<PAGE>


RISK FACTORS

    Algos operates in a rapidly changing environment that involves a number of
risks that may significantly affect Algos' results, some of which are beyond
Algos' control. The following discussion highlights some of these risks, and
others are discussed elsewhere in other documents filed by Algos with the
Securities and Exchange Commission.

    IF WE ARE UNABLE TO DEVELOP A MARKETABLE PRODUCT FROM WHICH WE CAN DERIVE
REVENUES, WE ARE UNLIKELY TO ACHIEVE PROFITABILITY.

    We have no revenues from product sales and no history of commercial
manufacturing or marketing. To date, substantially all of our funding has been
provided by contributions of capital made by our founders, sales of our stock
and payments received under a license agreement with McNeil Consumer Products
Company with whom we are working to develop an over-the-counter pain reliever.
As a result, we have experienced losses since our inception and losses are
continuing and are expected to continue.

    We have a limited history upon which you may base an evaluation of our
likely performance and there is a risk that we will not be able to develop a
marketable product and/or achieve profitability. Algos' prospects must be
considered in light of the potential problems, expenses, complications and
delays encountered in connection with the formation of a new business and the
development of new pharmaceutical products, including obtaining the necessary
regulatory approvals, the utilization of unproven technology and the competitive
market environment in which Algos plans to operate.

    IF WE ARE UNABLE TO ADEQUATELY DEMONSTRATE THE SAFETY AND EFFECTIVENESS OF
OUR PRODUCTS IN HUMANS, WE MAY NOT BE ABLE TO PROCURE NECESSARY REGULATORY
APPROVALS TO BRING OUR PRODUCTS TO MARKET.

    In order to receive regulatory approval to sell our products, Algos must
demonstrate that our potential products are safe and effective in humans.
Although the results of Algos' trials to date have been encouraging, the results
are not by themselves predictive of results that will be obtained from
subsequent or more extensive trials. Furthermore, there can be no assurance that
clinical trials of products under development will demonstrate the safety and
efficacy of such products to the extent necessary to obtain regulatory
approvals. Many pharmaceutical companies have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials.
Therefore, there is a risk that we may fail to adequately demonstrate the safety
and efficacy of our products which could delay or prevent regulatory approval of
our products and prevent them from being sold.

    The speed with which we complete our clinical trials is dependent upon,
among other factors, the ability to locate and enroll suitable patients at
acceptable facilities. Accordingly, delays in planned patient enrollment in
Algos' current trials or future clinical trials may result in increased costs,
program delays or both, which may delay the ability of Algos to begin generating
revenues.

    We currently do not have regulatory approval to sell any products. The FDA
and comparable agencies in foreign countries impose substantial requirements on
the introduction of pharmaceutical products including lengthy and detailed
laboratory and clinical testing and other costly and time-consuming procedures.
Satisfaction of these requirements typically takes a number of years and varies
substantially based upon the type, complexity and novelty of the pharmaceutical
products. There can be no assurance that if clinical trials are completed, Algos
will be able to submit a New Drug Application or that any such application will
be reviewed and approved by the FDA in a timely manner, or at all. Government
regulation also affects the manufacture and marketing of pharmaceutical
products. Regulatory approvals, if granted, may include significant limitations
on the indicated uses for which a product may be marketed, which may reduce the
size of the market for Algos' product. See 'Business -- Government Regulation'.

    IF ALGOS PRODUCTS ARE NOT ACCEPTED BY THE MARKET, ALGOS WILL NOT BE ABLE TO
ACHIEVE PROFITABILITY.

    Even if regulatory approvals are obtained and Algos products prove to be
superior to alternative products on the market, uncertainty exists as to Algos'
ability, or the length of time required, to achieve






<PAGE>
market acceptance of Algos products. A number of factors may limit the market
acceptance of Algos products, including:

     the availability of alternative products with greater name and brand
     recognition than Algos,

     the price of Algos products relative to alternative products,

     the availability of third-party reimbursement and

     the extent of marketing efforts by third-party distributors or agents
     retained by Algos.

    Furthermore, some of the Algos products contain opioid ingredients that may
require stringent record-keeping obligations, strict storage requirements and
other limitations on such products' availability that could limit the
distribution and commercial usage of such products. In light of these factors,
there is a significant risk that Algos will not be able to gain market
acceptance for its products which may prevent us from achieving profitability.

    OUR SUBSTANTIAL RELIANCE ON THE CAPITAL MARKETS IN ORDER TO MEET OUR
FINANCIAL REQUIREMENTS MAY BE DILUTIVE OF THE VALUE OF ALGOS COMMON STOCK AND
MAY IMPEDE OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS.

    As a development stage company, Algos requires substantial amounts of
funding for its research and product development programs, operating expenses,
regulatory approvals and sales and marketing expenses, and no assurance can be
given that development and commercialization costs will not exceed the amounts
budgeted for such purposes. Because we do not currently generate any revenues
from product sales, we are dependent on our existing cash and our ability to
raise additional capital in order to fund our operations until we can begin
marketing our products. Any material delay in the marketing of our products may
require us to raise additional capital. Algos has limited financial resources
and its substantial reliance on the capital markets to satisfy its financial
requirements may dilute the value of Algos common stock. Conversely, if Algos is
unable to obtain sufficient funds through the financial markets or through
collaborative or other arrangements on a timely basis, there is a risk that
Algos may be required to delay, scale back or eliminate certain of its research,
development or commercialization programs or to make arrangements with third
parties to develop or commercialize products or technologies that Algos would
otherwise seek to develop or commercialize itself. In the event this occurs,
Algos may not be able to independently develop or commercialize any or all of
its products.

    IF ALGOS IS UNABLE TO SUCCESSFULLY MARKET AND SELL OUR PRODUCTS, WE MAY BE
FORCED TO LICENSE OUR PRODUCTS TO OTHERS WHICH WILL HAVE AN ADVERSE EFFECT ON
ALGOS' PROFITABILITY.

    Algos intends to market and sell some or all of its products, if
successfully developed and approved, through a direct sales force in the United
States. However, Algos currently has limited marketing and sales staff, and has
yet to establish any product distribution channels. If we are unable to develop
a sales force with technical expertise or to establish appropriate distribution
channels, we may be forced to license products we have developed to third
parties instead of directly marketing them which may reduce our profitability.

    IF ALGOS IS UNABLE TO ACQUIRE SUFFICIENT SUPPLIES FROM THIRD PARTIES, THEN
ALGOS' ABILITY TO DELIVER OUR PRODUCTS TO THE MARKET MAY BE IMPEDED.

    Algos currently uses, and expects to continue to use, outside contractors to
manufacture drug supplies for its clinical trials. In addition, Algos currently
intends to use outside contractors to manufacture products approved for sale, if
any. There is no assurance that Algos will be able to obtain its requested
amounts of drugs from these contractors or that supplies will not be interrupted
due to FDA and/or Drug Enforcement Agency, the DEA, regulatory requirements or
other reasons. If Algos cannot obtain a sufficient supply of ingredients or
supplies are interrupted, this may have a material adverse effect on our
reputation in the marketplace and our ability to develop and commercialize our
products.

    For instance, Algos currently uses a single contract manufacturer for
supplies of its most developmentally advanced product, MorphiDex'r', and
suppliers of raw materials are limited. The regulatory qualification of
additional suppliers and/or manufacturers may require significant time and
expense. In addition, the acquisition of opioid ingredients as components of
certain Algos products is subject to quota restrictions imposed and administered
by the DEA. Accordingly, there is a risk that






<PAGE>
Algos will be unable to obtain its requested quantities of opioid ingredients
which could be detrimental to Algos' ability to bring its product to market.

    IF ALGOS IS UNABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE
ABLE TO MAINTAIN OUR COMPETITIVE POSITION.

    Because of the specialized scientific nature of Algos' business, we are
highly dependent upon our ability to attract and retain qualified scientific and
technical personnel. The loss of significant scientific and technical personnel
or the failure to recruit additional key scientific and technical personnel
could have a material adverse effect on Algos' ability to develop and deliver
our products to market in a competitive manner. While Algos has consulting
agreements with certain key individuals and institutions and has employment
agreements with certain key executives, there can be no assurance that Algos
will be successful in retaining such personnel or their services under existing
agreements. The loss of John Lyle, Algos' Chief Executive Officer, could have a
material adverse effect on Algos because of the loss of Mr. Lyle's expertise and
because we would need to expend time and financial resources to seek a new Chief
Executive Officer which would materially slow our efforts to develop and
commercialize our products. Algos currently maintains a $6.0 million life
insurance policy on Mr. Lyle. There is intense competition for qualified
personnel in the areas of Algos' activities, and there can be no assurance that
Algos will be able to continue to attract and retain the qualified personnel
necessary for the development of its business.

    IF WE ARE UNABLE TO PATENT OUR TECHNOLOGY OR ARE FOUND TO HAVE VIOLATED OR
INFRINGED ON THE PATENTS OF OTHERS, THIS WOULD ADVERSELY AFFECT OUR ABILITY TO
GENERATE REVENUES AND WE MAY NOT BE ABLE TO RECEIVE AN APPROPRIATE RETURN ON OUR
INVESTMENT.

    Algos' policy is to seek patent protection and enforce intellectual property
rights. However, no assurance can be given that any patents will be allowed or
will provide protection against competitive products or otherwise be
commercially viable. In this regard, the patent position of pharmaceutical
compounds and compositions is particularly uncertain. Because we are a
development stage company without brand name recognition for our products, our
ability to successfully patent and protect the technologies we are developing or
may develop in the future is especially crucial to our ability to generate
future revenues and maintain our competitive position. However, there is a risk
that Algos' pending patent applications may not be allowed, or if they are
allowed, that the scope of the claims allowed will be insufficient to protect
Algos products. Furthermore, even issued patents may later be modified or
revoked by the United States Patent and Trademark Office, the PTO, or in legal
proceedings. Any of these outcomes would reduce future revenues and the return
on any investment in Algos.

    In addition, no assurance can be given as to whether Algos will be able to
avoid violating or infringing upon patents issued to others. If Algos were found
to be infringing on a patent held by another, Algos might have to seek a license
to use the patented technology. There can be no assurance that, if required,
Algos would be able to obtain such a license on terms acceptable to Algos, if at
all. If a legal action were to be brought against Algos or its licensors or
licensees, Algos could incur substantial costs in defending itself, and there
can be no assurance that such an action would be resolved in Algos' favor. If a
patent infringement dispute were to be resolved against Algos, Algos could be
subject to significant damages and the manufacture or sale of one or more of
Algos' technologies or proposed products, if developed, could be stopped.

    IF THIRD-PARTY REIMBURSEMENT FOR OUR PRODUCTS IS UNAVAILABLE OR INADEQUATE,
WE MAY NOT BE ABLE TO REALIZE AN APPROPRIATE RETURN ON OUR INVESTMENT AND/OR THE
MARKET ACCEPTANCE OF OUR PRODUCTS COULD BE ADVERSELY AFFECTED.

    Algos' ability to commercialize its pain management products may depend in
part on the extent to which reimbursement for the costs of such products will be
available from government health administration authorities, private health
insurers and others. Government, private insurers and other third-party payers
are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new products approved for marketing
by the FDA and by refusing, in some cases, to provide any coverage for uses of
approved products for indications for which the FDA has not granted marketing
approval. Because we are developing drugs that may have higher costs than






<PAGE>
generic alternatives that are currently available, there is a risk that insurers
will be unwilling to provide coverage for our product. If adequate coverage and
reimbursement levels are not provided by government and third-party payers for
uses of Algos products, the market acceptance of our products could be adversely
affected and/or Algos may not be able to establish and maintain price levels
sufficient for the realization of an appropriate return on our investment.

    IF ALGOS INCURS INDEMNIFICATION LIABILITY, OR A PRODUCTS LIABILITY SUIT IS
SUCCESSFULLY PROSECUTED AGAINST US, WE MAY NOT HAVE SUFFICIENT FUNDS TO PAY THE
RESULTING LIABILITY.

    Algos will be exposed to potential product liability risks, which are
inherent in the testing, manufacturing and marketing of human therapeutic
products. In addition, Algos is contractually obligated under certain of our
license agreements to indemnify the individuals and/or institutions from whom we
have licensed the technology against claims relating to the manufacture and sale
of the products to be sold by Algos. Algos' indemnification liability, as well
as direct liability to consumers for any defects or health risks in the products
sold, could expose Algos to substantial losses which would reduce earnings and
funds available for research and development activities.

    Algos currently carries certain liability insurance for our clinical trial
activities and we plan to purchase such product liability insurance as we deem
appropriate prior to marketing our products. McNeil Consumer Products Company is
required by its license agreement to maintain product liability insurance and
may self-insure to cover its indemnification obligations to Algos. However,
there can be no assurance that Algos will be able to obtain or maintain such
insurance on acceptable terms or that any insurance obtained will provide
adequate coverage against potential liabilities.

    IF THE MCNEIL LICENSE AGREEMENT IS TERMINATED AND ALGOS DESIRES TO DEVELOP
AND COMMERCIALIZE ITS OVER-THE-COUNTER PRODUCTS, ALGOS MAY BE FORCED TO DO SO
ITSELF WHICH MAY REDUCE PROFITS.

    We are relying on McNeil to commercialize products involving acetaminophen,
ibuprofen and certain other over-the-counter pain relievers. Acetaminophen is
the active ingredient in Tylenol and ibuprofen is the active ingredient in
Motrin, both of which are manufactured by McNeil. If the agreement with McNeil
is terminated, then in the event that we desire to develop and commercialize our
products, we may be forced to do so ourselves. Because Algos does not have the
same level of resources as McNeil, this may reduce any potential future revenues
we may otherwise generate.

    The license agreement dated June 26, 1996 with McNeil Consumer Products
Company extends until the later of the expiration of Algos' patent rights or ten
years from the date of execution, provided that the agreement is terminable:

     by either party in the event of a breach by the other party upon 90 days
     notice or upon certain events of bankruptcy;

     by McNeil Consumer Products Company, at any time upon 60 days notice; and

     by Algos upon certain other circumstances.

    IF ALGOS' COMPETITORS SUCCEED IN DEVELOPING COMPETING TECHNOLOGIES MORE
RAPIDLY THAN ALGOS, THE PRODUCTS WE ARE DEVELOPING MAY BE RENDERED OBSOLETE
WHICH WOULD PREVENT US FROM SUCCESSFULLY COMPETING IN OUR TARGET MARKETS.

    As a development stage company, Algos' success will largely depend upon its
ability to successfully achieve market share at the expense of existing and
established products in Algos' target markets. A number of pharmaceutical
companies are developing pain relief products. Many of Algos' competitors have a
significantly higher degree of brand name recognition and substantially more
financial resources than those of Algos. They also may have greater research and
development capacities, experience, recognition and marketing, financial and
managerial resources than Algos. Accordingly, if Algos' competitors succeed in
developing competing technologies and obtaining FDA approval for products more
rapidly than Algos, Algos products or technologies may be rendered
non-competitive or obsolete in which case we would be unable to compete in our
target market.






<PAGE>
    A THIRD PARTY MAY HAVE DIFFICULTY SUCCESSFULLY MOUNTING A TAKEOVER BID FOR
CONTROL OF ALGOS WHICH COULD PREVENT YOU FROM MAXIMIZING THE VALUE OF YOUR ALGOS
COMMON STOCK AND COULD MAKE YOUR INVESTMENT LESS LIQUID.

    The ownership of Algos is concentrated, with a small group of stockholders,
directors, officers and related investors owning approximately 40% of the common
stock. These stockholders, if they acted together, would have the ability to
influence significantly the election of Algos' directors as well as the
management and policies of Algos. This concentration of ownership may have the
effect of delaying or preventing a change of control of Algos. Certain other
provisions of Algos' Amended and Restated Certificate of Incorporation could
also have the effect of delaying or preventing changes of control or management
of Algos, which could adversely affect the market price and liquidity of our
common stock. In addition, Algos is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibits Algos from
engaging in a 'business combination' with an 'interested stockholder' for a
period of three years after the date of the transaction in which the person
first becomes an 'interested stockholder,' unless the business combination is
approved in a prescribed manner. The application of these provisions could have
the effect of delaying or preventing a change of control of Algos and could make
your investment less liquid.

    IF WE, OUR CONTRACTORS OR OTHER ENTITIES ARE UNABLE TO ADEQUATELY ADDRESS
THE POTENTIAL DISRUPTIONS TO COMPUTER SYSTEMS THAT MAY OCCUR DUE TO THE ADVENT
OF THE YEAR 2000, WE MAY NOT BE ABLE TO EFFECTIVELY DEVELOP OR COMMERCIALIZE OUR
PRODUCTS.

    A potential problem exists for all companies that rely on computers as the
year 2000 approaches. Computer software applications and systems that use only
the last two digits of a year to refer to a year may not properly recognize the
year 2000. This could cause a disruption of our operations, including, among
other things, a temporary inability to engage in normal business activities.
Because new development projects have not yet commenced and because we have not
completed our preparations for the commercialization and marketing of our
products, our assessment of our readiness with respect to the potential year
2000 computer problem will be ongoing.

    With respect to product development activities at Algos, if certain
manufacturing, data management or statistical applications do not function
properly, the conduct of studies or the analysis and reporting of study results
could be delayed and the timing of subsequent development activities and
regulatory filings could be adversely affected.

    Algos may make significant additions to and changes in its existing computer
software applications and systems and/or the use of these systems in
anticipation of the possible commercialization of products. If Algos makes any
of these additions or changes, it would affect Algos' exposure to the potential
year 2000 computer problem since Algos would become more reliant on its computer
software applications and systems. If Algos commercializes products, it expects
to place significant dependence on the third parties' computer systems for
purchasing, production, customer order entry and invoicing and other related
activities. A disruption in these systems could result in lost revenue from
inventory shortages, improper execution of customer orders and/or delays in the
resolution and collection of outstanding invoices.

    As part of our development and commercialization efforts, we will ask our
outside vendors, manufacturers, suppliers and service providers whether they
and/or any additional information systems and software that we acquire from them
are year 2000 compliant. However, these parties may be unable or unwilling to
make assurances of their year 2000 compliance. And, even if we do receive
assurances of year 2000 compliance, the parties making the assurances may not in
fact be year 2000 compliant. In the event any of our outside vendors,
manufacturers, suppliers and service providers are not year 2000 compliant, we
will likely be prevented from developing or commercializing some or all of our
products in a timely or efficient manner.

UNCERTAINTY ASSOCIATED WITH PRE-CLINICAL STUDIES AND CLINICAL TRIALS

    In order to receive regulatory approval to sell its products commercially,
Algos must demonstrate in pre-clinical studies and clinical trials that its
potential products are safe and effective in humans. Although the results of
Algos' pre-clinical studies and clinical trials to date have been encouraging,
the






<PAGE>
results of pre-clinical studies and clinical trials are not by themselves
predictive of results that will be obtained from subsequent or more extensive
trials. Furthermore, there can be no assurance that clinical trials of products
under development will demonstrate the safety and efficacy of such products to
the extent necessary to obtain regulatory approvals. Many pharmaceutical
companies have suffered significant setbacks in advanced clinical trials, even
after promising results in earlier trials. The failure to adequately demonstrate
the safety and efficacy of a product could delay or prevent regulatory approval
of such product and could have a material adverse effect on Algos.

    The rate of completion of clinical trials is dependent upon, among other
factors, the enrollment of patients. Patient accrual is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. Delays in planned patient enrollment in Algos'
current trials or future clinical trials may result in increased costs, program
delays or both, which could have a material adverse effect on Algos. There can
be no assurance that if clinical trials are completed Algos will be able to
submit a New Drug Application or that any such application will be reviewed and
approved by the United States Food and Drug Administration (FDA) in a timely
manner, or at all. See 'Business -- Government Regulation.'

GOVERNMENT REGULATION; NO ASSURANCE OF UNITED STATES OR FOREIGN REGULATORY
APPROVAL

    The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of therapeutic pharmaceutical products through
lengthy and detailed laboratory and clinical testing and other costly and
time-consuming procedures. Satisfaction of these requirements typically takes a
number of years, varies substantially based upon the type, complexity and
novelty of the pharmaceutical products and is subject to uncertainty. Government
regulation also affects the manufacture and marketing of pharmaceutical
products. Regulatory approvals, if granted, may include significant limitations
on the indicated uses for which a product may be marketed. The FDA actively
enforces regulations prohibiting marketing of products for non-indicated use.
Failure to comply with applicable regulatory requirements can result in, among
other things, government imposed fines, suspensions of approvals, seizures or
recalls of products, operating restrictions and criminal prosecutions.
Furthermore, changes in existing regulations or adoption of new regulations
could prevent Algos from obtaining, or affect the timing of, future regulatory
approvals. The effect of government regulation may be to delay marketing of
Algos' new products for a considerable period of time, to impose costly
procedures upon Algos' activities and to furnish a competitive advantage to
larger companies that compete with Algos. There can be no assurance that FDA or
other regulatory approval for any products developed by Algos will be granted on
a timely basis, if at all. Any such delay in obtaining, or failure to obtain,
such approvals would adversely affect the marketing of Algos' products and the
ability to generate product revenue. Algos is also subject to certain United
States Drug Enforcement Agency (DEA) regulations including restrictions on
storage, transportation and administration, for its narcotic products that could
limit the distribution and commercial usage of such products. Government
regulation may increase at any time creating additional hurdles for Algos. The
extent of potentially adverse government regulation which might arise from
future legislation or administrative action cannot be predicted. See
'Business -- Government Regulation.'

UNCERTAINTY OF MARKET ACCEPTANCE

    Even if regulatory approvals are obtained, uncertainty exists as to whether
Algos' products will be accepted by the market. A number of factors may limit
the market acceptance of Algos' products, including the timing of regulatory
approvals and market entry relative to competitive products, the availability of
alternative products, the price of Algos' products relative to alternative
products, the availability of third-party reimbursement and the extent of
marketing efforts by third-party distributors or agents retained by Algos. There
can be no assurance of Algos' ability, or the length of time required, to
achieve market acceptance of Algos' products. In addition, some of Algos'
products contain narcotic ingredients that may require stringent record-keeping
obligations, strict storage requirements and other limitations on such products'
availability that could limit the distribution and commercial usage of such
products.






<PAGE>
NEED FOR ADDITIONAL FUNDS

    The amount and timing of Algos' expenditures will depend on the progress of
its research and development, the cost and timing of regulatory approvals, the
amount of spending on sales, marketing and distribution activities in connection
with the possible commercialization of MorphiDex'r', general market conditions,
relationships with potential strategic partners, changes in the focus and
direction of Algos' research and development programs, competitive and
technological advances and other factors. Algos' cash requirements may vary
materially from those now planned and no assurance can be given that development
costs will not exceed the amounts budgeted for such purposes. Algos may require
additional funding for its research and product development programs, operating
expenses, regulatory clearances and sales and marketing expenses. Adequate funds
for these purposes, whether obtained through financial markets or through
collaborative or other arrangements with partners or from other sources, may not
be available when needed or on terms acceptable to Algos. Insufficient funds may
require Algos to delay, scale back or eliminate certain of its research,
development or commercialization programs or to make arrangements with third
parties to develop or commercialize products or technologies that Algos would
otherwise seek to develop or commercialize itself. As a result, Algos may not be
able to independently develop or commercialize any or all of the products
described in this report.

LIMITED SALES AND MARKETING EXPERIENCE

    Algos intends to market and sell some or all of its products, if
successfully developed and approved, through a direct sales force in the United
States. Algos currently has limited marketing and sales staff, and has yet to
establish any product distribution channels. In order to market its products
directly, Algos must develop a sales force with technical expertise. There can
be no assurance that Algos will be able to successfully establish a direct sales
organization or distribution channels. Failure to establish a sales force
capability in the United States may have a material adverse effect on Algos.

RELIANCE ON THIRD-PARTY MANUFACTURERS

    Algos currently uses, and expects to continue to use, outside contractors to
manufacture drug supplies for its clinical trials. In addition, Algos currently
intends to use outside contractors to manufacture products approved for sale, if
any. There is no assurance that supplies from any such contractor will not be
reduced or interrupted due to FDA and/or DEA regulatory requirements or other
reasons. Such a reduction or interruption could have a material adverse effect
on Algos' development and commercialization activities. Algos currently uses a
single contract manufacturer for supplies of its most developmentally advanced
product, MorphiDex'r', and suppliers of raw materials are limited. The
regulatory qualification of additional suppliers and/or manufacturers may
require significant time and expense. In addition, the acquisition of narcotics
as components of certain of Algos' products is subject to quota restrictions
imposed and administered by the DEA. There is no assurance that Algos will be
able to obtain its requested quantities of such narcotics.

DEPENDENCE ON QUALIFIED PERSONNEL

    Because of the specialized scientific nature of Algos' business, Algos is
highly dependent upon its ability to attract and retain qualified scientific and
technical personnel. The loss of significant scientific and technical personnel
or the failure to recruit additional key scientific and technical personnel
could have a material adverse effect on Algos. While Algos has consulting
agreements with certain key individuals and institutions and has employment
agreements with its key executives, there can be no assurance that Algos will be
successful in retaining such personnel or their services under existing
agreements. The loss of John Lyle, Algos' Chief Executive Officer, could have a
material adverse effect on Algos. Algos currently maintains a $6.0 million life
insurance policy on Mr. Lyle. There is intense competition for qualified
personnel in the areas of Algos' activities, and there can be no assurance that
Algos will be able to continue to attract and retain the qualified personnel
necessary for the development of its business.






<PAGE>
UNCERTAIN ABILITY TO PROTECT PROPRIETARY TECHNOLOGY

    Algos' success, competitive position and amount of potential future income
will depend in part on its ability to obtain patent protection relating to the
technologies, processes and products it is developing and may develop in the
future. Algos' policy is to seek patent protection and enforce intellectual
property rights. No assurance can be given that any patent issued or licensed to
Algos will provide protection against competitive products or otherwise be
commercially viable. In this regard, the patent position of pharmaceutical
compounds and compositions is particularly uncertain. Even issued patents may
later be modified or revoked by the United States Patent and Trademark Office
(PTO) or in legal proceedings. Moreover, Algos believes that obtaining foreign
patents may be more difficult than obtaining domestic patents because of
differences in patent laws, and accordingly, its patent position may be stronger
in the United States than abroad. In addition, foreign patents may be more
difficult to protect and/or the remedies available may be less extensive than in
the United States. Patent applications in the United States are maintained in
secrecy until patents issue and, since publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries, Algos
cannot be certain that it was the first creator of the inventions covered by
pending patent applications or the first to file patent applications on such
inventions. No assurance can be given that any of Algos' pending patent
applications will be allowed, or if allowed, whether the scope of the claims
allowed will be sufficient to protect Algos' products.

    Algos also expects to rely upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. There can be no assurance that others will not
independently develop substantially equivalent proprietary information or be
issued patents that may prevent the sale of Algos' products or know-how or
require licensing and the payment of significant fees or royalties by Algos in
order to produce its products. Moreover, there can be no assurance that Algos'
technology does not infringe upon any valid claims of patents owned by others.
If Algos were found to be infringing on a patent held by another, Algos might
have to seek a license to use the patented technology. There can be no assurance
that, if required, Algos would be able to obtain such a license on terms
acceptable to Algos, if at all. If a legal action were to be brought against
Algos or its licensors or licensees, Algos could incur substantial costs in
defending itself, and there can be no assurance that such an action would be
resolved in Algos' favor. If such a dispute were to be resolved against Algos,
Algos could be subject to significant damages and the testing, manufacture or
sale of one or more of Algos' technologies or proposed products, if developed,
could be enjoined.

    No assurance can be given as to the degree of protection any patents will
afford, whether patents will be issued or whether Algos will be able to avoid
violating or infringing upon patents issued to others. Despite the use of
confidentiality agreements and non-compete agreements, which themselves may be
of limited effectiveness, it may be difficult for Algos to protect its trade
secrets. See 'Risk Factors -- Dependence on Qualified Personnel.'

UNCERTAIN AVAILABILITY OF HEALTH CARE REIMBURSEMENT

    Algos' ability to commercialize its pain management products may depend in
part on the extent to which reimbursement for the costs of such products will be
available from government health administration authorities, private health
insurers and others. There can be no assurance that third-party insurance
coverage will be adequate for Algos to establish and maintain price levels
sufficient for realization of an appropriate return on its investment.
Government, private insurers and other third-party payers are increasingly
attempting to contain health care costs by limiting both coverage and the level
of reimbursement for new products approved for marketing by the FDA and by
refusing, in some cases, to provide any coverage for uses of approved products
for indications for which the FDA has not granted marketing approval. If
adequate coverage and reimbursement levels are not provided by government and
third-party payers for uses of Algos' products, the market acceptance of these
products could be adversely affected.

LIMITED PRODUCT LIABILITY INSURANCE

    Algos will be exposed to potential product liability risks, which are
inherent in the testing, manufacturing and marketing of human therapeutic
products. Algos is contractually obligated under






<PAGE>
certain of its license agreements to indemnify the individuals and/or
institutions from whom it has licensed the technology against claims relating to
the manufacture and sale of the products to be sold by Algos. McNeil Consumer
Products Company, however, has agreed to indemnify Algos for third party claims
or suits resulting from the manufacture, use or sale of the products pursuant to
the McNeil License Agreement. Algos' indemnification liability, as well as
direct liability to consumers for any defects in the products sold, could expose
Algos to substantial risk and losses. Algos currently carries certain liability
insurance for its clinical trial activities but does not have product liability
insurance covering commercial use of its products. Algos plans to purchase such
product liability insurance as it deems appropriate prior to marketing its
products. McNeil Consumer Products Company is required by the McNeil License
Agreement to maintain product liability insurance and may self-insure to cover
its indemnification obligations to Algos. However, there can be no assurance
that Algos will be able to obtain or maintain such insurance on acceptable terms
or that any insurance obtained will provide adequate coverage against potential
liabilities.

CERTAIN RISKS ASSOCIATED WITH THE MCNEIL LICENSE AGREEMENT

    The McNeil License Agreement extends until the later of the expiration of
Algos' patent rights or ten years from the date of execution, provided that the
McNeil License Agreement is terminable: (i) by either party in the event of a
breach by the other party upon 90 days notice or upon certain events of
bankruptcy; (ii) by McNeil Consumer Products Company at any time upon 60 days
notice; and (iii) by Algos upon certain other circumstances. Under certain
circumstances, the McNeil License Agreement could terminate with respect to
either acetaminophen or non-steroidal anti-inflammatory drug products without
terminating with respect to the other category. In the event of a termination by
McNeil Consumer Products Company, McNeil must pay all royalty payments and
milestone payments due, if any, through the date of termination and the
technology licensed by McNeil reverts to Algos. In such event, Algos retains the
rights to the results of the two clinical studies funded by Algos, and McNeil
Consumer Products Company retains the rights to the results of the clinical
studies funded by it during the term of the McNeil License Agreement.

COMPETITION AND TECHNOLOGICAL CHANGES, UNCERTAINTY AND OBSOLESCENCE

    Algos' success will depend, in part, upon its ability to successfully
achieve market share at the expense of existing and established products in
Algos' target markets. Algos' products will be competing directly with the
products of companies that are well-established and which may have a
significantly higher degree of brand and name recognition and substantially more
financial resources than those of Algos. Algos is also in competition with other
pharmaceutical companies, hospitals, research organizations, individual
scientists and non-profit organizations engaged in the development of new
pharmaceuticals. Many of these companies and entities have greater research and
development capacities, experience, recognition and marketing, financial and
managerial resources than Algos and represent significant competition for Algos.
Also, Algos' competitors may succeed in developing competing technologies and
obtaining FDA approval for products more rapidly than Algos. There can be no
assurance that developments by others will not render Algos' products or
technologies non-competitive or obsolete.

CONCENTRATION OF OWNERSHIP

    Algos' directors and officers beneficially own approximately 24% of Algos
common stock and two additional stockholders and related investors control
approximately 17% of the common stock (assuming all warrants held by such
entities are currently exercisable). As a result, these stockholders, if they
acted together, would have the ability to influence significantly the election
of Algos' directors as well as the management and policies of Algos. This
concentration of ownership may have the effect of delaying or preventing a
change of control of Algos.

POSSIBLE VOLATILITY OF STOCK PRICE

    The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. The market price of Algos






<PAGE>
common stock may prove to be highly volatile from a variety of variable
influences. Announcements of technological innovations, regulatory matters or
new commercial products by Algos or its competitors, developments or disputes
concerning patent or proprietary rights, publicity regarding actual or potential
clinical results relating to products under development by Algos or its
competitors, regulatory developments in both the United States and foreign
countries, public concern as to the safety of pharmaceutical products, economic
and other external factors, as well as period-to-period fluctuations in
financial results, may have a significant impact on the market price of Algos
common stock. The timing and amount of Algos' development and commercialization
expenditures are subject to significant uncertainties; operating results for any
accounting period may not be indicative of expected results for future periods.

ABSENCE OF DIVIDENDS

    Algos has never declared or paid any cash dividends on its capital stock.
Algos currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of Algos'
Board of Directors after taking into account various factors, including Algos'
financial condition, operating results, current and anticipated cash needs and
plans for expansion.

EFFECT OF ANTI-TAKEOVER PROVISIONS

    Algos' Amended and Restated Certificate of Incorporation provides for a
classified Board of Directors and that members of the Board of Directors may be
removed only for cause upon the affirmative vote of holders of at least a
majority of the shares of capital stock of Algos entitled to vote. Algos'
Amended and Restated Certificate of Incorporation requires that any action
required or permitted to be taken by stockholders of Algos must be effected at a
duly called annual or special meeting of stockholders and may not be effected by
any consent in writing, and will require reasonable advance notice by a
stockholder of a proposal or director nomination which such stockholder desires
to present at any annual or special meeting of stockholders. Special meetings of
stockholders may be called only by the Chairman of the Board or the President of
Algos or by the majority of the whole of the Board of Directors. In addition,
the Board of Directors has the authority, without further action by the
stockholders, to fix the rights and preferences of, and issue shares of,
preferred stock. Algos is subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law, which prohibits Algos from engaging in
a 'business combination' with an 'interested stockholder' for a period of three
years after the date of the transaction in which the person first becomes an
'interested stockholder,' unless the business combination is approved in a
prescribed manner. The application of these provisions could have the effect of
delaying or preventing a change of control of Algos. Certain other provisions of
Algos' Amended and Restated Certificate of Incorporation could also have the
effect of delaying or preventing changes of control or management of Algos,
which could adversely affect the market price of the common stock.