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                                                                   Exhibit 10.22

                                ENDO PHARMA LLC
             AMENDED AND RESTATED 1997 EMPLOYEE STOCK OPTION PLAN

          1.  Purpose.  The purpose of this Endo Pharma LLC Amended and Restated
              -------
1997 Employee Stock Option Plan (the "Plan") is to advance the interests of Endo
Pharma LLC, a Delaware limited liability company ("Endo Pharma"), by affording
certain directors, officers, employees, consultants and agents of Endo
Pharmaceuticals Holdings Inc. (the "Company") and its subsidiaries an
opportunity to acquire a substantial proprietary interest in shares of common
stock of the Company held by Endo Pharma and thus to stimulate in such persons
increased personal interest in the success and future growth of the Company.

          2.  Definitions.
              -----------

          "Acquiring Person" shall mean, with reference to the transactions
           ----------------
referred to in Section 12(a), (i) the continuing or surviving entity of a
consolidation or merger with the Company (if other than the Company), (ii) the
transferee of all or substantially all of the assets of the Company, (iii) the
parent entity of any corporation consolidating with or merging into the Company
in a consolidation or merger in connection with which the Common Stock is
changed into or exchanged for stock or other securities of any other Person
(including such parent entity) or cash or any other property if the Company
becomes a subsidiary of such entity, or (iv) in the case of a capital
reorganization or reclassification or in any case in which the Company is a
surviving corporation in a merger not described in clause (i) or (iii) above,
the Company.

          "Affiliate" shall mean, with respect to a specified person, a person
           ---------
that directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified.

          "Board" shall mean the Board of Managers of Endo Pharma.
           -----

          "Business Day" shall mean any day other than a Saturday or a Sunday or
           ------------
a day on which commercial banking institutions in the City of New York are
authorized by law to be closed.  Any reference herein to "days" (unless Business
Days are specified) shall mean calendar days.
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          "Cash Gross Profit" shall have the meaning ascribed to such term in
           -----------------
Section 5.21(d) of the Merger Agreement.

          "Cash Gross Profit Target" shall mean the Company's attainment of a
           ------------------------
Cash Gross Profit for the fiscal year ending December 31, 2000 that equals or
exceeds $147.4 million.

          "Class A Option" shall mean an option to purchase a number of shares
           --------------
of Common Stock, as specified in an option agreement, identified as a "Class A
Option," which shall be subject to the exercise and termination provisions set
forth in Section 8(a) hereof.

          "Class B Option" shall mean an option to purchase a number of shares
           --------------
of Common Stock, as specified in an option agreement, identified as a "Class B
Option," which shall be subject to the exercise and termination provisions set
forth in Section 8(b) hereof.

          "Class C Options" shall mean, collectively, Class C1 Options, Class C2
           ---------------
Options, Class C3 Options and Class C4 Options.

          "Class C1 Option" shall mean, collectively, Class C1A Options and
           ---------------
Class C1B Options.

          "Class C1A Option" shall mean an option to purchase a number of shares
           ----------------
of Common Stock, as specified in an option agreement, identified as a "Class C1A
Option," which shall be subject to the exercise and termination provisions set
forth in Section 8(c) hereof.

          "Class C1B Option" shall mean an option to purchase a number of shares
           ----------------
of Common Stock, as specified in an option agreement, identified as a "Class C1B
Option," which shall be subject to the exercise and termination provisions set
forth in Section 8(c) hereof.

          "Class C2 Option" shall mean an option to purchase a number of shares
           ---------------
of Common Stock, as specified in an option agreement, identified as a "Class C2
Option," which shall be subject to the exercise and termination provisions set
forth in Section 8(c) hereof.

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<PAGE>

          "Class C3 Option" shall mean an option to purchase a number of shares
           ---------------
of Common Stock, as specified in an option agreement, identified as a "Class C3
Option," which shall be subject to the exercise and termination provisions set
forth in Section 8(c) hereof.

          "Class C4 Options" shall mean an option to purchase a number of shares
           ----------------
of Common Stock, as specified in an option agreement, identified as a "Class C4
Option," which shall be subject to the exercise and termination provisions set
forth in Section 8(c) hereof.

          "Class C Option Exercise Date" shall have the meaning ascribed to such
           ----------------------------
term in Section 8(c)(ii) hereof.

          "Closing Date" shall mean August 26, 1997.
           ------------

          "Code" shall mean the Internal Revenue Code of 1986, as amended from
           ----
time to time.

          "Committee" shall mean the committee appointed by the Board to
           ---------
administer the Plan and to perform the functions set forth herein.

          "Common Stock" shall mean the common stock, par value $0.01 per share,
           ------------
of the Company held by Endo Pharma, such term to include any stock into which
such Common Stock shall have been changed or any stock resulting from any
reclassification of such Common Stock.

          "Company" shall have the meaning ascribed to such term in Section 1
           -------
hereof.

          "Compelled Exercise and Sale" shall have the meaning ascribed to such
           ---------------------------
term in Section 12(b) hereof.

          "Credit Agreement" shall mean the Credit Agreement, dated as of August
           ----------------
26, 1997, among Endo Pharmaceuticals, Chase Manhattan Bank, as Administrative
Agent, Chase Securities Inc., as Arranger and the Lenders party thereto.

          "EBITDA" shall have the meaning ascribed to "Consolidated EBITDA" in
           ------
the Credit Agreement.

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          "Eligible Person" shall have the meaning ascribed to such term in
           ---------------
Section 5 hereof.

          "Employee Stockholders Agreement" shall mean the Stockholders
           -------------------------------
Agreement, dated as of July 14, 2000, by and among the Company, Endo Pharma, KIA
V and the Employee Stockholders (as such term is defined therein).

          "Endo Pharma" shall have the meaning ascribed to such term in Section
           -----------
1 hereof.

          "Endo Pharmaceuticals" shall mean Endo Pharmaceuticals Inc., a
           --------------------
Delaware corporation, and any successor thereto.

          "Exercise Notice" shall have the meaning ascribed to such term in
           ---------------
Section 8(a) hereof.

          "Existing Stock Option Plans" shall mean collectively the Plan and the
           ---------------------------
Endo Pharma LLC Amended and Restated 1997 Executive Stock Option Plan.

          "Exit Event" shall mean a sale, disposition or transfer (collectively,
           ----------
a "sale") of shares of common stock of the Company after which neither Endo
Pharma nor Kelso any longer holds any shares of common stock of the Company.

          "Fair Market Value" shall have the meaning ascribed to such term in
           -----------------
Section 4.1 of the Employee Stockholders Agreement.

          "Holder" shall mean a person to whom an Option is granted pursuant to
           ------
the Plan.

          "Implied Public Stock Price Threshold", with respect to any Class C
           ------------------------------------
Option, shall mean:

          (i)   in the case of Class C1A Options, $8.09 per share, provided,
                                                                   --------
however, that the Implied Public Stock Price Threshold with respect to Class C1
-------
Options shall be adjusted in accordance with Schedule II attached hereto;

          (ii)  in the case of Class C1B Options, $8.09 per share, provided,
                                                                   --------
however, that the Implied Public Stock Price Threshold with respect to Class C1
-------
Options shall be adjusted in accordance with Schedule II attached hereto;

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<PAGE>

          (iii)  in the case of Class C2 Options, $12.50 per share, provided,
                                                                    --------
however, that the Implied Public Stock Price Threshold with respect to Class C2
-------
Options shall be adjusted in accordance with Schedule II attached hereto;

          (iv)   in the case of Class C3 Options, $19.99 per share, provided,
                                                                    --------
however, that the Implied Public Stock Price Threshold with respect to Class C3
-------
Options shall be adjusted in accordance with Schedule II attached hereto;

          (v)    in the case of Class C4 Options, $32.66 per share, provided,
                                                                    --------
however, that the Implied Public Stock Price Threshold with respect to Class C4
-------
Options shall be adjusted in accordance with Schedule II attached hereto.

          "Kelso" shall mean, collectively, KIA V, KEP V and their permitted
           -----
transferees.

          "KEP V" shall mean Kelso Equity Partners V, L.P., a Delaware limited
           -----
partnership.

          "KIA V" shall mean Kelso Investment Associates V, L.P., a Delaware
           -----
limited partnership.

          "Merger Agreement" shall mean the Agreement and Plan of Merger,  dated
           ----------------
as of November 26, 1999 (as may be amended and/or restated from time to time),
by and among, the Company, Endo, Inc., a Delaware corporation, and Algos
Pharmaceutical Corporation, a Delaware corporation.

          "MorphiDex(R) Approval" shall mean the Company's receipt of approval
           -------------------
from the U.S. Food and Drug Administration with respect to its New Drug
Application for MorphiDex(R) for the treatment of any pain.

          "Options" shall mean, collectively, Class A Options, Class B Options,
           -------
and Class C Options.

          "Option Price" shall mean, with respect to any Option, the price per
           ------------
share for which shares of Common Stock may be purchased pursuant to such Option,
which shall initially be $2.42 per share, except for Class C1A Options as to
which the Option Price shall initially be $3.42 per share.

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<PAGE>

          "Other Securities" shall mean any stock (other than Common Stock) and
           ----------------
other securities of the Company or any other Person (corporate or otherwise)
which the Holders of the Options at any time shall be entitled to receive, or
shall have received, upon the exercise of the Options, in lieu of or in addition
to Common Stock, or which at any time shall be issuable or shall have been
issued in exchange for or in replacement of Common Stock or Other Securities.

          "Permitted Transferee" of a Holder shall mean Endo Pharma and (A) the
           --------------------
spouses, family members, heirs, executors, administrators, testamentary trustees
or legatees or beneficiaries of the Holder and (B) any trust, the beneficiaries
of which, or a corporation or partnership, the stockholders or general or
limited partners of which, include only the Holder or the spouse or family
members of the Holder; provided, however, that each such transferor has obtained
                       --------  -------
the prior written consent of the Company; provided further that the transfer to
                                          -------- -------
any such person is in compliance with all applicable federal, state and foreign
securities laws.

          "Person" shall mean a corporation, an association, a partnership, an
           ------
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.

          "Plan" shall have the meaning ascribed to such term in Section 1
           ----
hereof.

          3.  Options Available for Grant Pursuant to the Existing Stock Option
              -----------------------------------------------------------------
Plans.  The Options available for grant pursuant to the Existing Stock Option
-----
Plans shall in no case exceed, in the aggregate, the following quantities
(subject to adjustment as provided in Section 11 hereof):

          (a) in the case of Class A Options, options to purchase 2,650,382
shares of Common Stock;

          (b) in the case of Class B Options, options to purchase 2,977,957
shares of Common Stock;

          (c) in the case of Class C1A Options, options to purchase 2,000,000
shares of Common Stock;

          (d) in the case of Class C1B Options, options to purchase 2,561,911
shares of Common Stock;

                                       6
<PAGE>

          (e) in the case of Class C2 Options, options to purchase 4,743,458
shares of Common Stock;

          (f) in the case of Class C3 Options, options to purchase 7,119,725
shares of Common Stock;

          (g) in the case of Class C4 Options, options to purchase 3,561,906
shares of Common Stock.

     Notwithstanding the foregoing, the Company may from to time to time
reallocate the number of Options available for grant,  in the case of either
Class A Options or Class B Options, from such Class A Options or Class B Options
to Class C Options to the extent such Class A Options or Class B Options
available for grant are not then subject to outstanding Options under the
Existing Stock Option Plans.

          4.  Reservation of Shares.  Endo Pharma has reserved (subject to
              ---------------------
adjustment as provided in Section 11 hereof), solely for issuance and delivery
upon exercise of the Options pursuant to the Existing Stock Option Plans
25,615,339 shares of Common Stock.  All shares of Common Stock (or Other
Securities) issuable upon exercise of any Options shall be duly authorized and,
when issued upon such exercise, shall be validly issued and, in the case of
shares, fully paid and nonassessable with no liability on the part of the
Holders thereof.

          5.  Grant of Options.  Options may be granted by Endo Pharma to
              ----------------
directors, officers, employees, consultants and agents of the Company or any of
its subsidiaries, from time to time, as determined by the Committee (each, an
"Eligible Person").  In determining (i) who shall be an Eligible Person or (ii)
grants under the Plan, the Committee shall take into account such factors as it
shall deem relevant in connection with accomplishing the purposes of the Plan.

          6.  No Right to Employment or Continued Service.  Nothing in the Plan
              -------------------------------------------
or in any Option shall confer any right on any Eligible Person to continue in
the employ or service of the Company or any of its subsidiaries or shall
interfere in any way with the right of the stockholders of the Company or any of
its subsidiaries to terminate such Eligible Person's employment or service at
any time.

          7.  Administration of the Plan.  The Plan shall be administered by the
              --------------------------
Committee.  The Committee shall have full power to construe and interpret the
Plan, to establish rules for its administration and to grant Options to Eligible

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<PAGE>

Persons, in each case in accordance with the provisions of the Plan. In
addition, the Committee may delegate such of its duties under the Plan as may be
deemed by the Committee to be clerical or ministerial to such delegates as the
Committee deems appropriate. All actions taken and decisions made by the
Committee pursuant to the Plan shall be binding and conclusive on all persons
interested in the Plan.

          8.   Exercisability of Options.
               -------------------------

          (a)  Class A Options.
               ---------------

               (i)    Subject to the acceleration and forfeiture provisions set
forth in this Section 8(a), Class A Options shall become exercisable with
respect to an equal proportion of the Common Stock subject thereto on each
anniversary of the date of grant of such Class A Option, through and until the
end of the fifth anniversary of the date of grant of such Class A Option.

               (ii)   Subject to Section 10 hereof, Class A Options shall become
exercisable in full upon the occurrence of an Exit Event and the right to
exercise such Option shall terminate at 12:00 p.m. on the date of the Exit
Event. In the event that any Exit Event is contemplated, Endo Pharma will mail
or deliver to each Holder of such Option at least ten days prior to the date of
such Exit Event a notice (an "Exercise Notice") specifying that (x) an Exit
Event is contemplated and that upon such Exit Event such Option will become
exercisable pursuant to its terms, (y) the date of the contemplated Exit Event
and the terms thereof, and (z) such Option shall expire at 12:00 p.m., New York
City time, on the date of the Exit Event if not exercised prior thereto.

               (iii)  Notwithstanding anything to the contrary herein, in the
event that a Holder's employment or service with the Company or any of its
subsidiaries is terminated for any reason, with or without cause, initiated
either by the Company or any of its subsidiaries or by the Holder, any
unexercisable portion of any Class A Option held by a Holder shall expire
immediately upon termination. Any portion of any Class A Option exercisable upon
termination shall expire on the 90th day after the termination of the Holder's
employment or service if unexercised.

               (iv)   Notwithstanding anything to the contrary herein, the
Committee may accelerate the exercisability or delay or postpone the expiration
of any outstanding Class A Option at such time and under such circumstances as
the Committee, in its sole discretion, deems appropriate.

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<PAGE>

          (b)  Class B Options.
               ---------------

               (i)   Subject to the acceleration and forfeiture provisions set
forth in this Section 8(b), Class B Options shall become exercisable after
December 31, 2006; provided, however, that, in the event that the EBITDA targets
                   --------  -------
set forth on Schedule I are achieved for a particular fiscal year by Endo
Pharmaceuticals, a portion of such Class B Option equal to the fraction, the
numerator of which is one and the denominator of which is the number of fiscal
years ending between the date of the grant of such Class B Option and end of the
fifth full fiscal year of the Company after the Closing Date, inclusive, shall
become exercisable at the end of such fiscal year of the Company.
Notwithstanding the foregoing, in the event that Endo Pharmaceuticals fails to
achieve the EBITDA target for a fiscal year, and the portion of a Class B Option
with respect to such fiscal year therefore does not become exercisable on an
accelerated basis, such portion of such Class B Option will nevertheless become
exercisable at the end of a subsequent fiscal year, if Endo Pharmaceuticals
exceeds such fiscal year's EBITDA target by a margin which equals or exceeds the
shortfall amount for the year in which the EBITDA target was not achieved. Endo
Pharmaceuticals' excess over the EBITDA target for subsequent years, for
purposes of the Class B Options, shall be treated on a cumulative basis, and
applied to portions of the Class B Options in chronological order, such that the
portion of Class B Options with respect to the earliest fiscal year in which
Endo Pharmaceuticals failed to achieve the EBITDA target would become
exercisable first. The Committee may, in its discretion, delay the acceleration
of the exercisability of any fiscal year's portion of Class B Options, or any
portion thereof, until the completion of the audited financial statements for
the applicable fiscal year, in order to verify the satisfaction of the preceding
exercisability requirements.

               (ii)  Subject to Section 10 hereof, Class B Options shall become
exercisable in full upon the occurrence of an Exit Event and the right to
exercise such Option shall terminate at 12:00 p.m. on the date of the Exit
Event, provided, however, that in order for such Class B Options to become
       --------  -------
exercisable pursuant to this clause (ii), either (A) the EBITDA targets for all
previous fiscal years must have been achieved by Endo Pharmaceuticals by the
date of the Exit Event, either in the contemporaneous fiscal year or in a
subsequent fiscal year, or (B) any of the Class C1 Options have become
exercisable. In the event that any Exit Event is contemplated, Endo Pharma will
mail or deliver to each Holder of such Option at least ten days prior to the
date of such Exit Event an Exercise Notice specifying that (x) an Exit Event is
contemplated and whether such Option will become exercisable pursuant to its
terms upon such Exit Event, (y) the date of the

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<PAGE>

contemplated Exit Event and the terms thereof, and (z) such Option shall expire
at 12:00 p.m., New York City time, on the date of the Exit Event if not
exercised prior thereto.

               (iii)  Notwithstanding anything to the contrary herein, in the
event that a Holder's employment or service with the Company or any of its
subsidiaries is terminated for any reason, with or without cause, initiated
either by the Company or any of its subsidiaries or by the Holder, any
unexercisable portion of any Class B Option held by a Holder shall expire
immediately upon termination. Any portion of any Class B Option exercisable upon
termination shall expire on the 90/th/ day after the termination of the Holder's
employment or service if unexercised.

               (iv)   Notwithstanding anything to the contrary herein, the
Committee may accelerate the exercisability or delay or postpone the expiration
of any outstanding Class B Option at such time and under such circumstances as
the Committee, in its sole discretion, deems appropriate.

          (c)  Class C Options.
               ---------------

               (i)    In the event (I) the Fair Market Value of a share of
Common Stock exceeds the Implied Public Stock Price Threshold with respect to
such subclass of Class C Option (for purposes of this Section 8(c)(i) only,
"Fair Market Value" shall have the meaning ascribed to such term in Section 3.1
of the Employee Stockholders Agreement, except that "90 consecutive trading
days" shall be substituted for "ten consecutive trading days" wherever it
appears in such term and, in any event, any such 90-consecutive-trading-day-
period shall not commence until the consummation of the merger contemplated by
the Merger Agreement), (II) such Fair Market Value of each share of Common Stock
on the last trading day of such 90 consecutive trading day period is greater
than or equal to 85% of such Implied Public Stock Price Threshold, and (III) the
Holder is a director, officer, employee, consultant or agent of the Company or
any of its subsidiaries on the date on which the conditions set forth in clauses
(I) and (II) of this Section 8(c)(i) are satisfied, then the Holder shall become
vested, with respect to each subclass of such Class C Options, in options with
respect to the number of shares equal to the product of (x) the number of
outstanding Class C Options of that subclass held by a Holder and (y) the
quotient of (A) number of Class C Options of that subclass set forth on Schedule
II attached hereto and (B) the aggregate number of outstanding Class C Options
of that subclass granted pursuant to the Existing Stock Option Plans. Whether or
not some of the Holder's Class C Options vest prior to December 31,

                                       10
<PAGE>

2000 in accordance with the foregoing sentence, any Class C Options then still
unvested will continue to vest in accordance with the foregoing sentence and
Schedule II attached hereto.

               (ii)   Subject to Section 10 hereof, Class C Options shall be
exercisable, solely to the extent vested pursuant to Section 8(c)(i) hereof,
upon the earlier of the occurrence of an Exit Event or January 1, 2006 (the
"Class C Option Exercise Date") and the right to exercise such Options shall
terminate at 12:00 p.m. on the Class C Option Exercise Date. In the event that
any Exit Event is contemplated prior to January 1, 2006 and that the conditions
in clauses (I), (II) and (III) of Section 8(c)(i) hereof will be satisfied, Endo
Pharma will mail or deliver to each Holder of such Option at least ten days
prior to the date of such Exit Event an Exercise Notice specifying that (i) an
Exit Event is contemplated and that upon such Exit Event such Option will become
exercisable pursuant to its terms, (ii) the date of the contemplated Exit Event
and the terms thereof, and (iii) such Option shall expire at 12:00 p.m., New
York City time, on the Class C Option Exercise Date if not exercised prior
thereto. Any Class C Options not vested as of the Class C Option Exercise Date
shall terminate at 12:00 p.m., New York City time, on the Class C Option
Exercise Date.

               (iii)  Notwithstanding anything to the contrary herein, any
unexercisable portion of any Class C Option held by a Holder will become
immediately exercisable in full, solely to the extent then vested pursuant to
Section 8(c)(i) hereof, in the event that such Holder's employment or service
with the Company or any of its subsidiaries is terminated for any reason;
provided, however, that any such Option shall expire on the 90th day after
--------  -------
termination of the Holder's employment or service if unexercised.

          9.   Manner of Exercise.
               ------------------

          (a)  Each Option shall further state the terms and conditions of the
Option (including the conditions to exercisability thereof) and the Option
Price. An Option may be exercised, subject to this Section 9, for any or all
whole number of shares which have become purchasable under such Option. To the
extent necessary upon the exercise of an Option, Endo Pharma shall round each
fractional share issuable upon such exercise up to the next whole number.

          (b)  Subject to the terms and conditions set forth in this Plan
(including the conditions to exercisability thereof), an Option may be exercised
by the Holder during normal business hours on any Business Day, by surrender of
the

                                       11
<PAGE>

Option to Endo Pharma at its principal office, accompanied by a subscription, in
cash or by certified or official bank check payable to the order of Endo Pharma,
in the amount obtained by multiplying (x) the number of shares of Common Stock
designated in such subscription (up to the amount of shares which such Holder is
entitled to receive at such time upon exercise of the Option) by (y) the Option
Price.

          (c)  Each exercise of an Option shall be deemed to have been effected
immediately prior to the close of business on the Business Day on which an
Option shall have been surrendered to Endo Pharma, and at such time the Person
or Persons in whose name or names any certificate or certificates for shares of
Common Stock (or Other Securities) shall be issuable upon such exercise shall be
deemed to have become the Holder or Holders of record thereof.

          (d)  Endo Pharma at its expense shall deliver to the relevant Holder
(or as such Holder may direct pursuant to the Option) a certificate or
certificates representing shares of the Common Stock so purchased as soon as
reasonably practicable, but in any event within five Business Days, after
receipt of such notice. Each such certificate shall bear the legend required by
the Employee Stockholders Agreement to the effect that there are restrictions on
the transfer of shares of Common Stock.

          (e)  In the event that such exercise is in part only, Endo Pharma
shall deliver a new Option of the same class and tenor, calling in the aggregate
on the face thereof for the number of shares of Common Stock equal to the number
of such shares which such Holder would be entitled to receive at such time upon
exercise of this Option, after giving effect to such recent exercise.

          (f)  Notwithstanding anything to the contrary in the Plan, in no event
may any Option be exercised prior to the time at which the Option becomes
exercisable (as set forth in the Option) or after the expiration of such Option,
and each Option shall terminate upon the terms set forth in Sections 8 and 10
hereof.

          (g)  If, at any time, the Committee shall determine, in its sole
discretion, that the listing, registration or qualification of the shares of
Common Stock upon any securities exchange or under any applicable securities
laws, or the consent or approval of any governmental or self-regulatory agency
or body, is necessary or reasonably desirable as a condition of, or in
connection with, the issue or purchase of the shares of Common Stock under any
Option, such Option may not be exercised in whole or in part unless such
listing, registration, qualification,

                                       12
<PAGE>

consent or approval shall have been effected or obtained free of any conditions
unacceptable to the Committee.

          10.  Expiration of Options.  Notwithstanding the provisions of Section
               ---------------------
8 above, the Options will expire no later than December 31, 2012; provided,
                                                                  --------
however, that in the event that any shares of Common Stock have been sold to the
-------
public pursuant to an effective registration statement, other than a
registration statement on Form S-4 or S-8 or any successor forms under the
Securities Act of 1933, the Options will expire no later than on August 26,
2007. Any outstanding unexercised Option, or portion thereof, shall be
forfeited, whether or not exercisable, upon the expiration of such Option.

          11.  Adjustment of Number of Shares of Common Stock Issuable Upon
               ------------------------------------------------------------
Exercise.  The number and kind of shares of Common Stock purchasable upon the
--------
exercise of Options shall be subject to adjustment from time to time as follows:

          (a)  Stock Dividends; Stock Splits; Reverse Stock Splits.  In case the
               ---------------------------------------------------
Company shall (i) pay a dividend or make any other distribution with respect to
the common stock of the Company in shares of its capital stock, (ii) subdivide
the outstanding common stock of the Company, or (iii) combine the outstanding
common stock of the Company into a smaller number of shares, the number of
shares of Common Stock issuable upon exercise of the Options immediately prior
to the record date for such dividend or distribution or the effective date of
such subdivision or combination shall be adjusted so that the Holder of the
Options shall thereafter be entitled to receive the kind and number of shares of
Common Stock or Other Securities of the Company that such Holder would have
owned or have been entitled to receive after the happening of any of the events
described above, had such Options been exercised immediately prior to the
happening of such event or any record date with respect thereto. An adjustment
made pursuant to this Section 11 shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for such
event.

          (b)  No Adjustment for Dividends; No Adjustment of Option Price.
               ----------------------------------------------------------
Except as otherwise provided in this Section 11, no adjustment in respect of any
dividends declared and paid on common stock of the Company, or on any other
capital stock of the Company, shall be made during the term of an Option or upon
the exercise of an Option. Notwithstanding anything to the contrary contained in
this Plan, in the event of any adjustments to Options pursuant to this Section
11,

                                       13
<PAGE>

adjustments shall be made solely to the number and kind of securities
purchasable upon the exercise of Options and no adjustments shall be made to the
Option Price.

          (c)  Other Adjustments.  In the event that at any time, as a result of
               -----------------
an adjustment made pursuant to this Section 11, the registered Holders shall
become entitled to receive any securities of the Company other than shares of
Common Stock, thereafter the number of such Other Securities so receivable upon
exercise of the Options shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the shares of Common Stock contained in this Section 11.

          (d)  Notice of Adjustment.  Whenever the number of shares of Common
               --------------------
Stock purchasable upon the exercise of an Option is adjusted, as herein
provided, the Company shall give notice to each Holder of such adjustment or
adjustments.

          12.  Purchase Rights Upon Merger, Consolidation, etc.
               -----------------------------------------------

          (a)  In the event of any consolidation of the Company with or merger
of the Company with or into another corporation or in case of any sale, transfer
or lease to another corporation of all or substantially all the assets of the
Company, the Acquiring Person shall execute an agreement that each Holder shall
have the right thereafter (whether or not the Option is then exercisable by its
terms) upon payment of the Option Price in effect immediately prior to such
action to purchase upon exercise of the Option the kind and amount of
securities, cash or other assets which such Holder would have owned or have been
entitled to receive after the happening of such consolidation, merger, sale,
transfer or lease had such Option been exercised immediately prior to such
action; provided, however, that no adjustment in respect of dividends, interest
        --------  -------
or other income on or from such shares or other securities and property shall be
made during the term of an Option or upon the exercise of an Option. The Company
shall mail by first class mail, postage prepaid, to each Holder, notice of the
execution of any such agreement (including a copy thereof). Such agreement shall
provide for adjustments, which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 12. The provisions
of this Section 12 shall similarly apply to successive consolidations, mergers,
sales, transfers or leases. The Acquiring Person shall mail to Holders a notice
describing any supplemental Option Agreement. In the event that this Section 12
shall be applicable, the provisions of Section 11(a) shall not be applicable.

                                       14
<PAGE>

          (b)  In the event of a sale of all or substantially all of the Company
to a third party, whether pursuant to a sale of capital stock of the Company,
merger, consolidation, sale of assets or similar transaction, the Company shall
have the right to compel the Holder of an Option to exercise such Option
(whether or not the Option is then exercisable by its terms) (a "Compelled
Exercise"). In the event that the Company determines to exercise its right to a
Compelled Exercise, it shall mail to Holders written notice of such event.

          13.  Employee Stockholders Agreement.  Notwithstanding anything in the
               -------------------------------
Plan to the contrary, all shares of Common Stock issued upon the exercise of
Options shall be subject to all terms and conditions set forth in the Employee
Stockholders Agreement. As a condition to the exercise of any Option, each
Holder shall be required to execute and deliver to Endo Pharma (i) an executed
copy of the Employee Stockholders Agreement, in the form in effect at the time
of such exercise, if such Holder had not previously done so and (ii) such
written representations and other documents as may be necessary or reasonably
desirable, in the opinion of the Committee, for purposes of compliance with
federal or state securities or other laws. For purposes of the Employee
Stockholders Agreement, each Holder shall be deemed to be a "Employee
Stockholder."

          14.  Restrictions on Transfer.
               ------------------------

          (a)   Restrictive Legend.  Except as otherwise permitted by this
                ------------------
Section 14, each Option (including each Option issued upon the transfer of any
option) shall be stamped or otherwise imprinted with a legend in substantially
the following form:

     "This Option and any shares acquired upon the exercise of this option
     have not been registered under the Securities Act of 1933, as amended,
     and may not be transferred, sold or otherwise disposed of except while
     a registration under such Act is in effect or pursuant to an exemption
     therefrom under such Act and in all cases in compliance with all
     applicable state securities laws, and in any event may not be
     transferred to any party other than a Permitted Transferee as defined
     in this Option."

          (b)  Restrictions on Transfer. Each Holder, by acceptance of an
               ------------------------
Option, shall acknowledge and agree that such Option may not be sold, assigned,
transferred, exchanged, mortgaged, pledged or granted a security interest in,
or

                                       15
<PAGE>

otherwise disposed of or encumbered by or to any party other than by or to a
Permitted Transferee.

          15.  Registration and Transfer of Options, etc.
               -----------------------------------------

          (a)  Option Register; Ownership of Options.  Endo Pharma will keep at
               -------------------------------------
its principal office a register in which Endo Pharma will provide for the
registration of Options and the registration of transfers of Options. Endo
Pharma may treat the Person in whose name any Option is registered on such
register as the owner thereof for all other purposes, and Endo Pharma shall not
be affected by any notice to the contrary, except that, if and when any Option
is accompanied by an instrument of assignment in a form acceptable to Endo
Pharma, it may (but shall not be obligated to) treat the bearer thereof as the
owner of such Option for all purposes. Subject to Section 14(b) hereof, an
Option, if properly assigned, may be exercised by a new Holder without a new
Option first having been issued.

          (b)  Transfer and Exchange of Options.  Upon surrender of any Option
               --------------------------------
for registration of transfer or for exchange to the Company at its principal
office, the Company at its expense will (subject to compliance with Section
14(b) hereof, if applicable) execute and deliver in exchange therefor a new
Option or Options of the same class and tenor, in the name of such Holder or as
such Holder (upon payment by such holder of any applicable transfer taxes) may
direct, calling in the aggregate on the face or faces thereof for the number of
shares of Common Stock called for on the face or faces of the Option or Options
so surrendered.

          (c)  Replacement of Options.  Upon receipt of evidence reasonably
               ----------------------
satisfactory to Endo Pharma of the loss, theft, destruction or mutilation of any
Option and, in the case of any such loss, theft or destruction of any Option,
upon delivery of an indemnity bond in such reasonable amount as Endo Pharma may
determine (or, at the sole option of Endo Pharma, of an indemnity agreement
reasonably satisfactory to Endo Pharma), or, in the case of any such mutilation,
upon the surrender of such Option for cancellation to Endo Pharma at its
principal office, Endo Pharma at its expense will execute and deliver, in lieu
thereof, a new Option of the same class and tenor.

          16.  Rights as Option Holders of Shares.  Neither the Holder of an
               ----------------------------------
Option nor any Permitted Transferees shall have any rights as a stockholder of
the Company (including, without limitation, any right to vote or to receive
dividends or to consent or to receive notice as a stockholder in respect of any
meeting of stock-

                                       16
<PAGE>

holders for the election of directors of the Company or any other matter, or any
right whatsoever as a stockholder of the Company (except for those notices and
other matters expressly set forth under the Plan or in the Option)). An Option
does not impose any obligation on a Holder or any of its Permitted Transferees
to purchase any securities or impose any liabilities on a Holder as a
stockholder of the Company, whether such obligation or liabilities are asserted
by the Company or by creditors of the Company.

          17.  Withholding.  Endo Pharma shall have the right to require a
               -----------
Holder or other person entitled to receive shares of Common Stock upon the
exercise of Options (or, if the Holder makes an election under Section 83(b) of
the Code, in connection with such grant) under the Plan to pay to Endo Pharma
the amount which Endo Pharma is or will be required to withhold with respect to
the issuance of such shares in order for Endo Pharma or the Company to pay taxes
or to claim an income tax deduction with respect to the issuance of such shares.
In lieu of a portion of such payment equal to the amount of the minimum
statutory tax withholding, Endo Pharma may retain, at the discretion of the
Committee, a sufficient number of such shares (valued at the Fair Market Value
thereof) to cover the amount equal to the minimum statutory tax withholding. A
Holder, however, may elect to pay to Endo Pharma all or a portion of the total
amount Endo Pharma is required to withhold by tendering shares of Common Stock
with a Fair Market Value equal to the amount Endo Pharma is required to
withhold; provided, however, that such Holder must have owned such tendered
          --------  -------
shares of Common Stock continuously through the date of issuance (or lapse) for
a period of a least six months. With respect to Class C Options, a Holder may
elect to pay to Endo Pharma all or a portion of the total amount Endo Pharma is
required to withhold by having shares of Common Stock with a Fair Market Value
equal to the minimum statutory amount Endo Pharma is required to withhold
withheld by Endo Pharma. The Holder shall promptly notify Endo Pharma of any
election made pursuant to Section 83(b) of the Code.

          18.  Liability.  Endo Pharma, and not the Company, the Board, the
               ---------
Committee, or any member thereof, shall be liable for any and all claims made
against Endo Pharma, the Company, the Board or the Committee in connection with
the Plan or any Option.

          19.  Legal Requirements.
               ------------------

          (a)  Endo Pharma shall be responsible and shall pay for any transfer,
revenue or documentary stamps with respect to shares of Common Stock

                                       17
<PAGE>

issued upon the exercise of Options granted under the Plan (other than any
transfer tax applicable to a transfer to a Permitted Transferee which shall be
payable by a Holder).

          (b)  Endo Pharma shall not be required to issue a certificate or
certificates for shares upon the exercise of any Option if such issuance would
result in a violation of any federal or state securities or other laws. Endo
Pharma agrees to use its reasonable efforts to clear the legal impediment as
soon as possible.

          20.  Amendment and Termination of the Plan.  The Committee may at any
               -------------------------------------
time and from time to time alter, amend, suspend, or terminate the Plan in whole
or in part. Notwithstanding the foregoing, no amendment, suspension, or
termination shall affect adversely any of the rights of any Holder, unless such
amendment suspension or termination is approved by a majority of the members of
the Committee that includes a Committee member who is a representative of the
Management Stockholders.

          21.  Nonqualified Stock Options.  Options granted hereby shall be
               --------------------------
treated as nonqualified stock options under the Code.

          22.  Effective Date.  The Plan shall take effect upon its adoption by
               --------------
the Board.

          23.  Interpretations.  Except as otherwise expressly provided in the
               ---------------
Plan, the following rules of interpretation apply to the Plan and each Option:
(i) the singular includes the plural and the plural includes the singular; (ii)
"include" and "including" are not limiting and "or" is not exclusive; (iii) a
reference to any agreement or other contract includes permitted supplements and
amendments; (iv) a reference to a law includes any amendment or modification to
such law and any rules or regulations issued thereunder; and (v) a reference to
any person, corporation or other entity includes its permitted successors and
assigns.

          24.  GOVERNING LAW.  THE PLAN AND ANY AND ALL OPTIONS AND OPTION AWARD
               -------------
AGREEMENTS SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF
THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF DELAWARE, WITHOUT
REGARD TO PRINCIPLES OF CONFLICT OF LAWS.

                                       18
<PAGE>

                                  SCHEDULE I


                             ENDO PHARMACEUTICALS
                      EBITDA TARGETS FOR CLASS B OPTIONS


Fiscal Year          EBITDA Target
-----------          -------------

   1998              $43.0 million
   1999              $60.0 million
   2000              $80.0 million
   2001             $100.0 million
   2002             $120.0 million

                                       19
<PAGE>

                                  SCHEDULE II
 VESTING MATRIX AND IMPLIED PUBLIC STOCK PRICE THRESHOLDS FOR CLASS C OPTIONS


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
Option        Prior to December              Cash Gross Profit Target is achieved
Class            31, 2000
         -----------------------------------------------------------------------------
           Implied Public Stock       Implied Public Stock       MorphiDex(R) Approval
           Price Threshold is met.    Price Threshold is met     does not occur on or
                                      on or prior to Decem-      prior to December 31,
                                      ber 31, 2002, regardless   2002.
                                      of whether or not
                                       MorphiDex(R)
                                      Approval occurs.
         -----------------------------------------------------------------------------
            Implied         Total     Implied            Total     Implied       Total
             Public        Number      Public           Number      Public      Number
              Stock            of       Stock               of       Stock          of
              Price        Vested       Price           Vested       Price      Vested
          Threshold       Class C   Threshold          Class C   Threshold     Class C
                          Options                      Options                 Options
--------------------------------------------------------------------------------------
<S>       <C>          <C>          <C>              <C>         <C>         <C>

Class C1A     $ 8.09    2,000,000      $ 6.06        2,000,000   $ 4.28      2,000,000
--------------------------------------------------------------------------------------

Class C1B     $ 8.09       14,349      $ 6.06        2,561,911   $ 4.28      2,561,911
--------------------------------------------------------------------------------------

Class C2      $12.50    3,557,594      $ 9.38        4,743,458   $ 6.62      4,743,458
--------------------------------------------------------------------------------------

Class C3      $19.99    5,339,794      $14.99        7,119,725   $10.58      7,119,725
--------------------------------------------------------------------------------------

Class C4      $32.66    2,671,429      $24.50        3,561,906   $17.29      3,561,906
--------------------------------------------------------------------------------------

<CAPTION>
Option                          Cash Gross Profit Target is not achieved
Class
         --------------------------------------------------------------------------------------
          Implied Public Stock         Implied Public Stock Price    MorphiDex(R) Approval
          Price Threshold is met       Threshold is met and          does not occur on or prior
          and MorphiDex(R)             MorphiDex(R) Approval         to December 31, 2002.
          Approval has occurred        has occurred prior
          prior to March 31, 2001.     to March 31, 2001.
         --------------------------------------------------------------------------------------
              Implied        Total       Implied            Total      Implied     Total Number
               Public       Number        Public        Number of       Public        of Vested
                Stock           of         Stock           Vested        Stock          Class C
                Price       Vested         Price          Class C        Price          Options
            Threshold      Class C     Threshold          Options    Threshold
                           Options
-----------------------------------------------------------------------------------------------
<S>         <C>          <C>           <C>              <C>          <C>           <C>

Class C1A      $ 7.51    2,000,000        $ 8.09        2,000,000       $ 6.06        2,000,000
-----------------------------------------------------------------------------------------------

Class C1B      $ 7.51      602,248        $ 8.09           14,349       $ 6.06           14,349
-----------------------------------------------------------------------------------------------

Class C2       $11.61    3,831,255        $12.50        3,557,594       $ 9.38        3,557,594
-----------------------------------------------------------------------------------------------

Class C3       $18.56    5,750,547        $19.99        5,339,794       $14.99        5,339,794
-----------------------------------------------------------------------------------------------

Class C4       $30.33    2,876,924        $32.66        2,671,429       $24.50        2,671,429
-----------------------------------------------------------------------------------------------
</TABLE>

                                       20