CYGNUS INC /DE/, 424B5, 1998-02-04

CYGNUS INC /DE/
424B5, 1998-02-04
PHARMACEUTICAL PREPARATIONS

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PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 12, 1997)

905,740 SHARES

CYGNUS, INC.

Common Stock

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All of the 905,740 shares of Common Stock (the "Shares") offered
hereby are being sold by Cygnus, Inc. (the "Company"). The Shares are being
offered directly by the Company to certain institutional investors at a price
of $15.25 per share. The total proceeds to the Company are $13,812,535. The
termination date of this offering is February 4, 1998, subject to extension
by mutual agreement by the Company and the institutional buyers. See "Plan
of Distribution." The Company's Common Stock is traded on the Nasdaq
National Market and is quoted under the symbol "CYGN." On February 3, 1998,
the last reported sales price of the Common Stock was $19.8125 per share.

Cygnus and the Cygnus logo are registered trademarks of the Company and
GlucoWatch and AutoSensor are trademarks of the Company. FemPatch is a
registered trademark of the Warner-Lambert Company and Nicotrol is a
registered trademark of Pharmacia & Upjohn. All other trademarks included in
this Prospectus Supplement are the property of their respective holders.

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See "Risk Factors" beginning on page S-6 herein for certain information
that should be considered by prospective investors.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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THE DATE OF THIS PROSPECTUS SUPPLEMENT IS FEBRUARY 4, 1998.

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SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND RELATED NOTES INCORPORATED BY
REFERENCE HEREIN AND IN THE ACCOMPANYING PROSPECTUS. AS USED IN THIS
PROSPECTUS SUPPLEMENT, UNLESS OTHERWISE INDICATED, REFERENCES TO THE
"COMPANY" AND "CYGNUS" ARE TO CYGNUS, INC. AND ITS CONSOLIDATED SUBSIDIARIES.
THE TERMS GLUCOWATCH AND GLUCOWATCH SYSTEM ARE USED INTERCHANGEABLY.

IN ADDITION TO THE HISTORICAL INFORMATION CONTAINED HEREIN, THE
DISCUSSION IN THIS PROSPECTUS SUPPLEMENT CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS, WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND
SECTION 21E OF THE EXCHANGE ACT, THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH
AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SUPPLEMENT
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS SUPPLEMENT. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW
AS WELL AS THOSE CAUTIONARY STATEMENTS AND OTHER FACTORS SET FORTH ELSEWHERE
OR INCORPORATED BY REFERENCE HEREIN.

THE COMPANY

Cygnus is engaged in the development and manufacture of diagnostic and
drug delivery systems, utilizing proprietary technologies to satisfy unmet
medical needs cost-effectively. The Company's current efforts are primarily
focused on two core areas: a painless, bloodless and automatic glucose
monitoring device (the GlucoWatch system) and transdermal drug delivery
systems.

THE GLUCOWATCH SYSTEM

The Company's GlucoWatch system represents a potential advance in
diabetes care technology as compared to the currently prevailing "finger
stab" blood monitoring method. The GlucoWatch is designed to measure glucose
painlessly, bloodlessly and automatically through the ease and convenience of
a device worn like a wristwatch. Worldwide sales of blood glucose
self-monitoring products were approximately $2.5 billion in 1996, which
represented an increase of approximately 14% over 1995 levels. It is
estimated that more than 40 million people in North America, Europe, Japan
and Korea have diabetes. In the U.S. alone, more than ten million people have
been diagnosed with another five million believed to have the condition. The
number of people with diabetes is expected to continue to grow with the aging
of the population, while the number of diagnosed cases is also expected to
increase with changes in diagnostic standards and new diagnostic
technologies. Clinical studies sponsored by the National Institutes of Health
indicate that better management of glucose levels through more frequent
testing would enable people with diabetes to reduce or significantly delay
many serious diabetes-related health complications. However, largely due to
the pain of repetitive finger stabbing and the associated disruption of daily
life, the Company believes most people with diabetes currently test their
glucose levels less than half as often as recommended. As a result of the
drawbacks of the finger stab method, the Company believes that there is a
significant unmet demand for a painless, bloodless, automatic
glucose-monitoring device.

To address this unmet demand, the Company is developing the GlucoWatch,
which is expected to reduce or eliminate significant drawbacks of the finger
stab testing technique. The device, which is worn like a wristwatch, is
designed to automatically extract and measure glucose levels painlessly
through intact skin every twenty or thirty minutes. The extracted glucose is
collected in a consumable transdermal pad called the AutoSensor, which is
attached to the back of the device and replaced approximately every twelve
hours. The GlucoWatch system is intended to offer a combination of features
not available in currently marketed devices, such as: an electronic memory to
store and display glucose levels; the ability to download stored information
to personal computers to analyze glucose data and trends; alarms indicating
hypo- and hyperglycemic conditions; and event markers which record factors
that affect glucose levels. The GlucoWatch is designed to be worn during the
day and night for continuous glucose monitoring. The Company

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believes the GlucoWatch system will provide the frequent testing and trend
analysis of glucose levels necessary to enable people with diabetes to better
manage their condition and eliminate the pain and inconvenience associated
with repetitively stabbing the finger to test the blood. The Company believes
this unique combination of features will result in better control of glucose
levels, improved quality of life and more cost-effective healthcare.

In developing the GlucoWatch, the Company has sought to design a device
that would offer the above features and be substantially equivalent to finger
stab blood glucose monitoring in terms of accuracy and precision. Test
results from a clinical study using a prototype of the GlucoWatch, which were
published in NATURE MEDICINE (November 1995), indicated a level of accuracy
and precision that the Company believes is comparable to those associated
with finger stab blood glucose monitoring devices. In 1997, Cygnus completed
extensive research clinical studies using a version of the GlucoWatch
designed for commercial sale. The results of these studies demonstrated that
the GlucoWatch is able to measure glucose levels with statistically
significant accuracy and precision across a variety of conditions. Based on
the Company's research clinical studies and published performance data for
certain currently marketed finger stab monitoring devices, the Company
believes the GlucoWatch is capable of a level of accuracy and precision
comparable to such devices. There can be no assurance that the Company will
be able to successfully develop the GlucoWatch or that it will obtain
clearance or approval from the FDA. See "Risk Factors -- Dependence on New
Products; Underwriting of Market Acceptance" and "Risk Factors -- Regulatory
Approvals Uncertain".

REGULATORY APPROVAL

To prepare a submission to the United States Food and Drug
Administration (the "FDA") for approval of the GlucoWatch, the Company has
initiated registration clinical trials. Based on discussions with the FDA,
the Company believes that the submission will be in the form of a 510(k)
notification, although the final determination will not be made until the FDA
receives the submission. The Company anticipates submitting a 510(k)
notification in the second quarter of 1998, although the potential exists for
this filing to be deferred to the second half of 1998.

Although the Company believes its clinical results to date are
encouraging, to seek FDA approval for the GlucoWatch system, the Company
will need to conduct registration clinical trials. No assurance can be given
that data generated in such trials will be as favorable as data generated in
clinical trials to date or that, even if such data are as favorable, such
data will provide a sufficient basis for the approval of the GlucoWatch
system by the FDA.

In 1996, Cygnus entered into collaborations with Becton Dickinson &
Company ("Becton Dickinson") and Yamanouchi Pharmaceutical Co., Ltd.
("Yamanouchi") for the commercialization of the GlucoWatch. Under the Becton
Dickinson agreement, the Company has granted Becton Dickinson exclusive
worldwide marketing and distribution rights, with the exception of Japan and
Korea. Under this agreement, the Company has primary responsibility for
product development, regulatory approvals, manufacturing and customer
support, and retains the option to participate in sales and marketing. The
Company also entered into an agreement with Yamanouchi for the marketing and
distribution of the GlucoWatch in Japan and Korea. Under these agreements,
Cygnus is eligible to receive up-front and milestone payments totaling $30
million prior to commercialization and to receive a percentage of the
product's future commercial success. In June 1997, Cygnus granted Becton
Dickinson worldwide marketing rights, with the exception of Japan and Korea,
for the Company's second generation glucose monitor. Becton Dickinson has
agreed to fund, in part, the development of the product. In the past some of
the Company's licensees, distributors and collaborators have approached the
Company requesting modification of the terms of existing agreements. Becton
Dickinson has recently approached the Company to discuss modifying the
non-compete terms of the existing agreement. The Company is unable to predict
the outcome of these discussions.

TRANSDERMAL DRUG DELIVERY SYSTEMS

Transdermal drug delivery systems provide for the controlled release of
drugs directly into the bloodstream through intact skin. The Company's
transdermal drug delivery products are thin multilayer systems, in the form
of small adhesive patches. Transdermal delivery can provide a number of
advantages over conventional methods of drug administration, including
enhanced efficacy, increased safety, greater convenience and improved patient
compliance. By delivering a steady flow of drugs into the bloodstream over an
extended period of time, transdermal systems can avoid the "peak and valley"
effect of oral or injectable therapy and can enable more controlled,
effective treatment. By avoiding first pass metabolism through the
gastrointestinal tract and the liver, the therapeutically equivalent dosage
for the transdermal delivery of certain compounds can be significantly less
than the corresponding oral dosage, potentially reducing dosage-related
side-effects.

S-3

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The Company's transdermal product line is focused on contraception,
hormone replacement therapy and smoking cessation. The Company has two
marketed products, the Nicotrol nicotine patch and the FemPatch estrogen
hormone replacement patch. The Company has strategic collaborations for its
transdermal products with Ortho Pharmaceutical Corporation, a subsidiary of
Johnson & Johnson (contraception), American Home Products Corporation,
Sanofi, S.A. and the Warner-Lambert Company (hormone replacement therapy),
and Pharmacia & Upjohn (smoking cessation).

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RECENT OPERATING RESULTS

The Company's revenues for the fiscal year ended December 31, 1997 were
$29.5 million, as compared to $36.2 million for the year ended December 31,
1996. The Company's net loss for fiscal year 1997 was $50.5 million, or $2.67
per share, as compared to a net loss of $11.1 million, or $0.60 per share, in
fiscal 1996. In the fourth quarter of fiscal 1997, the Company's revenues
were $6.5 million and its net loss was $5.2 million, or $0.27 per share,
compared to revenues of $12.6 million and a net loss of $1.0 million, or
$0.05 per share, for the same period in fiscal 1996.

On February 3, 1998, the Company entered into Note Purchase Agreements
with certain institutional investors to issue and sell approximately $43
million of 4% Senior Subordinated Convertible Notes due 2005 (the "Notes").
The Notes will be sold at par and mature on February 1, 2005 and bear
interest at a rate of 4% per annum. Interest on the Notes may be paid in
Common Stock or cash at the option of the Company. The Notes will be
convertible into Common Stock of the Company at a conversion price equal to
the average of the two lowest trade prices of the Common Stock as reported on
the Nasdaq National Market for a specified number of trading days immediately
preceding the conversion date until February 1, 2000. The conversion price
will be subject to maximum until February 1, 2000 and minimum conversion
prices until February 1, 1999. Commencing February 1, 2000, the conversion
price of the Notes will be set at a fixed price equal to the greater of
$150.00 per share and 150% of the market price of the Common Stock for 20
trading days preceding such date.

Cygnus filed a shelf registration statement on Form S-3 with the
Securities and Exchange Commission under which the Notes will be registered.
The Company engaged Diaz & Altschul Capital, LLC to provide financial
transaction advice. The Company has agreed to pay an advisory fee to Diaz &
Altschul Capital, LLC of $2.1 million, plus expenses.

S-4

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SUMMARY CONSOLIDATED FINANCIAL DATA

The summary consolidated financial data presented below is qualified in its
entirety by, and should be read in conjunction with, the Company's consolidated
financial statements and notes thereto incorporated by reference herein.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- -----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product revenues........................ $ 1,917 $ 3,704 $ 17,211 $ 12,442 $ 3,470
Contract revenues....................... 14,533 12,579 13,085 10,330 10,984
Royalty and other revenues.............. 4,820 2,723 5,907 790 8,516
-------- -------- --------- --------- --------
Total revenues........................ 21,270 19,006 36,203 23,562 22,970
-------- -------- --------- --------- --------
Costs and expenses:
Costs of products sold.................. 3,293 4,746 16,659 11,052 7,071
Research and development................ 21,605 20,029 23,165 16,881 16,353
Purchase of in-process research......... 9,000 -- -- -- --
Marketing, general and administrative... 5,491 7,369 9,296 6,876 6,103
Arbitration settlement.................. -- -- -- -- 39,633
-------- -------- --------- --------- --------
Total costs and expenses.............. 39,389 32,144 49,120 34,809 69,160
-------- -------- --------- --------- --------
Loss from operations...................... (18,119) (13,138) (12,917) (11,247) (46,190)
Interest and other income, net............ 759 296 1,865 1,202 910
-------- -------- --------- --------- --------
Net loss.................................. $(17,360) $(12,842) $(11,052) $(10,045) $(45,280)
-------- -------- --------- --------- --------

Net loss per share........................ $ (1.24) $ (0.79) $ (0.60) $ (0.54) $ (2.41)
Shares used in computation
of net loss per share................ 13,947 16,265 18,544 18,506 18,818
</TABLE>

DECEMBER 31, SEPTEMBER 30,
1996 1997(1)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments(2)............ $49,434 $39,201
Total assets.................................................... 68,798 54,048
Short-term obligations, including current portion of long-term
obligations(3)................................................ 24,148 29,656
Current portion(4).............................................. 13,437 34,184
Stockholders' equity (net capital deficiency)................... 31,213 (9,792)
</TABLE>

(1) Does not reflect the approximately $41 million in net proceeds from the
Company's sale of Notes. See "Prospectus -- Recent Events," "Use of
Proceeds" and "Capitalization."

(2) September 30, 1997 data does not reflect $14.0 million paid on January 2,
1998 under an arbitration settlement. See "Business--Legal Proceedings."

(3) September 30, 1997 data includes $16.6 million related to an arbitration
settlement. See "Business--Legal Proceedings."

(4) September 30, 1997 data includes $23.0 million related to an arbitration
settlement. See "Business--Legal Proceedings."

S-5

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RISK FACTORS

AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION
TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS BEFORE PURCHASING THE
SECURITIES OFFERED HEREBY. IN ADDITION TO THE HISTORICAL INFORMATION
CONTAINED HEREIN, THE DISCUSSION IN THIS PROSPECTUS SUPPLEMENT CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS, WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS
PROSPECTUS SUPPLEMENT SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED
FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS
SUPPLEMENT. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE THOSE DISCUSSED BELOW AS WELL AS THOSE CAUTIONARY STATEMENTS AND
OTHER FACTORS SET FORTH ELSEWHERE OR INCORPORATED BY REFERENCE HEREIN.

DEPENDENCE ON NEW PRODUCTS; UNCERTAINTY OF MARKET ACCEPTANCE

For the Company to be successful, it will need to develop, license, or
acquire new products. Several products based on the Company's technologies
are currently under development by Cygnus and its licensees. Many of these
products (including the GlucoWatch) will require significant additional
development and investment, including preclinical and clinical testing, prior
to their commercialization and are not expected to be commercially available
for several years, if at all. From time to time the Company has experienced
delays or setbacks in the development of certain of its products. For
example, the Company experienced development delays in the miniaturization of
the GlucoWatch system. There can be no assurance that such products or future
products (including the GlucoWatch) can or will be successfully developed,
prove to be safe and effective in clinical trials, meet applicable regulatory
standards, be capable of being manufactured in commercial quantities at
reasonable cost or be marketed successfully. Product development efforts can
be terminated by the Company or its licensees and there can be no assurance
that initial product development efforts or third party collaborations will
be successful. See "--Dependence on Licensees, Distributors and Collaborative
Arrangements."

Before the Company can market the GlucoWatch, it must first conduct
registration clinical trials using a version of the product designed for
commercial sale, prepare a submission to the FDA and obtain clearance or
approval from the FDA. Approval from other U.S. or foreign government
regulatory agencies may also be required. Each of these stages will involve
certain risks and challenges. The Company has completed research clinical
studies using a commercial version of the product and has initiated
registration clinical trials for submission to the FDA. There can be no
assurance that the commercial product will produce results that are
substantially equivalent to FDA-approved glucose monitoring products or that
will support the necessary regulatory filings and approvals. In addition, if
the Company receives the necessary regulatory approvals for the GlucoWatch,
there can be no assurance that unforeseen problems will not occur in product
manufacturing and commercial scale up or marketing or product distribution.
Any such occurrence could significantly delay the commercialization of the
GlucoWatch or prevent its market introduction entirely. Furthermore, if the
GlucoWatch is successfully developed, the commercial success of the
GlucoWatch will depend on its acceptance in the market.

The Company's revenues to date have been derived primarily from
manufacturing and royalty revenue from Nicotrol and from product development
and licensing fees related to its products under development. Pharmacia &
Upjohn ("Pharmacia"), the worldwide licensee for Nicotrol, has exercised its
option to manufacture Nicotrol for North America. Thus, the Company will no
longer receive manufacturing revenue from Nicotrol, although Cygnus will
continue to receive royalties on the worldwide sales of Nicotrol. It is
anticipated that total revenues received from Nicotrol will be less in the
future than the Company has received in the past. The Company expects that a
substantial portion of its future revenues will be derived from the sale of
the recently commercialized FemPatch transdermal patch and, if regulatory
approvals are obtained, sales of the GlucoWatch and other products currently
under development.

S-6

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HISTORY OF OPERATING LOSSES; FUTURE CAPITAL REQUIREMENTS

The Company reported a loss from operations of $51.6 million (including
a $39.6 million charge for the settlement of its litigation with Sanofi, S.A.
("Sanofi") further described in "Business--Legal Proceedings") for the nine
months ended September 30, 1997, and has experienced annual operating losses
since inception. At September 30, 1997, the Company had an accumulated
deficit of $136.5 million. The Company expects to continue to incur operating
losses at least until significant sales, if any, of the GlucoWatch commence.
There can be no assurance that the Company will generate significant revenues
or achieve profitability. The Company has, and expects to have, fluctuations
in quarterly results based on recognition of collaborative and contract
revenues and expenses. Some of these fluctuations could be significant.

The Company believes that its existing cash, cash equivalents and
short-term investments, at December 31, 1997 when coupled with cash from
revenues and earnings from investments and the net proceeds from the offering
hereby, will be sufficient to meet its operating expenses and capital
expenditure requirements at least through the end of 1998. The amounts and
timing of expenditures will depend on the progress of ongoing research and
development, the results of preclinical testing and clinical trials, the rate
at which operating losses are incurred, the execution of any development and
licensing agreements with corporate partners, the Company's development of
products, the FDA regulatory process and other factors, many of which are
beyond the Company's control.

The development of the Company's products will require the commitment of
substantial resources to conduct the research, preclinical development and
clinical trials necessary to bring such products to market and to establish
production and marketing capabilities. The Company may seek additional
funding through public or private financings, including debt or equity
financings, and through other arrangements, including collaborative
arrangements. Any additional equity financings may be dilutive to
stockholders and debt financing, if available, may involve restrictions on
dividends and other restrictions on the Company. Adequate funds, whether
through financial markets or collaborative or other arrangements with
corporate partners or from other sources, may not be available when needed
or, if available, on terms acceptable to the Company. Lack of sufficient
additional funds may require the Company to delay, scale back or eliminate
some or all of its research and product development programs or to license
others to commercialize products or technologies that the Company would
otherwise seek to develop itself. See "Use of Proceeds."

REGULATORY APPROVALS UNCERTAIN

The Company's products require the approval of the FDA before they can
be marketed in the U.S. In addition, approvals are required from regulatory
agencies in most foreign countries before the Company's products can be
marketed in such countries. To date, the Company has two products which have
received FDA approval, Nicotrol and FemPatch. Before a regulatory submission
can be filed with the FDA, a product must undergo extensive clinical trials.
The Company's drug delivery systems require the filing of a New Drug
Application ("NDA") with the FDA, and the FDA's approval of the NDA. Devices
such as the GlucoWatch under development by the Company will require the
filing and FDA clearance or approval of a medical device submission. The time
required for regulatory approval of the Company's products after a filing is
uncertain. There can be no assurance that problems will not arise that could
delay or prevent the commercialization of the Company's products or that the
FDA and foreign regulatory agencies will be satisfied with the results of
clinical trials or approve the marketing of any products. Moreover, even if
regulatory approval is granted, such approval may include significant
limitations on indicated uses for which any such products could be marketed.

The Company believes that the submission to the FDA for the GlucoWatch
will be in the form of a premarket notification (a "510(k) notification"),
although the final determination of the type of submission will not be made
until FDA submission. There can be no assurance that a 510(k) notification
will be accepted by the FDA. If a 510(k) notification is not accepted by the
FDA, the Company will be required to submit a pre-market approval application
("PMA") for this product. The FDA approval process for a PMA is typically
more involved and requires more time than a 510(k) notification and could
materially delay the introduction of the GlucoWatch. There can be no
assurance as to FDA acceptance or approval of the form or timing of a 510(k)
notification, a PMA or any similar

S-7

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FDA submission, that the results of the registration clinical trials for
submission to the FDA will be approved by the FDA nor that the results will
be comparable to the results obtained in the research clinical studies
performed to date. Delays or failure to receive clearance following a 510(k)
notification or approval of a PMA application could have a significant
adverse effect on the Company's business, financial condition and results of
operations.

A drug or medical device and its manufacturer are subject to continual
review after approval, and later discovery of previously unknown problems
with a product or the manufacturing process may result in restrictions on
such product or the manufacturer, including withdrawal of the product or
products from the market. Failure to comply with applicable regulatory
requirements may, among other things, result in fines, suspensions of
regulatory approvals, product recalls, operating restrictions and criminal
prosecution. In addition, new government regulations may be established that
could delay or prevent regulatory approval of the Company's potential
products. Cygnus is also subject to regulation under federal, state and local
regulations regarding work place safety, environmental protection and
hazardous and controlled substance controls, among others.

DEPENDENCE ON LICENSEES, DISTRIBUTORS AND COLLABORATIVE ARRANGEMENTS

Cygnus depends on its licensees and distributors to fund a significant
portion of product development costs, to conduct clinical testing, to obtain
regulatory approvals and to market products. The Company is dependent on
Pharmacia and its sublicensee, Johnson & Johnson, for the marketing of
Nicotrol. The Company is also dependent upon Sanofi and its sublicensee,
Warner-Lambert Company ("Warner-Lambert"), for the marketing of FemPatch. If
the GlucoWatch is commercialized the Company will be dependent upon Becton
Dickinson and Yamanouchi for marketing and distribution. The Company's
licensees and distributors generally have the right to terminate the
development funding or marketing arrangements for a product at any time prior
to regulatory approval for any reason without significant penalty. Licensees
have exercised this right in the past, and there can be no assurance that
current and future licensees or distributors will not exercise this right in
the future. In the past some of the Company's licensees, distributors and
collaborators have approached the Company requesting modification of the
terms of existing agreements. Becton Dickinson has recently approached the
Company to discuss modifying the non-compete terms of the existing agreement.
The Company is unable to predict the outcome of these discussions.

The resources and attention a licensee or distributor devotes to a
product are not within the Company's control. As a result, there may be
delays in clinical testing, the preparation and processing of regulatory
filings and commercialization efforts conducted by the Company's licensees or
distributors. Certain of the Company's licensees may also be permitted to
offer products that are competitive with those of the Company, which could
interfere with their efforts on behalf of the Company. The Company's ability
to develop and commercialize products in the future will also depend on its
ability to enter into collaborative arrangements. There can be no assurance
that the Company will be able to enter into new collaborative arrangements or
renew existing collaborative arrangements. Additionally, there can be no
assurance that existing or future collaborative arrangements will be
successful.

Since all payments to the Company under its licensing and distribution
agreements following their execution are contingent on the occurrence of
future events or sales levels, and the agreements are terminable by the
licensee or distributor, no assurance can be given as to whether the Company
will receive any particular payment thereunder or as to the amount or timing
of any such payment. The Company may choose to self-fund certain research and
development projects or sales and marketing efforts in order to exploit its
technologies. Any increase in Company-sponsored research and development or
sales and marketing activities will have an immediate adverse effect on the
Company's results of operations.

COMPETING PRODUCTS AND CHANGES IN TECHNOLOGY

A large number of companies are involved or are becoming involved in the
development and commercialization of products incorporating diagnostic and
drug delivery systems. This field is highly competitive, and Cygnus believes
that competition will substantially increase in the future. A number of
companies have invested, and are continuing to invest, significant resources
in the development of diagnostic and drug delivery systems. Many of these
companies have greater financial, research and development and other
resources than Cygnus, as well as

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more experience than Cygnus in commercializing diagnostic and transdermal
drug delivery products. Such companies may improve existing drug formulations
and products more efficiently than Cygnus or may design and develop new
diagnostic and transdermal drug delivery products which are more accepted in
the marketplace than the Company's products.

The Company's primary competitors in the glucose monitoring industry are
expected to be companies that currently market finger stab method products.
These companies have established products and distribution channels. In
addition, a number of companies are engaged in the development of products
using technology which is different than that used by Cygnus, but that are
also intended to permit less painful or painless glucose monitoring. These
technologies include infrared spectroscopy, which uses radiation to measure
glucose levels, and a variety of methods (including, in one case, transdermal
technology) to extract interstitial fluid and measure the glucose
concentration therein. The Company is not aware of any products under
development that offer the range of benefits of the GlucoWatch. However,
there can be no assurance that these products will not be more accepted in
the marketplace than the GlucoWatch or will not render the Company's glucose
monitor uncompetitive or obsolete. In addition, a number of companies have
developed or are seeking to develop new drugs to treat diabetes which could
reduce demand for glucose monitoring systems. In addition, many of the
Company's competitors and potential competitors have substantially greater
resources, research and development staffs and facilities than the Company
and have significantly greater experience than the Company in developing,
manufacturing and marketing glucose monitoring devices. Competition within
the glucose monitoring industry could also result in price reductions for
glucose monitoring devices such that the Company may not be able to sell the
GlucoWatch at a price level adequate for the Company to realize a return on
its investment.

The drug delivery industry is a rapidly evolving field. A number of
other companies, including major pharmaceutical companies, are also
developing and marketing transdermal and other similar systems for the
controlled delivery of drugs. Products currently on the market or under
development by competitors deliver the same drugs, or other drugs to treat
the same indications as many of the products under development by the
Company. The first pharmaceutical product to reach the market in a
therapeutic area often obtains and maintains significant market share
relative to later entrants to the market. The Company's transdermal products
will also compete with drugs marketed not only in similar drug delivery
systems but also in traditional dosage forms such as oral administration,
bolus injection and continuous infusion. New drugs, new therapeutic
approaches or future developments in alternative drug delivery technologies,
such as time-release capsules, liposomes and implants, may provide
therapeutic or cost advantages over the drug delivery systems being developed
by the Company.

THIRD-PARTY REIMBURSEMENT

Successful commercialization of certain of the Company's products may
depend in part on the availability of reimbursement from third-party health
care payors, such as private insurance plans and the government. There can be
no assurance that such reimbursement will be available. Third-party payors
are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new therapeutic and diagnostic
products. There can be no assurance that adequate levels of reimbursement
will be available to enable the Company to achieve market acceptance of the
GlucoWatch or other new products under development or to maintain price
levels sufficient to realize an appropriate return on its investment. In
certain international countries, the period of time needed to obtain such
reimbursement can be lengthy. The Company may delay the launch of its
products into certain countries until eligibility for reimbursement is
established. This could potentially have an adverse effect on the Company.

PRODUCT LIABILITY

The design, development, manufacture and use of the Company's products
involve an inherent risk of product liability claims and associated adverse
publicity. Producers of medical products may face substantial liability for
damages in the event of product failure or if it is alleged the product
caused harm. The Company currently maintains product liability insurance.
Such insurance is expensive, difficult to obtain and may not be available in
the future on acceptable terms or at all. There can be no assurance, however,
that the Company will not be subject

S-9

<PAGE>

to product liability claims, that the Company's current insurance would cover
such claims, or that adequate insurance will continue to be available on
acceptable terms to the Company in the future. In the event the Company is
held liable for damages in excess of the limits of its insurance coverage, or
if any claim or product recall results in significant adverse publicity
against the Company, the Company's business, financial condition and results
of operations could be materially and adversely affected.

INTELLECTUAL PROPERTY

The Company's success depends in large part on its ability to obtain
patent protection for its products, preserve its trade secrets and operate
without infringing the proprietary rights of others, both in the U.S. and in
other countries. Patent applications in the U.S. are maintained in secrecy
until patents issue, and since publication of discoveries in the scientific
or patent literature tends to lag behind actual discovery by several months,
Cygnus cannot be certain that it was the first to invent or to file patent
applications on such discoveries. No assurance can be made that patents will
issue with respect to any of the Company's patent applications or that any
patents will provide competitive advantages for its products or will not be
challenged or circumvented by competitors. Cygnus also relies on trade
secrets and proprietary know-how that it seeks to protect, in part, by
confidentiality agreements with its licensees, employees and consultants.
There can be no assurance that these agreements will not be breached, that
the Company would have adequate remedies for any breach or that the Company's
trade secrets will not otherwise become known or be independently developed
by its competitors.

Any litigation, in the U.S. or abroad, as well as foreign opposition
and/or domestic interference proceedings, could result in substantial expense
to the Company and significant diversion of effort by the Company's technical
and management personnel. Litigation may be necessary to enforce patents
issued to the Company or to protect trade secrets or know-how owned by the
Company. A negative determination in such proceedings in which the Company is
a party could subject the Company to significant liabilities to third parties
or require the Company to seek licenses from third parties. Although patent
and intellectual property disputes in the pharmaceutical product area have
often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include
ongoing royalties. Furthermore, there can be no assurance that necessary
licenses would be available to the Company on satisfactory terms, if at all.
Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing and selling certain of its products which would have a
material adverse effect on the Company. See "Business--Intellectual
Property."

MANUFACTURING; DEPENDENCE ON THIRD PARTY SUPPLIERS

Cygnus generally retains manufacturing rights for its products. The
Company's products are manufactured using several proprietary materials and
production technologies developed by Cygnus in conjunction with equipment and
material suppliers. Production of diagnostic and transdermal drug delivery
systems requires specialized skills in several areas, such as polymer
chemistry and adhesive technology.

The manufacture of the Company's products is subject to current good
manufacturing practices ("cGMP") requirements prescribed by the FDA or other
standards prescribed by the appropriate regulatory agency in the country of
use. Additionally, the Company's agreements with licensees either specify
pricing formulas for products manufactured and sold by Cygnus to its
licensees or specify that prices will be negotiated in the future. There can
be no assurance that prices for the Company's products will cover the
manufacturing costs for these products in light of the Company's limited
manufacturing experience and general supply and demand conditions in the
marketplace.

The Company's GlucoWatch has not yet been manufactured for commercial
sale. To successfully commercialize the GlucoWatch, the device will have to
be manufactured in compliance with regulatory requirements, in a timely
manner and in sufficient quantities while maintaining product performance,
quality and acceptable manufacturing costs. The Company is responsible for
all aspects of manufacturing the GlucoWatch system, although the "watch
device" will be manufactured by an outside supplier. Manufacturers often
encounter difficulties in scaling up production of new products, including
problems involving product performance, production

S-10

<PAGE>

yields, quality control and assurance and shortages of personnel. In the
past, the Company has experienced these problems in scaling up its products
for commercial launch. There can be no assurance that similar problems will
not be encountered in the future. In addition, there can be no assurance
that the Company will be able to achieve and maintain product performance
quality and reliability if and when producing the GlucoWatch in the
quantities required for commercialization, nor that the Glucowatch can be
assembled and manufactured at an acceptable cost. See
"Business--Manufacturing."

The GlucoWatch will be manufactured from components to be purchased from
outside suppliers, most of which are the Company's single source for such
components. In the event the Company is unable to obtain these components
from its suppliers, the Company would be required to obtain components from
alternate suppliers. Any interruption in the supply of GlucoWatch components
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Several materials used in the Company's transdermal products are
currently obtained from single sources. Although the Company has not
experienced difficulty acquiring these materials for the manufacture of its
products for sale or clinical trials, there can be no assurance that supply
interruptions will not occur or that the Company will not have to obtain
substitute vendors, if such vendors are available, which could require
additional regulatory submissions and approvals. Any such interruption of
supplies could have a material adverse effect on the Company's ability to
develop, manufacture and sell its transdermal products.

ATTRACTING AND RETAINING KEY EMPLOYEES

The successful development and commercialization of the Company's
products depends upon, among other things, skilled employees. In some cases,
the market for these skilled employees is highly competitive, which makes it
difficult to attract and retain key employees. There can be no assurance that
the Company can attract or retain key employees. The inability to do so could
materially and adversely affect the Company's business, financial condition
and results of operations.

POSSIBLE VOLATILITY OF STOCK PRICE

The Common Stock currently trades on the Nasdaq National Market. The
trading price of the Company's Common Stock could be subject to substantial
fluctuations in response to factors such as announcements by the Company or
its competitors of results of regulatory approval filings or clinical trials
or testing, developments or disputes governing proprietary rights,
technological innovations or new commercial products, government regulatory
action, general conditions in the medical technology industry, changes in
securities analysts' recommendations, or other events or factors, many of
which are beyond the Company's control. In addition, the stock market in
general has experienced extreme price and volume fluctuations in recent
years, which have particularly affected the market prices of many medical
technology companies and which have been unrelated to the operating
performance of such companies. Fluctuations or decreases in the trading price
of the Company's Common Stock may adversely affect the market for the
Company's Common Stock. In the past, following periods of volatility in the
market price for a company's securities, securities class action litigation
often has been instituted. Such litigation could result in substantial costs
and a diversion of management attention and resources, which could have a
material adverse effect on the Company's business, financial condition and
operating results.

ANTI-TAKEOVER PROVISIONS

The Board of Directors has authority, without further action by
shareholders, to issue up to 5,000,000 shares of Preferred Stock with rights,
preferences and privileges designated by the Board of Directors. This
Preferred Stock could be issued quickly with terms calculated to delay or
prevent a change in control of the Company or to make removal of management
more difficult. In certain circumstances, such issuance could have the
effect of decreasing the market price of the Common Stock or of delaying,
deterring or preventing a change in control of the Company. In addition, the
Board of Directors has adopted a Rights Plan (commonly known as a "poison
pill") which may also have the effect of delaying or preventing a change in
control of the Company.

S-11

<PAGE>

ABSENCE OF DIVIDENDS

The Company has never declared or paid cash dividends on its Common
Stock. The Company's current bank term loan precludes it from paying
dividends to stockholders. The Company currently intends to retain any
earnings for use in its business and therefore does not anticipate paying any
dividends in the future.

S-12

<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Common Stock
offered hereby are estimated to be approximately $13.8 million, after
deducting commissions and estimated expenses of the offering. The Company
anticipates that approximately $6.0 million of such net proceeds will be used
for the commercialization of the GlucoWatch. The balance of the proceeds will
be used for additional working capital, additional capital expenditures and
general corporate purposes, including research and development efforts.

The Company's management will have broad discretion with respect to the
specific working capital requirements to which the proceeds will be applied,
and there can be no assurance that the proceeds will be applied to any
specific working capital requirement. Pending utilization as described above,
the proceeds will be invested in short-term, investment-grade,
interest-bearing securities.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "CYGN." The following table sets forth, for the periods indicated,
the high and low last reported sale prices per share of the Common Stock as
quoted on the Nasdaq National Market.

HIGH LOW
---- ---
1996:
First Quarter .......................... $24.500 $19.375
Second Quarter .......................... 23.000 15.000
Third Quarter .......................... 17.250 11.000
Fourth Quarter .......................... 16.875 12.000
1997:
First Quarter .......................... $16.625 $13.375
Second Quarter .......................... 17.250 10.625
Third Quarter .......................... 19.750 16.000
Fourth Quarter .......................... 25.000 18.250
1998:
First Quarter through February 3, 1998... $21.000 $16.625

On February 3, 1998, the last reported sale price for the Common Stock
as quoted on the Nasdaq National Market was $19.8125 per share. As of
January 26, 1998, there were approximately 550 holders of record of the
Common Stock.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its Common Stock.
The Company's current bank term loan precludes it from paying dividends to
stockholders. The Company currently intends to retain any earnings for use in
its business and therefore does not anticipate paying any dividends in the
future.

S-13

<PAGE>

CAPITALIZATION

The following table sets forth the actual cash, cash equivalents and
short-term investments, short-term obligations and capitalization of the
Company at September 30, 1997. This table should be read in conjunction with
the consolidated financial statements and the notes thereto which are
incorporated by reference herein.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
(IN THOUSANDS, EXCEPT FOR
SHARE AMOUNTS)

<S> <C>
Cash, cash equivalents, and short-term investments(1)........... $ 39,201
---------
Short-term obligations, including current portion of
long-term obligations(2)...................................... $ 29,656
---------
Long-term obligations, less current portion:
Term debt..................................................... $ 4,615
Notes offered hereby.......................................... --
Capital lease obligation...................................... 600
Arbitration settlement........................................ 23,000
Other......................................................... 5,969
---------
Total long-term obligations................................. 34,184
---------
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized;
none issued and outstanding................................. --
Common stock, $.001 par value; 30,000,000 shares authorized;
19,193,559 shares issued and outstanding(3)................. 121,557
Accumulated deficit........................................... (131,349)
---------
Total stockholders' equity (net capital deficiency)......... (9,792)
---------
Total capitalization............................................ $ 24,392
</TABLE>

- ---------------
(1) Does not reflect the approximately $41 million in net proceeds from the
Company's sale of Notes. See "Prospectus Summary -- Recent Events." Also
does not reflect $14.0 million paid on January 2, 1998 under an arbitration
settlement. See "Business--Legal Proceedings."

(2) Short-term obligations include $16.6 million related to an arbitration
settlement. See "Business--Legal Proceedings."

(3) Excludes (i) 3,918,955 shares of Common Stock reserved for issuance under
the Company's Stock Option Plan, under which options to purchase 3,296,573
shares were outstanding as of September 30, 1997, (ii) 276,179 shares
issuable upon the conversion of the note payable under the arbitration
settlement; (iii) 127,719 shares reserved for issuance under the Company's
Employee Stock Purchase Plan as of September 30, 1997; and (iv) the shares
of Common Stock issuable upon conversion of the Notes offered hereby.

S-14

<PAGE>

BUSINESS

OVERVIEW

Cygnus is engaged in the development and manufacture of diagnostic and
drug delivery systems, utilizing its proprietary technologies to satisfy
unmet medical needs cost-effectively. The Company's current efforts are
primarily focused on two core areas: a painless, bloodless and automatic
glucose monitoring device (the GlucoWatch system) and transdermal drug
delivery systems.

THE GLUCOWATCH SYSTEM

The Company's GlucoWatch system represents a potential advance in
diabetes care technology as compared to the currently prevailing "finger
stab" blood monitoring method. The GlucoWatch is designed to measure glucose
painlessly, bloodlessly and automatically through the ease and convenience of
a device worn like a wristwatch. Worldwide sales of blood glucose
self-monitoring products were approximately $2.5 billion in 1996, which
represented an increase of approximately 14% over 1995 levels. It is
estimated that more than 40 million people in North America, Europe, Japan
and Korea have diabetes. In the U.S. alone, more than ten million people have
been diagnosed with another five million believed to have the condition. The
number of people with diabetes is expected to continue to grow with the aging
of the population, while the number of diagnosed cases is also expected to
increase with changes in diagnostic standards and new diagnostic
technologies. Clinical studies sponsored by the National Institutes of Health
("NIH") indicate that better management of glucose levels through more
frequent testing would enable people with diabetes to reduce or significantly
delay many serious diabetes-related health complications. However, largely
due to the pain of repetitive finger stabbing and the associated disruption
of daily life, the Company believes most people with diabetes currently test
their glucose levels less than half as often as recommended. As a result of
the drawbacks of the finger stab method, the Company believes that there is a
significant unmet demand for a painless, bloodless, automatic
glucose-monitoring device.

To address this unmet demand, the Company is developing the GlucoWatch
which is expected to reduce or eliminate significant drawbacks of the finger
stab testing technique. The device, which is worn like a wristwatch, is
designed to automatically extract and measure glucose levels painlessly
through intact skin every twenty or thirty minutes. The extracted glucose is
collected in a consumable transdermal pad called the AutoSensor, which is
attached to the back of the device and replaced approximately every twelve
hours. The GlucoWatch system is intended to offer a combination of features
not available in currently marketed devices, such as: an electronic memory to
store and display glucose levels; the ability to download stored information
to personal computers to analyze glucose data and trends; alarms indicating
hypo- and hyperglycemic conditions; and event markers which record factors
that affect glucose levels. The GlucoWatch is designed to be worn during the
day and night for continuous glucose monitoring. The Company believes the
GlucoWatch system will provide the frequent testing and trend analysis of
glucose levels necessary to enable people with diabetes to better manage
their condition and eliminate the pain and inconvenience associated with
repetitively stabbing the finger to test the blood. The Company believes this
unique combination of features will result in better control of glucose
levels, improved quality of life and more cost-effective healthcare.

In developing the GlucoWatch, the Company has sought to design a device
that would offer the above features and be substantially equivalent to finger
stab blood glucose monitoring in terms of accuracy and precision. Test
results from a clinical study using a prototype of the GlucoWatch, which were
published in NATURE MEDICINE (November 1995), indicated a level of accuracy
and precision that the Company believes is comparable to those associated
with finger stab blood glucose monitoring devices. In 1997, Cygnus completed
extensive research clinical studies using a version of the GlucoWatch
designed for commercial sale. The results of these studies demonstrated that
the GlucoWatch is able to measure glucose levels with statistically
significant accuracy and precision across a variety of conditions. Based on
the Company's research clinical studies and published performance data for
certain currently marketed finger stab monitoring devices, the Company
believes the GlucoWatch is capable of a level of accuracy and precision
comparable to such devices. There can be no assurance that the Company will
be able to successfully develop the GlucoWatch or that it will obtain
clearance or approval from the FDA. See "Risk Factors--Dependence on New
Products; Uncertainty of Market Acceptance" and "Risk Factors--Regulatory
Approvals Uncertain."

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<PAGE>

To prepare a submission to the FDA for approval of the GlucoWatch, the
Company has initiated registration clinical trials. Based on discussions with
the FDA, the Company believes that the submission will be in the form of a
510(k) notification, although the final determination will not be made until
the FDA receives the submission. The Company anticipates submitting a 510(k)
notification in the second quarter of 1998, although the potential exists for
this filing to be deferred to the second half of 1998.

Although the Company believes its clinical results to date are
encouraging, to seek FDA approval for the GlucoWatch system, the Company will
need to conduct registration clinical trials. No assurance can be given that
data generated in such trials will be as favorable as data generated in
clinical trials to date or that, even if such data are as favorable, such
data will provide a sufficient basis for the approval of the GlucoWatch
system by the FDA.

In 1996, Cygnus entered into collaborations with Becton Dickinson and
Yamanouchi for the commercialization of the GlucoWatch. Under the Becton
Dickinson agreement, the Company has granted Becton Dickinson exclusive
worldwide marketing and distribution rights, with the exception of Japan and
Korea. Under this agreement, the Company has primary responsibility for
product development, regulatory approvals, manufacturing and customer
support, and retains the option to participate in sales and marketing. The
Company also entered into an agreement with Yamanouchi for the marketing and
distribution of the GlucoWatch in Japan and Korea. Under these agreements,
Cygnus is eligible to receive up-front and milestone payments totaling $30
million prior to commercialization and to receive a percentage of the
product's future commercial success. In June 1997, Cygnus granted Becton
Dickinson worldwide marketing rights, with the exception of Japan and Korea,
for the Company's second generation glucose monitor. Becton Dickinson has
agreed to fund, in part, the development of the product. In the past some of
the Company's licensees, distributors and collaborators have approached the
Company requesting modification of the terms of existing agreements. Becton
Dickinson has recently approached the Company to discuss modifying the
non-compete terms of the existing agreement. The Company is unable to
predict the outcome of these discussions.

TRANSDERMAL DRUG DELIVERY SYSTEMS

The Company's transdermal product line is focused on contraception,
hormone replacement therapy and smoking cessation. The Company has two
marketed products, the Nicotrol nicotine patch and the FemPatch estrogen
hormone replacement patch. The Company has strategic collaborations for its
transdermal products with Ortho Pharmaceutical Corporation, a subsidiary of
Johnson & Johnson (contraception), American Home Products Corporation, Sanofi
and Warner-Lambert (hormone replacement therapy), and Pharmacia (smoking
cessation).

PAINLESS, BLOODLESS AND AUTOMATIC GLUCOSE MONITORING

MARKET OPPORTUNITY

People with diabetes measure blood glucose levels to adjust their diet
and insulin use to better control their glucose levels to prevent
diabetes-related complications. Currently, to measure their glucose levels,
people with diabetes must stab their fingers with a lancet, draw blood and
place a drop of blood on a glucose reagent strip inserted in an instrument
which provides a glucose reading. Each day of testing can involve numerous
stabs and the complete procedure is not only painful but disruptive to daily
life. As a result of this pain and disruption, the Company believes most
people with diabetes monitor their blood glucose levels less than twice per
day, instead of the recommended four to seven times per day. Even at this
level of testing, the market for products for self-monitoring of glucose
levels by people with diabetes is quite substantial.

S-16

<PAGE>

Worldwide sales of products for the self-monitoring of blood glucose
levels were approximately $2.5 billion in 1996, which represented an increase
of approximately 14% over 1995 levels. The Company believes that
approximately 80% to 90% of the sales were related to disposable glucose
reagent strips for finger stab monitoring. In the U.S., a relatively small
segment of people with diabetes who measure their glucose level account for
the majority of testing: for example, of these people, just 22% (about 1.7
million) account for 68% of the tests performed and 37% (about 2.9 million)
account for 87% of tests performed. It is estimated that more than 40 million
people in North America, Europe, Japan and Korea have diabetes. In the U.S.
alone, more than ten million people have been diagnosed with diabetes with
another five million believed to be undiagnosed. The number of people
diagnosed with diabetes has been growing and is expected to continue to grow
due to the aging of the population, changes in diagnostic standards and new
diagnostic technologies. Specifically, the diagnostic standards in the U.S.
have been changed such that a fasting plasma glucose value of greater than or
equal to 126 mg/dL now indicates a diagnosis of diabetes, whereas such
diagnosis previously required a value of greater than or equal to 140 mg/Dl.
Diabetes can lead to severe complications over time, including blindness,
loss of kidney function and peripheral neuropathy, causing circulation
problems to the arms and legs and pain and potential amputation. The American
Diabetes Association estimated that the complications arising from diabetes
cost the U.S. healthcare system in excess of $45 billion in 1992. These
complications are largely a consequence of years of poor management of
glucose levels by people with diabetes. Results of the Diabetes Control and
Complication Trial, a major clinical trial sponsored by the NIH and published
in 1993, showed that more frequently monitored blood glucose levels and rigid
adherence to a program of diet, exercise and insulin injections could prevent
or significantly delay the onset of many of the long-term complications of
diabetes.

THE GLUCOWATCH SYSTEM

The Company believes that there is an unmet demand for painless,
bloodless and automatic glucose monitoring. To address this unmet demand, the
Company is developing the GlucoWatch, which is worn like a wristwatch and
automatically extracts and measures glucose levels painlessly through intact
skin every twenty or thirty minutes. The GlucoWatch then displays and stores
current and past glucose levels and trend data. The extracted glucose is
collected in a consumable transdermal pad called the AutoSensor, which is
attached to the back of the device and replaced approximately every twelve
hours. The GlucoWatch system is designed to offer a combination of features
not available in currently marketed devices, in a portable and discreet
device. These include frequent data collection, electronic memory to store
and display glucose levels, personal computer downloading for trend analysis,
alarms indicating hypo- and hyperglycemic conditions and event markers which
record factors that affect glucose levels. The GlucoWatch is designed to be
worn day and night for continuous glucose monitoring. The GlucoWatch is
expected to reduce or eliminate significant drawbacks of the finger stab
technique, such as the pain of repetitive stabbing and the disruption of
normal activities caused by indiscreet, cumbersome procedures. The Company
believes the GlucoWatch can lead to improved disease management, enabling
people with diabetes to prevent or delay severe complications associated with
the condition.

The GlucoWatch extracts glucose molecules through intact skin utilizing
a patented proprietary process called electroosmosis, which uses low levels
of electric current. Glucose molecules are collected in the AutoSensor, which
adheres to the skin, contains a biosensor and is attached to the back of the
GlucoWatch. The collected glucose triggers an electro-chemical reaction in
the AutoSensor, generating electrons. The biosensor measures the electrons
and an application specific integrated circuit ("ASIC") in the GlucoWatch
equates the number of electrons to a concentration of glucose in the blood.
The GlucoWatch automatically measures glucose levels at frequent intervals.
The GlucoWatch displays the most recent readings and trends at the push of a
button. Its electronic memory capabilities permit the retrieval and
downloading of data, allowing longer-term trend analysis for better disease
management.

The GlucoWatch system was designed to be simple and easy to use. Each
day the rechargeable battery is replaced and a new AutoSensor is attached on
the back of the GlucoWatch. A finger stab blood glucose measurement is input
into the GlucoWatch for calibration. Measurements will then be generated
automatically by the GlucoWatch system, providing up to thirty-six glucose
measurements over a twelve hour period.

S-17

<PAGE>

The Company believes approximately 80% to 90% of current sales in the
glucose monitoring market come from the consumable test strips on which a
drop of blood is placed and inserted into a meter. The GlucoWatch uses a
similar approach. The "watch device" is designed to function for a number of
years while the consumable AutoSensor is designed to last for approximately
twelve hours.

REGULATORY APPROVAL

To prepare a submission to the FDA for approval of the GlucoWatch, the
Company has initiated registration clinical trials. Based on discussions
with the FDA, the Company believes that the submission will be in the form of
a 510(k) notification, although the final determination will not be made
until the FDA receives the submission. The Company anticipates submitting a
510(k) notification in the second quarter of 1998, although the potential
exists for this filing to be deferred to the second half of 1998. See
"Risk-Factors--Uncertainty of Regulatory Approval."

Although the Company believes its clinical results to date are
encouraging, to seek FDA approval for the GlucoWatch system, the Company will
need to conduct registration clinical trials. No assurance can be given that
data generated in such trials will be as favorable as data generated in
clinical trials to date or that, even if such data are as favorable, such
data will provide a sufficient basis for the approval of the GlucoWatch
system by the FDA.

COMPETITION

The glucose monitoring market is highly competitive. Currently the
market is dominated by finger stab blood glucose monitoring products. This
monitoring technique presents a number of barriers to generating more
frequent blood glucose measurements, including the pain of repetitive finger
lancing and the disruption of normal activities as people with diabetes
typically do not want to go through the finger stab process in public.
Several companies are attempting to develop non-invasive or less invasive
methods to monitor glucose levels. One technology that a number of companies
are pursuing is the use of infrared spectroscopy, which uses radiation to
measure glucose levels. Other companies are attempting to develop a variety
of methods to extract interstitial fluid and measure the glucose
concentration therein. The Company believes that none of the currently
marketed finger stab products nor other products in development have the
range of features and benefits offered by the GlucoWatch to address the unmet
needs of this category. See "Risk Factors--Competing Products and Changes in
Technology."

TRANSDERMAL DRUG DELIVERY SYSTEMS

Transdermal drug delivery systems provide for the controlled release of
drugs directly into the bloodstream through intact skin. The Company's
transdermal drug delivery products are thin multilayer systems, in the form
of small adhesive patches. Transdermal delivery can provide a number of
advantages over conventional methods of drug administration, including
enhanced efficacy, increased safety, greater convenience and improved patient
compliance. By delivering a steady flow of drugs into the bloodstream over
an extended period of time, transdermal systems can avoid the "peak and
valley" effect of oral or injectable therapy and can enable more controlled,
effective treatment. By avoiding first pass metabolism through the
gastrointestinal tract and the liver, the therapeutically equivalent dosage
for the transdermal delivery of certain compounds can be significantly less
than the corresponding oral dosage, potentially reducing dosage-related
side-effects.

Cygnus has established a comprehensive, integrated approach to the
development of transdermal delivery systems. Cygnus develops a unique product
profile for each transdermal product based on an evaluation of several key
variables that change with each drug and therapeutic indication. Based on its
assessment of the product profile and the interrelationship between the drug
and the physical and biological characteristics of the skin, Cygnus
formulates the appropriate materials and designs the structure of the
transdermal system to achieve desired product characteristics such as
comfort, extended wear, delayed or enhanced onset and controlled release.

S-18

<PAGE>

CONTRACEPTION

The contraceptive market is estimated to have had 1996 worldwide sales
of $2.4 billion. The market is dominated by oral contraceptive pills. There
are no transdermal patches currently marketed. The Company believes a seven
day contraceptive patch could lead to improved dosing compliance and is
developing such a product under an agreement with Ortho Pharmaceutical
Corporation ("Ortho"), a subsidiary of Johnson & Johnson. Ortho has exclusive
worldwide marketing rights to the product. Cygnus received up-front payments
and will receive milestone payments as well as a percentage of net sales, and
is responsible for the development and manufacture of the product. This
product is currently in Phase 3 clinical trials.

HORMONE REPLACEMENT

The hormone replacement market is large, with $1.75 billion in sales
worldwide in 1996, and is expected to grow as more women reach the age of
menopause. The Company believes that its transdermal hormone replacement
products have a competitive advantage over certain transdermal hormone
replacement products as a result of their seven-day extended delivery systems
and superior patient comfort profile. Many hormone replacement products under
development by competitors last for only 3.5 days. The Company believes,
based in part on its market research, that patients and physicians prefer
7-day systems to 3.5 day systems because of increased convenience and
comfort, which could also lead to improved compliance.

The Company has three hormone replacement products. FemPatch, a 7-day
estrogen patch launched in 1997, was developed under an agreement with
Sanofi. Warner-Lambert, which is Sanofi's sublicensee, is marketing FemPatch
in North America. For a discussion of the Company's recent arbitration
settlement with Sanofi, see "Business--Legal Proceedings." Cygnus' two other
hormone replacement products, a 7-day estrogen patch, and an
estrogen/progestin combination patch are currently in Phase 3 clinical
trials. These products are being developed under an agreement with American
Home Products. Under the terms of the agreement, American Home Products has
worldwide marketing rights with respect to the products resulting from the
collaboration. Cygnus received up-front fees and is entitled to receive
milestone payments as well as a percentage of net sales on all products to be
manufactured by Cygnus for the worldwide market. In addition, American Home
Products will pay for all clinical trial expenses. Cygnus is otherwise
responsible for financing the development and manufacture of the products.
Cygnus will pay Sanofi a percentage of net sales on the two products licensed
to American Home Products.

SMOKING CESSATION

The smoking cessation market is estimated to have had 1996 worldwide
sales of $450 million. The Company's Nicotrol product was initially
introduced in the U.S. as a prescription product in 1992 and subsequently
approved for over-the-counter sale in the U.S. in 1996. Nicotrol is currently
marketed in North America by Johnson & Johnson and many European countries by
Pharmacia. Cygnus receives royalties on the worldwide sales of Nicotrol. The
Company is developing a second generation nicotine patch designed to address
currently unsatisfied patient needs. These products are being developed to
match the nicotine dosing level with the patient's level of addiction. Phase
2 clinical trials have been completed and the Company is seeking a marketing
collaboration to fund further work on this product. The Company believes that
the number of people who wish to stop smoking will increase, which could
positively affect the smoking cessation category.

MANUFACTURING

S-19

<PAGE>

yields, quality control and assurance and shortages of personnel. In the
past, the Company has experienced these problems in scaling up its products
for commercial launch. There is no assurance that similar problems will not
be encountered in the future. Also, there can be no assurance that the
Company will be able to achieve and maintain product performance quality and
reliability if and when producing the GlucoWatch in the quantities required
for commercialization, nor that the Glucowatch can be assembled and
manufactured at an acceptable cost.

The Company recently received ISO 9002 certification. Subsequently, the
Company will seek approval for the use of the "CE" mark for sales of its
products in Europe. There can be no assurance that the Company will be
successful in being granted a CE mark for sales of its products in Europe.

The Company's transdermal products are manufactured using several
proprietary materials and production technologies developed by Cygnus in
conjunction with equipment and material suppliers. Since the Company designs
a unique transdermal system for each drug, Cygnus' process development
engineers become involved early in the product design process. The Company
believes that close interaction at the design stage permits development of
efficient manufacturing techniques. In addition, Cygnus performs analytical
testing in-house for each aspect of the manufacturing process, from raw
material studies to final product characterization. The Company has developed
proprietary assays to measure patch characteristics such as drug release
rate, drug and solvent residues, and product stability. The Company has
patented certain aspects of its manufacturing processes.

Several materials used in the Company's drug delivery products are
currently obtained from single sources. Although the Company has not
experienced difficulty acquiring these materials for the manufacture of its
products for sale or clinical trials, there can be no assurance that supply
interruptions will not occur or that the Company will not have to obtain
substitute vendors, if such vendors are available, which would require
additional regulatory submissions and approvals. Any such interruption of
supplies could have a material adverse effect on the Company's ability to
develop, manufacture and sell its products.

The Company leases a 21,000 square foot manufacturing facility used in
the commercial production of FemPatch and the clinical supply of other
products. The Company believes this facility will have sufficient capacity to
support the planned market introduction of its current drug delivery
products. The Company is currently establishing its commercial AutoSensor
manufacturing operations in an existing third-party facility. Each of the
foregoing facilities complies with applicable regulatory requirements. See
"Risk Factors--Manufacturing; Dependence on Third Party Suppliers."

INTELLECTUAL PROPERTY

It is the Company's policy to aggressively protect its investments in
technology and marketing by filing patent and trademark applications in the
U.S. and key foreign countries. The Company also relies on trade secrets,
know-how, licensing opportunities, and collaborative relationships to develop
and maintain its competitive position.

As of December 31, 1997, the Company had approximately 43 U.S. patents
and 85 foreign patents issued or allowed. These patents cover various aspects
of transdermal technology including transdermal patch formulations (such as
those used in hormone replacement therapy, contraception, and nicotine
dependence therapy) and glucose monitoring systems. The Company has numerous
additional patent applications pending worldwide.

The Company's GlucoWatch system incorporates technology developed
in-house as well as technology licensed exclusively to the Company by the
Regents of the University of California ("Regents"). Regents holds several
U.S. patents covering technology for transdermal extraction of glucose and
other analytes. Corresponding

S-20

<PAGE>

foreign patent applications are also pending. The Company has an exclusive
license worldwide under these patents. See "Risk Factors--Intellectual
Property."

GOVERNMENT REGULATION

The development, manufacture and marketing of drug delivery systems and
diagnostic devices are subject to regulation by the FDA and other U.S. and
foreign federal, state and local entities. These entities regulate, among
other things, research and development activities and the testing,
manufacture, safety, effectiveness, labeling, storage, record keeping,
approval, advertising and promotion of the Company's products. Sales of the
Company's products outside the U.S. are subject to comparable regulatory
requirements. These requirements vary widely from country to country.

FDA permission to market and distribute a new device can be obtained in
one of two ways. If a new or significantly modified device is "substantially
equivalent" to an existing legally marketed device, the new device can be
commercially introduced after submission of a 510(k) notification to the FDA,
and after the subsequent clearance or approval by the FDA. Changes to
existing devices that do not significantly affect safety or effectiveness can
be made by the Company without a 510(k) notification.

The second, more comprehensive approval process applies to a new device
that is not substantially equivalent to an existing product. First, the
Company must conduct clinical trials in compliance with testing protocols
approved by an Institutional Review Board ("IRB") for the participating
research institution and the FDA's investigational device exemption
regulations. Second, the Company must submit a PMA application that contains,
among other things, the results of the clinical trials. The PMA application
also contains other information required under the Federal Food, Drug, and
Cosmetic Act, such as a full description of the device and its components, a
full description of the methods, facilities and controls used for
manufacturing and proposed labeling. Finally, the manufacturing site for the
product subject to the PMA must operate using CGMP and pass an FDA
Pre-Approval Inspection ("PAI") before product approvals.

The process required by the FDA before a drug delivery system may be
marketed in the U.S. depends on whether the compound has existing approval
for use in other dosage forms. If the drug is a new chemical entity that has
not been approved, then the process includes (i) pre-clinical laboratory and
animal tests, (ii) the filing of an Investigational New Drug ("IND")
application, (iii) adequate and controlled human clinical trials to establish
the safety and efficacy of the drug in its intended indication and (iv) FDA
approval of an NDA. If the drug has been previously approved, then the
approval process is similar, except that certain toxicity tests normally
required for the IND and NDA applications may not be necessary. In addition
to the foregoing, the FDA requires proof that the drug delivery system
delivers sufficient quantities of the drug to the bloodstream to produce the
desired therapeutic result.

The results of preclinical studies and clinical studies are submitted to
the FDA in a submission for approval or clearance of the marketing and
commercial shipment of a drug delivery or diagnostic system. The FDA may deny
a clearance or approval if applicable regulatory criteria are not satisfied,
or may require additional clinical testing. Even if such data are submitted,
the FDA may ultimately decide that the submission does not satisfy the
criteria for clearance or approval. Product approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems occur
after the product reaches the market. The FDA may require testing in addition
to surveillance programs to monitor the effect of products that have been
commercialized, and it has the power to prevent or limit further marketing of
the product based on the results of these post-marketing programs.

Cygnus' drug delivery product licensees historically have been
responsible for the clinical and regulatory approval procedures. Cygnus has
participated in this process by submitting to the licensee portions of the
Drug Master File maintained by Cygnus and data concerning the manufacturing
process for the drug delivery system. Cygnus' ability to manufacture and sell
products developed under contract depends upon the licensee's completing
satisfactory clinical trials and obtaining the foregoing approvals or
clearances. Cygnus may prepare and submit an IND application, or obtain
Non-Significant Risk device investigation status from an IRB, and perform
initial clinical

S-21

<PAGE>

studies before licensing the product for marketing. The Company is
increasingly taking a more active role with its collaborative partners in the
clinical trials and regulatory processes of its products.

There can be no assurance that problems will not arise that could delay
or prevent the commercialization of the Company's products, or that the FDA,
state and foreign regulatory agencies will be satisfied with the results of
the clinical trials and approve the marketing of any products. See "Risk
Factors--Regulatory Approvals Uncertain."

LEGAL PROCEEDINGS

On June 30, 1994, Sanofi filed a request for arbitration against Cygnus
with the International Court of Arbitration. In its request for arbitration,
Sanofi alleged that Cygnus breached its existing contract with Sanofi by,
among other things, entering into a product development agreement with
another company for the development of transdermal systems in the field of
hormone replacement therapy (which agreements pertain to each of the
Company's hormone replacement products other than FemPatch). Sanofi, in the
original filing sought to recover from Cygnus in excess of $60.0 million for
damages attributable to the alleged breach. International Chambers of
Commerce (the "Tribunal") announced an interim award in the arbitration
proceedings in October 1996. The Tribunal found that two transdermal products
for hormone replacement therapy licensed by Cygnus to another company fall
within the scope of an exclusive license previously granted to Sanofi.

In September, 1997, the Company and Sanofi agreed to a settlement of the
arbitration dispute. Under the terms of the settlement, Cygnus (i) paid
Sanofi $14.0 million in cash in January 1998, (ii) will make royalty payments
of between 6.5% and 8.5% of any and all net sales of two products, which are
subject to minimum payments in an aggregate amount equal to $17.0 million,
commencing in 2001 and ending in 2005, whether or not any net sales of the
two products have occurred, and (iii) issued a convertible promissory note in
the principal amount of $6.0 million, payable in full at the end of four
years and bearing interest at 6.5% per annum. The note is convertible into
the Company's Common Stock at Sanofi's option, exercisable at any time during
the four year term, at a conversion rate of $21.725 per share. Overall,
Cygnus' non-recurring expenses attributable to the arbitration settlement
recorded in the quarter ended September 30, 1997 totaled $39.6 million, of
which $23 million is long-term.

In May 1997 Cygnus reported it had initiated arbitration proceedings
against Pharmacia & Upjohn ("Pharmacia") relating to Nicotrol, Cygnus'
smoking cessation patch. In March of this year, Cygnus announced that
Pharmacia exercised its option to purchase the U.S. manufacturing rights of
Nicotrol. The agreement between Cygnus and Pharmacia provided that Pharmacia
would be obligated to pay Cygnus for, among other things, existing inventory
costs and for certain purchase order commitments. Pharmacia disputes their
obligations regarding certain purchase order commitments. The arbitration is
intended to resolve these matters. Separately, Cygnus and Pharmacia are not
in agreement regarding certain royalty calculations for 1996 and 1997. If
this issue is unable to be resolved by the two companies, it could become
part of the arbitration proceedings. However, the Company does not believe
the resolution of this issue could have a material adverse effect on its
financial position or results of operations.

EMPLOYEES

As of December 31, 1997, the Company had 157 full time employees. Of
this total number of employees, 66 were engaged in research and development,
including process development, 26 in scientific affairs and quality
assurance, 25 in general administrative, and 40 in operations. None of the
Company's employees is represented by a labor union. Cygnus has experienced
no work stoppages and it believes its employee relations are good.

The Company's success will depend in large part on the continued
services of its scientific, managerial and manufacturing personnel. The loss
of a significant group of key personnel could have a material adverse effect
on the Company. The Company's success also depends upon its ability to
continue to attract and retain other highly qualified scientific, managerial
and manufacturing personnel. Competition for such personnel is intense. In
this respect, the Company competes with numerous pharmaceutical and health
care companies, as well as universities

S-22

<PAGE>

and nonprofit research organizations. There can be no assurance that the
Company will continue to be able to attract and retain sufficient qualified
personnel.

PROPERTIES

Cygnus leases approximately 92,000 square feet in four buildings. Three
are located in Redwood City, California and the fourth is located in Menlo
Park, California. The headquarters building, approximately 38,000 square
feet, is used for laboratories and administrative offices. The manufacturing
building, approximately 21,000 square feet, is wholly dedicated to
manufacturing and support. The third facility, also in Redwood City,
California, has approximately 11,000 square feet of which approximately 8,000
square feet are utilized for additional administrative offices and the
remainder is reserved for expansion purposes. The fourth facility, which is
located in Menlo Park, has approximately 22,000 square feet, and is used for
storage of manufacturing materials and final products.

The three facilities in Redwood City are leased through 1998 with an
option to renew at the then fair market value through 2003. The facility in
Menlo Park is leased over a three year period ending in 1999.

The manufacturing facility was designed and constructed to comply with
CGMP standards. Cygnus has received licenses from the California Department
of Health Services and the United States Drug Enforcement Agency for the
manufacture of drug products in this facility, and has filed a Drug Master
File for the facility with the FDA. The Company believes that this
manufacturing facility has sufficient capacity to meet operating requirements
and satisfy foreseeable future demands for its current commercial products.
To the extent that the manufacturing facility is not used for commercial
production, the Company intends to maintain a minimum level of staffing and
utilize the excess capacity for producing clinical supplies and process
improvement.

As the Company completes the development of its hormone replacement
products, it will begin evaluating its existing manufacturing plans under
which a new manufacturing site may become necessary.

S-23

<PAGE>

PLAN OF DISTRIBUTION

The shares of Common Stock offered hereby are being offered for sale
directly by the Company to certain institutional investors at a negotiated
price of $15.25 per share. Definitive prospectuses will be distributed to
all investors at the time of pricing, informing investors of the closing
date, which will be scheduled for the same day as pricing. The termination
date of this offering is February 4, 1998, subject to extension by mutual
agreement by the Company and the institutional buyers. The sale of Common
Stock to such institutional buyers will be effected pursuant to a Stock
Purchase Agreement. Subject to the terms and conditions of the Stock Purchase
Agreement, the institutional buyers have agreed to purchase an aggregate of
905,740 shares of the Company's Common Stock.

LEGAL MATTERS

Certain legal matters with respect to the legality of the Common Stock
and the validity of the securities offered hereby are being passed upon for
the Company by Brobeck, Phleger & Harrison LLP, Palo Alto, California.

S-24
<PAGE>
PROSPECTUS

$90,000,000

CYGNUS, INC.

DEBT SECURITIES AND COMMON STOCK
------------------------

Cygnus, Inc. ("Cygnus" or the "Company") may from time to time offer,
together or separately, its (i) debt securities (the "Debt Securities"), which
may be either senior debt securities (the "Senior Debt Securities") or
subordinated debt securities (the "Subordinated Debt Securities") and (ii)
shares of its Common Stock, $.001 par value per share (the "Common Stock"). The
Debt Securities and the Common Stock are collectively referred to herein as the
"Securities".

The Securities offered pursuant to this Prospectus may be issued in one or
more series or issuances and will be limited to $90,000,000 aggregate public
offering price (or its equivalent (based on the applicable exchange rate at the
time of the sale) in one or more foreign currencies, currency units or composite
currencies as shall be designated by the Company). Certain specific terms of the
particular Securities in respect of which this Prospectus is being delivered are
set forth in the accompanying Prospectus Supplement (the "Prospectus
Supplement"), including, where applicable, (i) in the case of Debt Securities,
the specific title, aggregate principal amount, the denomination, whether such
Debt Securities are secured or unsecured obligations, whether such Debt
Securities are senior or subordinated, maturity, premium, if any, the interest
rate or rates (which may be fixed, floating or adjustable), the time and method
of calculating payment of interest, if any, the place or places where principal
of (and premium, if any) and interest, if any, on such Debt Securities will be
payable, the currency in which principal of (and premium, if any) and interest,
if any, on such Debt Securities will be payable, any terms of redemption at the
option of the Company or the Holder, any sinking fund provisions, terms for any
conversion into other Securities, the initial public offering price and other
special terms and (ii) in the case of Common Stock, the number of shares offered
for sale by the Company and the initial public offering price or method of
determining the initial public offering price. If so specified in the applicable
Prospectus Supplement, Debt Securities of a series may be issued in whole or in
part in the form of one or more temporary or permanent global securities. The
Company's Common Stock is listed on the Nasdaq National Market under the symbol
"CYGN." Any Common Stock sold pursuant to a Prospectus Supplement will be listed
for quotation on such market.

Unless otherwise specified in a Prospectus Supplement, the Senior Debt
Securities, when issued, will be unsecured and will rank equally with all other
unsecured and unsubordinated indebtedness of the Company. The Subordinated Debt
Securities, when issued, will be subordinated in right of payment to all Senior
Debt (as defined) of the Company, including any outstanding Senior Debt
Securities. See "Description of Debt Securities--Subordination of Subordinated
Debt Securities."

The Prospectus Supplement may contain information concerning U.S. federal
income tax considerations, if applicable to the Securities offered.

The Securities may be sold directly, through agents, underwriters or dealers
as designated from time to time, or through a combination of such methods. See
"Plan of Distribution." If agents of the Company or any dealers or underwriters
are involved in the sale of the Securities in respect of which the Prospectus is
being delivered, the names of such agents, dealers or underwriters and any
applicable commissions or discounts, if any, are set forth in or may be
calculated from the Prospectus Supplement with respect to such Securities.

This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement. Any statement contained in this
Prospectus will be deemed to be modified or superseded by any inconsistent
statement contained in the accompanying Prospectus Supplement.

SEE "RISK FACTORS" ON PAGE 3 OF THIS PROSPECTUS FOR A DESCRIPTION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 12, 1997.
<PAGE>
AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, NW, Washington, D.C. 20549, and at the Commission's
Regional Offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, NW, Washington, D.C.
20549, at prescribed rates. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the World Wide Web site is http://www.sec.gov. The Common Stock is listed for
quotation on the Nasdaq National Market under the symbol "CYGN." Reports and
other information concerning the Company may be inspected at the offices of the
Nasdaq Stock Market at 1735 K Street, Washington, D.C. 20006.

The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Securities. This Prospectus which
constitutes part of the Registration Statement does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement.

Statements contained in this Prospectus as to the contents of any contract
or other document are not necessarily complete, and in each instance, reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents have been filed with the Commission and are
incorporated herein by reference:

(a) The Company's Annual Report on Form 10-K for the year ended December
31, 1996;

(b) The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31 and June 30, 1997; and

(c) The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A for such securities, including
any amendments or reports filed for the purpose of updating such
description.

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Registration Statement of which
this Prospectus forms a part and prior to the termination of the offering of the
Securities offered hereby shall be deemed to be incorporated by reference into
this Prospectus and be a part hereof from the dates of filing of such documents.

Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of the Registration Statement or this Prospectus to the extent that
a statement contained herein, in a Prospectus Supplement or in any other
document subsequently filed with the Commission which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded

2
<PAGE>
shall not be deemed, except as so modified or superseded, to constitute a part
of the Registration Statement or this Prospectus.

The Company will furnish without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents incorporated by
reference, other than exhibits to such documents. Requests should be directed to
Corporate Marketing, Cygnus, Inc., at the principal executive offices of the
Company. Cygnus, Inc., 400 Penobscot Drive, Redwood City, California 94063-4719,
telephone: (650) 369-4300.

THE COMPANY

Cygnus, Inc. ("Cygnus" or the "Company") is engaged in the development of
diagnostic and drug delivery systems, designed to satisfy unmet medical needs
cost-effectively. The Company's current efforts are primarily focused on two
technological platforms: a painless, bloodless and automatic glucose monitoring
device and transdermal drug delivery systems. The Company's products in the most
advanced stages of development include two in the market
(Nicotrol-Registered Trademark- and FemPatch-Registered Trademark-) and several
in different stages of clinical trials.

Cygnus, the Cygnus logo, GlucoWatch and AutoSensor are trademarks of the
Company. FemPatch is a registered trademark of Warner-Lambert and Nicotrol is a
registered trademark of Pharmacia & Upjohn. All other trademarks included in
this Prospectus are the property of their respective holders.

The Company was incorporated in the State of California in 1985, and
reincorporated in the State of Delaware in 1994. The Company's corporate
headquarters and principal executive offices are located at 400 Penobscot Drive,
Redwood City, California 94063-4719, telephone number (650) 369-4300.

RECENT DEVELOPMENTS

On June 30, 1994, Sanofi, S.A. ("Sanofi") filed a request for arbitration
against Cygnus with the International Court of Arbitration. In its request for
arbitration, Sanofi alleged that Cygnus breached its existing contract with
Sanofi by, among other things, entering into a product development agreement
with another company for the development of transdermal systems in the field of
hormone replacement therapy. The International Chambers of Commerce (the
"Tribunal") announced an interim award in the arbitration proceedings in October
1996. The Tribunal found that two transdermal products for hormone replacement
therapy licensed by Cygnus to another company fall within the scope of an
exclusive license previously granted to Sanofi. In September 1997, the Company
and Sanofi agreed to a settlement of the arbitration dispute. Under the terms of
the settlement, Cygnus (i) will pay Sanofi $14.0 million in cash, (ii) will make
royalty payments of between 6.5% to 8.5% of any and all net sales of two
specific products, which are subject to minimum payments in an aggregate amount
equal to $17.0 million, commencing in 2001 and ending in 2005, whether or not
any net sales of the two related products have occurred, and (iii) will issue a
convertible promissory note in the principal amount of $6.0 million payable in
full at the end of four years and bearing interest at 6.5% per annum. The note
will be convertible into the Company's Common Stock at Sanofi's option,
exercisable at any time during the four year term, at a conversion rate of
$21.725 per share. Overall, Cygnus' non-recurring expenses attributable to the
arbitration settlement recorded in the quarter ended September 30, 1997 totalled
approximately $39.6 million, of which $23.0 million is long-term.

RISK FACTORS

Prior to making an investment decision with respect to the Securities
offered hereby, prospective investors should carefully consider the specific
factors set forth under the caption "Risk Factors" in the applicable Prospectus
Supplement pertaining thereto, together with all of the other information
appearing herein or therein or incorporated by reference herein, in light of
their particular investment objectives and financial circumstances.

3
<PAGE>
USE OF PROCEEDS

Unless otherwise indicated in an accompanying Prospectus Supplement, the net
proceeds to be received by the Company from the sale of the Securities will be
used for general corporate purposes, including capital expenditures and to meet
working capital needs. Pending such uses, the Company will invest the net
proceeds in interest-bearing securities.

RATIO OF EARNINGS TO FIXED CHARGES

The Company has a history of operating and net losses, and therefore no
earnings have been available to cover fixed charges. Fixed charges consist of
interest, whether expensed or capitalized, and totalled $307,222, $449,383,
$291,964, $548,387, $744,311 and $718,730 for each of the five years in the
period ended December 31, 1996 and for the nine months ended September 30, 1997,
respectively.

DESCRIPTION OF DEBT SECURITIES

The Senior Debt Securities are to be issued under an Indenture (the "Senior
Indenture"), between the Company, as Issuer, and State Street Bank and Trust
Company of California, N.A., as Trustee (the "Trustee"). The Subordinated Debt
Securities are to be issued under a separate Indenture (the "Subordinated
Indenture"), also between the Company, as issuer, and State Street Bank and
Trust Company of California, N.A., as Trustee. The Senior Indenture and the
Subordinated Indenture are sometimes referred to collectively as the
"Indentures." A copy of the form of each Indenture is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The Debt Securities
may be issued from time to time in one or more series. The particular terms of
each series, or of Debt Securities forming a part of a series, which are offered
by a Prospectus Supplement will be described in such Prospectus Supplement.

The following summaries of certain provisions of the Indentures do not
purport to be complete and are subject, and are qualified in their entirety by
reference, to all the provisions of the Indentures, including the definitions
therein of certain terms, and, with respect to any particular Debt Securities,
to the description of the terms thereof included in the Prospectus Supplement
relating thereto. Wherever particular Sections or defined terms of the
Indentures are referred to herein or in a Prospectus Supplement, such Sections
or defined terms are incorporated by reference herein or therein, as the case
may be.

GENERAL

The Indentures will provide that Debt Securities in separate series may be
issued thereunder from time to time without limitation as to aggregate principal
amount. The Company may specify a maximum aggregate principal amount for the
Debt Securities of any series. (Section 301) The Debt Securities are to have
such terms and provisions which are not inconsistent with the Indentures,
including as to maturity, principal and interest, as the Company may determine.
Unless otherwise specified in the applicable Prospectus Supplement, the Senior
Debt Securities when issued will be unsecured and unsubordinated obligations of
the Company and will rank on a parity with all other unsecured and
unsubordinated indebtedness of the Company. The Subordinated Debt Securities
when issued will be subordinated in right of payment to the prior payment in
full of all Senior Debt of the Company, including any outstanding Senior Debt
Securities, as described under "Subordination of Subordinated Debt Securities"
and in the applicable Prospectus Supplement.

The applicable Prospectus Supplement will set forth whether the Debt
Securities offered shall be Senior Debt Securities or Subordinated Debt
Securities, and the price or prices at which the Debt Securities to be offered
will be issued, and will describe the following terms of such Debt Securities:
(1) the title of such Debt Securities; (2) any limit on the aggregate principal
amount of such Debt Securities or the series of which they are a part; (3) the
Person to whom any interest on a Debt Security shall be payable, if other than
the Person in whose name that Debt Security (or one or more predecessor Debt
Securities) is registered at the close of business on the Regular Record Date
for such interest; (4) the date or dates on

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which the principal of any of such Debt Securities will be payable; (5) the rate
or rates at which any of such Debt Securities will bear interest, if any, the
date or dates from which any such interest will accrue, the Interest Payment
Dates on which any such interest will be payable and the Regular Record Date for
any such interest payable on any Interest Payment Date; (6) the place or places
where the principal of and any premium and interest on any of such Debt
Securities will be payable; (7) the period or periods within which, the price or
prices at which and the terms and conditions on which any of such Debt
Securities may be redeemed, in whole or in part, at the option of the Company;
(8) the obligation, if any, of the Company to redeem or purchase any of such
Debt Securities pursuant to any sinking fund or analogous provision or at the
option of the Holder thereof, and the period or periods within which, the price
or prices at which and the terms and conditions on which any of such Debt
Securities will be redeemed or purchased, in whole or in part, pursuant to any
such obligation; (9) the denominations in which any of such Debt Securities will
be issuable, if other than denominations of $1,000 and any integral multiple
thereof; (10) if the amount of principal of or any premium or interest on any of
such Debt Securities may be determined with reference to an index or pursuant to
a formula, the manner in which such amounts will be determined; (11) if other
than the currency of the United States of America, the currency, currencies or
currency units in which the principal of or any premium or interest on any of
such Debt Securities will be payable (and the manner in which the equivalent of
the principal amount thereof in the currency of the United States of America is
to be determined for any purpose, including for the purpose of determining the
principal amount deemed to be Outstanding at any time); (12) if the principal of
or any premium or interest on any of such Debt Securities is to be payable, at
the election of the Company or the Holder thereof, in one or more currencies or
currency units other than those in which such Debt Securities are stated to be
payable, the currency, currencies or currency units in which payment of any such
amount as to which such election is made will be payable, the periods within
which and the terms and conditions upon which such election is to be made and
the amount so payable (or the manner in which such amount is to be determined);
(13) if other than the entire principal amount thereof, the portion of the
principal amount of any of such Debt Securities which will be payable upon
declaration of acceleration of the Maturity thereof; (14) if the principal
amount payable at the Stated Maturity of any of such Debt Securities will not be
determinable as of any one or more dates prior to the Stated Maturity, the
amount which will be deemed to be such principal amount as of any such date for
any purpose, including the principal amount thereof which will be due and
payable upon any Maturity other than the Stated Maturity or which will be deemed
to be Outstanding as of any such date (or, in any such case, the manner in which
such deemed principal amount is to be determined); (15) if applicable, that such
Debt Securities, in whole or any specified part, are defeasible pusuant to the
provisions of the Indentures described under "Defeasance and Covenant
Defeasance--Defeasance and Discharge" or "Defeasance and Covenant
Defeasance--Defeasance of Certain Covenants," or under both such captions; (16)
if applicable, the terms of any right to convert Debt Securities into shares of
Common Stock of the Company or other securities or property; (17) whether any of
such Debt Securities will be issuable in whole or in part in the form of one or
more Global Securities and, if so, the respective Depositaries for such Global
Securities, the form of any legend or legends to be borne by any such Global
Security in addition to or in lieu of the legends referred to under "Form,
Exchange and Transfer" or "Global Securities" and, if different from those
described under such captions, any circumstances under which any such Global
Security may be exchanged in whole or in part for Securities registered, and any
transfer of such Global Security in whole or in part may be registered, in the
names of Persons other than the Depositary for such Global Security or its
nominee; (18) any addition to or change in the Events of Default applicable to
any of such Debt Securities and any change in the right of the Trustee or the
Holders to declare the principal amount of any of such Debt Securities due and
payable; (19) any addition to or change in the covenants in the Indentures
described under "Restrictive Covenants" applicable to any of such Debt
Securities; and (20) any other terms of such Debt Securities not inconsistent
with the provisions of the relevant Indenture. (Section 301)

Debt Securities, including Original Issue Discount Securities, may be sold
at a substantial discount below their principal amount. Certain special United
States federal income tax considerations (if any)

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applicable to Debt Securities sold at an original issue discount will be
described in the applicable Prospectus Supplement under "United States
Taxation." In addition, certain special United States federal income tax or
other considerations (if any) applicable to any Debt Securities which are
denominated in a currency or currency unit other than United States dollars will
be described in the applicable Prospectus Supplement.

CONVERSION RIGHTS

The terms on which Debt Securities of any series are convertible into Common
Stock or other securities or property will be set forth in the Prospectus
Supplement relating thereto. Such terms shall include provisions as to whether
conversion is mandatory or at the option of the Holder and may include
provisions pursuant to which the number of shares of Common Stock or other
securities or property to be received by the Holders of Debt Securities upon
conversion would be calculated according to the market price of Common Stock or
other securities or property as of a time stated in the applicable Prospectus
Supplement. (Article Fourteen)

SUBORDINATION OF SUBORDINATED DEBT SECURITIES

Unless otherwise indicated in the Prospectus Supplement, the following
provisions will apply to the Subordinated Debt Securities.

The Subordinated Debt Securities will, to the extent set forth in the
Subordinated Indenture, be subordinate in right of payment to the prior payment
in full of all Senior Debt, including the Senior Debt Securities. In the event
of any insolvency or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization, debt restructuring or other similar case or
proceeding in connection therewith, relative to the Company or to its creditors,
as such, or to its assets, or any liquidation, dissolution or other winding up
of the Company, whether voluntary or involuntary and whether or not involving
insolvency or bankruptcy, or any assignment for the benefit of creditors or any
other marshaling of assets and liabilities of the Company, the holders of Senior
Debt will be entitled to receive payment in full of all amounts due or to become
due on or in respect of all Senior Debt in cash or other payment satisfactory to
the holders of Senior Debt before the Holders of the Subordinated Debt
Securities are entitled to receive any payment on account of principal of or any
premium or interest on the Subordinated Debt Securities or on account of the
purchase, redemption or other acquisition of Subordinated Debt Securities or
before the Company may make any sinking fund or defeasance payment to the
Trustee or any Paying Agent in accordance with the Subordinated Indenture.
Notwithstanding the foregoing, any amounts previously deposited by the Company
with the Trustee or Paying Agent in accordance with the subordination provisions
of Article Fifteen of the Subordinated Indenture at the time of such deposit may
be paid to the Holders of Subordinated Debt Securities ("Defeased Payments").
(Section 1502)

By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are not holders of Senior Debt may recover less,
ratably, than holders of Senior Debt and may recover more, ratably, than the
Holders of the Subordinated Debt Securities.

In the event that any Subordinated Debt Securities are declared due and
payable before their Stated Maturity as a result of an Event of Default, the
holders of the Senior Debt outstanding at the time such Subordinated Debt
Securities so become due and payable will be entitled to receive payment in full
of all amounts due or to become due on or in respect of all Senior Debt in cash
or other payment satisfactory to the holders of Senior Debt before the Holders
of the Subordinated Debt Securities are entitled to receive any payment by the
Company on account of the principal of or any premium or interest on the
Subordinated Debt Securities or on account of the purchase, redemption or other
acquisition of Subordinated Debt Securities or before the Company may make any
sinking fund or defeasance payment to the Trustee or any Payment Agent in
accordance with the Subordinated Indenture (other than Defeased Payments). If
the payment of Subordinated Debt Securities is accelerated because of an Event
of Default,

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the Company and the Trustee are required under the Subordinated Indenture to
promptly notify holders of Senior Debt of the acceleration. (Section 1503)

The Company may not make any payment of principal (or premium, if any) or
interest, if any, in respect of the Subordinated Debt Securities or on account
of the purchase, redemption or other acquisition of Subordinated Debt Securities
or any payment constituting a sinking fund or defeasance payment to the Trustee
or Paying Agent in accordance with the Subordinated Indenture (other than
Defeased Payments) if (i) a default in the payment of principal, premium, if
any, or interest (including a default under any repurchase or redemption
obligation) or other amounts with respect to any Senior Debt occurs and is
continuing beyond the applicable grace period or (ii) any other event of default
occurs and is continuing with respect to Designated Senior Debt (as defined)
that permits the holders thereof or their representatives to accelerate the
maturity thereof, and the Trustee under the Subordinated Indenture receives a
notice of such default (a "Payment Blockage Notice") from the Company, a holder
of such Designated Senior Debt or other person permitted to give such notice
under the Subordinated Indenture. The Company may and shall resume payments on
the Subordinated Debt Securities and may purchase, redeem or otherwise acquire
the Subordinated Debt Securities and may make a sinking fund or defeasance
payment to the Trustee or Paying Agent in accordance with the Subordinated
Indenture (a) in the case of a payment default, upon the date on which such
default is cured or waived or ceases to exist and (b) in the case of a
nonpayment default, the earlier of the date on which such nonpayment default is
cured or waived or ceases to exist or 179 days after the date on which the
applicable Payment Blockage Notice is received (unless the subordination
provisions of Article Fifteen of the Indenture prohibit the payment, purchase,
redemption, acquisition, sinking fund payment or defeasance payment at the time
of such payment, purchase, redemption, acquisition, sinking fund payment or
defeasance payment (including, without limitation, in the case of a nonpayment
referred to in clase (ii) above, as a result of a payment default with respect
to applicable Senior Debt as a consequence of the acceleration of the maturity
thereof or otherwise)). No new period of payment blockage may be commenced
unless and until 365 days have elapsed since the effectiveness of the
immediately prior Payment Blockage Notice. No nonpayment default that existed or
was continuing on the date of delivery of any Payment Blockage Notice to the
Trustee under the Subordinated Indenture shall be, or be made, the basis for a
subsequent Payment Blockage Notice. (Section 1504) In the case of Subordinated
Debt Securities that are convertible at the option of the Holder, the payment,
issuance and delivery of cash, property or securities (other than stock and
certain subordinated securities of the Company) upon conversion of a
Subordinated Debt Security will be deemed to constitute payment on account of
the principal of such Subordinated Debt Security. (Section 1515)

"Senior Debt" is defined in the Indenture to mean: the principal of (and
premium, if any) and interest, if any (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company whether or not such claim for post-petition interest is allowed in such
proceeding), on, rent with respect to, and all fees and other amounts payable in
connection with, the following, whether absolute or contingent, secured or
unsecured, due or to become due, outstanding on the date of the Subordinated
Indenture or thereafter created, incurred or assumed: (a) indebtedness for
borrowed money of the Company evidenced by a credit or loan agreement, note,
bond, debenture or other written obligation, (b) all other obligations of the
Company for money borrowed, (c) all obligations of the Company evidenced by a
note or similar instrument given in connection with the acquisition of any
businesses, properties or assets of any kind, (d) obligations of the Company (i)
as lessee under leases required to be capitalized on the balance sheet of the
lessee under generally accepted accounting principles, (ii) as lessee under
other leases for facilities, equipment or related assets, whether or not
capitalized, entered into or leased after the date of the Subordinated Indenture
for financing purposes (as determined by the Company) or (iii) under any lease
or related document (including a purchase agreement) that provides that the
Company is contractually obligated to purchase or cause a third party to
purchase the leased property and the obligations of the Company under such lease
or related document to purchase or to cause a third party to purchase such
leased property, (e) all obligations of the Company under interest rate and
currency swaps, caps, floors, collars, hedge agreements, forward contracts, or

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similar agreements or arrangements, (f) all obligations of the Company with
respect to letters of credit, bankers' acceptances or similar facilities
(including reimbursement obligations with respect to any of the foregoing), (g)
all obligations of the Company issued or assumed as the deferred purchase price
of property or services (but excluding trade accounts payable arising in the
ordinary course of business), (h) all obligations of the type referred to in
clauses (a) through (g) above of another Person and all dividends of another
Person, the payment of which, in either case, the Company has assumed or
guaranteed (or in effect guaranteed through an agreement to purchase or
otherwise (including, without limitation, "take or pay" and similar
arrangements)), or for which the Company is responsible or liable, directly or
indirectly, jointly or severally, as obligor, guarantor, or otherwise, or which
is secured by a lien on property of the Company, and all obligations of the
Company with respect thereto, and (i) renewals, extensions, modifications,
replacements, restatements and refundings of, or any indebtedness or obligation
issued in exchange for, any such indebtedness or obligation described in clauses
(a) through (h) of this paragraph; provided, however, that Senior Debt shall not
include the Subordinated Debt Securities or any such indebtedness or obligation
if the terms of such indebtedness or obligation (or the terms of the instrument
under which, or pursuant to which it is issued) expressly provide that such
indebtedness or obligation is not superior in right of payment to the
Subordinated Debt Securities.

"Designated Senior Debt" means certain existing Senior Debt (including the
Company's obligations under its existing bank term loan agreement) and the
Company's obligations under any other particular Senior Debt having an
outstanding principal amount or commitment in excess of $10.0 million in which
the instrument creating or evidencing the same or the assumption or guarantee
thereof (or related agreements or documents to which the Company is a party)
expressly provides that such Senior Debt shall be "Designated Senior Debt" for
purposes of the Subordinated Indenture and any Senior Debt so designated as
Designated Senior Debt by the Company in the applicable Prospectus Supplement
(provided that such instrument, agreement or other document may place
limitations and conditions on the right of such Senior Debt to exercise the
rights of Designated Senior Debt).

The Subordinated Indenture does not limit or prohibit the incurrence of
additional Senior Debt, which may include indebtedness that is senior to the
Subordinated Debt Securities, but subordinate to other obligations of the
Company. The Senior Debt Securities, when issued, will constitute Senior Debt.

The Prospectus Supplement may further describe the provisions, if any,
applicable to the subordination of the Subordinated Debt Securities of a
particular series.

FORM, EXCHANGE AND TRANSFER

The Debt Securities of each series will be issuable only in fully registered
form, without coupons, and, unless otherwise specified in the applicable
Prospectus Supplement, only in denominations of $1,000 and integral multiples
thereof. (Section 302)

At the option of the Holder, subject to the terms of the Indentures and the
limitations applicable to Global Securities, Debt Securities of each series will
be exchangeable for other Debt Securities of the same series of any authorized
denomination and of a like tenor and aggregate principal amount. (Section 305)

Subject to the terms of the Indentures and the limitations applicable to
Global Securities, Debt Securities may be presented for exchange as provided
above or for registration of transfer (duly endorsed or with the form of
transfer endorsed thereon duly executed) at the office of the Security Registrar
or at the office of any transfer agent designated by the Company for such
purposes. No service charge will be made for any registration or transfer or
exchange of Debt Securities, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith. Such transfer or exchange will be effected upon the Security
Registrar or such transfer agent, as the case may be, being satisfied with the
documents of title and identity of the person making the request. The Company
has appointed the Trustee as Security Registrar. Any transfer agent (in addition
to the

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Security Registrar) initially designated by the Company for any Debt Securities
will be named in the applicable Prospectus Supplement. (Section 305) The Company
may at any time designate additional transfer agents or rescind the designation
of any transfer agent or approve a change in the office through which any
transfer agent acts, except that the Company will be required to maintain a
transfer agent in each Place of Payment for the Debt Securities of each series.
(Section 1002)

If the Debt Securities of any series (or of any series and specified tenor)
are to be redeemed in part, the Company will not be required to (i) issue,
register the transfer of or exchange any Debt Security of that series (or of
that series and specified tenor, as the case may be) during a period beginning
at the opening of business 15 days before the day of mailing of a notice of
redemption of any such Debt Security that may be selected for redemption and
ending at the close of business on the day of such mailing or (ii) register the
transfer of or exchange any Debt Security so selected for redemption, in whole
or in part, except the unredeemed portion of any such Debt Security being
redeemed in part. (Section 305)

GLOBAL SECURITIES

Some or all of the Debt Securities of any series may be represented, in
whole or in part, by one or more global securities which will have an aggregate
principal amount equal to that of the Debt Securities represented thereby (a
"Global Security"). Each Global Security will be registered in the name of a
depositary (the "Depositary") or a nominee thereof identified in the applicable
Prospectus Supplement, will be deposited with such Depositary or nominee or a
custodian therefor and will bear a legend regarding the restrictions on
exchanges and registration of transfer thereof referred to below and any such
other matters as may be provided for pursuant to the Indentures.

Notwithstanding any provision of the Indentures or any Debt Security
described herein, no Global Security may be exchanged in whole or in part for
Debt Securities registered, and no transfer of a Global Security in whole or in
part may be registered, in the name of any Person other than the Depositary for
such Global Security or any nominee of such Depositary unless (i) the Depositary
has notified the Company that it is unwilling or unable to continue as
Depositary for such Global Security or has ceased to be qualified to act as such
as required by the Indentures, (ii) there shall have occurred and be continuing
an Event of Default with respect to the Debt Securities represented by such
Global Security or (iii) there shall exist such circumstances, if any, in
addition to or in lieu of those described above as may be described in the
applicable Prospectus Supplement. All securities issued in exchange for a Global
Security or any portion thereof will be registered in such names as the
Depositary may direct. (Sections 204 and 305)

As long as the Depositary, or its nominee, is the registered Holder of a
Global Security, the Depositary or such nominee, as the case may be, will be
considered the sole owner and Holder of such Global Security and the Debt
Securities represented thereby for all purposes under the Debt Securities and
the Indentures. Except in the limited circumstances referred to above, owners of
beneficial interests in a Global Security will not be entitled to have such
Global Security or any Debt Securities represented thereby registered in their
names, will not receive or be entitled to receive physical delivery of
certificated Debt Securities in exchange therefor and will not be considered to
be the owners or Holders of such Global Security or any Debt Securities
represented thereby for any purpose under the Debt Securities or the Indentures.
All payments of principal of and any premium and interest on a Global Security
will be made to the Depositary or its nominee, as the case may be, as the Holder
thereof. The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form. Those
laws may impair the ability to transfer beneficial interests in a Global
Security.

Ownership of beneficial interests in a Global Security will be limited to
institutions that have accounts with the Depositary or its nominee
("participants") and to persons that may hold beneficial interests through
participants. In connection with the issuance of any Global Security, the
Depositary will credit, on its book-entry registration and transfer system, the
respective principal amounts of Debt Securities represented by the Global
Security to the accounts of its participants. Ownership of beneficial interests
in a

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Global Security will be shown only on, and the transfer of those ownership
interests will be effected only through, records maintained by the Depositary
(with respect to participants' interests) or any such participant (with respect
to interests of persons held by such participants on their behalf). Payments,
transfers, exchanges and other matters relating to beneficial interests in a
Global Security may be subject to various policies and procedures adopted by the
Depositary from time to time. None of the Company, the Trustee or any agent of
the Company or the Trustee will have any responsibility or liability for any
aspect of the Depositary's or any participant's records relating to, or for
payments made on account of, beneficial interests in a Global Security, or for
maintaining, supervising or reviewing any records relating to such beneficial
interests.

PAYMENT AND PAYING AGENTS

Unless otherwise indicated in the applicable Prospectus Supplement, payment
of interest on a Debt Security on any Interest Payment Date will be made to the
Person in whose name such Debt Security (or one or more Predecessor Debt
Securities) is registered at the close of business on the Regular Record Date
for such interest. (Section 307)

Unless otherwise indicated in the applicable Prospectus Supplement,
principal of and any premium and interest on the Debt Securities of a particular
series will be payable at the office of such Paying Agent or Paying Agents as
the Company may designate for such purpose from time to time, except that at the
option of the Company payment of any interest may be made by check mailed to the
address of the Person entitled thereto as such address appears in the Security
Register. Unless otherwise indicated in the applicable Prospectus Supplement,
the Corporate Trust Office of the Trustee will be designated as the Company's
sole Paying Agent for payments with respect to Debt Securities of each series.
Any other Paying Agents initially designated by the Company for the Debt
Securities of a particular series will be named in the applicable Prospectus
Supplement. The Company may at any time designate additional Paying Agents or
rescind the designation of any Paying Agent or approve a change in the office
through which any Paying Agent acts, except that the Company will be required to
maintain a Paying Agent in each Place of Payment for the Debt Securities of a
particular series. (Section 1002)

All moneys paid by the Company to a Paying Agent for the payment of the
principal of or any premium or interest on any Debt Security which remain
unclaimed for a period ending the earlier of 10 business days prior to the date
such money would escheat to the State or at the end of two years after such
principal, premium or interest has become due and payable will be repaid in the
Company, and the Holder of such Debt Security thereafter may look only to the
Company for payment thereof. (Section 1003)

RESTRICTIVE COVENANTS

Unless otherwise indicated in the applicable Prospectus Supplement, the
following provisions will apply to the Senior Debt Securities.

LIMITATIONS ON LIENS

The Senior Indenture will provide that the Company will not issue, incur,
create, assume or guarantee, and will not permit any Restricted Subsidiary (as
defined below) to issue, incur, create, assume or guarantee, any debt for
borrowed money secured by a mortgage, security interest, pledge, lien, charge or
other encumbrance ("mortgages") upon any Principal Property (as defined below)
of the Company or any Restricted Subsidiary or upon any shares of stock or
indebtedness of any Restricted Subsidiary (whether such Principal Property,
shares or indebtedness are now existing or owned or hereafter created or
acquired) without in any such case effectively providing concurrently with the
issuance, incurrence, creation, assumption or guarantee of any such secured
debt, or the grant of a mortgage with respect to any such indebtedness, that the
Senior Debt Securities (together with, if the Company shall so determine, any
other indebtedness of or guarantee by the Company or such Restricted Subsidiary
ranking equally with the

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Senior Debt Securities) shall be secured equally and ratably with (or, at the
option of the Company, prior to) such secured debt. The foregoing restriction,
however, will not apply to: (a) mortgages on property existing at the time of
acquisition thereof by the Company or any Subsidiary, provided that such
mortgages were in existence prior to the contemplation of such acquisition, (b)
mortgages on property, shares of stock or indebtedness or other assets of any
corporation existing at the time such corporation becomes a Restricted
Subsidiary, provided that such mortgages are not incurred in anticipation of
such corporation becoming a Restricted Subsidiary; (c) mortgages on property,
shares of stock or indebtedness existing at the time of acquisition thereof by
the Company or a Restricted Subsidiary or mortgages thereon to secure the
payment of all or any part of the purchase price thereof, or mortgages on
property, shares of stock or indebtedness to secure any indebtedness for
borrowed money incurred prior to, at the time of, or within 270 days after, the
latest of the acquisition thereof, or, in the case of property, the completion
of construction, the completion of improvements, or the commencement of
substantial commercial operation of such property for the purpose of financing
all or any part of the purchase price thereof, such construction, or the making
of such improvements; (d) mortgages to secure indebtedness owing to the Company
or to a Restricted Subsidiary; (e) mortgages existing at the date of the Senior
Indenture; (f) mortgages on property of a corporation existing at the time such
corporation is merged into or consolidated with the Company or a Restricted
Subsidiary or at the time of a sale, lease or other disposition of the
properties of a corporation as an entirety or substantially as an entirety to
the Company or a Restricted Subsidiary, provided that such mortgage was not
incurred in anticipation of such merger or consolidation or sale, lease or other
disposition; (g) mortgages in favor of the United States or any State, territory
or possession thereof (or the District of Columbia), or any department, agency,
instrumentality or political subdivision of the United States or any State,
territory or possession thereof (or the District of Columbia), to secure
partial, progress, advance or other payments pursuant to any contract or statute
or to secure any indebtedness incurred for the purpose of financing all or any
part of the purchase price or the cost of constructing or improving the property
subject to such mortgages; (h) mortgages created in connection with the
acquisition of assets or a project financed with, and created to secure, a
Nonrecourse Obligation (as defined below); and (i) extensions, renewals,
refinancings or replacements of any mortgage referred to in the foregoing
clauses (a), (b), (c), (d), (e), (f), (g), and (h), provided, however, that any
mortgages permitted by any of the foregoing clauses (a), (b), (c), (d), (e),
(f), (g), and (h) shall not extend to or cover any property of the Company or
such Restricted Subsidiary, as the case may be, other than the property, if any,
specified in such clauses and improvements thereto, and provided further that
any refinancing or replacement of any mortgages permitted by the foregoing
clauses (g) and (h) shall be of the type referred to in such clauses (g) or (h),
as the case may be.

Notwithstanding the restrictions described in the preceding paragraph, the
Company or any Restricted Subsidiary will be permitted to issue, incur, create,
assume or guarantee debt secured by a mortgage which would otherwise be subject
to such restrictions, without equally and ratably securing the Senior Debt
Securities, provided that after giving effect thereto, the aggregate amount of
all debt so secured by mortgages (not including mortgages permitted under
clauses (a) through (i) above) does not exceed 15% of the Consolidated Net
Tangible Assets (as defined below) of the Company as most recently determined on
or prior to such date.

LIMITATIONS ON SALE AND LEASE BACK TRANSACTIONS

The Senior Indenture will provide that the Company will not, nor will it
permit any Restricted Subsidiary to, enter into any Sale and Lease-Back
Transaction (as defined below) with respect to any Principal Property, other
than any such transaction involving a lease for a term of not more than three
years or any such transaction between the Company and a Restricted Subsidiary or
between Restricted Subsidiaries, unless (a) the Company or such Restricted
Subsidiary would be entitled to incur indebtedness secured by a mortgage on the
Principal Property involved in such transaction at least equal in amount to the
Attributable Debt (as defined below) with respect to such Sale and Lease-Back
Transaction, without equally and ratably securing the Senior Debt Securities,
pursuant to the limitation on liens in the Senior

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Indenture; or (b) the Company shall apply an amount equal to the greater of the
net proceeds of such sale or the Attributable Debt with respect to such Sale and
Lease-Back Transaction within 180 days of such sale to either (or a combination
of) the retirement (other than any mandatory retirement, mandatory prepayment or
sinking fund payment or by payment at maturity) of debt for borrowed money of
the Company or a Restricted Subsidiary that matures more than 12 months after
the creation of such indebtedness or the purchase, construction or development
of other comparable property.

CERTAIN DEFINITIONS APPLICABLE TO COVENANTS

The term "Attributable Debt" when used in connection with a Sale and
Lease-Back Transaction involving a Principal Property shall mean, at the time of
determination, the lesser of: (a) the fair value of such property (as determined
in good faith by the Board of Directors of the Company); or (b) the present
value of the total net amount of rent required to be paid under such lease
during the remaining term thereof (including any renewal term or period for
which such lease has been extended), discounted at the rate of interest set
forth or implicit in the terms of such lease or if not practicable to determine
such rate, the weighted average interest rate per annum (in the case of Original
Issue Discount Securities, the imputed interest rate) borne by the Senior Debt
Securities of each series outstanding pursuant to the Indenture compounded
semi-annually. For purposes of the foregoing definition, rent shall not include
amounts required to be paid by the lessee, whether or not designated as rent or
additional rent, on account of or contingent upon maintenance and repairs,
insurance, taxes, assessments, water rates and similar charges. In the case of
any lease which is terminable by the lessee upon the payment of a penalty, such
net amount shall be the lesser of the net amount determined assuming termination
upon the first date such lease may be terminated (in which case the net amount
shall also include the amount of the penalty, but no rent shall be considered as
required to be paid under such lease subsequent to the first date upon which it
may be so terminated) and the net amount determined assuming no such
termination.

The term "Consolidated Net Tangible Assets" shall mean, as of any particular
time, total assets (excluding applicable reserves and other properly deductible
items) less: (a) total current liabilities, except for (1) notes and loans
payable, (2) current maturities of long-term debt and (3) current maturities of
obligations under capital leases; and (b) goodwill, patents and trademarks, to
the extent included in total assets; all as set forth on the most recent
consolidated balance sheet of the Company and its Restricted Subsidiaries and
computed in accordance with generally accepted accounting principles.

The term "Nonrecourse Obligation" means indebtedness or other obligations
substantially related to (i) the acquisition of assets not previously owned by
the Company or any Restricted Subsidiary or (ii) the financing of a project
involving the development or expansion of properties of the Company or any
Restricted Subsidiary, as to which the obligee with respect to such indebtedness
or obligation has no recourse to the Company or any Restricted Subsidiary or any
assets of the Company or any Restricted Subsidiary other than the assets which
were acquired with the proceeds of such transaction or the project financed with
the proceeds of such transaction (and the proceeds thereof).

The term "Principal Property" shall mean the land, land improvements,
buildings and fixtures (to the extent they constitute real property interests,
including any leasehold interest therein) constituting the principal corporate
office, any manufacturing facility or any distribution center (whether now owned
or hereafter acquired) which: (a) is owned by the Company or any Subsidiary; (b)
is located within any of the present 50 states of the United States (or the
District of Columbia); (c) has not been determined in good faith by the Board of
Directors of the Company not to be materially important to the total business
conducted by the Company and its Subsidiaries taken as a whole; and (d) has a
market value on the date as of which the determination is being made in excess
of 2.0% of Consolidated Net Tangible Assets of the Company as most recently
determined on or prior to such date.

The term "Restricted Subsidiary" shall mean any Subsidiary that owns any
Principal Property; provided, however, that the term "Restricted Subsidiary"
shall not include (a) any Subsidiary which is

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principally engaged in financing receivables, or which is principally engaged in
financing the Company's operations outside the United States of America or (b)
any Subsidiary less than 80% of the voting stock of which is owned, directly or
indirectly, by the Company or by one or more other Subsidiaries, or by the
Company and one or more other Subsidiaries if the common stock of such
Subsidiary is traded on any national securities exchange or quoted on the Nasdaq
National Market or other over-the-counter market.

The term "Sale and Lease-Back Transaction" shall mean any arrangement with
any person providing for the leasing by the Company or any Restricted Subsidiary
of any Principal Property which property has been or is to be sold or
transferred by the Company or such Restricted Subsidiary to such person.

The term "Subsidiary" shall mean any corporation of which at least a
majority of the outstanding voting stock having the power to elect a majority of
the board of directors of such corporation is at the time owned, directly or
indirectly, by the Company or by one or more other Subsidiaries, or by the
Company and one or more other Subsidiaries, and the accounts of which are
consolidated with those of the Company in its most recent consolidated financial
statement in accordance with generally accepted accounting principles. For the
purposes of this definition, "voting stock" means stock which ordinarily has
voting power for the election of directors, whether at all times or only so long
as no senior class of stock has such voting power by reason of any contingency.

CONSOLIDATION, MERGER AND SALE OF ASSETS

The Indentures will provide that the Company may not consolidate with or
merge into any other Person (in a transaction in which the Company is not the
surviving corporation), or convey, transfer or lease its properties and assets
substantially as an entirety to, any Person (a "Successor Person"), unless (i)
the Successor Person (if any) is a corporation, limited liability company,
partnership, trust or other entity organized and existing under the laws of any
domestic jurisdiction and assumes the Company's obligations on the Debt
Securities and under the Indentures, (ii) immediately after giving effect to the
transaction, and treating any indebtedness which becomes an obligation of the
Company or any Subsidiary as a result of the transaction as having been incurred
by it at the time of the transaction, no Event of Default, and no event which,
after notice or lapse of time or both, would become an Event of Default, shall
have occurred and be continuing and (iii) certain other conditions are met.
(Section 801)

EVENTS OF DEFAULT

Each of the following will constitute an Event of Default under the
Indentures with respect to Debt Securities of any series: (a) failure to pay
principal of or any premium on any Debt Security of that series when due,
whether or not such payment is prohibited by the subordination provisions of the
Subordinated Indenture; (b) failure to pay any interest on any Debt Securities
of that series when due, continued for 30 days, whether or not such payment is
prohibited by the subordination provisions of the Subordinated Indenture; (c)
failure to deposit any sinking fund payment, when due, in respect of any Debt
Security of that series, whether or not such deposit is prohibited by the
subordination provisions of the Subordinated Indenture; (d) failure to perform
any other covenant of the Company in the Indentures (other than a covenant
included in the Indentures solely for the benefit of a series other than that
series), continued for 60 days after written notice has been given by the
Trustee, or the Holders of at least 25% in aggregate principal amount of the
Outstanding Securities of that series, as provided in the Indentures; (e)
certain events in bankruptcy, insolvency or reorganization with respect to the
Company; and (f) any other Event of Default specified in the applicable
Prospectus Supplement. (Section 501)

The Indentures will provide that, if an Event of Default (other than an
Event of Default described in clause (e) above) with respect to the Debt
Securities of any series at the time Outstanding shall occur and be continuing,
either the Trustee or the Holders of at least 25% in aggregate principal amount
of the Outstanding Securities of that series by notice as provided in the
Indentures may declare the principal amount of the debt securities of that
series (or, in the case of any Debt Security that is an Original Issue

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Discount Security or the principal amount of which is not then determinable,
such portion of the principal amount of such Debt Security, or such other amount
in lieu of such principal amount, as may be specified in the terms of such Debt
Security) to be due and payable immediately. If an Event of Default described in
clause (e) above with respect to the Debt Securities of any series at the time
Outstanding shall occur, the principal amount of all the Debt Securities of that
series (or, in the case of any such Original Issue Discount Security or other
Debt Security, such specified amount) will automatically, and without any action
by the Trustee or any Holder, become immediately due and payable. Any payment by
the Company on the Subordinated Debt Securities following any such acceleration
will be subject to the subordination provisions of Article Fifteen of the
Subordinated Indenture. After any such acceleration, but before a judgment or
decree based on acceleration, the Holders of a majority in aggregate principal
amount of the Outstanding Securities of that series may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than the non-payment of accelerated principal (or other specified amount),
have been cured or waived as provided in the Indentures. (Section 502) For
information as to waiver of defaults, see "Modification and Waiver."

Subject to the provisions of the Indentures relating to the duties of the
Trustee in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indentures at the request or direction of any of the Holders, unless such
Holders shall have offered to the Trustee reasonable indemnity. (Section 603)
Subject to such provisions of the indemnification of the Trustee, the Holders of
a majority in aggregate principal amount of the Outstanding Securities of any
series will have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on the Trustee with respect to the Debt Securities of that
series. (Section 512)

No holder of a Debt Security of any series will have any right to institute
any proceeding with respect to the Indentures, or for the appointment of a
receiver or trustee, or for any other remedy thereunder, unless (i) such Holder
has previously given to the Trustee written notice of a continuing Event of
Default with respect to the Debt Securities of that series, (ii) the Holders of
at least 25% in aggregate principal amount of the Outstanding Securities of that
series have made a written request, and such Holder or Holders have offered
reasonable indemnity, to the Trustee to institute such proceeding as trustee and
(iii) the Trustee has failed to institute such proceeding, and has not received
from the Holders of a majority in aggregate principal amount of the Outstanding
Securities of that series a direction inconsistent with such request, within 60
days after such notice, request and offer. (Section 507) However, such
limitations do not apply to a suit instituted by a Holder of a Debt Security for
the enforcement of payment of the principal of or any premium or interest on
such Debt Security on or after the applicable due date specified in such Debt
Security. (Section 508)

The Indentures will include a covenant requiring the Company to furnish to
the Trustee annually a statement by certain of its officers as to whether or not
the Company, to their knowledge, is in default in the performance or observance
of any of the terms, provisions and conditions of the Indentures and, if so,
specifying all such known defaults. (Section 1004)

MODIFICATION AND WAIVER

Modifications and amendments of the Indentures may be made by the Company
and the Trustee with the consent of the Holders of a majority in aggregate
principal amount of the Outstanding Securities of each series affected by such
modification or amendment; provided, however, that no such modification or
amendment may, without the consent of the Holder of each Outstanding Security
affected thereby, (a) change the Stated Maturity of the principal of, or any
installment of principal of or interest on, any Debt Security, (b) reduce the
principal amount of, or any premium or interest on, any Debt Security, (c)
reduce the amount of principal of an Original Issue Discount Security or any
other Debt Security payable upon acceleration of the Maturity thereof, (d)
change the place or currency of payment of principal of, or any premium or
interest on, any Debt Security, (e) impair the right to institute suit for the

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enforcement of any payment on or with respect to any Debt Security, (f) in the
case of Subordinated Debt Securities, modify the subordination provisions in a
manner materially adverse to the Holders of the Subordinated Debt Securities,
(g) reduce the percentage in principal amount of Outstanding Securities of any
series, the consent of whose Holders is required for modification or amendment
of the Indentures, (h) reduce the percentage in principal amount of Outstanding
Securities of any series necessary for waiver of compliance with certain
provisions of the Indentures or for waiver of certain defaults or (i) modify
such provisions with respect to modification and waiver. (Section 902)

The Indentures will provide that the Holders of a majority in aggregate
principal amount of the Outstanding Securities of any series may waive, on
behalf of the Holders of all Debt Securities of such series, compliance by the
Company with certain restrictive provisions of the Indentures. (Sections 1010
and 1008 of the Senior Indenture and the Subordinated Indenture, respectively).
The Holders of a majority in principal amount of the Outstanding Securities of
any series may waive any past default under the Indentures, except a default in
the payment of principal, premium or interest and certain covenants and
provisions of the Indentures which cannot be amended without the consent of the
Holder of each Outstanding Security of such series affected. (Section 513)

The Indentures will provide that in determining whether the Holders of the
requisite principal amount of the Outstanding Securities have given or taken any
direction, notice, consent, waiver or other action under the Indentures as of
any date, (i) the principal amount of an Original Issue Discount Security that
will be deemed to be Outstanding will be the amount of the principal thereof
that would be due and payable as of such date upon acceleration of the Maturity
thereof to such date, (ii) if, as of such date, the principal amount payable at
the Stated Maturity of a Debt Security is not determinable (for example, because
it is based on an Index), the principal amount of such Debt Security deemed to
be Outstanding as of such date will be an amount determined in the manner
prescribed for such Debt Security and (iii) the principal amount of a Debt
Security denominated in one or more foreign currencies or currency units that
will be deemed to be Outstanding will be the U.S. dollar equivalent, determined
as of such date in the manner prescribed for such Debt Security, of the
principal amount of such Debt Security (or, in the case of a Debt Security
described in clause (i) or (ii) above, of the amount described in such clause).
Certain Debt Securities, including those for whose payment or redemption money
has been deposited or set aside in trust for the Holders and those that have
been fully defeased pursuant to Section 1302, will not be deemed to be
Outstanding. (Section 101)

Except in certain limited circumstances, the Company will be entitled to set
any day as a record date for the purpose of determining the Holders of
Outstanding Securities of any series entitled to give or take any direction,
notice, consent, waiver or other action under the Indentures, in the manner and
subject to the limitations provided in the Indentures. In certain limited
circumstances, the Trustee will be entitled to set a record date for action by
Holders. If a record date is set for any action to be taken by Holders of a
particular series, such action may be taken only by persons who are Holders of
Outstanding Securities of that series on the record date. To be effective, such
action must be taken by Holders of the requisite principal amount of such Debt
Securities within a specified period following the record date. For any
particular record date, this period will be 180 days or such other shorter
period as may be specified by the Company (or the Trustee, if it set the record
date), and may be shortened or lengthened (but not beyond 180 days) from time to
time. (Section 104)

DEFEASANCE AND COVENANT DEFEASANCE

If and to the extent indicated in the applicable Prospectus Supplement, and
subject to such other conditions and limitations as may be set forth in the
applicable Prospectus Supplement, the Company may elect, at its option at any
time, to have the provisions of Section 1302, relating to defeasance and
discharge of indebtedness, or Section 1303, relating to defeasance of certain
restrictive covenants in the Indenture, applied to the Debt Securities of any
series, or to any specified part of a series. (Section 1301)

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DEFEASANCE AND DISCHARGE. The Indentures will provide that, upon the
Company's exercise of its option (if any) to have Section 1302 applied to any
Subordinated Debt Securities, the provisions of Article Fifteen of the
Subordinated Indenture relating to subordination will cease to be effective and,
with respect to any Debt Securities, the Company will be discharged from all its
obligations with respect thereto (except for certain obligations to exchange or
register the transfer of Debt Securities, to replace stolen, lost or mutilated
Debt Securities, to maintain paying agencies, to hold moneys for payment in
trust and, if applicable, to effect conversions of Debt Securities) upon the
deposit in trust for the benefit of the Holders of such Debt Securities of money
or U.S. Government Obligations, or both, which, through the payment of principal
and interest in respect thereof in accordance with their terms, will provide
money in an amount sufficient to pay the principal of and any premium and
interest on such Debt Securities on the respective Stated Maturities in
accordance with the terms of the Indentures and such Debt Securities. Such
defeasance or discharge may occur only if, among other things, the Company has
delivered to the Trustee an Opinion of Counsel to the effect that the Company
has received from, or there has been published by, the United States Internal
Revenue Service a ruling, or there has been a change in tax law, in either case
to the effect that Holders of such Debt Securities will not recognize gain or
loss for federal income tax purposes as a result of such deposit, defeasance and
discharge and will be subject to federal income tax on the same amount, in the
same manner and at the same times as would have been the case if such deposit,
defeasance and discharge were not to occur. (Sections 1302 and 1304)

DEFEASANCE OF CERTAIN COVENANTS. The Indentures will provide that, upon the
Company's exercise of its option (if any) to have Section 1303 applied to any
Debt Securities, the Company may omit to comply with certain restrictive
covenants, including those described under "Restrictive Covenants" and any that
may be described in the applicable Prospectus Supplement, and the occurrence of
certain Events of Default, which are described above in clause (d) (with respect
to such restrictive covenants) under "Events of Default" and any that may be
described in the applicable Prospectus Supplement, will be deemed not to be or
result in an Event of Default, in each case with respect to such Debt
Securities, and, in the case of the Subordinated Indenture, the provisions of
Article Fifteen relating to subordination will cease to be effective with
respect to any Subordinated Debt Securities. The Company, in order to exercise
such option, will be required to deposit, in trust for the benefits of the
Holders of such Debt Securities, money or U.S. Government Obligations, or both,
which, through the payment of principal and interest in respect thereof in
accordance with their terms, will provide money in an amount sufficient to pay
the principal of and any premium and interest on such Debt Securities on the
respective Stated Maturities in accordance with the terms of the Indentures and
such Debt Securities. The Company will also be required, among other things, to
deliver to the Trustee an Opinion of Counsel to the effect that Holders of such
Debt Securities will not recognize gain or loss for federal income tax purposes
as a result of such deposit and defeasance of certain obligations and will be
subject to federal income tax on the same amount, in the same manner and at the
same times as would have been the case if such deposit and defeasance were not
to occur. In the event the Company exercised this option with respect to any
Debt Securities and such Debt Securities were declared due and payable because
of the occurrence of any Event of Default, the amount of money and U.S.
Government Obligations so deposited in trust would be sufficient to pay amounts
due on such Debt Securities at the time of their respective Stated Maturities
but may not be sufficient to pay amounts due on such Debt Securities upon any
acceleration resulting from such Event of Default, in such case, the Company
would remain liable for such payments. (Sections 1303 and 1304)

The Company may, at its option, satisfy and discharge each of the Indentures
(except for certain obligations of the Company and the Trustee, (including,
among others, the obligations to apply money held in trust) when (i) either (a)
all Debt Securities under such Indenture previously authenticated and delivered
(other than (1) Debt Securities that were destroyed, lost or stolen and that
have been replaced or paid and (2) Debt Securities for the payment of which
money has been deposited in trust or segregated and held in trust by the Company
and thereafter repaid to the Company or discharged from such trust) have been
delivered to the Trustee for cancellation or discharge from such trust) have
been delivered to the Trustee for cancellation or (b) all such Debt Securities
under such Indenture not theretofore delivered to

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the Trustee for cancellation (1) have become due and payable, (2) will become
due and payable at their Stated Maturity within one year, or (3) are to be
called for redemption within one year under arrangements satisfactory to the
Trustee for the giving of notice of redemption by the Trustee in the name and at
the expense of the Company, and the Company has deposited or caused to be
deposited with the Trustee as trust funds in trust for such purpose an amount
sufficient to pay and discharge the entire indebtedness on such Debt Securities
under such Indenture not previously delivered to the Trustee for cancellation,
for principal and any premium and interest to the date of such deposit (in the
case of Debt Securities under such Indenture which have become due and payable)
or to the Stated Maturity or redemption date as the case may be, (ii) the
Company has paid or caused to be paid all other sums payable under such
Indenture by the Company, and (iii) the Company has delivered to the Trustee an
Officer's Certificate and an Opinion of Counsel, each to the effect that all
conditions precedent relating to the satisfaction and discharge of such
Indenture have been satisfied.

NOTICES

Notices to Holders of Debt Securities will be given by mail to the addresses
of such Holders as they may appear in the Security Register. (Sections 101 and
106)

TITLE

The Company, the Trustee and any agent of the Company or the Trustee may
treat the Person in whose name a Debt Security is registered as the absolute
owner thereof (whether or not such Debt Security may be overdue) for the purpose
of making payment and for all other purposes. (Section 308)

GOVERNING LAW

The Indentures and the Debt Securities will be governed by, and construed in
accordance with, the law of the State of New York. (Section 112)

REGARDING THE TRUSTEE

The Indentures contain certain limitations on the right of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize for its own account on certain property received in
respect of any such claim as security or otherwise. (Section 613) The Trustee is
permitted to engage in certain other transactions; however, if it acquires any
conflicting interest and there is a default under the Securities of any series
for which the Trustee serves as trustee, the Trustee must eliminate such
conflict or resign. (Section 608)

DESCRIPTION OF CAPITAL STOCK

The Company's Certificate of Incorporation authorizes capital stock
consisting of 30,000,000 shares of Common Stock, $0.001 par value per share, of
which 18,934,609 shares were outstanding as of September 30, 1997, and 5,000,000
shares of preferred stock, $0.001 par value per share, none of which is
outstanding. The following summary is qualified in its entirety by reference to
the Company's Amended and Restated Certificate of Incorporation and Bylaws.

COMMON STOCK

The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders, including the election of
directors, and are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company's Amended and Restated Certificate of
Incorporation does not provide for cumulative voting with respect to the
election of directors. As a result, the holders of a majority of the shares
voting in the election of directors can elect all of the directors then standing
for election. In the event of liquidation

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or dissolution of the Company, the holders of Common Stock are entitled to
receive all assets available for distribution to the stockholders, subject to
any preferential rights of any preferred stock then outstanding. The holders of
Common Stock have no preemptive or other subscription rights, and there are no
conversion rights or redemption or sinking fund provisions with respect to the
Common Stock. All outstanding shares of Common Stock are fully paid and
nonassessable.

PREFERRED STOCK

The Company is authorized to issue 5,000,000 shares of "blank check"
preferred stock that may be issued from time to time in one or more series upon
authorization by the Company's Board of Directors. The Board of Directors,
without further approval of the stockholders, is authorized to fix the dividend
rights and terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, and any other rights, preferences, privileges and
restrictions applicable to each series of preferred stock. The issuance of
preferred stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes could, among other things, adversely
affect the voting power of the holders of Common Stock and, under certain
circumstances, make it more difficult for a third party to gain control of the
Company, discourage bids for the Company's Common Stock at a premium or
otherwise adversely affect the market price of the Common Stock. The Company has
no current plans to issue any preferred stock.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Amended and Restated Certificate of Incorporation limits the
liability of directors to the maximum extent permitted by Delaware law. Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except for
liability (i) for any breach of their duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit.

The Company's Bylaws provide that the Company shall indemnify its directors
and may indemnify its officers and employees and other agents to the fullest
extent permitted by law. The Company believes that indemnification under its
Bylaws covers at least negligence and gross negligence on the part of
indemnified parties. The Company's Bylaws also permit it to secure insurance on
behalf of any officer, director, employee or other agent for any liability
arising out of his actions in such capacity, regardless of whether the Bylaws
would permit indemnification.

The Company has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the Company's
Bylaws and Amended and Restated Certificate of Incorporation. These agreements,
among other things, indemnify the Company's directors and executive officers for
certain expenses (including attorneys' fees), judgments, fines and settlement
amounts incurred by any such person in any action or proceeding, including any
action by or in the right of the Company, arising out of such person's services
as a director or executive officer of the Company, any subsidiary of the Company
or any other company or enterprise to which the person provides services at the
request of the Company. The Company believes that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.

At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that might result in a claim for such indemnification.

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DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" transaction with
any "interested stockholder" for a period of three years after the date of the
transaction in which the person became an "interested stockholder," unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of a corporation's
voting stock. By virtue of the Company's decision not to elect out of the
statute's provisions, the statute applies to the Company. The statute could
prohibit or delay the accomplishment of mergers or other takeover or change in
control attempts with respect to the Company and, accordingly, may discourage
attempts to acquire the Company.

Stockholders who are officers and directors or their affiliates may be able
to significantly influence the election of the Company's directors and the
determination of the outcome of corporate actions requiring stockholder
approval, such as mergers and acquisitions. This may have a significant effect
in delaying, deferring or preventing a change in control of the Company and may
adversely affect the voting and other rights of other holders of Common Stock.
Certain provisions of the Company's Certificate of Incorporation, Bylaws and
equity compensation plans and Delaware law may also discourage certain
transactions involving a change in control of the Company. This may, when
combined with the Company's classified Board of Directors and the ability of the
Board of Directors to issue blank check Preferred Stock without further
stockholder approval, have the effect of delaying, deferring or preventing a
change in control of the Company and may adversely affect the voting and other
rights of other holders of Common Stock.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C. Its telephone number is (415) 743-1424.

PLAN OF DISTRIBUTION

The Company may sell the Securities separately or together, (i) to one or
more underwriters or dealers for public offering and sale by them and (ii) to
investors directly or through agents. The distribution of the Securities may be
effected from time to time in one or more transactions at a fixed price or
prices (which may be changed from time to time), at market prices prevailing at
the time of sale, at prices related to such prevailing market prices or at
negotiated prices. Each Prospectus Supplement will describe the method of
distribution of the Securities offered thereby.

In connection with the sale of the Securities, underwriters, dealers or
agents may receive compensation from the Company or from purchasers of the
Securities for whom they may act as agents, in the form of discounts,
concessions or commissions. The underwriters, dealers or agents which
participate in the distribution of the Securities may be deemed to be
underwriters under the Securities Act and any discounts or commissions received
by them and any profit on the resale of the Securities received by them may be
deemed to be underwriting discounts and commissions thereunder. Any such
underwriter, dealer or agent will be identified and any such compensation
received from the Company will be described in the Prospectus Supplement. Any
initial public offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.

Under agreements that may be entered into with the Company, underwriters,
dealers and agents may be entitled to indemnification by the Company against
certain civil liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments which the underwriters, dealers or agents
may be required to make in respect thereof.

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The Company may grant underwriters who participate in the distribution of
Securities an option to purchase additional Securities to cover over-allotments,
if any.

All Debt Securities will be new issues of securities with no established
trading market. Any underwriters to whom Debt Securities are sold by the Company
for public offering and sale may make a market in such securities, but such
underwriters will not be obligated to do so and may discontinue any market
making at any time without notice. No assurance can be given as to the liquidity
of the trading market for any Debt Securities.

Certain of the underwriters or agents and their associates may be customers
of, engage in transactions with or perform services for the Company in the
ordinary course of business.

LEGAL OPINIONS

The validity of the Securities is being passed upon for the Company by
Brobeck, Phleger & Harrison LLP, Palo Alto, California.

EXPERTS

The consolidated financial statements of Cygnus Inc. incorporated by
reference in the Cygnus, Inc. Annual Report on Form 10-K for the year ended
December 31, 1996 have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon incorporated by reference therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report, given on the
authority of such firm as experts in accounting and auditing.

20
<PAGE>

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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.

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TABLE OF CONTENTS

PAGE

Prospectus Supplement
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Price Range of Common Stock. . . . . . . . . . . . . . . . . . . . . . S-13
Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . S-24
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-24

Prospectus
Available Information. . . . . . . . . . . . . . . . . . . . . . . . . 2
Incorporation of Certain Documents by Reference. . . . . . . . . . . . 2
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Recent Developments. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Ratio of Earnings to Fixed Charges . . . . . . . . . . . . . . . . . . 4
Description of Debt Securities . . . . . . . . . . . . . . . . . . . . 4
Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . 17
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . 19
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

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905,740 SHARES

CYGNUS, INC.

COMMON STOCK

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PROSPECTUS
SUPPLEMENT
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February 4, 1998

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