    clinical expenses, supplies and other expenses
                    incurred specifically in connection with the Program.

           (b)      Indirect expenses include general research management
                    and support costs of the research and product
                    development organization. Indirect expenses are
                    allocated to all projects and billed to clients at a
                    fixed rate* of 160% of direct research salaries.

           Examples of items included in direct and indirect expenses are listed
           on Exhibit E-1

           (ii)     General and administrative expenses are allocated among
           the research and product development, manufacturing and
           marketing organizations. The portion allocated to the research
           and product development organization is then allocated to all
           research and development projects and billed to clients at a
           fixed rate* of 80% of direct research salaries.)

                    Examples of items included in general and administrative
           expenses are listed on Exhibit E-1.

           (iii)    Capital asset expenditures are the actual costs of new
           capital assets acquired specifically for the project.

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

         * This fixed billing rate will not be changed prior to January 1, 1999
and, if changed on or after January 1, 1999, such changes will be limited to not
more than one change per calendar year and shall be a maximum of 10% of the rate
in effect at the time of the increase.

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<PAGE>

                   EXHIBIT E-1 - Examples of Research Expenses

Direct Expenses

Direct research salaries*
Project clinical expenses and outside services
Project specific supplies
Project travel and related expenses
Miscellaneous project expenses
Regulatory and filing fees and maintenance payments

Indirect Expenses

Research management and indirect salaries*
General research supplies and materials
General research consulting and outside services
Facilities expenses
Telephone and communications
Equipment depreciation, rent, maintenance and services
Research travel and related expenses
Patent and trademark expenses
Miscellaneous indirect research expenses

                                   Examples of
                       General and Administrative Expense

Corporate management, administrative, and indirect salaries*
Telephone and communications
Equipment depreciation, rent, maintenance and services
Board of directors and corporate consulting
Annual audit, accounting and legal expenses
Facilities expenses
Information services (data processing) expenses
Interest expense
Miscellaneous general and administrative expenses

*Salaries include fringe benefits at a fixed rate of 52% of salaries. This fixed
rate will not be changed prior to January 1, 1999 and, if changed on or after
January 1, 1999, such changes will be limited to not more than one change per
calendar year and shall be a maximum of 10% of the rate in effect at the time of
the increase.

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such material has been filed separately with the SEC

<PAGE>

                         Exhibit F - Payments to Durect

         For purposes of this Exhibit F, "ALZA Net Sales" shall mean the amounts
invoiced on sales of any Product in a Durect Field by ALZA and its Affiliates
and subcontractors to independent, unrelated third parties in bona fide
arms-length transactions, less the following deductions actually allowed by
ALZA, its Affiliates and subcontractors and taken by such third parties and not
otherwise recovered by or reimbursed to ALZA, or its Affiliates or
subcontractors: (i) trade, cash and quantity discounts; (ii) taxes or government
charges levied on the sale of such product to the extent added to the sales
price and set forth separately as such in the amount invoiced; (iii) amounts
repaid or credited by reason of rejections, defects or returns or because of
rebates or retroactive price reductions; and (iv) delivery charges (including
transportation and insurance costs) actually included in the net sales invoiced.
ALZA Net Sales shall not include the prices charged (at fair market value) for
separate products such as catheter access devices, syringes, gloves, and gauze
pads, that may be either sold separately from such product or bundled with such
product in the form of a kit; provided, however, that any ALZA Net Sales shall
be deemed to include the amount or fair market value of any consideration (other
than consideration described in Section F.1(b)) received by ALZA or its
Affiliates or subcontractors that can be attributable to such product, whether
such consideration is in cash or payments in kind. ALZA Net Sales shall not
include sales of any product between or among ALZA and its Affiliates and
subcontractors.

         All other capitalized terms used in this Exhibit F have the meanings
set forth in Article 1 of this Agreement.

               F.1 Product Payments. In consideration of the rights granted to
ALZA under Section 2.5 of this Agreement, ALZA shall make product payments to
Durect on ALZA Net Sales of each Product described in Section 2.5(c) for a
period of [ * * * ] follows:

               (a) Product payments on ALZA Net Sales due under this Section F.1
for any calendar year shall be based on [ * * * ]. The applicable payment rate
shall be calculated by dividing by [ * * * ], but shall not be less than [ * * *
]% nor more than [ * * * ]%. During the first calendar year of ALZA Net Sales of
any Product, the payment rate will be [ * * * ]%.

       Examples:
                Sales in Year X-1*                 Payment Rate
                      ($ Million)                  For Year X**

                     $[ * * * ]                       [ * * * ]
                     [ * * * ]                        [ * * * ]
                     [ * * * ]                        [ * * * ]
                     [ * * * ]                        [ * * * ]
                     [ * * * ]                        [ * * * ]
                     [ * * * ]                        [ * * * ]

* ALZA Net Sales in the Territory for the prior calendar year.

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<PAGE>

** The applicable payment rate for the current calendar year.

               (b) In addition to product payments under Section F.1(a), ALZA
shall make payments to Durect equal to [ * * * ] of any upfront, milestone or
any special fees, payments or other consideration received by ALZA, its
Affiliates or subcontractors with respect to any applicable Product for which
there are ALZA Net Sales after deducting from such consideration: (i) any tax or
other government charge (other than income tax) levied on such consideration to
the extent borne by ALZA, its Affiliates and subcontractors and (ii) any
payments (or portions thereof) that constitute reimbursement of [ * * * ] costs
incurred by ALZA, its Affiliates and subcontractors including but not limited to
reimbursement of expenses for reagents, materials, equipment, salaries, testing,
clinical trials, insurance and any overhead reasonably attributable to such
research, development or manufacture.

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such material has been filed separately with the SEC

<PAGE>

                         EXHIBIT G - Manufacturing Costs

"Cost of Manufacturing" shall mean ALZA's or Durect's, as the case may be,
standard cost of manufacturing Product, including packaging thereof, determined
in accordance with generally accepted accounting procedures and consistent with
the company's accounting practices on its other products, and including the cost
of materials, direct labor and benefits, and allocated overhead, the total
expressed as Manufacturing Cost per Unit of Product manufactured.

               A. Materials. Includes those items which form an integral and
direct part of the Product, or are necessary for its production, as well as
cartons, labels, package inserts, shippers, etc.

               B. Direct Labor and Benefits. Includes labor and related payroll
taxes and employment benefits spent in the actual production of the Product. It
is that portion of basic wages, taxes and benefits which can be identified with
or charged to a specific product.

               C. Overhead. Overhead includes all operating expenses incurred by
and in support of all manufacturing cost centers and quality operations. Cost
elements included are:

           -        Direct labor, related payroll taxes and employee benefits

           -        Depreciation

           -        Taxes

           -        Insurance

           -        Rent

           -        Repairs and maintenance

           -        Supplies, scrap and inventory expenses

           -        Utilities

           -        Factory administration expenses

           -        Other similar cost elements of factory overhead

           -        Allocation of general and administrative overhead
                    allocated to Product manufacturing centers and
                    quality operations.

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such material has been filed separately with the SEC

<PAGE>

           EXHIBIT H - Amended and Restated Market Stand-Off Agreement

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such material has been filed separately with the SEC

<PAGE>

                         SCHEDULE 1 - Product Candidates
<TABLE>
<CAPTION>
                                                                                                            Milestone
                                                                                                           Target Date
                                                       Removed from Schedule                               ------------
                                     Date Added to    -----------------------                                 Start         File
      Project            Field         Schedule 1        Date        Reason       Status       File IND     Phase III       NDA
     --------          --------        ----------     ---------     --------     --------      --------    ----------    ---------
<S>     <C>               <C>             <C>             <C>             <C>          <C>          <C>          <C>           <C>

     [ * * * ]         [ * * * ]       [ * * * ]      [ * * * ]     [ * * * ]    [ * * * ]     [ * * * ]    [ * * * ]     [ * * * ]

     [ * * * ]         [ * * * ]       [ * * * ]      [ * * * ]     [ * * * ]    [ * * * ]     [ * * * ]    [ * * * ]     [ * * * ]

     [ * * * ]         [ * * * ]       [ * * * ]      [ * * * ]     [ * * * ]    [ * * * ]     [ * * * ]    [ * * * ]     [ * * * ]

     [ * * * ]         [ * * * ]       [ * * * ]      [ * * * ]     [ * * * ]    [ * * * ]     [ * * * ]    [ * * * ]     [ * * * ]
</TABLE>

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such material has been filed separately with the SEC

<PAGE>

                              SCHEDULE 2 - Products

                               Date               Removed from Schedule
                             Added to         -----------------------------
 Project       Field        Schedule 2            Date             Reason
---------    ---------      ----------        ----------         ----------

[ * * * ]    [ * * * ]      [ * * * ]

[ * * * ]    [ * * * ]      [ * * * ]

**Material has been omitted pursuant to a request for confidential treatment and
such material has been filed separately with the SEC<PAGE>

                         EXECUTIVE EMPLOYMENT AGREEMENT

     THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is made as of
November 5, 2002, by and among Muzak Holdings LLC, a Delaware limited liability
company ("Holdings LLC"), Muzak LLC, a Delaware limited liability company and a
wholly owned subsidiary of Holdings LLC (the "Company"), and Stephen P. Villa
("Executive").

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

     1. Employment. The Company will employ Executive, and Executive accepts
employment with the Company, upon the terms and conditions set forth in this
Agreement, for the period beginning on October 3, 2001 and ending as provided in
Section 6 (the "Employment Period").

     2. Position and Duties. During the Employment Period, Executive will (i)
serve on the board of directors (or equivalent supervising body) of Holdings LLC
(the "Board"), (ii) exclusively serve as the Chief Operating Officer, Chief
Financial Officer, and Treasurer of Holdings LLC and the Company, and (iii)
render such managerial, analytical, administrative, marketing, creative and
other executive services to Holdings LLC, the Company and their respective
Subsidiaries (such entities, the "Muzak Entities") as are from time to time
necessary in connection with the management and affairs of the Muzak Entities
subject to the authority of the Board and to the proviso set forth in the
following sentence. Executive will devote his best efforts and substantially all
of his business time and attention (except for permitted vacation periods and
reasonable periods of illness or other incapacity) to the business and affairs
of the Muzak Entities; provided that, during the Employment Period, Executive
will not directly or indirectly own, manage, control, participate in, consult
with, render services for, or in any other manner engage in the business of
providing business music programming and ancillary communications products and
services including broadcast data delivery, satellite delivered cable television
channels, audio marketing and in-store advertising services to a diverse
customer base that includes, among others, restaurants, retailers, supermarkets
and business offices (together with all reasonably related activities, the
"Business") other than (i) on behalf of the Muzak Entities or (ii) as a passive
owner of less than 5% of the outstanding stock of a corporation of any class
which is publicly traded, so long as Executive has no direct or indirect
participation in the business of such corporation. Executive will report to the
Board and the Chief Executive Officer of the Company. Executive will perform his
duties and responsibilities to the best of his abilities in a diligent,
trustworthy, businesslike and efficient manner.

     3. Compensation and Benefits.

        (a) Base Salary. During the Employment Period, Executive shall be
entitled to receive $200,000 per annum as base compensation for services (as in
effect from time to time, the "Base Salary"); provided that, effective on
October 1, 2002 and each anniversary of such date, the Base Salary shall
increase by 5% over the preceding year. The Base Salary will be payable in
regular installments in accordance with the general payroll practices of the
Company.

<PAGE>

        (b) Bonus. In addition to the Base Salary, the Board in its sole
discretion may award a bonus (as in effect from time to time, the "Bonus") in an
amount up to 50% of the Base Salary as then in effect ("Maximum Bonus") to
Executive following the end of each fiscal year during the Employment Period as
the Board deems appropriate based upon, among other things, the Company's
overall performance and satisfaction of the personal goals of Executive as
established by the Board in advance of each fiscal year. The Bonus, if awarded,
for a fiscal year shall be paid in a single payment within thirty (30) days
after the audited financial statements for such fiscal year have been reviewed
by the Board. For any fiscal year which Executive is not employed by the Company
at the end of the fiscal year, Executive shall not be entitled to receive any
Bonus.

        (c) Reimbursement of Expenses. During the Employment Period, the Company
will reimburse Executive for all reasonable expenses incurred by him in the
course of performing his duties under this Agreement and which are consistent
with the Company's policies in effect from time to time with respect to travel,
entertainment and other business expenses, subject to the Company's requirements
with respect to reporting and documentation of such expenses.

        (d) Benefits. During the Employment Period, Executive shall be entitled
to participate in any health insurance plan and other similar benefits which the
Company makes available generally to other Company executives and further shall
be entitled to a monthly automobile allowance of $300 or, in lieu thereof and at
Company's discretion, the use of an automobile leased by the Company.

        (e) Incentive Units. In the event that the Employment Period has not
terminated as of April 3, 2003, Holdings LLC shall grant to Executive 78 Class
B-1 Units, 78 Class B-2 Units and 79 Class B-3 Units in Holdings LLC that will
vest ratably over a four (4) year period commencing on April 3, 2003; on or
about April 3, 2003, the Board of Directors of Holdings LLC will confirm such
grant, and such grant will be subject to the terms and conditions of an
Incentive Unit Agreement acceptable in form and substance to Holdings LLC.

     4. Vacation Days. Executive shall be entitled to four (4) weeks of paid
vacation during each year of the Employment Period, in addition to legal
holidays; provided, however, that no such vacation time shall accrue or be
earned to the extent that such accrual or earning would cause Executive's
accrued or earned, but unused, vacation time to exceed four (4) weeks. Executive
shall make best efforts to schedule vacations so as not to conflict with the
conduct of the Muzak Entities' business, and Executive shall give to the Board
adequate advance notice of his planned absences.

     5. Board Membership. During the Employment Period, Executive shall serve as
a member of the Board, but only if Executive is then serving as the Chief
Operating Officer of Holdings LLC and the Company.

     6. Termination. The Employment Period shall terminate under the following
circumstances:

        (a) Death. Executive's death, in which case Executive's employment shall
terminate on the date of death.

                                        2

<PAGE>

        (b) Disability. If, as a result of Executive's illness, physical or
mental disability or other incapacity, Executive is unable to perform his or her
duties under this Agreement for any period of three (3) consecutive months, and
within thirty (30) days after written notice of termination is given by the
Company to Executive (which notice may be given before or after the end of such
three-month period) he or she shall not have returned to the performance of his
or her duties hereunder on a full-time basis, the Company may terminate
Executive's employment hereunder as of the latest of (i) the expiration of such
three-month period or (ii) the thirty-first (31st) day following the giving by
the Company of the written notice of termination.

        (c) Consolidation, Merger or Comparable Transaction. In the event that
Holdings LLC consolidates with or merges with and into any other entity, effects
a share exchange, sells or causes the Company to sell all or substantially all
of its and its subsidiaries' consolidated assets or enters into a comparable
capital transaction pursuant to which Holdings LLC is not the continuing or
surviving entity or a sale of a majority of the outstanding voting power of
Holdings LLC's equity securities to a third party occurs such that the
beneficial owners of Holdings LLC have substantially changed, Executive's
employment may, by written notice of termination, be terminated by the Company
simultaneous with the consummation of such consolidation, merger, share
exchange, asset sale, stock sale or comparable transaction; provided, however,
that if as a result of any such consolidation, merger, share exchange, asset
sale, stock sale or comparable transaction, Holdings LLC's stockholders do not,
directly or indirectly, receive cash and/or marketable securities having a value
of at least fifty percent (50%) of the value of their membership interests of
Holdings LLC held immediately prior to such transaction, then in any such event
a termination of Executive's employment by the Company shall be deemed and
treated as a termination of the Employment Period hereunder by the Company other
than for Company's Good Reason under Section 6(d)(i) for purposes of this
Agreement, including without limitation, for determining termination benefits
under Section 7 hereof.

        (d) Voluntary Termination by the Company. The Company may terminate
Executive's employment, upon written notice to Executive, (i) for "Company's
Good Reason," which for purposes of this Agreement shall mean a material breach
by Executive which has not been cured within ten (10) days after written notice
to Executive of any material provision of this Agreement, violation in any
material respect of a written directive of the Board, or violation of a material
Company policy, or (ii) for any other reason or for no reason, in each case,
subject to payment of the termination payments, if any, specified in Section 7
hereof.

        (e) Termination by Executive With Good Reason. Executive may terminate
his or her employment hereunder at any time for Executive's Good Reason, with
such termination to be effective as of the date stated in a written notice of
termination delivered by Executive to the Company. For purposes of this
Agreement, "Executive's Good Reason" shall mean a material breach by Holdings
LLC or the Company of a material provision of this Agreement which has not been
cured within ten (10) days after written notice of noncompliance has been given
by Executive to the Company.

                                       3

<PAGE>

        (f) Voluntary Termination by Executive Without Good Reason. Executive
may terminate his or her employment hereunder for any reason other than
Executive's Good Reason as defined above, or for no reason, upon thirty (30)
days prior written notice to the Company (provided that, at the Company's
election, such termination will become effective immediately or at such other
time during such 30-day period as the Company may elect).

        (g) Retirement. The Company may require Executive to retire upon
attaining age 65 if not violative of applicable law; such a decision shall not
be treated as a voluntary termination by the Company for purposes of Section
6(d)(ii) above.

     In no event shall the termination of Executive's employment affect the
rights and obligations of the parties set forth in this Agreement, except as
expressly set forth herein.

     7. Termination Payments. Executive (or his or her estate pursuant to
Section 6(a) hereof) shall be entitled to receive the following payments upon
termination of his or her employment hereunder:

        (a) In the event of the termination of Executive's employment pursuant
to Section 6(a), 6(c) or 6(f) hereof, or by the Company pursuant to Section
6(d)(i) for Company's Good Reason or pursuant to Section 6(g) , the Company
shall pay to Executive (or his or her estate, as the case may be) as soon as
practicable following such termination any accrued and unpaid Base Salary
through the date of termination as provided in Section 3 hereof.

        (b) In the event of the termination of Executive's employment pursuant
to Section 6(b) hereof, the Company shall pay to Executive for a period of
twelve (12) months after the date of termination the amount of the Base Salary
through the end of such twelve (12) month period, less any amounts paid to
Executive pursuant to disability insurance, if any, provided by the Muzak
Entities.

        (c) In the event of termination pursuant to Section 6(d)(ii) of
Executive's employment other than for Company's Good Reason, or pursuant to
Section 6(e) for Executive's Good Reason, the Company shall continue to pay the
Base Salary for twelve (12) months after the date of termination.

        (d) Without limiting the remedies available to the Company for breach by
Executive of Section 9 or 10 hereof, in the event that Executive violates the
provisions of Section 9 or 10 after the termination of his or her employment
with the Company in a manner reasonably determined by the Company to be
materially injurious to any Muzak-Related Company (as that term is defined in
Section 9), any termination payments provided in this Section 7 remaining unpaid
at the time such violation occurs shall be automatically forfeited.

     8. Resignation as Officer or Director. Upon the termination of the
Employment Period, Executive will resign each position (if any) that he then
holds as an officer, director or manager of any of the Muzak Entities
(including, without limitation, his membership on the Board).

                                       4

<PAGE>

     9.  Confidential Information. Executive acknowledges that the information,
observations and data that (i) have been or may be obtained by him during his
employment or other relationship or interaction with any of the Muzak Entities
or any predecessor thereof (any of the Muzak Entities or any such predecessor
being a "Muzak-Related Company," and collectively they are "Muzak-Related
Companies"), prior to and/or after the date of this Agreement concerning the
business or affairs of the Muzak-Related Companies, and (ii) is treated by the
Muzak-Related Companies as confidential information (collectively, "Confidential
Information") are and will be the property of the Muzak-Related Companies.
Therefore, Executive agrees that he will not disclose to any unauthorized person
or use for his own account any Confidential Information without the prior
written consent of Holdings LLC (by the action of the Board), unless and to the
extent that (x) the aforementioned matters become generally known to and
available for use by the public other than as a result of Executive's acts or
omissions to act, or (y) disclosure of the aforementioned matters is required
under federal or state law or a duly issued subpoena. In the event any
disclosure pursuant to clause (y) above is to be made, Executive will give the
Company reasonable prior notice thereof and will permit the Muzak-Related
Companies to resist or limit the scope of the disclosure to be made. Executive
will deliver or cause to be delivered to Company at the termination of the
Employment Period, or at any other time any of the Muzak Entities or the Board
may request, all memoranda, notes, plans, records, reports, computer tapes and
software and other documents and data (and copies thereof) containing or
relating to Confidential Information or the business of any Muzak-Related
Company, which he may then possess or have under his control.

     10. Non-Compete, Non-Solicitation.

         (a) Non-Compete. Executive acknowledges that during his employment or
other relationship or interaction with the Muzak-Related Companies, he has and
will become familiar with trade secrets and other confidential information
concerning the Muzak-Related Companies, and with investment opportunities
relating to the Business, and that his services have been and will be of
special, unique and extraordinary value to the foregoing entities. Therefore,
Executive agrees that, during the Employment Period and thereafter, until the
2nd anniversary of the last day of the Employment Period (the Employment Period
and the remainder of such period being the "Noncompete Period"), he will not
directly or indirectly own, manage, control, participate in, consult with,
render services for, or in any other manner engage in any business, or as an
investor in or lender to any business (in each case including, without
limitation, on his own behalf or on behalf of another entity) which constitutes
or is competitive with all or part of the Business (as and where the same is
conducted or proposed to be conducted by any of Muzak-Related Companies during
the Employment Period). In addition, in as much as the Company regularly seeks
to acquire additional Muzak franchises and/or Muzak franchisees, Executive
agrees that, during the Employment Period and thereafter, until the 1st
anniversary of the last day of the Employment Period, he will not directly or
indirectly acquire or seek to acquire any Muzak franchise or the assets or
ownership interest of any Muzak franchisee within the United States. Nothing in
this Section 10 will prohibit Executive from being a passive owner of less than
5% of the outstanding stock of a corporation engaged in a competing business
described above of any class which is publicly traded, so long as Executive has
no direct or indirect participation in the business of such corporation. By
initialing in the space provided below, Executive acknowledges that he has read
carefully and had the opportunity to consult with legal counsel regarding the
provisions of this Section 10(a). _____ [initial].

                                       5

<PAGE>

         (b) Non-Solicitation. During the Noncompete Period, Executive will not
directly or indirectly (i) induce or attempt to induce any employee or full-time
independent contractor of any Muzak-Related Company to leave the employ or
contracting relationship with such entity, or in any way interfere with the
relationship between any such entity and any employee or full-time independent
contractor thereof, (ii) solicit for employment or as an independent contractor
any person who was an employee or full-time independent contractor of any
Muzak-Related Company, at any time during the Employment Period, or (iii) induce
or attempt to induce any customer, supplier or other business relation of any
Muzak-Related Company to cease doing business with such entity or in any way
interfere with the relationship between any such customer, supplier or other
business relation and such entity. By initialing in the space provided below,
Executive acknowledges that he has read carefully and had the opportunity to
consult with legal counsel regarding the provisions of this Section 10(b). _____
[initial].

     11. Enforcement. The parties hereto agree that if, at the time of
enforcement of Section 9 or 10, a court holds that any restriction stated in any
such Section is unreasonable under circumstances then existing, then the maximum
period, scope or geographical area reasonable under such circumstances will be
substituted for the stated period, scope or area. Because Executive's services
are unique and because Executive has access to information of the type described
in Sections 9 and 10, the parties hereto agree that money damages would be an
inadequate remedy for any breach of Section 9 or 10. Therefore, in the event of
a breach or threatened breach of Section 9 or 10, any Muzak-Related Company,
may, in addition to other rights and remedies existing in their favor, apply to
any court of competent jurisdiction for specific performance and/or injunctive
or other relief in order to enforce, or prevent any violations of, the
provisions of Section 9 or 10, without posting a bond or other security. The
provisions of Sections 9, 10, and 11 are intended to be for the benefit of the
Company, Holdings LLC, each of the other Muzak Entities, and their respective
successors and assigns, each of which may enforce such provisions and each of
which (other than Holdings LLC and the Company) is an express third-party
beneficiary of such provisions and this Agreement generally. Sections 9, 10, and
11 will survive and continue in full force in accordance with their terms
notwithstanding any termination of the Employment Period. By initialing in the
space provided below, Executive acknowledges that he has read carefully and had
the opportunity to consult with legal counsel regarding the provisions of this
Section 11. _____ [initial].

     12. Representations. Executive represents and warrants to the Company and
Holdings LLC that Executive is not a party to or bound by any employment
agreement, noncompete agreement or confidentiality agreement with any other
person.

     13. Key-Man Life Insurance. Executive agrees to submit to any requested
physical examination in connection with any of the Muzak Entities' purchase of a
"key-man" insurance policy. Executive agrees to cooperate fully in connection
with the underwriting, purchase and/or retention of any such key-man insurance
policy.

                                       6

<PAGE>
     14. Miscellaneous.

         (a) Notices. All notices, demands or other communications to be given
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid), or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to the address indicated below:

         Notices to Executive:

         Stephen P. Villa
         10228 Chilvary Drive
         Charlotte, NC  28277

         Notices to the Company:

         Muzak LLC
         3318 Lakemont Boulevard
         Fort Mills, SC  29708
         Attn:  Chief Executive Officer

         with copies (which shall not constitute notice to any Muzak-Related
         Company) to:

         ABRY Partners, LLC
         111 Huntington Avenue
         30th Floor
         Boston, MA 02199
         Attention: Peni Garber

         and

         Kirkland & Ellis
         Citigroup Center
         153 East 53rd Street
         New York, New York 10022
         Attention: John L. Kuehn, Esq.
                    Lisa M. Anastos, Esq.

or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.

         (b) Amendment and Waiver. No modification, amendment or waiver of any
provision of this Agreement will be effective unless such modification,
amendment or waiver is approved in writing by Holdings LLC, the Company,
Executive and ABRY Broadcast Partners III, L.P. ("ABRY"), if ABRY then holds any
equity securities of Holdings LLC. The failure of any party to enforce any of
the provisions of this Agreement will in no way be

                                       7

<PAGE>

construed as a waiver of such provisions and will not affect the right of such
party thereafter to enforce each and every provision of this Agreement in
accordance with its terms.

         (c) Severability. Without limiting Section 11, whenever possible, each
provision of this Agreement will be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision of this Agreement
is held to be invalid, illegal or unenforceable in any respect under any
applicable law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect the validity, legality or enforceability of any
other provision of this Agreement in such jurisdiction or affect the validity,
legality or enforceability of any provision in any other jurisdiction, but this
Agreement will be reformed, construed and enforced in that jurisdiction as if
such invalid, illegal or unenforceable provision had never been contained in
this Agreement.

         (d) Entire Agreement. Except as otherwise expressly set forth herein,
this agreement and the other agreements referred to herein embodies the complete
agreement and understanding among the parties hereto with respect to the subject
matter hereof and supersedes and preempts any prior understandings, agreements
or representations by or among the parties, written or oral (including that
certain Employment Agreement dated September 27, 2000 by and between Executive
and the Company), which may have related to the subject matter hereof in any
way.

         (e) Successors and Assigns. This Agreement will bind and inure to the
benefit of and be enforceable by Holdings LLC, the Company and Executive and
their respective assigns; provided that Executive may not assign his rights
under this Agreement without the prior written consent of each of Holdings LLC,
the Company and ABRY, if ABRY then holds any equity securities of Holdings LLC.

         (f) Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, any one of which need not contain the signatures of more
than one party, but all such counterparts taken together will constitute one and
the same Agreement.

         (g) Descriptive Headings; Interpretation. The descriptive headings of
this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement.

         (h) GOVERNING LAW. ALL ISSUES AND QUESTIONS CONCERNING THE
CONSTRUCTION, VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT WILL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF
SOUTH CAROLINA, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT PROVISION
OR RULE (WHETHER OF THE STATE OF SOUTH CAROLINA OR ANY OTHER JURISDICTION) THAT
WOULD CAUSE THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF SOUTH CAROLINA
TO BE APPLIED. IN FURTHERANCE OF THE FOREGOING, THE INTERNAL LAW OF THE STATE OF
SOUTH CAROLINA WILL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS
AGREEMENT, EVEN IF UNDER THAT JURISDICTION'S CHOICE OF LAW OR CONFLICT OF LAW
ANALYSIS, THE

                                       8

<PAGE>

SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.

         (i) WAIVER OF JURY TRIAL. EACH PARTY TO THIS AGREEMENT HEREBY WAIVES,
TO THE EXTENT PERMITTED BY APPLICABLE LAW, TRIAL BY JURY IN ANY LITIGATION IN
ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT
OR ANY ANCILLARY AGREEMENT OR THE VALIDITY, PROTECTION, INTERPRETATION,
COLLECTION OR ENFORCEMENT THEREOF.

         (j) No Strict Construction. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement.

                                    * * * * *

                                       9

<PAGE>

     IN WITNESS WHEREOF, the parties hereto have executed this Executive
Employment Agreement as of the date first written above.

                                        /s/  Stephen P. Villa
                                        ----------------------------------------
                                        STEPHEN P. VILLA

                                        MUZAK HOLDINGS LLC

                                        By:  /s/ Peni Garber
                                             -----------------------------------
                                             Name:  Peni Garber
                                             Title: Vice President

                                        MUZAK LLC

                                        By:  /s/ Peni Garber
                                             -----------------------------------
                                             Name:  Peni Garber
                                             Title: Vice President

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