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                      THE ALGOS PHARMACEUTICAL CORPORATION
                  1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN



               Algos Pharmaceutical Corporation, a Delaware corporation, has
adopted the Algos Pharmaceutical Corporation 1996 Non-Employee Director Stock
Option Plan (the "Plan"), effective ___________ ___, 1996, for the benefit of
its eligible non-employee directors.

               The purposes of this Plan are as follows:

               (1) To provide an additional incentive for non-employee directors
to further the growth, development and financial success of the Company by
personally benefiting through the ownership of options with respect to Company
stock which recognize such growth, development and financial success.

               (2) To enable the Company to obtain and retain the services of
non-employee directors considered essential to the long range success of the
Company by offering them an opportunity to own options with respect to stock in
the Company which will reflect the growth, development and financial success of
the Company.

                                    ARTICLE I

                                   DEFINITIONS

               1.1 General.  Wherever the following  terms are used in this Plan
they  shall  have the  meaning  specified  below,  unless  the  context  clearly
indicates otherwise.

               1.2  Board.  "Board"  shall  mean the Board of  Directors  of the
Company.

               1.3 Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.

               1.4 Common Stock.  "Common  Stock" shall mean the common stock of
the Company, par value $0.01 per share.

               1.5   Company.   "Company"   shall  mean   Algos   Pharmaceutical
Corporation, Delaware corporation.

               1.6 Corporate Transaction. "Corporate Transaction" shall mean any
of the  following  stockholder-approved  transactions  to which the Company is a
party:

               (a) a merger or  consolidation  in which the  Company  is not the
       surviving entity, except for a transaction the principal purpose of which
       is to change  the  state in which the  Company  is  incorporated,  form a
       holding company or effect a similar  reorganization  as to form whereupon
       this Plan and all Options are assumed by the successor entity;

               (b) the sale,  transfer,  exchange or other disposition of all or
       substantially all of the assets of the Company,  in complete  liquidation
       or  dissolution  of the  Company  in a  transaction  not  covered  by the
       exceptions to clause (a), above; or





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               (c) any  reverse  merger in which the  Company  is the  surviving
       entity but in which  securities  possessing more than fifty percent (50%)
       of  the  total  combined  voting  power  of  the  Company's   outstanding
       securities are  transferred  to a person or persons  different from those
       who held such securities immediately prior to such merger.

               1.7 Director. "Director" shall mean a member of the Board.

               1.8 Employee. "Employee" shall mean any officer or other employee
(as defined in accordance with Section 3401(c) of the Code) of the Company or of
any corporation which is a Subsidiary.

               1.9  Exchange  Act.  "Exchange  Act"  shall  mean the  Securities
Exchange Act of 1934, ------------ as amended.

               1.10 Fair Market Value.  "Fair Market Value" of a share of Common
Stock as of a given date  shall be (a) the  average on that date of the high and
low  prices  of a share of Common  Stock on the  principal  national  securities
exchange on which  shares of Common Stock are then  trading,  or, if shares were
not  traded  on such  date,  then on the  next  preceding  date on which a trade
occurred, or (b) if Common Stock is not traded on a national securities exchange
but is quoted on NASDAQ or a successor  quotation system, the last reported sale
price on such date as reported by NASDAQ or such successor  quotation system; or
(c) if Common Stock is not traded on a national  securities  exchange and is not
reported on NASDAQ or a successor  quotation  system,  the closing bid price (or
average of bid  prices)  last  quoted on such date by an  established  quotation
service for over-the-counter securities; or (d) if Common Stock is not traded on
a  national  securities  exchange,  is not  reported  on NASDAQ  or a  successor
quotation  system and is not otherwise  publicly  traded on such date,  the fair
market  value of a share of Common Stock as  established  by the Board acting in
good faith and taking into consideration all factors which it deems appropriate,
including, without limitation,  recent sale offer prices for the Common Stock in
private arm's-length transactions.

               1.11 Independent  Director.  "Independent  Director" shall mean a
member of the Board who is not an Employee of the Company.

               1.12 Option.  "Option"  shall mean a stock option  granted  under
Article  III of this Plan,  which is not  intended  to qualify as an  "incentive
stock option" under Section 422 of the Code.

               1.13 Option Agreement. "Option Agreement" shall mean an agreement
between the Company and an Optionee  that sets forth the terms,  conditions  and
limitations applicable to an Option.

               1.14  Optionee.  "Optionee"  shall mean an  Independent  Director
granted an Option under this Plan.

               1.15  Plan.   "Plan"   shall   mean  this  Algos   Pharmaceutical
Corporation 1996 Non- Employee Director Stock Option Plan.

               1.16 QDRO. "QDRO" shall mean a qualified domestic relations order
as defined by the Code or Title I of the Employee Retirement Income Security Act
of 1974, as amended, or the rules thereunder.

               1.17 Rule 16b-3.  "Rule 16b-3" shall mean that certain Rule 16b-3
under the Exchange Act, as such Rule may be amended from time to time.



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               1.18 Securities Act.  "Securities  Act" shall mean the Securities
Act of 1933, as amended.

               1.19  Subsidiary.  "Subsidiary"  shall mean any corporation in an
unbroken  chain  of  corporations  beginning  with  the  Company  if each of the
corporations  other than the last  corporation  in the unbroken  chain then owns
stock  possessing 50 percent or more of the total  combined  voting power of all
classes of stock in one of the other corporations in such chain.

               1.20 Termination of  Directorship.  "Termination of Directorship"
shall mean the time when an  Optionee  ceases to be a Director  for any  reason,
including, but not by way of limitation,  a termination by resignation,  failure
to be  elected,  removal or death.  The  Board,  in its sole  discretion,  shall
determine the effect of all matters and  questions  relating to  Termination  of
Directorship.

                                   ARTICLE II

                             SHARES SUBJECT TO PLAN

               2.1  Shares  Subject  to Plan.  The  shares of stock  subject  to
Options shall be Common Stock.  The aggregate number of such shares which may be
issued upon  exercise  of such  Options  under the Plan shall not exceed  10,000
thousand  (10,000).  The shares of Common Stock  issuable  upon exercise of such
options may be either  previously  authorized  but  unissued  shares or treasury
shares.

               2.2 Add-back of Options. If any Option under this Plan expires or
is cancelled without having been fully exercised, or is exercised in whole or in
part for cash as  permitted by this Plan,  the number of shares  subject to such
Option but as to which such Option was not  exercised  prior to its  expiration,
cancellation  or  exercise  may  again be  optioned  hereunder,  subject  to the
limitations of Section 2.1. Furthermore, any shares subject to Options which are
adjusted  pursuant to Section 7.3 and become  exercisable with respect to shares
of stock of another  corporation shall be considered  cancelled and may again be
optioned hereunder,  subject to the limitations of Section 2.1. Shares of Common
Stock which are  delivered  by the  Optionee or withheld by the Company upon the
exercise of any Option under this Plan, in payment of the exercise price thereof
or withholding taxes thereon,  may again be optioned  hereunder,  subject to the
limitations of Section 2.1.

                                  ARTICLE III

                              GRANTING OF OPTIONS

               3.1 Eligibility.  Each Independent  Director of the Company shall
be  eligible  to be granted  Options at the times and in the manner set forth in
Section 3.2.

               3.2    Granting of Options

               (a) During  the term of the Plan,  each  person who is  initially
elected or appointed  to the Board,  and who is an  Independent  Director at the
time of such initial election or appointment  automatically  shall be granted an
Option to purchase one hundred  twenty (120) shares of Common Stock  (subject to
adjustment  as provided in Section 7.3) on the date of such initial  election or
appointment.  Members  of  the  Board  who  are  employees  of the  Company  who
subsequently  incur a Termination of Employment and remain on the Board will not
receive an initial  Option  grant  pursuant to this  subsection  (a), but to the
extent that they are otherwise eligible, will receive, after such Termination of
Employment, Options as described in subsection (b) below.


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               (b)  During  the  term of the  Plan,  each  Independent  Director
automatically shall be granted an Option to purchase sixty (60) shares of Common
Stock  (subject to  adjustment  as provided in Section  7.3) on the date of each
annual meeting of  stockholders  at which Directors are elected and at the close
of which the Independent  Director is then serving as a Director,  provided that
the  Independent  Director has served as a Director  during the entire six month
period preceding the date of such annual meeting.

               (c) All the foregoing  Option  grants  authorized by this Section
3.2 are subject to stockholder approval of the Plan.


                                   ARTICLE IV

                                TERMS OF OPTIONS

               4.1 Option Agreement. Each Option shall be evidenced by a written
Option  Agreement,  which shall be executed by the  Optionee  and an  authorized
officer of the Company and which shall contain such terms and  conditions as the
Board shall determine, consistent with this Plan.

               4.2 Exercise Price.  The price per share of the shares subject to
each Option shall be 100% of the Fair Market Value of a share of Common Stock on
the date the Option is granted.

               4.3 Option  Term.  The term of an Option  shall be ten (10) years
from the date the Option is granted, except as provided in Section 7.3(b).

               4.4    Option Vesting

               (a) Options  granted  pursuant  to Section  3.2(a)  shall  become
exercisable in cumulative  annual  installments of one-third each on each of the
first,  second and third annual meetings of stockholders of the Company at which
Directors  are  elected  following  the  date of  grant,  without  variation  or
acceleration hereunder except as provided in Section 7.3(b).

               (b) Options  granted  pursuant  to Section  3.2(b)  shall  become
exercisable in full on the date of the first annual meeting of  stockholders  of
the Company at which Directors are elected following the date of grant,  without
variation or acceleration hereunder except as provided in Section 7.3(b).

               (c) No portion of an Option which is unexercisable at Termination
of Directorship shall thereafter become exercisable.

               4.5 Consideration. In consideration of the granting of an Option,
the Optionee shall agree,  in the written Option  Agreement,  to render faithful
and  efficient  services as Director of the Company.  Nothing in this Plan or in
any Option  Agreement  shall confer upon any Optionee any right to continue as a
Director  of the  Company,  or shall  interfere  with or restrict in any way the
rights of the Company and any Subsidiary,  which are hereby expressly  reserved,
to discharge any Optionee at any time for any reason whatsoever, with or without
good cause.




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                                    ARTICLE V

                               EXERCISE OF OPTIONS

               5.1 Partial Exercise.  An exercisable  Option may be exercised in
whole or in part.  However,  an Option shall not be exercisable  with respect to
fractional  shares and the Board may  require  that,  by the terms of the Option
Agreement, a partial exercise be with respect to a minimum number of shares.

               5.2 Manner of Exercise. All or a portion of an exercisable Option
shall be deemed exercised upon delivery of all of the following to the Secretary
of the Company or his or her office:

               (a)  A  written  notice   complying  with  the  applicable  rules
established  by the Board  stating  that the Option,  or a portion  thereof,  is
exercised.  The notice  shall be signed by the  Optionee  or other  person  then
entitled to exercise the Option or such portion;

               (b) Such  representations and documents as the Board, in its sole
discretion,   deems  necessary  or  advisable  to  effect  compliance  with  all
applicable  provisions of the Securities Act, as amended,  and any other federal
or state securities laws or regulations.  The Board may, in its sole discretion,
also take  whatever  additional  actions  it deems  appropriate  to effect  such
compliance including, without limitation,  placing legends on share certificates
and issuing stop-transfer notices to agents and registrars;

               (c) In the event that the Option shall be  exercised  pursuant to
Section 7.1 by any person or persons other than the Optionee,  appropriate proof
of the right of such person or persons to exercise the Option; and

               (d) Full cash  payment to the  Secretary  of the  Company for the
shares  with  respect to which the Option,  or portion  thereof,  is  exercised.
However,  the Board,  may in its sole discretion (i) allow a delay in payment up
to thirty (30) days from the date the Option, or portion thereof,  is exercised;
(ii) allow  payment,  in whole or in part,  through  the  delivery  of shares of
Common Stock owned by the  Optionee,  duly  endorsed for transfer to the Company
with a Fair Market Value on the date of delivery equal to the aggregate exercise
price of the Option or exercised portion thereof;  (iii) allow payment, in whole
or in part,  through the  surrender of shares of Common Stock then issuable upon
exercise of the Option having a Fair Market Value on the date of Option exercise
equal  to the  aggregate  exercise  price of the  Option  or  exercised  portion
thereof;  (iv) allow  payment,  in whole or in part,  through  the  delivery  of
property of any kind which  constitutes  good and  valuable  consideration;  (v)
allow  payment,  in whole or in part,  through the  delivery of a full  recourse
promissory  note  bearing  interest  (at no less than  such  rate as shall  then
preclude the  imputation of interest under the Code) and payable upon such terms
as may be  prescribed by the Board or (vi) allow  payment,  in whole or in part,
through  the  delivery of a notice  that the  Optionee  has placed a market sell
order with a broker with  respect to shares of Common Stock then  issuable  upon
exercise  of the  Option,  and  that  the  broker  has  been  directed  to pay a
sufficient  portion  of  the  net  proceeds  of  the  sale  to  the  Company  in
satisfaction  of the Option  exercise  price; or (vii) allow payment through any
combination of the consideration  provided in the foregoing  subparagraphs (ii),
(iii),  (iv), (v) and (vi). In the case of a promissory note, the Board may also
prescribe the form of such note and the security to be given for such note.  The
Option may not be exercised,  however,  by delivery of a promissory note or by a
loan from the Company  when or where such loan or other  extension  of credit is
prohibited by law.




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               5.3  Conditions  to Issuance of Stock  Certificates.  The Company
shall not be required to issue or deliver any  certificate or  certificates  for
shares of stock  purchased  upon the  exercise of any Option or portion  thereof
prior to fulfillment of all of the following conditions:

               (a)  The  admission  of  such  shares  to  listing  on all  stock
exchanges on which such class of stock is then listed;

               (b) The completion of any registration or other  qualification of
such shares under any state or federal law, or under the rulings or  regulations
of the Securities and Exchange  Commission or any other governmental  regulatory
body which the Board shall, in its sole discretion, deem necessary or advisable;

               (c) The  obtaining  of any approval or other  clearance  from any
state  or  federal  governmental  agency  which  the  Board  shall,  in its sole
discretion, determine to be necessary or advisable;

               (d) The lapse of such  reasonable  period of time  following  the
exercise of the Option as the Board may establish  from time to time for reasons
of administrative convenience; and

               (e) The receipt by the Company of full  payment for such  shares,
including payment of any applicable withholding tax.

               5.4 Rights as Stockholders.  The holders of Options shall not be,
nor have any of the rights or  privileges  of,  stockholders  of the  Company in
respect of any shares  purchasable  upon the  exercise  of any part of an Option
unless and until  certificates  representing such shares have been issued by the
Company to such holders.

               5.5 Ownership and Transfer  Restrictions.  The Board, in its sole
discretion, may impose such restrictions on the ownership and transferability of
the shares  purchasable upon the exercise of an Option as it deems  appropriate.
Any such  restriction  shall be set forth in the respective  Option Agreement or
other  agreement  between  the Company and the holders of such shares and may be
referred to on the certificates evidencing such shares.

               5.6  Limitations  on  Exercise  of  Options.  No  Option  may  be
exercised  to any  extent  by anyone  after the first to occur of the  following
events:

               (a) The  expiration  of twelve  (12)  months from the date of the
Optionee's death;

               (b) the  expiration  of twelve  (12)  months from the date of the
Optionee's  Termination  of  Directorship  by reason of his  permanent and total
disability (within the meaning of Section 22(e)(3) of the Code);

               (c) the  expiration  of  seven  (7)  days  from  the  date of the
Optionee's  Termination  of  Directorship  by  reason of  removal  for cause (as
determined by the Board in its sole discretion);

               (d) the  expiration  of  thirty  (30)  days  from the date of the
Optionee's Termination of Directorship for any reason other than such Optionee's
death,  removal  for cause or his  permanent  and total  disability,  unless the
Optionee dies within said three-month period; or

               (e) The  expiration  of ten years  from the date the  Option  was
granted.




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                                   ARTICLE VI

                                 ADMINISTRATION

               6.1 Duties and Powers of Board. It shall be the duty of the Board
to  conduct  the  general  administration  of this Plan in  accordance  with its
provisions.  The  Board  shall  have the  power to  interpret  this Plan and the
agreements  pursuant to which  Options are granted,  and to adopt such rules for
the  administration,  interpretation,  and  application  of  this  Plan  as  are
consistent therewith and to interpret, amend or revoke any such rules.

               6.2 Majority Rule; Unanimous Written Consent. The Board shall act
by a majority  of its  members in  attendance  at a meeting at which a quorum is
present or by a memorandum or other written  instrument signed by all members of
the Board.

               6.3 Professional Assistance; Good Faith Actions. All expenses and
liabilities   which  members  of  the  Board  incur  in   connection   with  the
administration of this Plan shall be borne by the Company.  The Board may employ
attorneys, consultants,  accountants, appraisers, brokers, or other persons. The
Company and the Company's  officers and Directors shall be entitled to rely upon
the advice,  opinions or valuations  of any such persons.  All actions taken and
all  interpretations and determinations made by the Board in good faith shall be
final and binding  upon all  Optionees,  the  Company  and all other  interested
persons.  No members of the Board  shall be  personally  liable for any  action,
determination or interpretation  made in good faith with respect to this Plan or
the Options and all members of the Board shall be fully protected by the Company
in respect of any such action, determination or interpretation.

                                   ARTICLE VII

                            MISCELLANEOUS PROVISIONS

               7.1 Not  Transferable.  Options  under this Plan may not be sold,
pledged,  assigned,  or transferred in any manner other than by will or the laws
of descent and distribution or pursuant to a QDRO, unless and until such Options
have been exercised, or the shares underlying such Options have been issued, and
all  restrictions  applicable to such shares have lapsed.  No Option or interest
therein shall be liable for the debts,  contracts or engagements of the Optionee
or his or her  successors  in  interest  or shall be subject to  disposition  by
transfer, alienation, anticipation, pledge, encumbrance, assignment or any other
means whether such  disposition  be voluntary or  involuntary or by operation of
law by judgment,  levy, attachment,  garnishment or any other legal or equitable
proceedings (including bankruptcy),  and any attempted disposition thereof shall
be null and void and of no effect, except to the extent that such disposition is
permitted by the preceding sentence.

               During the lifetime of the  Optionee  only he or she may exercise
an Option (or any portion thereof) granted to him or her under the Plan,  unless
it has been disposed of pursuant to a QDRO. After the death of the Optionee, any
exercisable  portion  of an Option  may,  prior to the time  when  such  portion
becomes unexercisable under the Plan or the applicable Option Agreement or other
agreement,  be exercised by his or her personal  representative or by any person
empowered  to do so  under  the  deceased  Optionee's  will or  under  the  then
applicable laws of descent and distribution.

               7.2 Amendment,  Suspension or Termination of this Plan. Except as
otherwise  provided in this  Section  7.2,  this Plan may be wholly or partially
amended or otherwise modified,  suspended or terminated at any time or from time
to time by the Board. However, without approval of



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the Company's stockholders given within twelve months before or after the action
by the Board,  no action of the Board may,  except as provided  in Section  7.3,
increase the limits imposed in Section 2.1 on the maximum number of shares which
may be issued  under  this  Plan,  and no action of the Board may be taken  that
would  otherwise  require  stockholder  approval as a matter of applicable  law,
regulation or rule. No amendment,  suspension or termination of this Plan shall,
without  the  consent  of the  holder of  Options  alter or impair any rights or
obligations under any Options theretofore  granted,  unless the Option Agreement
itself  otherwise  expressly so provides.  No Options may be granted  during any
period of suspension or after termination of this Plan.

               7.3 Changes in Common Stock or Assets of the Company, Acquisition
or Liquidation of the Company and Other Corporate Events.

               (a)  Subject  to  Section  7.3(d),  in the  event  that the Board
determines that any dividend or other distribution (whether in the form of cash,
Common  Stock,   other   securities,   or  other  property),   recapitalization,
reclassification,  stock split,  reverse  stock split,  reorganization,  merger,
consolidation,   split-up,  spin-off,  combination,   repurchase,   liquidation,
dissolution,  or  sale,  transfer,  exchange  or  other  disposition  of  all or
substantially  all of the assets of the Company,  or exchange of Common Stock or
other  securities  of the  Company,  issuance  of  warrants  or other  rights to
purchase  Common  Stock or other  securities  of the Company,  or other  similar
corporate  transaction  or event,  in the Board's sole  discretion,  affects the
Common  Stock  such  that  an  adjustment  is  determined  by  the  Board  to be
appropriate  in order to prevent  dilution  or  enlargement  of the  benefits or
potential  benefits intended to be made available under the Plan or with respect
to an Option,  then the Board  shall,  in such manner as it may deem  equitable,
adjust any or all of

                    (i) the number and kind of shares of Common  Stock (or other
        securities  or property)  with  respect to which  Options may be granted
        under  the Plan  (including,  but not  limited  to,  adjustments  of the
        limitations in Section 2.1 on the maximum number and kind of shares),

                    (ii) the number and kind of shares of Common Stock (or other
        securities or property) subject to outstanding Options, and

                    (iii) the exercise price with respect to any Option.

               (b) Subject to Sections  7.3(b)(vi)  and 7.3(d),  in the event of
any Corporate  Transaction or other  transaction  or event  described in Section
7.3(a) or any  unusual or  nonrecurring  transactions  or events  affecting  the
Company,  any  affiliate  of the Company,  or the  financial  statements  of the
Company or any  affiliate,  or of changes in applicable  laws,  regulations,  or
accounting principles,  the Board in its sole discretion is hereby authorized to
take any one or more of the following actions whenever the Board determines that
such action is  appropriate  in order to prevent  dilution or enlargement of the
benefits or potential  benefits  intended to be made available under the Plan or
with respect to any Option under this Plan, to facilitate  such  transactions or
events or to give effect to such changes in laws, regulations or principles:

                    (i) In its sole discretion, and on such terms and conditions
        as it deems appropriate,  the Board may provide,  either by the terms of
        the Option  Agreement or by action taken prior to the occurrence of such
        transaction  or event and either  automatically  or upon the  Optionee's
        request,  for either the  purchase  of any such  Option for an amount of
        cash equal to the amount that could have been attained upon the exercise
        of such Option or realization  of the Optionee's  rights had such Option
        been currently  exercisable or the replacement of such Option with other
        rights or property selected by the Board;



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                    (ii) In its sole discretion,  the Board may provide,  either
        by the terms of the Option  Agreement  or by action  taken  prior to the
        occurrence  of such  transaction  or event  that it cannot be  exercised
        after such event;

                    (iii) Subject to subsection (d), in its sole discretion, and
        on such  terms and  conditions  as it deems  appropriate,  the Board may
        provide,  either by the terms of such Option or by action taken prior to
        the occurrence of such transaction or event, that for a specified period
        of time  prior  to such  transaction  or  event,  such  Option  shall be
        exercisable as to all shares covered thereby,  notwithstanding  anything
        to  the  contrary  in (A)  Section  4.4 or  (B)  the  provisions  of the
        applicable Option Agreement;

                    (iv)  In  its  sole  discretion,   and  on  such  terms  and
        conditions as it deems appropriate, the Board may provide, either by the
        terms of such Option or by action taken prior to the  occurrence of such
        transaction  or event,  that upon such event,  such option be assumed by
        the  successor  or  survivor  corporation,  or a  parent  or  subsidiary
        thereof,  or shall be substituted  for by similar  options  covering the
        stock  of  the  successor  or  survivor  corporation,  or  a  parent  or
        subsidiary  thereof,  with appropriate  adjustments as to the number and
        kind of shares and prices; and

                    (v) In its sole discretion, and on such terms and conditions
        as it deems  appropriate,  the Board may make  adjustments in the number
        and type of shares of Common  Stock (or other  securities  or  property)
        subject to  outstanding  Options  and/or in the terms and  conditions of
        (including  the  exercise   price),   and  the  criteria   included  in,
        outstanding Options and Options which may be granted in the future.

                    (vi)  None  of the  foregoing  discretionary  terms  of this
        Section  7.3(b) shall be  permitted  to the extent that such  discretion
        would be inconsistent with the applicable  exemptive  conditions of Rule
        16b-3.  In the event of  Corporate  Transaction,  to the extent that the
        Board does not have the  ability  under Rule 16b-3 to take or to refrain
        from taking the discretionary  actions set forth in Section  7.3(b)(iii)
        above, each Option shall be exercisable as to all shares covered thereby
        during the five days  immediately  preceding  the  consummation  of such
        Corporate Transaction and subject to such consummation,  notwithstanding
        anything to the contrary in Section 4.4 or the vesting  schedule of such
        Options. In the event of a Corporate Transaction, to the extent that the
        Board does not have the  ability  under Rule 16b-3 to take or to refrain
        from taking the  discretionary  actions set forth in Section  7.3(b)(ii)
        above, no Option may be exercised  following such Corporate  Transaction
        unless such Option is, in connection  with such  Corporate  Transaction,
        either  assumed by the successor or survivor  corporation  (or parent or
        subsidiary  thereof) or replaced with a comparable right with respect to
        shares of the capital stock of the successor or survivor corporation (or
        parent or subsidiary thereof).

               (c) Subject to Section 7.3(d) and 7.8, the Board may, in its sole
discretion,  include  such  further  provisions  and  limitations  in any Option
Agreement as it may deem equitable and in the best interests of the Company.

               (d) No adjustment  or action  described in this Section 7.3 or in
any other  provision  of the Plan shall be  authorized  to the extent  that such
adjustment or action would result in short-swing profits liability under Section
16 of the Exchange Act or violate the exemptive  conditions of Rule 16b-3 unless
the  Board  determines  that the  Option is not to  comply  with such  exemptive
conditions.  The number of shares of Common  Stock  subject to any Option  shall
always be rounded to the next whole number.



                                              9


<PAGE>




               7.4 Approval of Plan by Stockholders. This Plan will be submitted
for the approval of the  Company's  stockholders  within twelve months after the
date of the Board's initial adoption of this Plan.  Options may be granted prior
to  such  stockholder  approval,   provided  that  such  Options  shall  not  be
exercisable  prior to the time when this Plan is approved  by the  stockholders,
and provided  further that if such  approval has not been obtained at the end of
said twelve-month  period,  all Options previously granted under this Plan shall
thereupon be cancelled and become null and void.

               7.5 Tax  Withholding.  The  Company  shall be entitled to require
payment in cash or deduction from other compensation payable to each Optionee of
any sums required by federal, state or local tax law to be withheld with respect
to the issuance or exercise of any Option.  The Board may in its sole discretion
allow such Optionee to elect to have the Company withhold shares of Common Stock
otherwise  issuable  under such  Option (or allow the return of shares of Common
Stock) having a Fair Market Value equal to the sums required to be withheld.

               7.6 Loans. The Board may, in its sole  discretion,  extend one or
more loans to Independent Directors in connection with the exercise of an Option
granted under this Plan.  The terms and conditions of any such loan shall be set
by the Board.

               7.7 Forfeiture  Provisions.  Pursuant to its general authority to
determine  the  terms  and  conditions  applicable  to  Options  under  the Plan
consistent  with the  provisions of the Plan, the Board shall have the right (to
the extent consistent with the applicable exemptive conditions of Rule 16b-3) to
provide,  in the terms of Options  granted  under the Plan,  or to  require  the
recipient to agree by separate written instrument,  that (a) any proceeds, gains
or other economic benefit actually or  constructively  received by the recipient
upon any  receipt or exercise of the Option or upon the receipt or resale of any
Common Stock  underlying  such Option must be paid to the  Company,  and (b) the
Option  shall  terminate  and any  unexercised  portion of such Option  shall be
forfeited,  if (i) the Optionee incurs a Termination of Directorship  prior to a
specified date, or within a specified time period following  receipt or exercise
of the  Option,  or (ii) the  Optionee at any time,  or during a specified  time
period,  engages in any activity in  competition  with the Company,  or which is
inimical,  contrary  or  harmful to the  interests  of the  Company,  as further
defined by the Board.

               7.8 Limitations Applicable to Section 16 Persons. Notwithstanding
any other  provision  of this  Plan,  this Plan and any  Option  granted  to any
individual  who is then  subject  to  Section  16 of the  Exchange  Act shall be
subject to any additional limitations set forth in any applicable exemptive rule
under Section 16 of the Exchange Act  (including  any amendment to Rule 16b-3 of
the Exchange Act) that are  requirements  for the  application of such exemptive
rule. To the extent  permitted by applicable  law, the Plan and Options  granted
hereunder  shall be deemed  amended to the extent  necessary  to conform to such
applicable exemptive rule.

               7.9  Effect of Plan Upon  Options  and  Compensation  Plans.  The
adoption of this Plan shall not affect any other compensation or incentive plans
in effect  for the  Company  or any  Subsidiary.  Nothing  in this Plan shall be
construed to limit the right of the Company (a) to establish  any other forms of
incentives  or  compensation  for  Employees,  Directors or  consultants  of the
Company or any  Subsidiary  or (b) to grant or assume  options  or other  rights
otherwise than under this Plan in connection with any proper  corporate  purpose
including  but not by way of  limitation,  the grant or assumption of options in
connection with the acquisition by purchase,  lease,  merger,  consolidation  or
otherwise,  of the business,  stock or assets of any  corporation,  partnership,
firm or association.

               7.10 Compliance with Laws. This Plan, the granting and vesting of
Options  under this Plan and the issuance and delivery of shares of Common Stock
under Options granted hereunder are


                                              10


<PAGE>


subject to  compliance  with all  applicable  federal and state laws,  rules and
regulations  (including but not limited to state and federal  securities law and
federal margin requirements) and to such approvals by any listing, regulatory or
governmental  authority  as may, in the opinion of counsel for the  Company,  be
necessary or advisable in connection  therewith.  Any securities delivered under
this Plan shall be subject to such  restrictions,  and the person acquiring such
securities  shall,  if  requested by the Company,  provide such  assurances  and
representations to the Company as the Company may deem necessary or desirable to
assure  compliance  with  all  applicable  legal  requirements.  To  the  extent
permitted by applicable law, the Plan and the Options granted hereunder shall be
deemed  amended to the  extent  necessary  to  conform  to such laws,  rules and
regulations.

               7.11 Titles.  Titles are provided herein for convenience only and
are not to serve as a basis for interpretation or construction of this Plan.

               7.12 Governing Law. This Plan and any agreements  hereunder shall
be  administered,  interpreted and enforced under the internal laws of the state
of New York without regard to conflicts of laws thereof.

                                      * * *

               I hereby  certify that the foregoing Plan was duly adopted by the
Board of Directors of Algos  Pharmaceutical  Corporation  on  __________________
1996.

               Executed on this ____ day of _______________, 199___.



                                             -----------------------------------
                                                         Secretary



                                              11




<PAGE>


                               FIRST AMENDMENT TO
                      THE ALGOS PHARMACEUTICAL CORPORATION
                  1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN


       1. Effective January 16, 1997,  Section 3.2 of the Plan is hereby amended
in its entirety to read as follows:

         "3.2 Granting of Options

         (a) During the term of the Plan,  each person who is initially  elected
or appointed  to the Board,  and who is an  Independent  Director at the time of
such initial election or appointment automatically shall be granted an Option to
purchase ten thousand  (10,000) shares of Common Stock (subject to adjustment as
provided in Section  7.3) on the date of such initial  election or  appointment.
Members of the Board who are employees of the Company who  subsequently  incur a
Termination  of  Employment  and remain on the Board will not receive an initial
Option grant  pursuant to this  subsection  (a), but to the extent that they are
otherwise eligible, will receive, after such Termination of Employment,  Options
as described in subsection (b) below.

         (b)  During the term of the Plan,  on the date of the first  meeting of
the Board that  occurs in each  calendar  year each  Independent  Director  then
serving  as such  automatically  shall be  granted  an Option to  purchase  five
thousand  (5,000)  shares of Common Stock  (subject to adjustment as provided in
Section 7.3).

         (c) All the foregoing Option grants  authorized by this Section 3.2 are
subject to stockholder approval of the Plan in accordance with Section 7.4."

       2. Effective January 16, 1997,  Section 4.4 of the Plan is hereby amended
in its entirety to read as follows:

         "4.4 Option Vesting

         (a) Options granted pursuant to Section 3.2(a) shall become exercisable
in cumulative annual installments of one-third each on each of the first, second
and third annual  meetings of stockholders of the Company at which Directors are
elected following the date of grant, without variation or acceleration hereunder
except as provided in Section 7.3(b).

         (b) Options granted pursuant to Section 3.2(b) shall become exercisable
in full on the first anniversary of the date of the grant,  without variation or
acceleration hereunder except as provided in Section 7.3(b).

         (c) No portion of an Option which is  unexercisable  at the  Optionee's
Termination of Directorship shall thereafter become exercisable."