Document:

EXHIBIT 10.32

                   MODIFIED SEPARATION AND SEVERANCE AGREEMENT

   MODIFICATION TO THE SEVERANCE COMPENSATION AND PAYMENTS FOR DONALD C. LIES
                                FEBRUARY 15, 2000

This Modified Separation and Severance Agreement (the "Modified Agreement") is
made and entered into this 15th day of February, 2000, by and between RSI
Systems, Inc., a Minnesota corporation ("Employer") and Donald C. Lies, a
Minnesota resident ("Employee").

Whereas, Employer has paid Employee a total of $67,692.32, in accordance with
the Separation and Severance Agreement dated September 7, 1999 (the
"Agreement"), the last such payment having been made on January 7, 2000, and

Whereas, Employer has experienced significant cash flow constraints over the
past several months, and has expressed to Employee its desire to change the
amount and timing of remaining payments due to Employee under the Agreement
dated September 7, 1999.

Now therefore, in consideration of the recitals and the mutual representations,
warranties, covenant, agreements and promises made herein, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree to the following modifications to the
Agreement as follows:

SECTION 2(b). SEVERANCE PAYMENTS

This modification supersedes Section 2 (b) of the Agreement - Severance payments
due Donald C. Lies ("Employee") by RSI Systems ("Employer") as originally agreed
upon by both parties on September 7, 1999.

NEW SEVERANCE PAYMENT TERMS. In satisfaction of all remaining severance amounts
due under the original Agreement, Employer agrees to pay Employee a total lump
sum of $50,000, less withholding taxes as required by law, in two (2) equal
payments of $25,000 each, to be paid on or before February 15, 2000, and March
15, 2000.

                                Payment Schedule

---------------------- ---------------- -----------------------------------
Payment due date       Amount           Time
---------------------- ---------------- -----------------------------------
February 15, 2000      $25,000          On or before 2 p.m. CST
---------------------- ---------------- -----------------------------------
March 15, 2000         $25,000          On or before 2 p.m. CST
---------------------- ---------------- -----------------------------------

For the payments to be recognized as "made", the check and/or cash must have
been delivered to Employee's place or residence (9425 Toledo Avenue S.,
Bloomington, Minnesota 55437) no later than 2 p.m. CST on said due date.

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Upon remittance of both $25,000 payments on the dates as specified above by
Employer to Employee, the Employee agrees to waive his claim to any further
compensation, obligations or terms and conditions related to payment of said
compensation by Employer, and Employer is not obligated to pay any future
compensation. However, if said payments are not made in their entirety and/or on
or before the dates and times as specified in this Modified Agreement, Employer
will be considered in default of the terms and conditions of this Modified
Agreement and the terms and conditions in Section 2(b) of the original Agreement
shall stand as stipulated in the September 7, 1999 Agreement.

Except as amended herein, the Seperation and Severance Agreement shall remain in
full force and effect. No other agreements, be they written or verbal, exist as
it relates to the Separation and Severance Agreement other than in writing and
executed by both parties.

In witness thereof, the undersigned have executed this Modified Agreement
effective as of the date in the year first written above.

-------------------------------- -------------------------------
            Employer                       Employee
-------------------------------- -------------------------------
By: RSI Systems, Inc.            Name:
-------------------------------- -------------------------------
Name:                            Signature:
-------------------------------- -------------------------------
Title:                           Date:
-------------------------------- -------------------------------
Signature:
-------------------------------- -------------------------------
Date:
-------------------------------- -------------------------------

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Received from, RSI Systems, Inc. payment to Don Lies in the sum of $23,087.50.

Date: February 15, 2000

_____________________________
Signature

For: Donald C. LiesEXHIBIT 10.15

                                SUPPLY AGREEMENT

      THIS SUPPLY AGREEMENT, dated as of May 15, 2000 (the "Effective Date"), is
between Novartis Consumer Health, Inc., 560 Morris Avenue, Summit, New Jersey
07901 ("Novartis"), a Delaware corporation, and LecTec Corporation, a Minnesota
corporation, 10701 Red Circle Dr., Minnetonka, MN 55343 ("LecTec").

                                   Background

      A. LecTec is a manufacturer of medical and health-related consumer
products, including a line of proprietary patch products for the
over-the-counter market which emit vapors which, when inhaled, provide relief of
cough and cold symptoms (the "Vapor Patches"). LecTec manufactures and sells
such patch products under its own trade names and also manufactures and sells
certain of such patch products to third parties.

      B. Novartis is a manufacturer and reseller of health-related consumer
products.

      C. Novartis desires to obtain a supply of certain LecTec patch products,
and LecTec desires to supply same, all upon the terms and conditions set forth
below and in the attached exhibits.

      NOW, THEREFORE, the parties do hereby agree to the following:

1.    GENERAL SCOPE OF AGREEMENT

      1.1 Manufacturing. LecTec has developed and shall manufacture, sell and
cause to be delivered to Novartis the products set forth in Exhibit A hereto
(the "Products") in quantities sufficient to meet the total requirements,
consistent with the forecasting and purchase order mechanism set forth in
Article 3 of this Agreement, of Novartis for use in the pediatric field of use
(the "Field of Use") and in the countries set forth in Exhibit D hereto (the
"Territory") of such Products. LecTec shall manufacture and sell the Products
exclusively to Novartis, provided, however, "exclusivity" in the foregoing
sentence shall mean that LecTec may not manufacture and sell the Products or any
other Vapor Patches (collectively, "Comparable Products") in the Field of Use
and in the Territory to any other customer. Notwithstanding such exclusivity,
LecTec may continue to manufacture and sell Comparable Products directly to
retailers under its "TheraPatch" tradename, or under any Other LecTec Trade Name
(as defined below) even if such Comparable Products may compete directly with
the Products in the Field of Use and in the Territory. The term "Other LecTec
Trade Names" shall mean any LecTec tradenames in existence at the Effective Date
or as developed by LecTec during the term of this Agreement, but not including
any third party's trade names which LecTec acquires or to which LecTec otherwise
gains rights during the term of this Agreement.

      1.2 ( * )
* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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      1.2.1 ( * )

      1.2.2 ( * )

      1.3 Fulfillment of Requirements. Novartis shall purchase all of Novartis'
requirements of the Products for use in the Territory and the Field of Use
exclusively from LecTec, in accordance with and subject to the terms and
conditions of this Agreement. This requirements obligation is limited to
Novartis' requirements of Products which meet the Specifications (as defined
below).

      1.4 Minimum Requirements. During the period commencing on the Effective
Date and ending on December 31, 2001 (the "Initial Period"), and during each
calendar year thereafter (the Initial Period and each calendar year thereafter
each being a "Period"), Novartis shall purchase at least the minimum
requirements of Products set forth in Exhibit C hereto (the "Minimum
Requirements").

            1.4.1 In calculating whether Novartis has in fact purchased the
Minimum Requirements, the parties shall count all variations of the Products
purchased by Novartis from LecTec in the Period in one cumulative total. Any
Products returned to LecTec by Novartis hereunder shall not be counted in such
total (but replacements of such returned Products shall be

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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included in such counting as if such replacements had been purchased at the time
of the Products being replaced).

            1.4.2 Beginning on January 1, 2002 and in each January thereafter,
if Novartis failed to purchase at least the Minimum Requirements of Products
during the preceding Period, then, by February 28 of the applicable calendar
year, Novartis shall either (a) place firm purchase orders for the shortfall
("Shortfall") and such Shortfall amount of Products shall be deemed added, on a
one-time basis, to the Minimum Requirements for the Period in which such
purchase order is placed; or (b) pay to LecTec an amount equal to forty percent
(40%) of the difference between (i) the amount Novartis would have paid if it
had actually purchased the Minimum Requirements of Products for such period and
(ii) the amount actually paid for Products purchased during such period
("Compensatory Payment"). If Novartis elects not to place such orders for the
Shortfall amount by such date, and elects not to make the Compensatory Payment
by such date, then LecTec shall no longer be obligated to sell Products to
Novartis on an exclusive basis within the Field of Use and the Territory and may
thereafter sell Comparable Products to third parties within the Field of Use and
the Territory. Upon such termination of Novartis' exclusivity, Novartis shall
cease to have any requirements to purchase the Minimum Requirements of the
Products. The provisions of this Section 1.4.2 shall not apply in the event that
Novartis' failure to purchase the Minimum Requirements is due to to the actions
or omissions of LecTec.

            1.4.3 On January 1, 2002, at the option of LecTec, the parties shall
negotiate in good faith an increase in the annual Minimum Requirements. However,
in no event shall Novartis be obligated to agree to an increase in the Minimum
Requirements of more than twenty-five percent (25%).

      1.5 Regulatory Compliance. As set forth below, LecTec shall be responsible
for regulatory compliance in the manufacture of the Products and supply of same
to Novartis. Novartis shall be responsible for regulatory compliance in the
proper labeling of the Products and the sale of same to end users, directly or
indirectly, which shall be under the exclusive control of Novartis. The parties
shall cooperate in good faith to achieve such regulatory compliance.

      1.6 Production Standards. All Products sold and delivered to Novartis
hereunder shall (a) conform in all material respects with the specifications set
forth in the Quality Assurance Agreement, attached hereto as Exhibit B (the "QA
Agreement"), and with such further specifications as shall be agreed to by all
parties in writing (the "Specifications"); (b) be manufactured, packaged and
sold to Novartis without any material deviation from or breach of (i) the
QAAgreement, and (ii) any applicable laws, regulations, and requirements of any
government or governmental agency; and (c) be subject to the warranties set
forth in Article 9 of this Agreement.

      1.7 Brand Name. Novartis intends to market the Products under the
proprietary names "Vapor Patch" or "VaporPatch" (as selected by Novartis in its
own discretion). LecTec hereby acknowledges that it has no objection to Novartis
seeking to register such names at its own expense and risk with the United
States Trademark Office, or with other authorities, and

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shall file its consent thereto, as requested in writing by Novartis, but LecTec
does not warrant or imply that such marks are otherwise available or will be
granted. LecTec shall give commercially reasonable cooperation to Novartis to
manufacture and label the Products with such name or names or other names as
Novartis, in its sole discretion, may designate from time to time during the
term of this Agreement. However, subject to the foregoing, nothing herein shall
be deemed to authorize the use of any LecTec trade name or trademark or any
other mark that would dilute or reasonably tend to dilute any such LecTec trade
name or trademark.

2.    PAYMENT

      2.1 Prices. In consideration of the satisfactory manufacture and delivery
to Novartis of the ordered quantities of Products, and subject to adjustment in
accordance with this Agreement, Novartis shall pay LecTec for the Products in
accordance with the prices set forth in Exhibit C hereto. Novartis shall make
such payments within thirty (30) days of the date of each LecTec invoice issued
upon shipment of the Products. Such payments shall be without prejudice to the
inspection and credit rights of Novartis under Article 4 of this Agreement.

      2.2 Taxes. Novartis shall bear the cost of taxes of any kind, nature or
description whatsoever applicable to the sale of any Products by LecTec to
Novartis (other than taxes based upon the income of LecTec or LecTec's
employees), unless Novartis is exempt therefrom and provides to LecTec, at the
time of the submission of any Purchase Order, tax exemption certificates or
permits acceptable to the appropriate taxing authorities.

      2.3 Shipment. ( * )

      2.4 ( * )

      2.5 ( * )

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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      2.5.1 ( * )

      2.5.2 ( * )

      2.5.3 ( * )

      2.6 ( * )

      2.7 Raw Material Vendors. Novartis may at any time identify to LecTec
lower cost and comparable quality sources from which LecTec may obtain any of
the Raw Materials. In such an event, except to the extent that such other source
is unable to reasonably satisfy LecTec's quality, service or delivery standards,
or any of LecTec's other standard vendor qualification requirements, LecTec
shall utilize the sources identified by Novartis as soon as commercially

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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feasible, and the prices charged to Novartis for Products shall be reduced by
the amount of any resulting reductions in Raw Material costs. Novartis shall
reimburse LecTec for any costs LecTec shall reasonably incur in implementing any
such change in sources.

      2.8 ( * )

      2.9 ( * )

3.    FORECASTS AND ORDERS

      3.1 Rolling Forecasts. In order to assist LecTec in planning production,
Novartis shall provide LecTec with a twelve (12) month rolling forecast of the
quantities of Products and delivery dates required by Novartis, by month, for
the following twelve (12) months. It is understood that such forecasts are
intended to be estimates only and shall not be binding upon Novartis.
Notwithstanding the foregoing, Novartis shall be bound to purchase from LecTec
one hundred percent (100%) of those quantities of Products set forth in each
such forecast as being Novartis' requirements of Products for the first three
(3) months of each twelve (12) month period and, accordingly, shall issue
purchase orders therefor pursuant to Section 3.2. LecTec shall, no later than
ten (10) business days after receipt of each such forecast, notify Novartis in
writing of any prospective problems of which it is then aware that might prevent
it from meeting Novartis' forecasted order quantities or estimated delivery
dates. Unless LecTec so informs Novartis that it would have problems in meeting
Novartis' forecasted requirements, LecTec shall be obligated to deliver during
any calendar year, pursuant to purchase orders provided under Section 3.2 of
this Agreement, up to one hundred twenty percent (120%) of Novartis' estimated
purchases for that calendar year (but in no single month more than one hundred
fifty percent

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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(150%) of those quantities of Products set forth in the most recent forecast as
being Novartis' requirements of Products for the first month of the forecasted
twelve (12) month period). LecTec shall further use its commercially reasonable
efforts to comply with purchase orders for Products in excess of such one
hundred twenty percent (120%) and one hundred fifty percent (150%) amounts.

      3.2 Purchase Orders. Subject to Section 3.1, at least sixty (60) days
prior to the date on which Novartis desires to have a shipment of Products
delivered (as defined in Section 2.4), Novartis shall furnish to LecTec a
binding purchase order for such shipment, stating (a) the desired quantity of
Products, and (b) the desired delivery date. Each such Novartis purchase order
shall be subject to acceptance by LecTec. If LecTec has not indicated in writing
its rejection of such a purchase order within five (5) business days from
receipt of same, such purchase order shall be deemed accepted. If LecTec cannot
accept a specific purchase order, it shall, within such 5-day period, inform
Novartis in writing of the circumstances and of LecTec's proposed alternative
delivery proposal. In such event, Novartis shall have no firm commitment to
purchase, and LecTec shall have no firm commitment to supply, unless Novartis
furnishes LecTec with a new purchase order incorporating such alternative
proposal and LecTec has accepted same.

      3.3 Amendment of Purchase Orders. LecTec shall use its commercially
reasonable efforts to accommodate any Novartis requests for delivery of Products
in excess of the quantities described in any previously-submitted and accepted
purchase order, or for delivery of Products sooner than that allowed pursuant to
this Article 3. If Novartis' business conditions necessitate reduction or delay
in purchase order requirements, then LecTec shall use its commercially
reasonable efforts to implement such requested changes. Notwithstanding the
foregoing, LecTec shall not take any action in response to any such requests
which would result in charges to Novartis in addition to those set forth in the
respective purchase order without Novartis' prior written consent.

4.    INSPECTIONS AND ACCEPTANCE

      4.1 Inspection; Right of Rejection. Novartis shall accept any delivery of
Products hereunder if, in Novartis' sole and reasonable discretion, Novartis
determines that the delivery complies fully with the relevant purchase order,
the Specifications and the requirements of this Agreement. Novartis shall have
the right to inspect all Products delivered hereunder within thirty (30) days of
its receipt of the Products and all required documentation. Novartis shall
provide LecTec with written notice of its acceptance or rejection of the
shipment within sixty (60) days of receipt of the Products and all required
documentation. Any notice of rejection shall specify the reason(s) therefor.
Except in the event of any investigation, corrective action or retesting of a
shipment, if Novartis fails to provide LecTec with written notice of its
acceptance or rejection of the shipment within sixty (60) days of receipt of the
Products and all required documentation, then the shipment shall be deemed to
have been accepted by Novartis. Novartis' prior payment of any invoice for a
shipment which is timely rejected under this Section 4.1 shall not prejudice
Novartis' right under Section 4.2 to seek replacement Products or a credit or
refund, as Novartis may deem appropriate, with respect to any such rejected
Products.

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      4.2 Replacements. If Novartis notifies LecTec that any, or any part
thereof, is rejected pursuant to Section 4.1, then, at Novartis' option, (a)
LecTec shall, at no additional charge, deliver replacement Products to Novartis
as soon as reasonably practicable thereafter (but, in any event, within ninety
(90) days after the initial notification by Novartis); or (b) the purchase order
at issue shall be deemed terminated, and Novartis shall not be obligated to make
any payments to LecTec with respect to such purchase order or the rejected
shipment (or, if payment has already been made for such Products, then Novartis
shall be entitled to a credit in such amount). Novartis shall give commercially
reasonable cooperation to LecTec to determine the nature and extent of any
problem giving rise to a rejection of Products, including, without limitation,
prompt samples of any allegedly non-conforming Products.

      4.3 Returns. Novartis shall not return any rejected Products to LecTec
except upon a return material authorization ("RMA") from LecTec. LecTec shall
pay the freight to deliver replacement Products to Novartis for rightfully
rejected Products, and LecTec shall pay the freight to return to LecTec or its
designee rejected Products for which LecTec has provided to Novartis an RMA.

5.    DOCUMENTATION AND INFORMATION

      5.1 Confirmation. LecTec shall submit to Novartis the batch manufacturing
and testing documents relating to any Products ordered hereunder, within ten
(10) days of the completion of the manufacturing process with respect to any
particular batch of Products. LecTec shall provide such documentation as
reasonably requested by Novartis solely (a) to assist Novartis in determining
whether any manufactured or delivered Products comply fully with the
Specifications and the requirements of this Agreement; (b) to assist Novartis in
obtaining any and all regulatory approvals necessary to market the Products in
the Territory; or (c) to enable Novartis to comply with any statutory or
regulatory requirements or with a request by any governmental or regulatory
authority in the Territory. Such records and reports shall be subject to the
confidentiality provisions of Article 8 of this Agreement, shall be deemed
LecTec's Confidential Information, and shall be subject to the requirements of
Section 1.3 of the QA Agreement.

      5.2 Certificate of Analysis. Every shipment of the Products to Novartis
shall be accompanied by a Certificate of Analysis from LecTec to certify the
active ingredients therein. LecTec shall warrant the accuracy of each such
Certificate of Analysis to a reasonable degree of scientific certainty.

      5.3 Books and Records. LecTec shall keep on file all books and records in
connection with the manufacture and testing of the Products, including, but not
limited to, those books and records relating to cross-over cleaning, process
validation, installation qualification, operational qualification and cleaning
validation for a period of seven (7) years, plus the active year, from the time
of generation of such documents.

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6.    PRODUCTION PROCEDURES

      6.1 No Reworked Products. LecTec shall not rework or reprocess any
non-conforming Products without the prior written approval of Novartis.

      6.2 Product Packaging. The Products shall be delivered to Novartis
packaged in accordance with the Specifications. Notwithstanding the foregoing,
Novartis shall have the right to require any special or varied packing that it
believes is reasonably necessary to meet customs or regulatory requirements in
the Territory. Reasonable incremental costs which result directly from any
packing changes required by Novartis will be borne by Novartis.

      6.3 Production Procedures. At an agreed upon time prior to its first
production run of the Products for Novartis, and at some mutually agreeable time
prior to the production of qualification batches, LecTec either shall provide to
a designated Novartis employee, or shall permit such designated Novartis
employee to review at LecTec's facility, for Novartis' review and approval,
LecTec's production procedures for the Products ("Production Procedures"). Such
Production Procedures shall include the manufacturing site, manufacturing
equipment, manufacturing process, manufacturing conditions and testing
procedures for the manufacture of the Products. After such initial Novartis
approval, if LecTec wishes to make any material change in any of the Production
Procedures so documented and approved, LecTec shall provide notice thereof to
the designated Novartis employee, and shall permit such designated Novartis
employee to review such proposed changes at LecTec's facility, at least thirty
(30) days prior to its first production run under such revised Production
Procedures. All such changes to the Production Procedures must be approved in
writing by Novartis prior to being implemented, which approval shall not
unreasonably be withheld.

      6.4 Waste Disposal. LecTec represents and warrants, to the best of its
knowledge, and shall take all commercially reasonable actions necessary to
ensure, that all facilities, equipment and practices used to perform LecTec's
responsibilities under this Agreement by or on behalf of LecTec, or by any of
LecTec's contractors of any rank (including, without limitation, environmental
or safety and health consultants or waste management or disposal firms) (each a
"LecTec Contractor") will be during the term of this Agreement, in full
compliance with all health, safety and environmental laws, statutes, ordinances,
regulations, rules, permits and pronouncements. LecTec assumes responsibility
for disposing of any and all waste generated during the performance of its
responsibilities under this Agreement (including, without limitation, during any
manufacturing, storage and transportation activities) in accordance with all
legal and professional standards.

            6.4.1 LecTec shall Dispose or arrange for the Disposal of Waste and
at an Approved Disposal Facility. Novartis shall have the right to unilaterally
modify any designation of any Approved Disposal Facility at any time based upon
audit and inspection results. LecTec shall only transport Waste to an Approved
Disposal Facility by means of a transporter lawfully permitted to transport the
particular types of Waste at issue. LecTec shall be solely responsible for the
proper Disposal of Waste. For purposes of this Section 6.4.1,

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                  6.4.1.1 "Dispose" or "Disposal" shall mean any discharge,
deposit, injection, dumping, spilling, leaking, or placing of any Waste into or
on any land or water and the arrangement of any of the foregoing, and shall
include any storage, pretreatment, treatment (including incineration), any other
actual disposal, use, sale, sampling or other transfer or application of Waste
of any kind or nature whatsoever;

                  6.4.1.2 "Waste" shall mean, for purposes of this Agreement
only, all materials that are produced or generated in connection with the
manufacture of any chemical compounds pursuant to this Agreement and for which
Disposal is required, including but not limited to materials that are Hazardous
Waste, co-product, by-product, chemical compounds that fail to conform to the
requirements of this Agreement, wastewaters, residues, wastes, bottoms and other
remainders and materials, packaging of, or components of the chemical compounds,
and components of any chemical compounds that are not used in the manufacture of
the chemical compounds;

                  6.4.1.3 "Hazardous Waste" shall mean (a) any material or
substance defined as or containing materials defined as a "hazardous substance"
pursuant to any applicable laws or regulations, including the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, the Resource
Conservation and Recovery Act, as amended, and any similar successor or
supplementary legislation, and the regulations promulgated thereunder, or (b)
any material or substance that is radioactive; and

                  6.4.1.4 "Approved Disposal Facility" shall mean a disposal
facility approved by Novartis, which approval shall not be unreasonably
withheld.

            6.4.2 Notwithstanding anything to the contrary herein, (i) if LecTec
and/or any LecTec Contractor fails to comply with the obligations set forth in
this Section 6.4, then LecTec shall be responsible for any claims, suits, or
liabilities resulting therefrom (including, without limitation, those based on
strict liability and joint and several liability), and LecTec shall indemnify,
defend and save Novartis (including officers, directors, employees and agents of
Novartis) harmless from and against any and all such claims, suits, and
liabilities; and (ii) LecTec shall indemnify, defend and save Novartis
(including officers, directors, employees and agents of Novartis) harmless from
and against any and all claims, suits, and liabilities which arise directly or
indirectly from the storage, release, transportation or disposal of chemicals,
raw materials, product, waste or any other substance by LecTec and/or any LecTec
Contractor.

7.    OWNERSHIP

      7.1 Novartis Property. All materials, inventions, know-how, trademarks,
information, data, writings and other property, in any form whatsoever, which is
provided to LecTec by and/or on behalf of Novartis, or which is used by LecTec
with respect to the performance of its obligations hereunder, and which was
owned by Novartis prior to being provided to LecTec, shall remain the property
of Novartis (the "Novartis Property"). LecTec shall have a royalty-free license
to use any Novartis Property supplied to it solely to the extent necessary to
enable LecTec to perform its obligations hereunder. LecTec shall not acquire any
other right, title or interest in the Novartis Property as a result of its
performance hereunder. Without limiting the

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foregoing, Novartis Property shall include the copyrights and trademarks used in
the packaging of the Products ("Packaging IP Rights").

      7.2 LecTec Property. All materials, inventions, know-how, trademarks,
information, data, writings and other property, in any form whatsoever, which is
provided to Novartis by or on behalf of LecTec, or which is used by LecTec with
respect to the performance of its obligations hereunder, and which was owned by
LecTec prior to its performance or is developed or acquired in the course of
such performance hereunder, shall remain the property of LecTec (the "LecTec
Property"). Novartis shall acquire no right, title or interest in the LecTec
Property as a result of LecTec's performance hereunder. Without limiting the
foregoing, as between the parties hereto, all the intellectual property rights
for the Products other than the Packaging IP Rights shall be deemed to be LecTec
Property.

      7.3 Effect of Termination. Upon the termination of this Agreement, each
party shall return to its owner all Novartis Property or LecTec Property, as
applicable, except for one copy which may be retained in the returning party's
confidential files.

8.    TRADE SECRETS, CONFIDENTIALITY AND PUBLICITY

      8.1 Confidential Information. During the period that this Agreement is in
effect and thereafter, LecTec and Novartis shall not disclose to anyone in any
manner whatsoever or use for any purpose other than its performance of this
Agreement (except as authorized in writing by the disclosing party) any
information it receives from the other party ( "Confidential Information"),
including, without limitation, intellectual property, inventions, works of
authorship, trade secrets or know-how or other information relating in any way
to the Products, processes, and services of the other party.

      8.2 Limitations. Each party shall limit disclosure of Confidential
Information received hereunder to only those of its employees who are directly
concerned with the performance of any activities with respect to which the
Confidential Information was disclosed. Each party agrees to advise those of its
employees who receive any other party's Confidential Information that such
Confidential Information (a) is proprietary and confidential to such party and
(b) shall not be disclosed to anyone except as authorized by this Agreement or
otherwise authorized by such party in writing. Each party further agrees to take
at least such precautions as it normally takes with its own Confidential
Information to prevent unauthorized disclosure of the other party's Confidential
Information.

      8.3 Injunctive Relief. Each party acknowledges that any unauthorized
disclosure of any portion of the other party's Confidential Information shall
cause irreparable injury to the other party and that no adequate or complete
remedy shall be available at law to such other party to compensate for such
injury. Accordingly, each party hereby also acknowledges that the other party
shall be entitled to injunctive relief in the event of such unauthorized
disclosure by a party or any of its employees in addition to whatever other
remedies it might have at law.

                                       11
<PAGE>

      8.4 Effect of Termination. Upon termination of this Agreement, each party
shall return to the other all copies of the other party's Confidential
Information, and shall make no further use of such Confidential Information,
except for one copy which may be retained in the receiving party's confidential
files.

      8.5 Exceptions. The obligations of this Section 8 shall not apply to
-information.

            8.5.1 that is or has been in the possession of the recipient prior
to receipt of the same from the disclosing party as evidenced by recipient's
written records;

            8.5.2 which the recipient lawfully obtains from any third party not
under an obligation to the disclosing party to hold the same in confidence;

            8.5.3 that is published or becomes part of the public domain without
breach of any undertakings discussed hereinabove;

            8.5.4 that is independently developed by personnel of the recipient
without any use of or reliance upon the disclosing party's Confidential
Information; or

            8.5.5 that is required to be disclosed pursuant to judicial process,
court order or administrative request, or that is otherwise required for any
regulatory filing, provided that the recipient shall notify the other party
sufficiently prior to disclosing such Confidential Information as to permit such
other party to seek a protective order.

      8.6 Press Releases. LecTec shall not issue any press release or other
public statement disclosing the existence of or relating to this Agreement
without prior written consent of Novartis, which consent shall not be
unreasonably withheld or delayed. The foregoing shall not limit LecTec's rights
to make such disclosures as reasonably required by applicable securities laws or
the rules of any stock exchange where its securities are traded.

9.    QUALITY OF THE PRODUCT; COMPLIANCE WITH LAW

      9.1 Representations and Warranties. LecTec hereby represents and warrants
that:

            9.1.1 no Products constituting or being a part of any shipment
hereunder shall at the time of any such shipment be (i) adulterated or
misbranded within the meaning of the Federal Food, Drug and Cosmetic Act, as
amended from time to time (the "Act"), or regulations promulgated thereunder, as
such law or regulation is constituted and in effect at the time of any such
shipment, or (ii) an article which may not, under the provisions of Sections
404, 505 or 512 of the Act, be introduced into interstate commerce;

            9.1.2 all Products furnished to Novartis hereunder shall be in full
compliance with the Specifications, and shall remain in full compliance with the
Specifications for the full period of the expected shelf-life of such Products,
so long as the Products are stored in accordance with the Specifications;

                                       12
<PAGE>

            9.1.3 LecTec shall perform its obligations hereunder in compliance
with any materially applicable federal, state and local laws and regulations,
including without limitation the Act, the FDA's then-current Good Manufacturing
Practices ("cGMP"), and any health, safety and environmental laws and
regulations materially applicable to LecTec's manufacture and packaging of the
Products and its other performance hereunder;

            9.1.4 all Products furnished to Novartis hereunder shall have been
manufactured in accordance with the terms of the QA Agreement;

            9.1.5 LecTec's manufacturing, laboratory and packaging facilities
shall remain in compliance with CGMP at all times during the term of this
Agreement to the extent applicable to the manufacture and packaging of the
Products; and

            9.1.6 LecTec owns or has the right to use all necessary copyright,
trademark, patents, trade secrets and other intellectual property rights which
it shall use to perform its obligations hereunder with respect to the Territory.

      9.2 Disclaimer. EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED IN THIS
AGREEMENT, LECTEC MAKES NO WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, CONCERNING
THE PRODUCTS, OR THE MERCHANTABILITY OR FITNESS THEREOF FOR ANY PURPOSE.

      9.3 Remedy. In the event that Products are delivered to Novartis by LecTec
which are not in compliance with the warranties made in Section 9.1 then, at
Novartis' option (i) LecTec shall replace the non-compliant Products at no
additional charge (which replacement Products shall be delivered to Novartis as
soon as reasonably practicable, but in no event more than ninety (90) days after
the initial notification by Novartis); or (ii) LecTec shall credit Novartis'
account in the amount of the price of the non-compliant Products. Novartis shall
give commercially reasonable cooperation to LecTec to determine the nature and
extent of any problem giving rise to a breach of warranties, including, without
limitation, prompt samples of any allegedly non-compliant Products. Returns of
non-compliant Products shall be subject to the provisions of Section 4.3.

10.   INDEMNIFICATION AND INSURANCE

      10.1 Novartis Indemnification. Novartis shall defend, indemnify and hold
LecTec harmless against any and all claims, damages, expenses, reasonable
attorneys' fees, settlement costs and judgments arising out of any death,
personal injury, bodily injury or property damage to a third party alleged to
have been caused by the Products, except to the extent that such injury or
damage was the result of any breach of this Agreement by LecTec, including any
warranty contained herein, or the result of any latent defects in the Products
caused by the negligence or willful misconduct of LecTec. LecTec shall promptly
notify Novartis of any such claim or action, shall reasonably cooperate with
Novartis in the defense of such claim or action, and shall permit Novartis to
control the defense and settlement of such claim or action, all at Novartis'
cost and expense.

                                       13
<PAGE>

      10.2 LecTec Indemnification. LecTec shall defend, indemnify and hold
Novartis harmless against any and all claims, damages, expenses, reasonable
attorneys' fees, settlement costs and judgments arising out of any death,
personal injury, bodily injury or property damage to a third party to the extent
that such death, injury or damage is the result of (i) any breach of this
Agreement by LecTec, including any warranty contained herein; (ii) any claim
regarding a work-related death or injury to any LecTec employee; (iii) any claim
regarding latent defects in the Products caused by the negligence or willful
misconduct of LecTec; or (iv) any claim that the Products, or any means used to
manufacture the Products, infringe any third party's patent, trade secret,
trademark, copyright, or other proprietary interest in the Territory. Novartis
shall promptly notify LecTec of any such claim or action, shall reasonably
cooperate with LecTec in the defense of such claim or action, and shall permit
LecTec to control the defense and settlement of such claim or action, all at
LecTec's cost and expense.

      10.3 Product Recalls and Withdrawals. Each party shall promptly notify the
other party of any legal and/or factual circumstances which might, under
applicable laws and regulations, necessitate a field correction, recall or
withdrawal of any Products (collectively, a "Regulatory Recall") and shall
consult with each other regarding the appropriate steps to be taken. Novartis
shall determine whether any Regulatory Recall shall take place. Novartis shall
notify all regulatory authorities of any such Regulatory Recall, and shall take
all steps necessary to effectuate such Regulatory Recall. LecTec shall assist
Novartis in each of these activities to the extent reasonably requested by
Novartis. LecTec shall reimburse Novartis for the costs of any such Regulatory
Recall to the extent such Regulatory Recall was made necessary by the actions or
inaction of LecTec. If LecTec is unable in good faith to obtain the recall
insurance required by Section 10.4.6 for a reasonable premium, then the maximum
amount which LecTec shall be required to reimburse Novartis pursuant to the
preceding sentence shall be $500,000 per Regulatory Recall, not including the
cost of any replacement Products made necessary by the applicable Regulatory
Recall. Novartis shall reimburse LecTec for the costs of any such Regulatory
Recall to the extent such Regulatory Recall was made necessary by the actions or
inaction of Novartis. Any claim for such reimbursement of costs incurred in such
a Regulatory Recall shall be subject to audit by the CPA Firm.

      10.4 LecTec's Insurance Coverage. LecTec shall obtain, at its own expense,
policies of insurance in amounts no less than those specified below and shall
cause its carrier or carriers to name Novartis as an additional insured on those
coverages marked with an (*) below:

            10.4.1 *general liability insurance with combined limits of not less
than $1,000,000 per occurrence and $1,000,000 per accident for bodily injury,
including death, and property damage;

            10.4.2 workers' compensation and disability insurance in the amounts
required by the law of the state(s) in which its workers are located, and
employer's liability insurance with limits of not less than $1,000,000 per
occurrence;

            10.4.3 *automobile liability insurance (in the event that the use of
an automobile by LecTec is required in the performance of this Agreement) with
combined limits of not less

                                       14
<PAGE>

than $1,000,000 per occurrence and $1,000,000 per accident for bodily injury,
including death, and property damage is required;

            10.4.4 *product liability insurance with limits not less than
$5,000,000;

            10.4.5 property insurance for the replacement value of the
facilities and equipment used to produce the Products;

            10.4.6 *recall insurance with limits not less than $2,000,000; and

            10.4.7 *excess insurance with limits not less than $5,000,000.

      10.5 Documentation of Coverage. Upon request, LecTec shall provide to
Novartis evidence of its insurance or self insurance. LecTec shall provide
Novartis thirty (30) days prior written notice of any cancellation or material
change in coverage.

      10.6 Novartis' Insurance Coverage. Novartis warrants and represents to
LecTec that Novartis maintains a policy or program of insurance or
self-insurance at levels sufficient to support the indemnification obligations
assumed herein. Upon request, Novartis shall provide to LecTec evidence of its
insurance or self-insurance. Novartis shall provide to LecTec thirty (30) days
prior written notice of any cancellation or material change in coverage.

11.   TERM AND TERMINATION

      11.1 Initial Term; Renewal. This Agreement shall commence on the Effective
Date and shall continue in effect for five (5) years ( the "Initial Term") and,
thereafter, shall be renewed for subsequent one (1) year terms upon the mutual
consent of the parties.

      11.2 Termination for Convenience. Notwithstanding Section 11.1, Novartis
may terminate this Agreement for convenience at no cost, at any time, by giving
LecTec at least six (6) months prior written notice thereof.

      11.3 Termination for Cause. In the event LecTec is unable for three (3)
consecutive months to supply Products which comply with LecTec's obligations
hereunder in quantities sufficient to meet Novartis' purchase orders under
Section 3.2, then Novartis may terminate this Agreement at no cost upon ten (10)
days prior written notice thereof. In addition, if either party materially
breaches this Agreement, the other party shall give such breaching party written
notice thereof with reasonable detail. If the breaching party fails to cure such
breach within forty-five (45) days of its receipt of such notice, then the
non-breaching party may terminate this Agreement at no cost upon written notice
thereof. In addition, either party may terminate this Agreement with immediate
effect upon giving written notice to the other party in the event of insolvency,
assignment for the benefit of creditors, or bankruptcy proceedings by or against
the other party.

      11.4 Survival. Notwithstanding any termination of this Agreement, the
provisions of Sections 1.6, 1.7, 2.1, 2.2, 2.4, 2.5, 2.6, 2.9, 5.3, 6.4.2, 7, 8,
9, 10 and 13 shall remain in effect.

                                       15
<PAGE>

12.   AUDIT AND INSPECTION RIGHTS

      12.1 Audit, Inspection and Observation. During the term of this Agreement
and any renewal thereof, Novartis shall have the right, at its sole cost and
expense, to send Novartis representatives to audit, inspect and observe the
manufacture, storage, disposal and transportation of the Products, and all other
materials reasonably related thereto or used in connection therewith, upon
reasonable prior notice to LecTec and during LecTec's normal business hours.
Such Novartis representatives shall have no responsibility or authority for
supervision of LecTec employees performing such manufacture, storage, disposal
or transportation operations. Such Novartis representatives shall comply with
any reasonable LecTec health, safety or security rules or policies while at
LecTec's premises. The audit, inspection and observations rights set forth in
this Section 12.1 are solely for the purpose of determining LecTec's compliance
with the terms of this Agreement and the QA Agreement.

      12.2 Action Plan. If, as a result of any such audit, inspection or
observation under Section 12.1, Novartis reasonably concludes that LecTec is not
in compliance with any of its obligations hereunder, it shall so notify LecTec
in writing, specifying such areas of non-compliance in reasonable detail. LecTec
shall provide to Novartis within thirty (30) days of Novartis' request a written
action plan with a time line for resolution of the problems identified within a
reasonable, mutually agreed upon time frame.

      12.3 Government Inspections. LecTec shall inform Novartis within
twenty-four (24) hours of any notification to LecTec of any site visits to the
LecTec facility by the FDA, state or federal regulatory agencies or any other
governmental or regulatory agency, relating, directly or indirectly, to the
manufacture of the Products, and shall provide to Novartis all other materials
related thereto or used in connection therewith. Novartis shall have the option
of participating in any site visit by any governmental or regulatory agency
(except to the extent such governmental or regulatory agency visitor objects) if
the site visit relates, directly or indirectly, to the manufacturing, storage,
disposal and transportation of the Products. If Novartis does not participate in
the site visit for any reason, LecTec shall report in writing the results of the
visit to Novartis within seven (7) days of the occurrence thereof. In the event
that any such governmental or regulatory agency finds that the site is deficient
or unsatisfactory in any material respect, LecTec shall cure all such material
deficiencies within the earlier of ninety (90) days or such cure period as
ordered by the government or regulatory agency. If all such deficiencies are not
cured by LecTec within the required time frame, Novartis may deem such condition
to be a material breach of this Agreement without the required 45-day cure
period in Section 11.2 of this Agreement and thus may immediately terminate this
Agreement.

13.   MISCELLANEOUS

      13.1 Waiver. Each party acknowledges and agrees that any failure on the
part of the other party to enforce at any time, or for any period of time, any
of the provisions of this Agreement shall not be deemed or construed to be a
waiver of such provisions or of the right of such other party thereafter to
enforce each an every such provision.

                                       16
<PAGE>

      13.2 Enforcement. If and to the extent that any provision of this
Agreement is determined by any legislature, court or administrative agency to
be, in whole or in part, invalid or unenforceable, such provision or part
thereof shall be deemed to be surplusage and, to the extent not so determined to
be invalid or unenforceable, each provision hereof shall remain in full force
and effect unless the purposes of this Agreement cannot be achieved. In the
event any provisions shall be held invalid, illegal or unenforceable the parties
shall use commercially reasonable efforts to substitute a valid, legal and
enforceable provision which insofar as practical implements the purposes hereof.

      13.3 Choice of Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Minnesota as though made and to be
fully performed in said State.

      13.4 Notices. All notices required or permitted hereunder shall be given
in writing and sent by confirmed facsimile transmission, or mailed postage
prepaid by first-class certified or registered mail, or sent by a nationally
recognized express courier service, or hand-delivered to the following
addressees:

         Novartis:         Novartis Consumer Health, Inc.
                           560 Morris Avenue
                           Summit, NJ 07901
                           Attn: General Counsel

         LecTec:           LecTec Corporation
                           10701 Red Circle Dr.
                           Minnetonka, MN 55343
                           Attn: Chief Executive Officer

or to such other address as may be specified in a notice given to the other
party in accordance with this Section 13.4. Any notice, if sent properly
addressed, postage prepaid, shall be deemed made three (3) days after the date
of mailing as indicated on the certified or registered mail receipt, or on the
next business day if sent by express courier service or on the date of delivery
or transmission (if delivered or sent during ordinary business hours, otherwise
on the next business day) if hand-delivered or sent by confirmed facsimile
transmission.

      13.5 Captions. The captions of each section of this Agreement are inserted
only as a matter of convenience and for reference and in no way shall be deemed
to define, limit, enlarge, or describe the scope of this Agreement and the
relationship of the parties hereto, and shall not in any way affect this
Agreement or the construction of any provisions herein.

      13.6 Entire Agreement; Amendment. This Agreement, including all Exhibits
annexed hereto (which are incorporated herein by reference), represents and
incorporates the entire understanding between the parties hereto with respect to
the subject matter of this Agreement and supersedes any prior offers, proposals,
drafts or other communications with respect thereto. Each party acknowledges
that there are no warranties, representations, covenants or

                                       17
<PAGE>

understandings of any kind, nature or description whatsoever made by any party
to any other, except such as are expressly hereinabove set forth. This Agreement
shall not be subject to change or modification except by the execution of a
writing specified to be an explicit amendment to this Agreement duly executed by
all parties hereto.

      13.7 Effect of Forms. The parties recognize that, during the term of this
Agreement, a purchase order, acknowledgment form or similar routine document
(collectively, "Forms") may be used to implement or administer provisions of
this Agreement. Therefore, the parties agree that the terms of this Agreement
shall prevail in the event of any conflict between this Agreement and the
printed provisions of such Forms, or typed provisions of Forms that appear to
add to, vary, modify or conflict with the provisions of this Agreement.

      13.8 Relationship. Nothing in this Agreement shall create between the
parties a partnership, joint venture or principal-agent relationship and, for
the avoidance of doubt, each of LecTec and Novartis now confirms and accepts
that it is an independent contractor trading for and on its own behalf.

      13.9 Assignment. LecTec may not assign or otherwise transfer this
Agreement or any interest herein or any right hereunder (other than to an
affiliate) without the prior written consent of Novartis, which consent shall
not be unreasonably withheld, except that LecTec may assign this Agreement in
connection with the transfer or sale of all or substantially all of its assets
or business or its merger or consolidation with another company, so long as (i)
such acquiror or successor in interest agrees in writing to be bound by all the
terms and conditions hereof; and (ii) LecTec shall first give Novartis written
notice of any such assignment, and fifteen (15) days to object thereto. The only
grounds upon which Novartis may object to such an assignment are if such
acquiror or successor in interest is (a) a direct competitor of Novartis; (b) in
Novartis' reasonable discretion, is not a manufacturer which has a proven record
of operational quality at least equal to that of LecTec; or (c) in Novartis'
reasonable discretion, does not have sufficient financial wherewithal. Any
purported assignment, transfer, or attempt to assign or transfer any interest or
right hereunder except in compliance with this Section 13.9 shall be null, void
and of no effect.

      13.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original and all of which
together shall constitute a single instrument.

      13.11 Force Majeure. A party shall not be liable for delayed performance
or non-performance of this Agreement (other than payment of money when due) if
such condition is due to events beyond its reasonable control, including,
without limitation, fire, flood, storm, earthquake, any other Act of God,
electrical or computer failures, supply or labor shortages, strikes, riot, civil
disorder, war or government order or decree.

            13.11.1 A party claiming relief under this Section 13.11 shall give
prompt written notice thereof to the other party, together with its best
estimate of when such condition will end and its full performance may be
resumed.

                                       18
<PAGE>

            13.11.2 In the event of a Force Majeure, or if for any other reason
LecTec experiences any shortage and is therefore unable to supply Novartis with
the full quantity of Products and with the delivery date as ordered by Novartis
and accepted by LecTec, then Novartis shall be entitled to the same
proportionate quantity of available Vapor Patches as the quantity of Products
purchased by Novartis from LecTec in the twelve (12) months preceding the
shortage bears to all orders for Vapor Patches received by LecTec from all its
customers during such period, including LecTec's sales to Novartis, and
including LecTec's sales of Comparable Products directly to retailers under its
"TheraPatch" tradename, or under any Other LecTec Trade Name. 13.11.3
Notwithstanding the foregoing, if such condition continues without change for
more than ninety (90) days, the other party may then elect to treat such delayed
performance or non-performance as a material breach of this Agreement.

      IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.

LECTEC CORPORATION                       NOVARTIS CONSUMER HEALTH, INC.

By:    /s/ Rodney A. Young               By:    /s/ Thomas E. Berry
   -----------------------------------      ------------------------------------

Name:  Rodney A. Young                   Name:  Thomas E. Berry
     ---------------------------------        ----------------------------------

Title: Chairman/CEO/President            Title: Sr V P Supply Chain & Production
      --------------------------------         ---------------------------------

Date:  5/15/00                           Date:  5/23/00
     ---------------------------------        ----------------------------------

                                       19
<PAGE>

                                    EXHIBIT A
                                  THE PRODUCTS

      1. Packages of six (6) menthol-scented hydrogel patches containing
menthol, camphor, eucalyptus oil, and fragrance used for the topical application
of vapor active ingredients for relief of symptoms due to coughs and colds.

      2. Packages of six (6) mentholated cherry-scented hydrogel patches
containing menthol, camphor, eucalyptus oil, and fragrance used for the topical
application of vapor active ingredients for relief of symptoms due to coughs and
colds.

                                       20

<PAGE>

                                    EXHIBIT C
                PRODUCT PRICING AND MINIMUM PURCHASE REQUIREMENTS

FUNDING REQUIREMENTS                              STANDARD PRODUCT/PRIVATE LABEL
--------------------                              ------------------------------
Concept Phase                                        (*)
Feasibility Phase                                    (*)
Salesmen's Samples                                   (*)
Completion of Design Phase                           (*)
Transfer Phase                                       (*)

(*)

PRICING
-------
Finished product: Price per patch:                   (*)
Per 6-patch folding carton:                          (*)
Per 24-carton case:                                  (*)

ANNUAL MINIMUM PURCHASE REQUIREMENTS FOR US PEDIATRIC EXCLUSIVITY
-----------------------------------------------------------------
(*)

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

<PAGE>

                                    EXHIBIT D
                                    TERRITORY

United States of America

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