Document:

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                            PRODUCT SUPPLY AGREEMENT

                                     between

                                  CYGNUS, INC.

                                       and

                          CONTRACT MANUFACTURING, INC.

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                            PRODUCT SUPPLY AGREEMENT

         This Agreement (the "Agreement") is made this 15th day of July 1997
("Effective Date"), by and between Cygnus, Inc., a Delaware
corporation("Cygnus"), and Contract Manufacturing, Inc. ("CMI"), a Michigan
corporation, and is made with reference to the following facts.

          RECITALS

         A.   Cygnus is in the course of developing a product for the
non-invasive measurement of human blood glucose levels known as the
"Glucowatch", and

         B.   Two components of the Glucowatch are a Glucopad and a biosensor,
and

         C.   Cygnus desires to market to end users, packaged together, a
Glucopad, physically contained within rails, known as a "corral" and a
biosensor, and

         D.   CMI is willing to accept, from sources of Cygnus' selection,
supply of Glucopad material (supplied in rolls) and biosensors, and (i)
manufacture finished Glucopads by cutting the Glucopad material and inserting
the material into corrals which CMI would manufacture (ii) combine the pads and
biosensors protected by suitable release liner backings, and (iii) supply the
combination in final consumer protective packaging.

         WHEREFORE, the parties do hereby agree as follows:

1.       DEFINITIONS

         1.1.     "CONSUMER PACKAGE UNIT" shall mean a single package which
                  contains a Glucopad and a biosensor as more particularly
                  specified in Exhibit 1.

         1.2.     "GLUCOWATCH" shall mean Cygnus' Reverse Iontophoresis Product
                  currently under development for the measurement of human blood
                  glucose values and any modifications, improvements,
                  evolutions, and for future versions thereof.

         1.3.     "GLUCOPAD" shall mean laminate material, supplied in rolls cut
                  into pads and placed within a corral as more particularly
                  specified in Exhibit 1.

         1.4.     "MANUFACTURING COST" for a Consumer Package Unit means the
                  following costs (as determined in accordance with GAAP):
                  both direct and indirect costs specifically attributable to
                  the production of such components (excluding , freight
                  charges, sales taxes and duties). Direct costs are personnel,
                  supplies, materials purchased by CMI, contracted and outside
                  services costs specifically attributable to the applicable
                  materials or activities. Raw Materials are not part of
                  Manufacturing Cost. Indirect costs are (i) utility,
                  facility-related and machine maintenance expenses and (ii)
                  personnel, supplies and material expenses of internal services
                  from other departments (including general management and
                  administration), in each case, only to the extent specifically
                  attributable to the applicable materials or activities.

         1.5.     "TERM" shall mean the period beginning at the Effective Date
                  of this Agreement and ending five years after the date of the
                  first commercial sale of Consumer Package Units anywhere in
                  the world.

         1.6.     "RAW MATERIALS" shall mean those components required to build
                  a Consumer Package Unit as set forth in the bill of materials
                  specified in Exhibit 1.

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2.       PURCHASE AND SALE

         2.1.     SUPPLY. For the Term hereof CMI agrees to supply Consumer
                  Package Units to Cygnus as provided in this Agreement.

         2.2.     PURCHASE PRICE. The purchase price for Consumer Package Units
                  shall be [CONFIDENTIAL TREATMENT REQUESTED]:

         Annualized Production Volume:           Maximum
         Consumer Package Units/12 Month Period  Price/Consumer Package Unit
         --------------------------------------  ---------------------------

         [CONFIDENTIAL TREATMENT REQUESTED]  [CONFIDENTIAL TREATMENT REQUESTED]

         2.3.     COST REDUCTION. CMI and Cygnus will work to reduce the
                  cost of Consumer Package Units. Routine reductions in the
                  Manufacturing Cost due to things such as volume increases or
                  "learning curve" gains in efficiency will result in lower
                  pricing according to Section 2.2 above. If CMI, through it's
                  own effort, reduces the cost of the Consumer Package Units as
                  a result of a capital improvement to the Equipment (as defined
                  in Section 7.1 below), which proposal of such improvement
                  shall be submitted to Cygnus in writing and approved by Cygnus
                  in writing prior to implementation, the benefits from the cost
                  reduction effort will be shared equally. In such instance of
                  capital improvement to the Equipment, CMI's markup will be
                  increased while the maximum price will be reduced accordingly
                  in all annualized production volume ranges. All new pricing
                  resulting from cost reduction efforts shall be amended to this
                  Agreement.

         2.4.     MATERIAL WASTAGE. CMI agrees that material wastage shall not
                  exceed a maximum of [CONFIDENTIAL TREATMENT REQUESTED] for
                  each item of material at the commencement of supply and shall
                  not exceed a maximum of [CONFIDENTIAL TREATMENT REQUESTED]
                  commencing [CONFIDENTIAL TREATMENT REQUESTED] after the
                  commencement of supply. In the event wastage exceeds the
                  maxima specified in this Section, Cygnus shall be entitled to
                  a credit equal to the full cost of any wasted material in
                  excess of the maxima specified above. Material wastage shall
                  not include defective material supplied by vendors.

         2.5.     MANUFACTURING REPORTS. Within fifteen (15) days of the end of
                  each month, CMI shall provide Cygnus with a report, in an
                  electronic format compatible to Cygnus' system, indicating for
                  such month (i) the quantity of Consumer Package Units produced
                  and shipped, (ii) the Manufacturing Cost of such Consumer
                  Package Units (including quantity and cost for each component
                  of such Manufacturing Cost), (iii) the amount of material
                  wastage for each material, and (iv) such other information as
                  shall be requested by Cygnus from time to time. CMI and Cygnus
                  will work together to develop a method to transfer this
                  information electronically. CMI will use a system that is
                  compatible with Cygnus' system.

3.       CONSUMER PACKAGE UNIT SPECIFICATIONS. Consumer Package Units shall
         conform to the specifications set forth in Exhibit 1, as amended from
         time to time ("Specifications"). Cygnus may modify the Specifications
         in Exhibit 1, from time to time in its sole discretion. It shall give
         written notice of any change in the Specifications to CMI, which change
         shall become effective within forty-five (45) days of such notice. All
         such changes shall be forwarded in writing by Cygnus to CMI to the
         attention of the Production Manager and the Quality Assurance Manager.
         Provided, however, if CMI in good faith determines that it would be
         commercially unreasonable to supply Consumer Package Units meeting any
         such changed Specification, it may give written notice of such
         inability to supply to Cygnus within fifteen (15) days of the change
         notice. Failure to give such notice within this fifteen (15) day period
         shall be deemed to be acceptance of the

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         Specification change. Upon giving of timely notice of such inability to
         supply, CMI shall be relieved of its obligation to accept orders
         according to the changed Specification.

4.       PURCHASES AND PURCHASE ORDER PROCEDURE

         4.1.      ORDERS AND FORECASTS. With respect to Consumer Package Units
                   which Cygnus wishes to purchase from CMI, prior to the first
                   month in which annualized production volume reaches
                   [CONFIDENTIAL TREATMENT REQUESTED] Consumer Package Units per
                   year, Cygnus will order Consumer Package Units on a lot by
                   lot basis. Cygnus shall deliver to CMI at least two (2) full
                   months prior to the month in which it wishes to take
                   delivery, Cygnus' firm order (which firm orders must be in
                   writing) and requested delivery date ("Delivery Date") for a
                   lot of Consumer Package Units. Immediately following the
                   first month in which annualized production volume reaches
                   [CONFIDENTIAL TREATMENT REQUESTED] Consumer Package Units per
                   year, Cygnus shall deliver to CMI at least one (1) full month
                   prior to the month in which it wishes to take delivery,
                   Cygnus' firm order (which firm orders must be in writing) and
                   requested delivery dates ("Delivery Dates") for such Consumer
                   Package Units for the month and a forecast of its quantity
                   requirements for such Consumer Package Units for the
                   subsequent eleven (11) months. Thereafter, Cygnus shall
                   deliver to CMI within five (5) days after the beginning of
                   each calendar month, Cygnus' firm order and Delivery Dates
                   for such Consumer Package Units for the next month and a
                   forecast of its quantity requirements for such Consumer
                   Package Units for the subsequent eleven (11) months. If a
                   required forecast or order for a one (1) month period is not
                   timely submitted for Consumer Package Units, the immediately
                   preceding forecast for that month shall become the new
                   forecast or order; if there is no preceding forecast for a
                   month, the forecast or order for the immediately preceding
                   month shall become the forecast or order. All forecasts are
                   non-binding. All firm orders are binding.

         4.2.      DELIVERY DATE. CMI will provide a firm scheduled delivery
                   date and an order acknowledgment promptly after receipt of
                   Cygnus' firm order. CMI will meet each firm scheduled
                   delivery date, but will not be liable for failure to do so
                   due to an event of force majeure (as defined in Section 15.11
                   below) or Cygnus' firm order not being received according to
                   the provisions of 4.1 above. If an event of force majeure
                   occurs, CMI may not reduce production or shipment of Consumer
                   Package Units for Cygnus by any amount exceeding the amount
                   of reduction caused by the force majeure event. Other than in
                   the case of an event of force majeure or Cygnus' firm order
                   not being received according to the provisions of 4.1 above,
                   CMI shall be solely responsible for any costs associated with
                   expediting materials in order to meet the scheduled delivery
                   date for each firm order (including, without limitation,
                   overtime charges, fees required to expedite materials or
                   services used in manufacturing and incremental transportation
                   costs), provided that Cygnus has complied with the terms of
                   this Agreement in placing such order.

         4.3.     TITLE AND RISK OF LOSS: PAYMENT. All shipments shall be FOB
                  Origin, Prepaid and Charged Back. Title and risk of loss shall
                  remain with CMI until Consumer Package Units have been
                  delivered to a common carrier for shipment. All of CMI's costs
                  for transportation, shipping and transportation insurance
                  expenses shall be invoiced to and paid by Cygnus.

         4.4.     PAYMENT. Prior to the first month in which the annualized
                  production volume reaches [CONFIDENTIAL TREATMENT REQUESTED]
                  Consumer Package Units per year, CMI shall invoice Cygnus for
                  shipped Consumer Package Units, in accordance with Section 2.
                  The payment terms for these shipments shall be [CONFIDENTIAL
                  TREATMENT REQUESTED] upon receipt of CMI's order
                  acknowledgment and invoice and [CONFIDENTIAL TREATMENT
                  REQUESTED] within thirty (30) days of receipt of Consumer
                  Package Units.

                  Immediately following the first month in which annualized
                  production volume reaches [CONFIDENTIAL TREATMENT REQUESTED]
                  Consumer Package Units per year, CMI shall

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                  invoice Cygnus for shipped Consumer Package Units in
                  accordance with Section 2 within thirty (30) days of shipment.
                  Within thirty (30) days of receipt of Consumer Package Units,
                  Cygnus shall pay CMI's invoice for Consumer Package Units.

         4.5.     QUARTERLY RECONCILIATION. No later than ten (10) working days
                  after the end of each of Cygnus' fiscal quarters during the
                  Term hereof, CMI shall prepare a quarterly reconciliation of
                  all Manufacturing Costs and Consumer Package Units provided by
                  CMI to Cygnus. This information will be provided by CMI to
                  Cygnus in an electronic format that is compatible with Cygnus'
                  system.

         4.6.     REIMBURSEMENT OF COST BY CYGNUS. In the event Cygnus has not
                  provided CMI with any firm orders, as provided in Section
                  4.1, by [CONFIDENTIAL TREATMENT REQUESTED], Cygnus and CMI
                  will develop a plan to reimburse CMI for costs incurred in
                  order to maintain readiness of the manufacturing facility
                  for a period of time to be determined by Cygnus.

         4.7.     CONFLICTING TERMS. In ordering and delivering Consumer Package
                  Units, CMI and Cygnus may use their standard forms, but
                  nothing in such forms shall be construed to amend or modify
                  the terms of this Agreement.

5.       QUALITY

         5.1      QUALITY CONTROL. Prior to each shipment of Consumer Package
                  Units, CMI shall perform or cause to be performed quality
                  control procedures that are calculated to verify that the
                  units to be shipped conform with the Specifications for such
                  Consumer Package Units as determined under Section 3 hereof.
                  Each shipment of Consumer Package Units shall be accompanied
                  by a Quality Assurance Analytical Certificate of Conformance
                  ("Q.A. Certificate of Conformance").

         5.2.     REJECTION. Cygnus shall have sixty (60) days following the
                  day on which it receives a shipment to reject same because
                  all or part of the shipment fails to conform to the
                  applicable Specifications or otherwise fails to conform to
                  the warranties given by CMI herein, by giving written
                  notice to CMI specifying the manner in which all or part of
                  such shipment fails to meet the foregoing requirements. If
                  Cygnus timely rejects all or part of a shipment, CMI is
                  responsible for replacing the defective units at its
                  expense. CMI will be solely responsible for any
                  transportation charges pertaining to the return and
                  reshipping of rejected Consumer Product Units.

         5.3.     LATENT DEFECTS. It is recognized that it is possible for a
                  shipment of Consumer Package Units to have defects ("defects"
                  meaning that such Consumer Package Units fail to conform to
                  the applicable Specifications or otherwise fail to conform to
                  the warranties given by CMI herein) which would not be
                  discoverable upon reasonable physical inspection or testing
                  (the "Latent Defects"). As soon as either party becomes aware
                  of a Latent Defect in any lot or batch of Consumer Package
                  Units, it shall immediately notify the other party and the lot
                  or batch involved, at Cygnus' election, shall be deemed
                  rejected as of the date of such notice. CMI shall be
                  responsible for replacing all defective units involved at its
                  expense and shall reimburse Cygnus for its costs of accepting
                  returns from its customers and shall be responsible for all
                  costs reasonably incurred by Cygnus in recalling the Consumer
                  Package Units having Latent Defects. At its election, Cygnus
                  may recover moneys to which it may become entitled under this
                  Section by deducting same from amounts then due or that may
                  subsequently become due to CMI from Cygnus hereunder.

         5.4.     ISO 9002; QUALITY CONTROL SYSTEM. CMI shall obtain IS0 9002
                  certification of the facility used to manufacture Consumer
                  Package Units no later than [CONFIDENTIAL TREATMENT
                  REQUESTED]. CMI shall, at all times during the performance of
                  its manufacturing and supply

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                  obligations under this Agreement, manufacture all Consumer
                  Package Units in compliance with, and maintain a quality
                  control system that meets the requirements of, ISO 9002 and
                  all applicable Good Manufacturing Practices which are in force
                  or hereinafter adopted by the FDA or any successor agency
                  thereto ("GMP"). CMI shall at all times take such additional
                  measures as are necessary to maintain a quality control system
                  designed to identify, correct and prevent quality deficiencies
                  in the Consumer Package Units. CMI shall establish and
                  maintain registration as a medical device manufacturer through
                  the United States Food and Drug Administration.

         5.5.     SUBCONTRACT MANUAL. In addition to ISO 9002 and GMP compliant
                  procedures, CMI shall comply with such other quality
                  requirements as may be set forth from time to time in Cygnus'
                  Subcontract Manual for the Glucowatch.

         5.6.     INSPECTION. Cygnus shall have the right to inspect the
                  manufacturing and testing facilities of CMI from time to time
                  during normal business hours in order to verify compliance
                  with this Agreement.

6.       MINIMUM QUANTITIES

         6.1.     MINIMUM. [CONFIDENTIAL TREATMENT REQUESTED]

         6.2.     REMEDY FOR FAILURE TO PURCHASE. If in any Minimum Year,
                  Cygnus' firm orders shall require shipment of less than the
                  Minimum during the Minimum year, CMI shall be entitled to a
                  termination election ("Elective Termination") as provided
                  herein. No later than April 15 following the Minimum Year in
                  which the Minimum was not met, CMI may give written notice of
                  Elective Termination to Cygnus. CMI's right to give notice of
                  Elective Termination shall not extend beyond April 15 of any
                  year in which it shall be entitled to give notice and any
                  notice given untimely shall be void. Upon the giving of timely
                  notice of Elective Termination, Cygnus shall be relieved of
                  any requirements for firm orders under Section 4 hereof and
                  shall have thirty days after receipt of the notice of Elective
                  Termination to submit revised firm orders, which shall be
                  binding on both parties for the period from the date of notice
                  of Elective Termination through October 1 of that year.

6.3.              EXCLUSIVENESS OF REMEDY. The sole remedy for CMI in the event
                  of a failure to fulfill Minimums in a Minimum Year, shall be
                  an election to terminate as provided in Section 6.2 above and,
                  more particularly, CMI shall have no remedy for monetary
                  damages of any kind, regardless of the cause of Cygnus'
                  failure to meet Minimums. This Section shall not be construed
                  to prevent CMI from recovering monetary damages on account of
                  other breaches of this contract by Cygnus.

7.        SUPPLY SPECIFIC EQUIPMENT

         7.1.     EQUIPMENT. "Equipment" shall mean those items of manufacturing
                  equipment required to produce Consumer Package Units which
                  cannot be reasonably accomplished by CMI's general production
                  equipment.

         7.2.     INSTALLATION AND MAINTENANCE OF EQUIPMENT. In the event Cygnus
                  elects to provide such Equipment, it shall acquire the
                  Equipment or otherwise obtain the Equipment and provide for
                  shipping to CMI's facilities located at 4550 AIRWEST DR., SE.
                  SUITE A, GRAND RAPIDS, MI 49512-3950 ("CMI's Premises"). CMI
                  shall be obligated to bear all costs of tenant improvements,
                  installation, qualification and acceptance of the Equipment.
                  Thereafter, CMI shall be obligated to reasonably maintain the
                  Equipment in accordance with any requirements set forth in the
                  operating manuals for such Equipment. CMI shall be responsible
                  for any and all damage to the Equipment, apart from normal
                  wear and tear.

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         7.3.     TITLE: UCC FILINGS. Title to any Equipment provided by Cygnus
                  hereunder shall remain with Cygnus or any party with whom
                  Cygnus contracts to obtain the Equipment; CMI shall have no
                  ownership interest in any Supply Specific Equipment or any
                  replacement parts or components installed in the Equipment.
                  Cygnus may display notice of its ownership of the Equipment by
                  affixing to the Equipment an identifying label, or plate or
                  any other indication of ownership and CMI shall not alter or
                  remove any such identification. CMI shall cooperate with
                  Cygnus and shall execute any documents, including UCC filings
                  or other notices, as Cygnus may determine are advisable to
                  document Cygnus' or third-party ownership in the Equipment.
                  CMI shall cooperate with Cygnus to sign any and all security
                  agreements, financing statements, or otherwise, in order to
                  effectuate a bailment lien on the Equipment, and to file such
                  documents at the proper location or locations.

         7.4.     USE OF THE EQUIPMENT. CMI shall use Equipment provided by
                  Cygnus solely for production of Consumer Package Units for
                  Cygnus and for no other use. CMI is responsible for the
                  operation of the Equipment after its delivery to, and
                  installation at, CMI's Premises and the use of the Equipment
                  shall be restricted solely to CMI unless Cygnus instructs
                  otherwise in writing. CMI will use and operate the Equipment
                  in a careful manner, will comply with all governmental laws
                  and regulations related thereto, and will cause the Equipment
                  to be operated in accordance with the applicable operating
                  manuals. CMI will not make or authorize any change to the
                  Equipment without the prior written consent of Cygnus. CMI
                  shall only permit the Equipment to be operated by competent
                  and qualified employees and shall ensure that the Equipment is
                  not subject to careless or rough usage. The Equipment will not
                  be moved from CMI's Premises without Cygnus' prior written
                  consent.

         7.5.     REMOVAL OF EQUIPMENT. At the end of the Term or following any
                  termination, CMI shall provide Cygnus with reasonable access
                  to its facilities, as Cygnus requires, to remove all Equipment
                  from CMI's facilities. Cygnus shall have responsibility for
                  any damage to CMI's facility arising from the removal of such
                  Equipment.

         7.6.     TAXES; PERMITS; FEES. CMI shall secure any and all necessary
                  governmental or regulatory approvals or permits required by
                  any law or regulation for the possession or operation of the
                  Equipment. Cygnus is solely responsible for the payment of any
                  and all required taxes or governmental fees incurred with
                  respect to the Equipment during the Term. If any change is
                  required in the Equipment during the bailment term to bring
                  the Equipment into compliance with any new law or regulation
                  applicable to the Equipment, CMI shall be responsible for
                  implementing and Cygnus shall pay for the change required to
                  make the Equipment comply with such requirements. CMI shall
                  secure and pay for any necessary governmental or regulatory
                  approvals or permits required by any law or regulation for the
                  operation or maintenance of CMI's Premises. Taxes, Permits and
                  Fees relating to the operation and maintenance of CMI's
                  Premises are not to be included in the Manufacturing Cost.

         7.7.     NO WARRANTY, NO LIABILITY FOR EQUIPMENT. THE PARTIES HERETO
                  AGREE THAT THE EQUIPMENT IS LOANED WITHOUT ANY EXPRESS OR
                  IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO IMPLIED
                  WARRANTIES OF MERCHANTABILITY, NONINFRINGEMENT AND FITNESS FOR
                  A PARTICULAR PURPOSE. Cygnus shall not be liable for any loss
                  or damage, including third party losses or claims, claimed to
                  have resulted from the design, manufacture, testing,
                  installation, warning, possession, or use of the Equipment
                  regardless of the form of action, including, but not limited
                  to, those claims based upon strict liability or negligence.
                  Cygnus shall not be liable for loss of profit or other
                  consequential damages resulting from the theft, destruction,
                  breakdown, or disrepair of the Equipment or for the failure of
                  the Equipment to operate properly.

         7.8.     INSURANCE. During the Term, CMI shall maintain casualty, fire,
                  and theft insurance on the

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                  Equipment in amounts deemed appropriate by Cygnus. The
                  proceeds of any such insurance coverage with respect to the
                  Equipment shall be payable solely to Cygnus. CMI, at its own
                  expense, shall obtain such additional insurance coverage on
                  the Equipment or on CMI's Premises as CMI shall require. Upon
                  Cygnus' request, CMI shall deliver copies of the policies and
                  loss payable endorsements (in form satisfactory to Cygnus) to
                  Cygnus.

8.       RAW MATERIALS.

         8.1.     Cygnus will negotiate agreements with suppliers of Cygnus'
                  choice for supply of Glucopad material (supplied in rolls) and
                  biosensors ( materials to be used in the manufacture of
                  Consumer Package Units ). Cygnus will provide CMI with a copy
                  of the relevant supply agreements ("Master Supply
                  Agreements"). CMI shall issue its own purchase orders directly
                  to such suppliers, with a copy to Cygnus, and will reference
                  the applicable Master Supply Agreements for terms and pricing.

         8.2.     For any such materials that are purchased to enable CMI to
                  fill firm orders, Cygnus shall pay CMI at least ten (10) days
                  prior to the date upon which CMI must pay the supplier for
                  such materials. If CMI acquires inventory in excess of the
                  materials needed for firm orders it shall bear sole
                  responsibility and risk with respect to such inventory,
                  including without limitation the risk that such inventory
                  could become obsolete. However, this paragraph shall not apply
                  to the extent that such excess material obtained by CMI is
                  pursuant to minimum requirements defined in a Master Supply
                  Agreement. CMI shall be solely responsible for any
                  transportation charges pertaining to the return and reshipping
                  of any rejected materials.

9.       WARRANTY; INDEMNITY.

         9.1.     CMI warrants (i) Consumer Package Units, when shipped to
                  Cygnus, shall conform to the then in effect Specifications as
                  determined under Section 3; (ii) Consumer Package Units, when
                  shipped to Cygnus, shall conform with the information on the
                  Q. A. Certificate of Conformance sheet provided for the
                  particular shipment and not contain any Latent Defects or any
                  other defects in materials or workmanship; (iii) Consumer
                  Package Units shall have been manufactured, stored and shipped
                  in conformance with all applicable Good Manufacturing
                  Practices which are in force or hereinafter adopted by the FDA
                  or any successor agency thereto; (iv) Consumer Package Units
                  shall not have been adultered; and (v) title to all Consumer
                  Package Units shall be free of any security interest or
                  encumbrance. CMI makes no warranty, expressed or implied, with
                  respect to material supplied by vendors under the Master
                  Supply Agreements including the warranty of merchantability.

         9.2.     CMI agrees to defend Cygnus from, indemnify Cygnus and hold
                  Cygnus harmless from any claim, demand, action, cause of
                  action or suit (each a "Claim") related to or arising from any
                  breach of the warranty set forth in Section 9.1, negligence on
                  the part of CMI or defect in Consumer Package Units supplied
                  by CMI. Provided, however as an exception to the foregoing
                  right to defense and indemnity will be any claim, action or
                  cause of action arising from a defect in a Consumer Package
                  Unit, where such Consumer Package Unit, as supplied, was in
                  full conformance with the warranty set forth in Section 9.1.
                  CMI also agrees to defend Cygnus from, indemnify Cygnus and
                  hold Cygnus harmless from any Claim arising out of or
                  resulting from any injury to any person or damage to any
                  property caused by the Supply Specific Equipment as a result
                  of the testing , installation, insufficiency of any warnings
                  thereon or of CMI's improper use of the Equipment. In the
                  event Cygnus is served or is otherwise notified of any Claim
                  under this Section 9.2, it shall notify CMI thereof and tender
                  its defense to CMI who shall promptly undertake such defense
                  with counsel mutually acceptable to both parties. Either party
                  receiving an offer of settlement shall communicate such offer
                  as soon as reasonably practicable to the other. In the event
                  Cygnus enters into a settlement, without the prior consent of
                  CMI, it will be deemed to

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                  have waived its right under this Section to be indemnified
                  from any amounts it becomes obligated to pay under the terms
                  of the settlement agreement.

10.      PATENT/INTELLECTUAL PROPERTY INDEMNITY.

         10.1.    CMI agrees to defend Cygnus from, indemnify Cygnus and hold
                  Cygnus harmless from any claim, demand, action, cause of
                  action or suit related to or arising from any claim that the
                  manufacturing processes used to produce Consumer Package Units
                  (apart from the materials supplied by Cygnus) supplied by CMI
                  infringe any patent or intellectual property right held by a
                  third party. In the event Cygnus is served or is otherwise
                  notified of any such claim, it shall notify CMI thereof and
                  tender its defense to CMI who shall promptly undertake such
                  defense with counsel mutually acceptable to both parties.
                  Either party receiving an offer of settlement shall
                  communicate such offer as soon as reasonably practicable to
                  the other. In the event Cygnus enters into a settlement,
                  without the prior consent of CMI, it shall be deemed to have
                  waived its right under this Section to be indemnified from any
                  amounts it becomes obligated to pay under the terms of such
                  settlement agreement.

11.      SECONDARY FACILITIES.

         11.1.    The parties agree that Cygnus may establish one or more of its
                  own facilities ("Secondary Facilities") to produce Consumer
                  Package Units or components thereof. CMI hereby grants to
                  Cygnus a fully paid-up, royalty-free, worldwide, perpetual
                  license under its intellectual property rights in CMI
                  Technology (as defined below) for the purpose of making,
                  having made and marketing Consumer Package Units and
                  components thereof. For the purposes of this Section 11, "CMI
                  Technology" shall mean any invention (whether or not
                  patentable), idea, process, formula, know-how and/or software
                  owned, licensed or controlled by CMI during the term of this
                  Agreement, that is or will be necessary or useful to Cygnus in
                  the production of Consumer Package Units or components
                  thereof.

         11.2.    To carry out the physical transfer of CMI Technology from CMI
                  to Cygnus, CMI shall, as requested from time to time by
                  Cygnus, disclose to Cygnus in tangible form the CMI
                  Technology. To carry out the transfer of CMI Technology that
                  cannot be provided in tangible form (for instance, certain
                  "know-how"), CMI shall, as soon as reasonably practicable
                  after a request from Cygnus from time to time, disclose such
                  CMI Technology to employees and contractors of Cygnus through
                  consultation at Cygnus' Secondary Facilities. In connection
                  with such technology transfer, Cygnus shall compensate CMI for
                  time of its employees and for the reasonable direct costs of
                  travel to the Secondary Facilities, as approved in advance by
                  Cygnus.

12.      INTELLECTUAL PROPERTY OWNERSHIP AND CONFIDENTIALITY.

         12.1.    OWNERSHIP. As between the parties, each party will be the sole
                  owner of the intellectual property rights in any invention of
                  which only its employees and its third party contractors are
                  inventors and each party will jointly own the intellectual
                  property rights in all inventions of which both parties'
                  employees or contractors are joint inventors, except that
                  intellectual property rights with respect to inventions which
                  claim or relate in any way to (i) [CONFIDENTIAL TREATMENT
                  REQUESTED], (ii) [CONFIDENTIAL TREATMENT REQUESTED], (iii)
                  [CONFIDENTIAL TREATMENT REQUESTED], (iii) [CONFIDENTIAL
                  TREATMENT REQUESTED], (iv) [CONFIDENTIAL TREATMENT REQUESTED],
                  will be solely owned by Cygnus. Any assignments necessary to
                  accomplish the foregoing are hereby made and each party will
                  execute such further documents as may be reasonably requested
                  by the other with respect thereto.

                                       8
<PAGE>

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

                                    a)  Is or has become readily publicly
                                        available through no fault of the
                                        receiving party or its employees or
                                        agents; or

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

                                    c)  Was rightfully in the possession of the
                                        receiving party prior to its disclosure
                                        by the other party provided the
                                        receiving party abides by all
                                        restrictions, if any, imposed on its
                                        possession of such information; or

                                    d)  Was independently developed by
                                        employees or consultants of the
                                        receiving party without use of or
                                        access to Proprietary Information of
                                        the disclosing party; or

                                    e)  Is required to be disclosed to a
                                        governmental entity or agency in
                                        connection with seeking any
                                        governmental or regulatory
                                        registration, approval or license, or
                                        pursuant to the lawful requirement or
                                        request of a governmental entity or
                                        agency, provided that reasonable
                                        measures are taken to obtain
                                        confidential treatment thereof and to
                                        guard against further disclosure.

         12.3.    Nothing in Section 12.1 or 12.2 shall prevent Cygnus from
                  utilizing in the manufacture by Cygnus itself or with a
                  third-party of Consumer Package Units or any other product
                  using Proprietary Information which Cygnus learned, received
                  or otherwise acquired from CMI.

13.      RECORDS AND AUDIT RIGHT. Both parties shall keep complete and accurate
         books and records reflecting all information necessary or useful in
         verifying the accuracy of any payment made hereunder. Each party shall
         have the right to hire an independent certified public accountant to
         inspect all such records so required to be kept by the other (which
         accountant shall agree in writing to keep all information confidential
         except as needed to disclose any discovered discrepancies); provided,
         such audit (i) is conducted during normal business hours, (ii) is
         conducted no more often than once per year (unless a discrepancy
         greater than seven percent (7%) is discovered in favor of the auditing
         party), and (iii) is conducted only after the auditing party has given
         ten (10) days prior written notice to the audited party. The auditing
         party shall bear the full cost and expense of such audit. Regardless of
         the amount of discrepancy discovered, all discrepancies (and interest
         thereon) shall be immediately due and payable by the party found to
         have caused the discrepancy. All books and records relating to either
         party's obligations under this Agreement shall be retained by such
         party for five years after the Term has expired.

14.      TERMINATION

         14.1.    TERMINATION. This Agreement may be terminated in its entirety
                  by a party immediately upon the

                                       9
<PAGE>

                  occurrence of any of the following events:

                  14.1.1.  If the other ceases to do business, or otherwise
                           terminates its business operations;

                  14.1.2.  If the other shall fail to promptly secure or renew
                           any license, registration, permit, authorization or
                           approval necessary for the conduct of its business in
                           the manner contemplated by this Agreement, or if any
                           such license, registration, permit, authorization or
                           approval is revoked or suspended and not reinstated
                           within sixty (60) days or if reinstatement is not
                           possible within sixty (60) days, or if diligent
                           efforts are not being made to effect such
                           reinstatement;

                  14.1.3.  If the other materially breaches any material
                           provision of this Agreement and fails to cure such
                           breach within sixty (60) days (except immediately in
                           the case of a breach of Section 12.2) of written
                           notice describing the breach; or

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

         14.2.    NO LIABILITY FOR TERMINATION. Neither party shall incur any
                  liability whatsoever for any damage, loss or expenses of any
                  kind suffered or incurred by the other (or for any
                  compensation to the other) arising from or incident to any
                  termination of this Agreement by such party which complies
                  with the terms of this Agreement, whether or not such party is
                  aware of any such damage, loss or expenses.

         14.3.    EFFECT OF TERMINATION. In addition to provisions that by their
                  terms survive termination, the following provisions shall
                  survive the termination of this Agreement: Sections 4.4, 7,
                  8.2, 9, 10, 12, 13 and 15. Remedies for all breaches hereunder
                  will also survive. Each party will promptly return all
                  Proprietary Information of the other (and all copies and
                  abstracts thereof, except that one (I) copy may be retained
                  and shall be kept in its legal archives for legal record
                  keeping purposes only) that it is not entitled to under the
                  surviving terms of this Agreement.

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

15.      GENERAL.

         15.1.    AMENDMENT AND WAIVER. Except as otherwise expressly provided
                  herein, any provision of this Agreement may be amended and the
                  observance of any provision of this Agreement may be waived
                  (either generally or in any particular instance and either
                  retroactively or prospectively) only with the written consent
                  of the parties. However, it is the intention of the parties
                  that this Agreement be controlling over additional or
                  different terms of any purchase order, confirmation, invoice
                  or similar document, even if accepted in writing by both
                  parties, and that waivers and amendments of any provision of
                  this Agreement shall be effective only if made by
                  non-pre-printed agreements signed by both parties and clearly
                  understood by both parties to be an amendment or waiver. The
                  failure of either party to enforce its rights under this
                  Agreement at any time for any period shall not be construed as
                  a waiver of such rights.

         15.2.    GOVERNING LAW AND LEGAL ACTIONS. This Agreement shall be
                  governed by and construed under the laws of the State of
                  California and the United States without regard to conflicts
                  of laws provisions thereof and without regard to the United
                  Nations Convention on Contracts for the International Sale of
                  Goods. The sole jurisdiction and venue for actions related to
                  the subject matter hereof

                                       10
<PAGE>

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

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

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

                  If to CMI:

                                    Contract Manufacturing, Inc.
                                    4550 Airwest Dr., SE, Suite A
                                    Grand Rapids, MI 49512-3950

                                    Attention:       Jack Sauer

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

                                    Attention:       Director, Materials

         15.5.    ENTIRE AGREEMENT. This Agreement (and all Exhibits hereto)
                  constitutes the entire understanding and agreement with
                  respect to the subject matter hereof and supersedes all
                  proposals, oral or written, all negotiations, conversations,
                  or discussions between or among parties relating to the
                  subject matter of this Agreement and all past dealing or
                  industry custom.

         15.6.    SEVERABILITY. If any provision of this Agreement is held to be
                  illegal or unenforceable, that provision shall be limited or
                  eliminated to the minimum extent necessary so that this
                  Agreement shall otherwise remain in full force and effect and
                  enforceable.

         15.7.    BASIS OF BARGAIN. Each party recognizes and agrees that the
                  warranty disclaimers and liability and remedy limitations in
                  this Agreement are material bargained for bases of this
                  Agreement and that they have been taken into account and
                  reflected in determining the consideration to be given by each
                  party under this Agreement and in the decision by each party
                  to enter into this Agreement.

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

         15.9.    ASSIGNMENT. This Agreement and the rights and obligations
                  hereunder are not transferable or assignable by either party
                  without the prior written consent of the other party, except
                  for rights to

                                       11
<PAGE>

                  payment and except to a person or entity who acquires all or
                  substantially all of a party's stock, assets or business to
                  which this Agreement pertains, whether by sale, merger,
                  acquisition or otherwise.

         15.10.   PUBLICITY AND PRESS RELEASES. Except to the extent necessary
                  under applicable laws or for ordinary marketing purposes, the
                  parties agree that no press releases or other publicity
                  relating to the substance of the matters contained herein will
                  be made without approval by both parties. A press release
                  announcing this Agreement will be jointly developed and
                  released by the parties.

         15.11.   FORCE MAJEURE. No liability or loss of rights hereunder shall
                  result to either party from delay or failure in performance
                  caused by an event of force majeure (that is, circumstances
                  beyond the reasonable control of the party affected thereby,
                  including, without limitation, acts of God, fire, flood, war,
                  government action, strikes, lockouts or other serious labor
                  disputes and vendors inability to supply material due to such
                  events.) for so long as such event of force majeure continues
                  in effect.

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

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

CYGNUS, INC.                                CONTRACT MANUFACTURING, INC.

By:  /s/ Gregory B. Lawless                 By: /s/ Jack Sauer
   -------------------------------              -------------------------------

Name: G.B. Lawless                          Name: Jack Sauer
    ------------------------------                -----------------------------

Title: President & CEO                     Title: President (CEO/COO)
      -----------------------------               ------------------------------

                                       12

<PAGE>

                                    EXHIBIT 1

                       [CONFIDENTIAL TREATMENT REQUESTED]

                                       13<PAGE>

                                SUPPLY AGREEMENT

This Supply Agreement ("Agreement") is entered as of December 1, 1999
("Effective Date") by and between Cygnus, Inc., a Delaware corporation, with its
principal place of business at 400 Penobscot Drive, Redwood City, California
94063 ("Cygnus"), and Key Tronic Corporation., a Washington corporation, with
its principal place of business at N. 4424 Sullivan Road, Spokane, Washington
99216 ("Key Tronic").

1.       SCOPE OF AGREEMENT

A.       This Agreement shall cover the purchase by Cygnus and the sale by Key
Tronic of one or more of the products identified in Exhibit A (the "Product"),
attached to this Agreement. Key Tronic agrees to manufacture the Product in
accordance with Cygnus' specifications and drawings set forth in Exhibit B (the
"Specifications"), attached to this Agreement. Exhibit B may be amended from
time to time by mutual written agreement of the parties. Key Tronic acknowledges
that (i) time is of the essence in the delivery of the Product and (ii) Product
quality is of critical importance to Cygnus. Failure of Key Tronic to supply
Product as specified shall be grounds for termination of this Agreement by
Cygnus.

B.       Whenever Cygnus wishes to purchase the Product from Key Tronic, Cygnus
shall issue its purchase order which shall reference this Agreement and shall be
construed to have incorporated the terms and conditions hereof. Purchase orders
issued by Cygnus shall include the part number, description of the Product,
quantity, unit price and requested delivery date for the Product.

C.       Cygnus will notify Key Tronic if it wishes to add a new Product to this
Agreement. The parties shall then proceed to establish pricing and delivery
schedules for each such new Product. Upon agreement of these items, such Product
shall be considered Product under this Agreement.

2.       TERM

This Agreement shall commence on the Effective Date set forth above and will be
for a term of three (3) years, unless terminated as otherwise provided herein.
During the term of this Agreement Cygnus agrees to purchase from Key Tronic,
Product in accordance with the Exhibit C, attached to this agreement.

3.       PRICE AND PAYMENT

A.       PRICES. The prices for the Product are set forth in Exhibit C, attached
to this Agreement. Prices will not change for the term of this Agreement except
for the following reasons:

         (1) For price changes to extraordinary raw material as listed in
Exhibit C; any extraordinary price adjustments due to cost fluctuations (up or
down) to such raw material will be effective on January 1st of each year during
the term of this Agreement and will be based on costs actually paid by Key
Tronic as evidenced by actual invoices or quotations made available for Cygnus'
review.

                                       1
<PAGE>

         (2) Changes in design, materials, or requirements made by Cygnus.
         (3) PRODUCTIVITY. Commencing on [CONFIDENTIAL TREATMENT REQUESTED] Key
         Tronic will implement a continuous productivity program with the
         objective of achieving actual cost reductions as set forth in Exhibit
         C. The productivity projects will be jointly agreed on by both parties
         and involve the following types of activities:

             (a)      manufacturing process improvements;
             (b)      the Key Tronic's involvement in the design process to
             ensure manufacturability;
             (c)      target saving for materials/design;
             (d)      review of processes and equipment to ensure quality
              and cost;
             (e)      joint efforts to plan inventory levels;
             (f)      reduced overhead rates; and
             (g)      improved layout and alternative packaging.

B.       TAXES. Prices do not include applicable U.S. federal or state sales or
use taxes which shall be paid by Cygnus, unless an exemption is available, if
separately indicated on the invoice for the applicable Product shipment.

C.       INVOICING. Invoices will be submitted by Key Tronic to the Cygnus
location indicated on purchase orders. Invoices will reference Cygnus' purchase
order number and will contain such other information as Cygnus may request.
Invoices are to be submitted upon shipment of the Product. Payment for
acceptable Product will be made by Cygnus within thirty-five (35) calendar days
of receipt of invoice. Any invoice not paid within thirty five (35) calendar
days from receipt of invoice or Product, whichever is later, shall be subject to
a late charge of [CONFIDENTIAL TREATMENT REQUESTED] per month of the invoice
amount.

4.       VALUE ENGINEERING

Key Tronic agrees to explore and identify cost reduction opportunities in the
Product in addition to those set forth in Section 3. Cygnus and Key Tronic agree
to share equally, all cost reductions once all price increases for raw materials
have been offset.

5.       PURCHASE ORDERS

On the first day of each month during the term of this Agreement, Cygnus shall
issue its written purchase order to Key Tronic for the current month for
purchase of the Product. Purchase orders may be issued by EDI, facsimile or via
U.S. mail. Purchase orders shall not be binding on Key Tronic until acknowledged
in writing by Key Tronic. Such acknowledgement shall be made within five (5)
business days of receipt by Key Tronic; otherwise the purchase order shall be
deemed binding on Key Tronic. In addition, purchase orders shall contain the
following data:

         (1)      Purchase Order number and date;
         (2)      Description, quantity and price of Product;
         (3)      Date and Location of delivery; and

                                       2
<PAGE>

         (4)      Mode of shipment.

6.       DELIVERY AND SHIPPING TERMS

Subject to Section 10 hereof, Key Tronic shall deliver Product to Cygnus'
facility to meet the delivery dates requested by Cygnus in its purchase orders,
which in no event shall be less than the lead times for the Product as set forth
in Exhibit A. Delivery of the Product shall be F.O.B. Key Tronic's facility,
freight collect. The price of all Product shall exclude transportation charges.
Transportation charges will be the responsibility of Cygnus and shall be billed
directly to Cygnus by carrier. Key Tronic shall use Cygnus' designated contract
carriers which are indicated on the purchase order. Risk of loss of the Product
shall pass to Cygnus upon delivery to the designated carrier at Key Tronic's
facility.

7.       FORECASTS, BINDING PURCHASE ORDERS AND BUFFER STOCK

A.       Cygnus shall provide Key Tronic on a monthly basis a non-binding three
month rolling forecast. Key Tronic is authorized to rely on the forecasts to
order, purchase and otherwise make available within normal acquisition cycles in
existence from time to time as determined by Key Tronic in its reasonable
judgment parts and materials required for incorporation into forecasted Product.

B.       Key Tronic agrees to maintain an inventory of stock sufficient to
provide Cygnus an additional [CONFIDENTIAL TREATMENT REQUESTED] of Product over
and above the stock necessary to meet Cygnus' forecasted requirements of
Product.

8.       ORDER CANCELLATION AND RESCHEDULING

A.       Cygnus may cancel any purchase order for Product by giving Key Tronic
written notice of at least the number of days specified for the given products
in Exhibit A, prior to the scheduled delivery date. Upon cancellation of a
purchase order Cygnus agrees to pay the cancellation charges set forth in
Exhibit C.

B.       Cygnus may reschedule the delivery of any purchase order for Product by
giving Key Tronic written notice in advance of scheduled delivery, according to
the terms for the product in Exhibit A. Cygnus agrees to pay a rescheduling
charge for every purchase order that is rescheduled to cover Key Tronic's
documented material holding costs and production line utilization costs.

9.       CHANGES

A.       KEY TRONIC CHANGES. Key Tronic agrees that it will not make any changes
in: (i) Product, (ii) specified qualified suppliers for all components, (iii)
engineering or manufacturing processes, or (iv) the approved manufacturing
facility, without the prior written approval of Cygnus. In the event Key Tronic
does make an unapproved change, then Cygnus shall have the right to cancel the
purchase orders for such Product at no liability to Cygnus if not corrected
within thirty (30) days of written notice by Cygnus.

                                       3
<PAGE>

B.       CYGNUS CHANGES. When a change to the Product is required by Cygnus,
Cygnus shall provide Key Tronic the applicable documentation, specifications and
requested effective date of such change. Key Tronic shall respond within ten
(10) working days after receipt of such change, advising Cygnus as to (i)
implementation and the effective date of such change, (ii) associated costs and
effect to on-hand materials, (iii) on-order materials, work in process, and (iv)
the impact of the change upon existing Product pricing and shipment schedules
for the entire period for which purchase orders are outstanding.

10.      CONSIGNMENT OF MATERIAL

A.       Cygnus shall deliver on consignment to Key Tronic certain material
listed in Exhibit D, attached to this Agreement, for the sole purpose of
incorporation by Key Tronic into the Product (the "Consigned Material"). All
such Consigned Material shall remain the sole property of Cygnus and Key Tronic
shall not pledge or otherwise encumber such Consigned Material. Key Tronic shall
keep all Consigned Material in the same safe manner as its own procured material
and apply the same security measures to it. Key Tronic shall maintain full
replacement value insurance coverage for all Consigned Material. Key Tronic
agrees to assume liability for all losses of the Consigned Material while in Key
Tronic's possession, including scrap in excess of the range set forth in Exhibit
C, except losses due to passage of shelf life.

B.       Cygnus may require Key Tronic to perform, at Cygnus' expense,
acceptance testing on Consigned Material. This testing will be performed in
accordance to the Specifications as set forth in Exhibit B and the Quality
Agreement set forth in Exhibit E.

11.      WARRANTY

A.       Key Tronic warrants that all Product furnished hereunder shall be free
from defects in material (excluding Consigned Material to the extent that Key
Tronic does not perform any acceptance testing) and workmanship, and shall
conform to all Specifications, samples and descriptions referred to in this
Agreement and in Cygnus' Purchase Order(s). Additionally, Key Tronic warrants
that it has good title to the Product supplied (other than Consigned Material),
and that the Product supplied are free and clear from all liens and
encumbrances. These warranties shall survive acceptance and payment by Cygnus.

B.       If, within [CONFIDENTIAL TREATMENT REQUESTED] from date of manufacture,
such Product fails to conform to the warranties set forth above, Cygnus shall
have the right to return the Product to Key Tronic with all charges for
transportation both ways to be Key Tronic's responsibility. Key Tronic shall
repair, replace, or correct the defect(s), and/or non conformance at no cost to
Cygnus within ten (10) days following receipt thereof. In the event such failed
Product is found during automated processing at Cygnus, it may be rendered scrap
and will be accounted for by Cygnus and reported to Key Tronic. At periodic
intervals, scrap reports will be generated by Cygnus and sent to Key Tronic. At
the request of Key Tronic the scrap material will be sent to Key Tronic. Key
Tronic will credit Cygnus for this failed Product.

                                       4
<PAGE>

12.      QUALITY

A.       Cygnus intends to, from time to time, and without notice to Key Tronic,
subject samples of the Product to be purchased hereunder to qualification tests,
which will consist of sufficient testing to ensure that the Product meets all
the requirements of this Agreement and purchase orders. Cygnus shall notify Key
Tronic of any deficiencies indicated by the testing and Key Tronic shall, at Key
Tronic's expense, take appropriate corrective action. Design responsibility
shall remain solely with Cygnus and any costs associated with design deficiency
shall be borne by Cygnus.

B.       If Key Tronic fails to satisfactorily correct any and all deficiencies,
except deficiencies which are the responsibility of Cygnus, discovered in
Cygnus' qualification testing within a reasonable time after receipt of notice
from Cygnus, Cygnus shall have the right to cancel all or any portion of its
purchase orders for said discrepant Product without charge or billback and
without further obligation or liability to Key Tronic relating to that Product.

C.       Cygnus shall have the right to conduct a source inspection or process
control audit at Key Tronic's facility at any time prior to delivery of the
Product. Any such inspection or audit shall in no way relieve Key Tronic of its
obligations to comply in all respects with the terms of this Agreement.

D.       Product will be made in accordance with the Quality Agreement attached
hereto as Exhibit E, and Key Tronic will maintain ISO 9002 certification and
will comply with all applicable U.S. Federal Drug Administration (FDA) Code of
Federal Regulations.

13.      INDEMNITY AND INSURANCE

A. Each party shall defend, indemnify and hold harmless the other party from and
against all damages, claims or liabilities and expenses (including attorney's
fees) arising out of or resulting in any way from any act or omission of the
indemnifying party, its agents, employees or subcontracts. With respect to Key
Tronic, the indemnification obligations in this Section shall include, but not
be limited to claims arising out of or resulting in any way from (a) a
manufacturing defect in the Product; (b) Key Tronic's non-compliance with
Cygnus' Specifications; or (c) Key Tronic's breach of any of the provisions of
this Agreement. With respect to Cygnus, the indemnification obligations in this
Section shall include, but not be limited to, claims arising out of or resulting
in any way from (a) a design defect, (b) Cygnus' Specifications as provided to
Key Tronic under this Agreement; or (c) Cygnus' breach of any of the provisions
of this Agreement.

B. Additionally, Key Tronic agrees, solely at its expense, to indemnify and
defend any suit or proceeding brought against Cygnus, its affiliates or their
customers because of any Product based on a claim (of which claim timely notice
shall have been given to Key Tronic) that said Product constitutes an
infringement of any patent, copyright, trade secret or any other proprietary
right, strictly limited to the processes and materials which Key Tronic has
control over, and Key Tronic agrees to defend, hold harmless and indemnify such
parties, for all damages, liabilities, costs and expenses (including reasonable
attorney's fees) arising from any such claim. Key Tronic agrees to either
procure for Cygnus the right to continue selling and/or using said Product; or
to replace said

                                       5
<PAGE>

Product with non-infringing Product; or to modify it so that it becomes
non-infringing. The provisions of this section shall not apply to any claim for
infringement resulting solely from Key Tronic's compliance with Cygnus'
Specifications or to the Consigned Material supplied by Cygnus, and in such
event, Cygnus agrees, solely at its expense, to indemnify and defend any suit or
proceeding brought against Key Tronic. .

C.       During the Term, Key Tronic and Cygnus each will purchase and
maintain in full force and effect, with a responsible insurance carrier,
having Best's ratings of A-VIII or greater, a comprehensive Product liability
insurance policy in amounts typical in the medical devices industry. At the
time of execution of this Agreement, Key Tronic and Cygnus will exchange
Certificates of Insurance. Each party shall keep such policy current. Each
such insurance policy shall provide for at least thirty (30) days' prior
written notice to Cygnus and Key Tronic of the cancellation or any
substantial modification of the terms of coverage.

14.      TERMINATION

A.       TERMINATION FOR CAUSE

         (1)      This Agreement may be terminated immediately for cause by
         either party in the event the other party (i) becomes insolvent or
         bankrupt, or (ii) ceases to function as a going concern or to conduct
         its operation in the normal course of business, or (iii) fails to
         perform any of the obligations imposed upon it under the terms of this
         Agreement so as to be in default hereunder and fails to cure such
         default within thirty (30) days after written notice.

         (2)      Notwithstanding the termination of this Agreement, the parties
         will honor any of Cygnus' purchase orders which have been acknowledged
         by Key Tronic.

B.       SETTLEMENT OF TERMINATION CLAIMS

         (1)      Cygnus shall pay Key Tronic the following amounts within
         thirty (30) days after termination of this Agreement:

         (a)      The price for all Product completed (which items were
         delivered or available for delivery at the time notice of termination
         was given) and not previously paid for by Cygnus only to the extent
         such completed Product does not exceed any binding purchase orders;

         (b)      The actual, documented costs incurred related to the
         terminated portion of the Agreement, including, only to the extent that
         any components, materials and other inventory cannot be used in any of
         Key Tronic's non-Cygnus Product: (1) Key Tronic's cost of work in
         process materials, and (2) all components, materials and other items on
         hand or on order but not yet received by Key Tronic to meet Cygnus'
         forecasts for Product and which Key Tronic is unable to cancel; and

         (c)      the Key Tronic's actual on-hand buffer inventory but no more
         than the amount

                                       6
<PAGE>

         identified in Section 7, and

         (d)      In the event the agreement is terminated due only to Cygnus'
         uncured default, Key Tronic's cost of production line(s) shut down will
         be limited to immediate and direct severance costs for employees
         affected by the reduction, and the un-depreciated value of any
         equipment, tooling, fixtures purchased for, and exclusive to, the
         Product production process. Equipment, tooling, and fixtures purchased
         for, and exclusive to, the Product production process will be
         transferred to Cygnus upon payment.

C.       Notwithstanding the foregoing, payments made under Section 14 B above
shall in no event exceed the aggregate price specified in the terminated portion
of the Agreement less payments otherwise previously made.

15.      OWNERSHIP AND CONTROL OF MARKS

A.       Cygnus may require Key Tronic to affix one or more of Cygnus'
trademarks or tradenames (the "Marks") to the Product. The Marks shall be
applied only in accordance with Cygnus' instructions. Key Tronic recognizes the
value of the goodwill associated with the Marks and acknowledges that the Marks,
and all rights therein, belong exclusively to Cygnus.

B.       This Agreement shall not be construed as a grant of a license or an
assignment to Key Tronic of any right, title and/or interest in and to the
Marks. The Marks are and shall remain the exclusive property of Cygnus and at no
time shall Key Tronic acquire property rights or any interests therein.

C.       As between the parties, Cygnus shall own all rights, title, and
interest in the Product, including without limitation, all patent rights,
copyrights, trade secret rights, mask work rights and other rights throughout
the world, collectively, "Proprietary Rights".

16.      CONFIDENTIALITY

A.       Each party agrees that all code, inventions, algorithms, source code,
schematics, test vectors, list of suppliers, know-how and ideas and all other
business, technical and financial information it obtains from the other which is
identified in writing as "Confidential" or "Proprietary" are the confidential
property of the disclosing party ("Proprietary Information" of the disclosing
party). Except as expressly allowed herein, the receiving party will hold in
strictest confidence and not use or disclose any Proprietary Information of the
disclosing party, shall take reasonable protective measures to insure same (and
at least the same measures it takes for its own Proprietary Information) and
shall similarly bind its employees in writing. The receiving party shall not be
obligated under this section with respect to information the receiving party can
document:

         (1)      is or has become readily publicly available without
         restriction through no fault of the receiving party or its employees
         or agents; or

                                       7
<PAGE>

         (2)      is received without restriction from a third party lawfully in
         possession of such information and lawfully empowered to disclose such
         information; or

         (3)      was rightfully in the possession of the receiving party
         without restriction prior to its disclosure by the other party; or

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

         (5)      is required to be disclosed by law or order of a court.

B.       If either party breaches any of its obligations with respect to
confidentiality, the other party shall be entitled to equitable relief,
including specific performance or an injunction, in addition to any other rights
or remedies, including money damages provided by law.

C.       During the term of this Agreement, Key Tronic will not directly or
indirectly engage in (or assist or encourage others in) the Diagnostics Field.
"Diagnostics Field" shall mean all applications for the detection of glucose in
connection with the diagnosis and treatment of diabetes in humans; however
currently available, whether through publication or commercialization, invasive
diagnostics applications are not included within the definition of "Diagnostics
Field."

17.      LIMITATIONS ON WARRANTY AND LIABILITY

A.       Except as expressly provided in this Agreement, Key Tronic disclaims
all other warranties, express or implied, or arising by course of dealing or
performance, custom, usage in the trade or otherwise, including without
limitation the implied warranties of merchantability, title and fitness for a
particular use.

B.       In no event, whether as a result of breach of contract or otherwise,
shall either party be liable to the other party for any special, incidental,
consequential, or exemplary damages of any kind whether or not the other party
has been advised of the possibility of such damages.

18.      GENERAL

A.       CONFLICTING TERMS. The parties agree that the terms and conditions of
this Agreement shall prevail, notwithstanding contrary or additional terms in
any purchase order, sales acknowledgment, confirmation or any other document
issued by either party affecting the purchase and/or sale of Product.

B.       ENTIRE AGREEMENT. This Agreement contains the entire understanding of
the parties with respect to the subject matter hereof and supersedes all prior
agreements relating thereto, written or oral, between the parties. Amendments to
this Agreement must be in writing, signed by the duly authorized agents of the
parties.

                                       8
<PAGE>

C.       ASSIGNMENT. Key Tronic may not assign or transfer, in whole or in part,
this Agreement or any of its rights or obligations arising hereunder without the
prior written consent of Cygnus.

D.        COMPLIANCE WITH LAWS. Key Tronic warrants that in performance of work
under this Agreement it has complied with or will comply with all applicable
federal, state, local laws and ordinances enacted, including, but not limited
to, all laws which regulate any material because it is radioactive, toxic,
hazardous or otherwise a danger to health, reproduction or the environment. In
addition, Key Tronic shall secure and maintain adequate worker's compensation
insurance in accordance with the laws of the state or states from which Key
Tronic shall furnish Product for Cygnus. Upon request, Key Tronic agrees to
issue certificates certifying compliance with any of the aforementioned laws or
regulations as may be applicable to the Product being furnished hereunder.

E.       CONTROLLING LAW. This Agreement shall be governed, controlled,
interpreted and defined by and under the laws of the State of California without
regard to the conflicts of laws provisions thereof.

F.       RELATIONSHIP OF THE PARTIES. In fulfilling its obligations under this
Agreement, each party shall be acting as an independent contractor. This
Agreement does not make either party the employee, agent or legal representative
of the other.

G.       SURVIVORSHIP. The terms and obligations of Sections 11, 13, 15, and 16,
17, and 18, as well as all applicable definitions shall survive termination or
expiration of this Agreement. Remedies for all breaches hereunder will also
survive.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.

CYGNUS, INC.                                             KEY TRONIC CORPORATION

<TABLE>

<S>                                                     <C>
By:    /s/ Barbara G. Mcclung                            By:   /s/ Ronald F. Klawitter
   ------------------------------------                     --------------------------------
Barbara G. McClung                                             Ronald F. Klawitter
---------------------------------------                  -----------------------------------
Printed Name                                             Printed Name

Title: Senior. Vice President and General Counsel        Title: Exec. Vice President of
       --------------------------------------------             ----------------------------
                                                                Administration, CFO & Teas.

Date:    1/12/00                                                Date:    January 20, 2000
     ----------------------------------------------                  -----------------------
</TABLE>

                                       9
<PAGE>

                                    EXHIBIT A

                             PRODUCTS AND LEAD TIMES
                       [CONFIDENTIAL TREATMENT REQUESTED]

                                       10
<PAGE>

                                    EXHIBIT B

                                  SPECIFICATION

                       [CONFIDENTIAL TREATMENT REQUESTED]

                                       11
<PAGE>

                                    EXHIBIT C

                           SENSOR ASSEMBLY WEB PRICING
                       [CONFIDENTIAL TREATMENT REQUESTED]

                                       12
<PAGE>

                                    EXHIBIT D

                               CONSIGNED MATERIAL
                       [CONFIDENTIAL TREATMENT REQUESTED]

                                       13
<PAGE>

                                    EXHIBIT E

                                QUALITY AGREEMENT

                                       14

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