Document:

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                                                                  Exhibit 10.26

                          FORM OF EMPLOYMENT AGREEMENT

                                    Parties

   This Employment Agreement (the "Agreement") made as of     , 2000 is entered
into by and between Endo Pharmaceuticals Holdings Inc., with its principal
business address at 223 Wilmington-West Chester Pike, Chadds Ford, Pennsylvania
19317 (the "Company"), and John W. Lyle, residing at 28 Inlet Terrace, Belmar,
New Jersey 07719 ("Executive").

                                    Recitals

   A. The Company has entered into an Agreement and Plan of Merger as may be
amended and restated from time to time, dated as of November 26, 1999 (the
"Merger Agreement") among the Company, Endo Inc., a Delaware corporation and a
newly formed wholly owned subsidiary of the Company ("Sub"), and Algos
Pharmaceutical Corporation, a Delaware Corporation ("Algos"), pursuant to
which, among other things, Algos will merge with and into Sub.

   B. The Company desires to retain Executive to provide the services
hereinafter set forth.

   C. Executive is willing to continue to provide such services to the Company
on the terms and conditions hereinafter set forth.

                               Terms of Agreement

   The parties agree as follows:

1. Employment.

   1.1 The Company hereby retains Executive's employment (subject to the
provisions of Section 6) in a senior executive capacity with the Company. The
Executive shall perform such duties and services, consistent with his
positions, as may be assigned to him from time to time by the Board of
Directors of the Company or its designee. In furtherance of the foregoing, the
Executive hereby agrees to perform well and faithfully the aforesaid duties and
responsibilities and the other reasonable senior executive duties and
responsibilities assigned to him from time to time by the Board of Directors of
the Company or its designee. During the Employment Period, the Company shall
provide the Executive with an office, secretarial and other support services
comparable to those provided to other senior executive officers of the Company
at its headquarters and at the Company's facility at 1333 Campus Parkway,
Neptune, New Jersey 07753 for so long as the Company maintains such facility
and afterward at another facility of the Company convenient to the Executive to
be chosen at Executive's discretion.

   1.2 Executive hereby accepts this employment on and subject to the terms and
conditions set forth in this Agreement, and shall use his reasonable best
efforts to promote the Company's interests.

2. Compensations Benefits.

   2.1 Salary. During the Employment Period, as compensation for Executive's
performance of Executive's duties under this Agreement, the Company shall pay
Executive a Base Salary ("Base Salary") at the annual rate of $325,000 from the
date of this Agreement through December 31, 2000. Thereafter, the Base Salary
shall be subject to increase at the option and in the sole discretion of the
Board of Directors of the Company annually. The Base Salary shall be payable in
installments pursuant to the Company's executive payroll policies in force at
the time of payment (but not less frequently than monthly) for the month or
shorter pay period then ended, subject to applicable withholding for FICA,
income taxes and other required payroll deductions.

     2.1.1 The Executive's Base Salary will be supplemented by payment of
  performance bonuses at the option and in the sole discretion of the Board
  of Directors of the Company annually.

                                       1
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   2.2 Expenses. During the Employment Period, to the extent such expenditures
meet the requirements and the policies of the Company for senior executives,
the Company shall reimburse Executive promptly for all reasonable travel,
entertainment, parking, business meeting and similar expenditures in pursuance
and furtherance of the Company's business, upon presentation of proper vouchers
or receipts therefor and in accordance with the Company's customary procedures.
During the Employment Period, the Company shall provide Executive with a mobile
phone, facsimile machine and photocopying machine for his home office, and the
Company shall reimburse Executive for expenses incurred in the use thereof by
Executive in pursuance and furtherance of the Company's business, upon
presentation of proper vouchers or receipts therefor and in accordance with the
Company's customary procedures.

   2.3 Other Benefits. Executive shall be entitled to participate, at
Executive's option and as eligible, in any Company plans for the benefit of
officers and key employees as from time to time established, including, without
limitation, profit sharing, pension plan, stock option plans, performance bonus
plans, disability, medical and group life insurance. If the Company shall not
provide coverage for comprehensive family major medical, family dental,
disability and life insurance to Executive, he shall be reimbursed for the cost
of such coverage acquired by him elsewhere.

3. Employment Period; Termination.

   3.1 Employment Period. Executive's employment term ("Employment Period")
shall terminate on the fifth anniversary of the date of this Agreement unless
earlier terminated pursuant to Section 3.2.

   3.2 Termination.

     3.2.1 Termination for Cause. The Company may, upon the approval of a
  majority of the members of the Board of Directors of the Company, discharge
  Executive and terminate the Employment Period for cause. Discharge for
  cause shall be effective ten (10) days after Executive's receipt of written
  notice of discharge or at such later date as may be specified in that
  notice, provided such notice contains the specific reasons and the specific
  events upon which discharge is predicated. If Executive is discharged for
  cause, Executive shall only be entitled to Base Salary through the
  effective date of the discharge or termination. As used in this paragraph,
  "cause" shall mean any or all of the following:

       (i) Willful and grossly negligent action taken by Executive which
    materially harms, or can reasonably be expected to harm, the Company;

       (ii) Commission of a fraud, misappropriation, embezzlement, or
    criminal misconduct that would constitute a felony or adversely affect
    the reputation of the Company or any of its affiliates (for purposes of
    this Employment Agreement the term "affiliates" shall be deemed to
    include, but not necessarily be limited to the corporation to which the
    Company assigns its rights to the name, "Endo Pharmaceuticals" or any
    variation thereof); or

       (iii) If Executive shall be in breach of, or in default under, any
    material provision, term or covenant of Article 4 of this Agreement
    (other than a breach or default described in clauses (i) and (ii)) and
    shall fail to cure such breach or default within a reasonable time
    after written notice describing such breach or default in particular by
    the Company; provided, however, that the Company need not give such
    notice of, and Executive shall not have such opportunity to cure, any
    material breach or default of any provision, term or covenant of
    Article 4 of this Agreement if Executive had previously committed such
    material breach or default and received notice thereof pursuant to this
    clause (iii). The Employment Agreement shall only be terminable by the
    Company with cause; provided, however, that "cause" shall in no event
    include failure by Executive to perform services under this Agreement
    because the Company and Executive have failed to agree on the nature,
    amount, scope or timing of his services.

   3.2.2 Termination for other than Cause. During the Employment Period, the
Company may terminate Executive's employment at any time for other than cause
on 30 days' written notice to Executive. Such termination shall be deemed
effective 30 days after Executive's receipt of the written notice of
termination or at such later date as may be specified in such notice.

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   3.2.3 Involuntary Termination. If, during the Employment Period, Executive
becomes ill, disabled or otherwise incapacitated so as to be unable regularly
to perform his usual duties for a period in excess of 120 consecutive days, or
more than 150 days in any consecutive twelve-month period (such condition being
hereinafter referred to as "Disability"), the Company shall have the right,
with the approval of a majority of the members of the Board of Directors, to
terminate Executive's employment on 30 days' written notice to Executive (such
termination, or Executive's death, being herein referred to as "Involuntary
Termination"). If the Executive dies during the Employment Period, his
employment hereunder shall be deemed to have ceased as of the date of his
death.

   3.2.4 Voluntary Termination. Any termination of the employment of the
Executive hereunder effectuated by the Executive shall be deemed to be a
"Voluntary Termination." A Voluntary Termination shall be deemed to be
effective immediately upon such termination.

   3.3 Effect of Termination of Employment.

     3.3.1 Upon the termination of the Executive's employment hereunder
  pursuant to a Voluntary Termination or a Termination for Cause, neither the
  Executive nor his beneficiary or estate shall have any further rights or
  claims against the Company under this Agreement except to receive:

       (i) the unpaid portion of the Base Salary provided for in Section
    2.1, computed on a pro rata basis to the date of termination; and

       (ii) reimbursement for any expenses for which the Executive shall
    not have theretofore been reimbursed as provided in Section 2.2.

     3.3.2 Upon the termination of the Executive's employment hereunder
  pursuant to an Involuntary Termination or a Termination for other than
  Cause, neither the Executive nor his beneficiary or estate shall have any
  further rights or claims against the Company under this Agreement except to
  receive:

       (i) the unpaid portion of the Base Salary provided for in Section
    2.1, to the fifth anniversary of the date of this Agreement;

       (ii) reimbursement for any expenses for which the Executive shall
    not have theretofore been reimbursed as provided in Section 2.2; and

       (iii) the continuation of the benefits afforded pursuant to Section
    2.3(i) through the fifth anniversary of the date of this Agreement.

4. Executive's Covenants.

   4.1 Executive agrees that he will not from and after the date hereof through
the fifth anniversary of the termination of the Employment Period (for whatever
reason), directly or indirectly, through any other person, firm or corporation,
solicit, raid, entice, induce or encourage any employee, sales representative,
agent or consultant of or for the Company or its affiliates, to (i) cease his
or her association with or leave the employ of the Company or its affiliates,
(ii) solicit customers or suppliers of the Company or its affiliates for
Executive's or any other person's or entity's benefit or (iii) otherwise act in
violation of that person's obligations to the Company or its affiliates, and
Executive shall not authorize or knowingly approve the taking of such actions
by any other person.

   4.2 Executive acknowledges that, by reason of his employment with the
Company, he will obtain confidential or non-public proprietary knowledge or
information pertaining to the business and policies of the Company and its
affiliates. Executive agrees that during and after the term of this Agreement,
he shall not disclose, without the prior written consent of the Board of
Directors of the Company or the Chairman of the Board, any confidential or non-
public proprietary knowledge or information pertaining to the Company and its
affiliates ("Confidential Information"), including, but not limited to (1)
trade secrets concerning the business and affairs of the Company and its
affiliates, product specifications, data, know-how, formulae, compositions,
processes, designs, sketches, photographs, graphs, drawings, samples,
inventions and ideas, past, current and

                                       3
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planned research and development, current and planned manufacturing or
distribution methods and processes, customer lists, information regarding
customers of the Company (including such customers' requirements), price lists,
market studies, business plans, computer software and programs (including
object code and source code), computer software and database technologies,
systems, structures, and architectures (and related formulae, compositions,
processes, improvements, devices, know-how, inventions, discoveries, designs,
methods and information); (2) information concerning the business and affairs
of the Company and its affiliates (which includes historical financial
statements, financial projections and budgets, historical and projected sales,
capital spending budgets and plans, the names and backgrounds of key personnel,
personnel training and techniques and material) however documented; and (3)
notes, analyses, compilations, studies, summaries and other materials prepared
by or for the Company and its affiliates containing or based, in whole or in
part, on any information included in the foregoing. Confidential Information
shall not include information that: (a) was known to Executive prior to his
first employment with the Company or its affiliates, or (b) is public
knowledge, or becomes public knowledge other than by action (or omission) of
(i) Executive or persons obtaining access to such information directly or
indirectly from Executive or (ii) other persons disclosing such information in
breach of obligations to the Company.

   4.3 Executive acknowledges and agrees that all memoranda, notes, reports,
records and other documents made or compiled by Executive, or made available to
Executive prior to or during the term of this Agreement concerning the
Company's and its affiliates, business, shall be the Company's or its
affiliates' property and shall be delivered to the Company on the termination
of this Agreement or at any other time on request by the Board of Directors or
Chairman of the Board of the Company.

   4.4 Executive agrees that he will not, from and after the date hereof
through the fifth anniversary of the termination of the Employment Period (for
whatever reason), (i) directly or indirectly engage in, represent in any way,
or be connected with, any business or activity (such business or activity being
hereinafter called a "Competing Business"), which engages in pain management,
generic pharmaceuticals or such other activities that (during Executive's
Employment Period) the Company engages in or intends to engage in and is set
forth in a detailed written business plan that has been submitted to the
Company's Board of Directors prior to the termination of the Executive's
Employment Period, within any state in which the Company or its affiliates
transact business, whether such engagement shall be as an officer, director,
owner, employee, partner, affiliate or other participant in any Competing
Business; or (ii) assist others in engaging in any Competing Business in the
manner described in the foregoing clause (i); provided, however, that it shall
not be a violation of this Section 4.4 for Executive (a) to be the registered
or beneficial owner of up to twelve percent (12%) of any class of capital stock
of U.S. Dermatalogics, Inc., and the amount and percentage ownership of shares
beneficially owned by Executive, as of the date of this Agreement is set forth
on Schedule 4.4 hereto, (b) to be the registered or beneficial owner of shares
of any class of capital stock of a Competing Business that Executive owns as of
the date of this Agreement, the amounts and percentage ownership of which is
set forth on Schedule 4.4 hereto or (c) to become the registered or beneficial
owner of up to five percent (5%) of any class of the capital stock of a
Competing Business, provided that in the case of each of clauses (a), (b) and
(c) Executive does not actively participate in the business of such Competing
Business until such time as this covenant expires. The Executive acknowledges
and understands that the foregoing restrictions may limit his ability to earn a
livelihood in a business similar to the business of the Company, but he
nevertheless believes that he has received and will receive sufficient
consideration and other benefits in connection with the Company's issuance of
certain stock to the Executive, as an employee of the Company and as otherwise
provided hereunder to clearly justify such restrictions which, in any event
(given his education, skills and ability), the Executive does not believe would
prevent him from earning a living; provided, however, that the Executive may
actively engage in a Competing Business during the term of the covenant set
forth in this Section 4.4 if the Executive provides written notice to the
Company prior to engaging in any such Competing Business and the Executive
thereafter receives the written consent of the Board of Directors of the
Company to engage in such Competing Business. Notwithstanding the foregoing,
during the period from and after the date of this Agreement through the fifth
anniversary of the termination of the Employment Period, the Executive shall
keep the Board of Directors apprised of his business activities.

                                       4
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   4.5 The Executive shall promptly disclose, grant and assign to the Company
for its sole use and benefit any and all inventions, improvements, technical
information and suggestions relating in any way to the business of the Company,
which he may develop or acquire during the Employment Period (whether or not
during usual working hours), together with all patent applications, letters
patent, copyrights and reissues thereof that may at any time be granted for or
upon any such invention, improvement or technical information. In connection
therewith:

     (i) The Executive shall without charge, but at the expense of the
  Company, promptly at all times hereafter execute and deliver such
  applications, assignments, descriptions and other instruments as may be
  reasonably necessary or proper in the reasonable opinion of the Company to
  vest title to any such inventions, improvements, technical information,
  patent applications, patents, copyrights or reissues thereof in the Company
  and to enable it to obtain and maintain the entire right and title thereto
  throughout the world; and

     (ii) The Executive shall render to the Company at its expense (including
  a reasonable payment for the time involved in case he is not then in its
  employ) all such assistance as it may reasonably require in the prosecution
  of applications for said patents, copyrights or reissues thereof, in the
  prosecution or defense of interferences which may be declared involving any
  said applications, patents or copyrights and in any litigation in which the
  Company may be involved relating to any such patents, inventions,
  improvements or technical information.

   4.6 The provisions of this paragraph 4 shall survive the termination or
expiration of this Agreement irrespective of the reason therefor.

   4.7 Executive acknowledges that the services to be rendered by him are of a
special, unique and extraordinary character and, in connection with such
services, he will have access to Confidential Information vital to the
Company's business. By reason of this, Executive consents and agrees that if he
violates any of the provisions of this Agreement with respect to the diversion
of the Company's or its affiliates' employees or confidentiality, the Company
or its affiliates would sustain irreparable harm and, therefore, in addition to
any other remedies which the Company may have under this Agreement or
otherwise, the Company shall be entitled to apply to any court of competent
jurisdiction for an injunction restraining Executive from committing or
continuing any such violation of this Agreement, and Executive shall not object
to any such application.

   5. Indemnification. The Company agrees to indemnify and hold harmless
Executive on the terms set forth in the Company's Bylaws and Certificate of
Incorporation as they exist on the date of this Agreement and in any event to
the same extent that the Company provides indemnification for its other
executive employees.

   6. Conflicting Duties. The Company acknowledges that during his tenure
pursuant to this Employment Agreement, Executive shall not be required to work
"full-time" for the Company and shall work on an as-needed basis, the dates and
times of which to be mutually agreed upon by the Company and Executive. In
addition, the Company acknowledges that during the Employment Period Executive
shall retain the right to pursue and/or fulfill other business opportunities,
commitments and obligations so long as such opportunities, commitments and
obligations would not constitute a breach by Executive of his obligations under
Section 4 of this Employment Agreement.

7. Miscellaneous.

   7.1 Notices. Any notice or communication given by either party hereto to the
other party shall be in writing and shall be deemed duly given (i) when
personally delivered, or (ii) when five days have elapsed after its
transmittal, by registered or certified mail, return receipt requested, postage
prepaid, or (iii) if transmitted by telecopy, when sent, or (iv) if transmitted
by telex (or equivalent service), when the sender's receiving apparatus has
printed the answerback of the addressee on a copy of the telex message. Notices
shall be addressed as follows:

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   If to the Company:

     Endo Pharmaceutical Holdings Inc.
     223 Wilmington-West Chester Pike
     Chadds Ford, Pennsylvania 19317
     Telecopier No.: 610-558-9683
     Attention: Chief Executive Officer

   If to Executive:

     Mr. John W. Lyle
     28 Inlet Terrace
     Belmar, New Jersey 07719

   With copies in each case to:

     Kleinberg, Kaplan, Wolff & Cohen, P.C.
     551 Fifth Avenue
     New York, New York 10176
     Telecopier No.: 212-986-8866
     Attention: James R. Ledley, Esq.

     Skadden, Arps, Slate, Meagher & Flom LLP
     Four Times Square
     New York, New York 10036-6522
     Telecopier No.: 212-735-2000
     Attention: Eileen T. Nugent, Esq.

Any person entitled to receive notice (or a copy thereof) may designate in
writing, by notice to the others, such other address to which notices to such
person shall thereafter be sent.

   7.2 Entire Agreement; Amendment; Waiver. This Agreement contains the entire
understanding of the parties covering its subject matter and supersedes all
prior agreements between the parties. This Agreement may be amended or waived
only by a writing signed by both parties. The waiver by either party of a
breach of any provision of this Agreement shall not operate or be construed as
a waiver of any other breach of that provision nor as a waiver of any breach of
another provision.

   7.3 Headings. The headings of the paragraphs of this Agreement are inserted
for convenience only and shall not be considered a part of or be referred to in
interpreting this Agreement.

   7.4 Governing Law; Interpretation; Service of Process. This Agreement shall
be construed in accordance with and governed for all purposes by the laws and
public policies of the State of New Jersey applicable to contracts executed and
to be wholly performed in that State. Service of process in any dispute shall
be effective: (a) upon the Company, if service is made on any officer of the
Company; and (b) upon Executive, if service is made to Executive's residence
last known to the Company with an information copy to Executive at any other
residence, or care of a subsequent employer, of which the Company may be aware.

   7.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall constitute an original, but all of which
together shall constitute one and the same instrument.

   7.6 Assignment. Assignment of the rights and obligations of this Agreement
shall bind and enure to the benefit of any successor of the Company by
reorganization, merger or consolidation, or any assignee of all or
substantially all of the Company's business and properties, provided that the
successor shall assume the obligations of the Company under this Agreement.
Executive's rights or obligations under this Agreement may not be assigned by
Executive.

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   7.7 Further Assurances. Each of the parties agrees to execute, acknowledge,
deliver and perform, and/or cause to be executed, acknowledged, delivered and
performed, at any time and/or from time to time, as the case may be, all such
further acts, deeds, assignments, transfers, conveyances, powers-of-attorney
and/or assurances as may be necessary and/or proper to carry out the provisions
and/or intent of this Agreement.

   7.8 Severability. If any one or more of the terms, provisions, covenants or
restrictions of this Agreement shall be determined by a court of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated,
unless the parties hereto would not have entered into this Agreement without
said invalid, void or unenforceable term, provision, covenant or restriction.
If, moreover, any one or more of the provisions contained in this Agreement
shall for any reason be determined by a court of competent jurisdiction to be
excessively broad as to duration, geographical scope, activity or subject, it
shall be construed by limiting or reducing it, so as to be enforceable to the
extent compatible with then applicable law.

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<PAGE>

                                   Execution

   The parties have duly executed this Agreement as of the date first above
written whereupon this Agreement enters into full force and effect in
accordance with its terms.

   ATTEST:                                ENDO PHARMACEUTICALS HOLDINGS INC.,
                                          a Delaware Corporation

By: _________________________________     By: _________________________________
  Name:                                     Name:
  Title:                                    Title:

                                          -------------------------------------
                                          John W. Lyle

                                       8
<PAGE>

                                  Schedule 4.4

<TABLE>
<CAPTION>
Competing Business        Shares Beneficially Owned   Percentage Ownership
------------------        -------------------------- -----------------------
<S>                       <C>                        <C>
U.S. Dermatalogics, Inc.  970,250 shares of common   7.9%, fully diluted for
                          stock                      the exercise of the
                                                     options and issuance
                          23,944 shares of common    the issuance of the
                          issuable under a           23,944 shares issuable
                          convertible note           shares issuable upon
                                                     conversion of the note
                          Options to purchase 25,000
                          shares of common stock
Warner Lambert            Less than 500 shares       Less than 1.0%
American Home Products    Less than 500 shares       Less than 1.0%
</TABLE>

                                       9<PAGE>

                                                                   EXHIBIT 10.27

                   AMENDED AND RESTATED EMPLOYMENT AGREEMENT

     THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement") is made
as of April 26, 2000 by Endo Pharmaceuticals Inc., a Delaware corporation (the
"Employer") and Carol A. Ammon (the "Executive").

                                   RECITALS

     WHEREAS, the Employer and the Executive entered into an employment
agreement, dated as of August 26, 1997 (the "Original Employment Agreement") and
concurrently with the execution and delivery of the Original Employment
Agreement, the Employer purchased from The DuPont Merck Pharmaceutical Company
("DMPC") and Endo Laboratories, L.L.C. ("Endo LLC"), certain assets comprising
their generic and multisource brand drug business (the "Business") pursuant to
an Asset Purchase Agreement, dated as of June 27, 1997 (the "Purchase
Agreement"), among DMPC, Endo LLC, DuPont Merck Pharma Puerto Rico, Employer and
Kelso & Company.  The Executive had been employed by DMPC in the Business and
the Employer continued to employ the Executive in the Business, and the
Executive accepted such continued employment, upon the terms and conditions set
forth in the Original Employment Agreement;

     WHEREAS, the Executive and the Board of Directors of the Employer have each
determined that amending and restating the Original Employment Agreement is
advisable and desirable; and

     WHEREAS, the Board of Directors of the Employer has approved this Agreement
upon the terms set forth herein;

     NOW THEREFORE, in consideration of the premises and agreements contained
herein, the parties hereto, intending to be legally bound, agree as follows:

ARTICLE 1.  DEFINITIONS.
            -----------

          For the purposes of this Agreement, the following terms have the
meanings specified or referred to in this Article 1.

          "Agreement" means this Employment Agreement, including the Exhibits
hereto, as amended from time to time.

          "Basic Compensation" means Salary and Benefits.

          "Benefits" shall have the meaning set forth in Section 3.1(c).

          "Board of Directors" means the board of directors of the Employer.
<PAGE>

          "Confidential Information" means any and all:

          (a) trade secrets concerning the business and affairs of the Employer,
product specifications, data, know-how, formulae, compositions, processes,
designs, sketches, photographs, graphs, drawings, samples, inventions and ideas,
past, current, and planned research and development, current and planned
manufacturing or distribution methods and processes, customer lists, current and
anticipated customer requirements, price lists, market studies, business plans,
computer software and programs (including object code and source code), computer
software and database technologies, systems, structures, and architectures (and
related formulae, compositions, processes, improvements, devices, know-how,
inventions, discoveries, concepts, ideas, designs, methods and information);

          (b) information concerning the business and affairs of the Employer
(which includes historical financial statements, financial projections and
budgets, historical and projected sales, capital spending budgets and plans, the
names and backgrounds of key personnel, personnel training and techniques and
materials) however documented; and

          (c) notes, analysis, compilations, studies, summaries, and other
material prepared by or for the Employer containing or based, in whole or in
part, on any information included in the foregoing.

     "CPI" means the Consumer Price Index-All Urban Consumers, Philadelphia
Region (1982-1984 = 100), as published by the United States Department of Labor.

     "disability" shall have the meaning set forth in Section 6.2.

     "Effective Date"  means  the date stated in the first paragraph of this
Agreement.

     "Employment Period" shall have the meaning set forth in Section 2.2.

     "Fiscal Year" means the Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.

     "for cause" shall have the meaning set forth in Section 6.3.

     "for good reason" shall have the meaning set forth in Section 6.4.

     "Incentive Compensation" shall have the meaning set forth in Section 3.2.

     "person" means any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, or governmental body.

     "Post-Employment Period" shall have the meaning set forth in Article 8.

     "Renewal Term" shall have the meaning set forth in Section 2.2.

                                      -2-
<PAGE>

     "Salary" shall have the meaning set forth in Section 3.1(a).

ARTICLE 2.  EMPLOYMENT TERMS AND DUTIES.
            ----------------------------

          Section 2.1  Employment.  The Employer hereby employs the Executive,
                       ----------
and the Executive hereby accepts employment by the Employer, upon the terms and
conditions set forth in this Agreement.

          Section 2.2  Term.  Subject to the provisions of Article 6, the
                       ----
initial term of the Executive's employment under this Agreement will be four (4)
years, beginning on the Effective Date and ending on the fourth anniversary of
the Effective Date.  The term of this Agreement may be renewed by the Executive
and the Employer for additional periods of one year (each, a "Renewal Term"; the
Initial Term together with all Renewal Terms, if any, are hereinafter referred
to as the "Employment Period").

          Section 2.3  Duties.  The Executive will have such duties as are
                       ------
assigned or delegated to the Executive by the Board of Directors, and will
initially serve as President and Chief Executive Officer of the Employer and the
Executive shall have the status, authority, duties and responsibilities
typically recognized as attributes of such position.  The Executive will devote
the Executive's business, time, attention, skill, and energy to the business of
the Employer, will promote the success of the Employer's business, and will
cooperate with the Board of Directors in the advancement of the best interests
of the Employer.  Nothing in this Section 2.3, however, will prevent the
Executive from engaging in additional activities in connection with personal
investments and community affairs that are not inconsistent with the Executive's
duties under this Agreement.  It is expressly understood and agreed that to the
extent any such activities have been conducted by the Executive prior to the
Effective Date, the continued conduct of such activities (or the conduct of
activities similar in nature and scope thereto) subsequent to the Effective Date
shall not thereafter be deemed to be inconsistent with the Executive's duties
under this Agreement.  The Executive shall, from time to time, inform the Board
of Directors of those additional activities in which the Executive is engaged.
If the Executive is elected as a director of the Employer or as a director or
officer of any of Employer's subsidiaries, the Executive will fulfill the
Executive's duties as such director or officer without additional compensation.

          Section 2.4  Director's and Officer's Liability Coverage.   The
                       --------------------------------------------
Employer shall cause the Executive to be (a) indemnified as an officer and
director of the Employer or any of its affiliates, to the extent applicable, to
the maximum extent permitted by applicable law, and (b) covered by director's
and officer's liability insurance in connection with the Executive serving as an
officer and director of Employer or any of its affiliates.  The provisions of
this Section 2.4 shall survive termination of this Agreement for any reason.

 ARTICLE 3. COMPENSATION.
            -------------

          Section 3.1   Basic Compensation.
                         ------------------

                                      -3-
<PAGE>

          (a)  Salary.  The Executive will be paid an annual salary of $325,000,
               ------
subject to adjustment as provided below (the "Salary"), which will be payable in
equal periodic installments according to the Employer's customary payroll
practices, but no less frequently than monthly. The Salary will be reviewed by
the Board of Directors not less frequently than annually, and be adjusted in the
sole discretion of the Board of Directors, but in no event will the Salary be
less than $325,000 per year. In determining the amount of any adjustment to
Salary, the Board of Directors shall take into account inflation, merit, changes
in responsibilities and industry salary practices for executives. Any increase
in Salary shall not serve to limit or reduce any other obligation to the
Executive under this Agreement. Salary shall not be reduced after such increase
unless such reduction is part of a reduction in salaries of specified management
personnel of the Employer undertaken in a program approved by the Employer's
Board of Directors.

          (b) Standard Benefits.  The Executive will, during the Employment
              -----------------
Period, be permitted to participate in such incentive, savings, pension, profit
sharing, bonus, life insurance, hospitalization and major medical, and other
employee benefit plans, practices, policies and programs, of the Employer that
may be in effect from time to time, to the extent the Executive is eligible
under the terms of those plans (collectively, the "Standard Benefits").

          (c) Supplemental Benefits.  Executive will be eligible to receive
              ---------------------
certain DMPC medical benefits (including dental benefits) given to retirees as a
result of the transactions contemplated by the Purchase Agreement. In order to
receive such DMPC medical benefits, Executive will be required to pay  60% of
the applicable insurance premiums (the "Executive's Co-Pay").  Executive agrees
to waive coverage under Employer's medical benefits included within the Standard
Benefits in return for Employer paying the Executive's Co-Pay.  Upon Executive's
employment with Employer terminating, Employer will continue to pay Executive's
Co-Pay for a period of 18 months thereafter. (The benefits described in this
Section 3.1(c) are hereinafter referred to as the "Supplemental Benefits"; and
the Standard Benefits together with the Supplemental Benefits are hereinafter
referred to as the "Benefits".)

          Section 3.2    Incentive Compensation.   For each Fiscal Year or part
                         ----------------------
thereof during the Employment Period the Executive shall be paid in cash as
additional compensation (the "Incentive Compensation") for the services to be
rendered by the Executive pursuant to this Agreement, an amount equal to fifty
percent (50%) of the Salary for such Fiscal Year (or such lesser (including
zero) or greater (not to exceed two hundred) percent of the Salary for such
Fiscal Year as is recommended in good faith to the Board of Directors by the
Chief Financial Officer of the Employer and approved by the Board of Directors)
if the Employer meets the performance targets set by the Board of Directors (the
"Performance Targets") for such Fiscal Year.  Incentive Compensation for each
Fiscal Year or part thereof shall be paid as soon as practicable following
receipt by the Employer of its audited financial statements for the Fiscal Year
for which the Incentive Compensation is being paid, unless the Executive shall
elect to defer the receipt of such Incentive Compensation.  The Executive shall
be permitted to submit a proposal for additional incentive compensation with
respect to the period commencing on the date hereof and ending at the end of the
Employer's current Fiscal Year, and the Employer shall consider such proposal in
good faith.

                                      -4-
<PAGE>

ARTICLE 4.  FACILITIES AND EXPENSES.
            ------------------------

          The Employer will furnish the Executive office space, equipment,
supplies, and such other facilities and personnel as the Employer deems
necessary or appropriate for the performance of the Executive's duties under
this Agreement.  The Employer will pay the Executive's dues in such professional
societies and organizations as are appropriate, and will pay on behalf of the
Executive (or reimburse the Executive for) reasonable expenses incurred by the
Executive at the request of, or on behalf of, the Employer in the performance of
the Executive's duties pursuant to this Agreement, and in accordance with the
Employer's employment policies, including reasonable expenses incurred by the
Executive in attending conventions, seminars, and other business meetings, in
appropriate business entertainment activities, and for promotional expenses. The
Executive must file expense reports with respect to such expenses in accordance
with the Employer's policies.

ARTICLE 5.  VACATIONS AND HOLIDAYS.
            ----------------------

          The Executive will be entitled to paid vacation each Fiscal Year in
accordance with the vacation policies of the Employer in effect for its
executive officers from time to time, provided that in no event shall such
number of paid vacation days be fewer than twenty. Vacation must be taken by the
Executive at such time or times as approved by the Chairman of the Board. The
Executive will also be entitled to the paid holidays and other paid leave set
forth in the Employer's policies.  Vacation days and holidays during any Fiscal
Year that are not used by the Executive during such Fiscal Year may be used in
any subsequent Fiscal Year.

ARTICLE 6.  TERMINATION AND ELECTION NOT TO RENEW.
            -------------------------------------

          Section 6.1  Events of Termination.  The Employment Period, the
                       ---------------------
Executive's Basic Compensation and Incentive Compensation, and any and all other
rights of the Executive under this Agreement or otherwise as an employee of the
Employer will terminate (except as otherwise provided in this Article 6):

          (a) upon the death of the Executive;

          (b) upon the disability of the Executive (as defined in Section 6.2);

          (c) for cause (as defined in Section 6.3), immediately upon notice
from the Employer to the Executive, or at such later time as such notice may
specify, unless otherwise provided in Section 6.3; or

          (d) for good reason (as defined in Section 6.4) upon not less than
thirty days' prior notice from the Executive to the Employer.

                                      -5-
<PAGE>

          Section 6.2  Definition of Disability.  For purposes of Sections 6.1
                       ------------------------
and 6.3, the Executive will be deemed to have a "disability" if, as a result of
the Executive's incapacity due to reasonably documented physical illness or
injury or mental illness, the Executive shall have been unable for more than six
months in any twelve month period to perform Executive's duties hereunder on a
full time basis and within 30 days after written notice of termination has been
give to the Executive, the Executive shall not have returned to the full time
performance of such duties.  The date of termination in the case of a
termination for "disability" shall be the last day of the aforementioned 30-day
period.

          Section 6.3  Definition of "For Cause."  For purposes of Section 6.1,
                       -------------------------
the phrase "for cause" means: (a) the continued failure, after written demand is
delivered to the Executive which specifically identifies the failure, by the
Executive substantially to perform the Executive's duties under this Agreement
(other than any such failure resulting from "disability"), (b) the engagement by
the Executive in serious misconduct that has caused, or in the good faith
judgment of the Board of Directors may cause if not discontinued, material harm
(financial or otherwise) to the Employer or any of its subsidiaries, if any
(provided that with respect to misconduct that the Board of Directors determines
may cause material harm if not discontinued, a written demand is delivered to
the Executive specifically identifying the misconduct and the Executive
continues the misconduct), such material harm to include, without limitation,
(i) the disclosure of material secret or confidential information of the
Employer or any of its subsidiaries, if any, (ii) the debarment of the Employer
or any of its subsidiaries, if any, by the U.S. Food and Drug Administration or
any successor agency (the "FDA"), or (iii) the registration of the Employer or
any of its subsidiaries, if any, with the U.S. Drug Enforcement Administration
of any successor agency (the "DEA") to be revoked or an application with the DEA
to be denied, (c) the debarment of the Executive by the FDA, or (d) the
continued material breach by the Executive of this Agreement or the
Stockholder's Agreement, dated as of August 26, 1997, among the Executive, the
Employer and other parties named therein (the "Stockholder's Agreement") after
written demand is delivered to the Executive which specifically identifies the
breach.

          Section 6.4  Definition of "For Good Reason."  For purposes of Section
                       ------------------------------
6.1, the phrase "for good reason" means any of the following: (a) The Employer's
material breach Section 2.4, 3.1 or 3.2 or of this Agreement or its obligations
under the Stockholder's Agreement for the benefit of Executive; (b) the
assignment of the Executive without the Executive's consent to a position,
responsibilities, or duties of a materially lesser status or degree of
responsibility than the Executive's position, responsibilities, or duties at the
Effective Date; or (c) sale of all or substantially all of the assets of the
Employer, sale of all or substantially all of the stock of the Employer, merger
of the Employer with one or more other related or unrelated entities, or other
similar transaction vesting control of the Employer with a third party or
parties.

          Section 6.5  Termination Pay. Effective upon the termination of this
                       ---------------
Agreement, the Employer will be obligated to pay the Executive (or, in the event
of Executive's death, Executive's designated beneficiary as defined below) only
such compensation as is provided in this Section 6.5 or Section 6.6. For
purposes of this Section 6.5, the Executive's designated beneficiary will be
such individual beneficiary or trust, located at such address, as the Executive
may designate by notice to the Employer from time to time or, if the Executive
fails to

                                      -6-
<PAGE>

give notice to the Employer of such a beneficiary, the Executive's estate.
Notwithstanding the preceding sentence, the Employer will have no duty, in any
circumstances, to attempt to open an estate on behalf of the Executive, to
determine whether any beneficiary designated by the Executive is alive or to
ascertain the address of any such beneficiary, to determine the existence of any
trust, to determine whether any person or entity purporting to act as the
Executive's personal representative (or the trustee of a trust established by
the Executive) is duly authorized to act in that capacity, or to locate or
attempt to locate any beneficiary, personal representative, or trustee.

          (a) Termination by the Executive for Good Reason.  If the Executive
              --------------------------------------------
terminates this Agreement for good reason, the Employer will (i) pay (A) monthly
to the Executive the Executive's Salary for the remainder of the Employment
Period or eighteen (18) months, whichever is longer, and (B) the Executive's
Incentive Compensation for the Fiscal Year during which the termination is
effective, prorated through the date of termination, provided that the
applicable Performance Targets are met, and (ii) continue to provide the
Executive with the Benefits for the remainder of the Employment Period or
eighteen (18) months, whichever is longer.

          (b) Termination by the Employer for Cause.  If the Employer terminates
              -------------------------------------
this Agreement for cause, the Executive will be entitled to receive the
Executive's Salary  and Incentive Compensation prorated through the date such
termination is effective.

          (c) Termination upon Disability.  If this Agreement is terminated by
              ---------------------------
either party as a result of the Executive's disability, as determined under
Section 6.2, the Employer will pay the Executive the Salary and Incentive
Compensation (if the applicable Performance Targets are met) through the
remainder of the calendar month during which such termination is effective and
the period until disability insurance benefits commence ("Disability Coverage
Commencement") under the disability insurance coverage furnished by the Employer
to the Executive.  From and after Disability Coverage Commencement and for
eighteen (18) consecutive months thereafter, the Employer will make regular
payments to the Executive in the amount by which the Salary exceeds the
Executive's  disability insurance benefits.

          (d) Termination upon Death.  If this Agreement is terminated because
              ----------------------
of the Executive's death, the Executive will be entitled to receive the
Executive's Salary through the end of the calendar month in which the
Executive's death occurs, and Incentive Compensation (if the applicable
Performance Targets are met) for the Fiscal Year during which the Executive's
death occurs, prorated through the date of the Executive's death.

          (e) Benefits.  Unless otherwise specifically provided herein or
              --------
otherwise provided for in the Standard Benefits, the Executive's accrual of, or
participation in plans providing for, the Benefits will cease at the effective
date of the termination of this Agreement, and the Executive will be entitled to
accrued Benefits pursuant to such plans only as provided in such plans.

                                      -7-
<PAGE>

          Section 6.6  Election Not to Renew.  If the Executive elects to renew
                       ---------------------
this Agreement for a Renewal Term, but Employer does not, and Employer's
election not to renew is not for cause, the Executive will be entitled to
receive, the Salary for the remainder, if any, of the calendar month in which
such termination is effective and for eighteen (18) consecutive calendar months
thereafter and the Benefits for eighteen (18) consecutive months after the date
of termination.

          Section 6.7  Adjustments for CPI.  The amounts payable to the
                       -------------------
Executive pursuant to Sections 6.5(a) and (c) and Section 6.6 shall be adjusted
based on CPI every 12 months to account for changes in the cost of living.

          Section 6.8  Shareholder Approval.  Employer represents and warrants
                       --------------------
that this Agreement has been approved by the shareholders of Employer in a
manner designed to satisfy the requirements of Section 280G(b)(5) of the
Internal Revenue Code of 1986, as amended (which section exempts from the term
"parachute payments" payments meeting the shareholder approval requirements
specified therein).  The effectiveness of this Agreement is subject to such
shareholder approval.

ARTICLE 7.  NON-DISCLOSURE COVENANT.
            ------------------------

          Section 7.1  Acknowledgments by the Executive.   The Executive
                       --------------------------------
acknowledges that (a) during the Employment Period and as a part of the
Executive's employment, the Executive will be afforded access to Confidential
Information; and (b) public disclosure of such Confidential Information could
have an adverse effect on the Employer and its business.

          Section 7.2  Agreements of the Executive.  In consideration of the
                       ---------------------------
compensation and benefits to be paid or provided to the Executive by the
Employer under this Agreement, the Executive covenants as follows:

          (a) During and following the Employment Period, the Executive will
hold in confidence the Confidential Information and will not disclose it to any
person except with the specific prior written consent of the Employer, as
otherwise may be required by law or legal process or except as otherwise
expressly permitted by the terms of this Agreement.

          (b) If any information that the Employer deems to be a trade secret is
found by a court of competent jurisdiction not to be a trade secret for purposes
of this Agreement, such information will, nevertheless, be considered
Confidential Information for purposes of this Agreement.  The Executive hereby
waives any requirement that the Employer submit proof of the economic value of
any trade secret or post a bond or other security.

          (c) None of the foregoing obligations and restrictions applies to any
part of the Confidential Information that the Executive demonstrates was or
became generally available to the public other than as a result of a disclosure
by the Executive.

                                      -8-
<PAGE>

          (d) Upon termination of this Agreement by either party, or upon the
request of the Employer during the Employment Period, the Executive will return
to the Employer all Confidential Information in the Executive's possession or
subject to the Executive's control, and the Executive may not retain any copies,
abstracts, sketches, or other physical embodiment of any of the Confidential
Information.

ARTICLE 8.  NON-COMPETITION AND NON-INTERFERENCE.
            -------------------------------------

          The Executive covenants that the Executive will not, directly or
indirectly during the Employment Period, except in the course of the Executive's
employment hereunder, and during the Post-Employment Period, directly or
indirectly manage, operate, control, or participate in the management,
operation, or control of, be employed by, associated with, or in any manner
connected with, lend the Executive's name to, or render services or advice to,
any third party (including without limitation DPMC and its affiliates) which
manufactures, markets, sells, distributes or develops any pharmaceutical product
that constitutes an API (as defined in the Purchase Agreement) or is Derivative
(as defined in the Purchase Agreement) of any API, or any business whose
products compete in whole or in part with the products of the Employer
(disregarding any non-pain management products that were not products of the
Employer during the Employment Period).

          For purposes of this Article 8, the term "Post-Employment Period"
means the period beginning on the effective date of termination of the
Executive's employment hereunder and ending on the later to occur of (i) 18
months after the effective date of such termination or (ii) the date amounts
payable to Executive under Section 6.5 (a) and (c) and Section 6.6 are to have
been paid in full pursuant to this Agreement (provided that notwithstanding
anything in this Agreement to the contrary, such amounts are being timely paid
by the Employer).

          If any covenant in this Article 8 is held to be unreasonable,
arbitrary, or against public policy, such covenant will be considered to be
divisible with respect to scope, time, and geographic area, and such lesser
scope, time, or geographic area, or all of them, as a court of competent
jurisdiction may determine to be reasonable, not arbitrary, and not against
public policy, will be effective, binding, and enforceable against the
Executive.

ARTICLE 9.  GENERAL PROVISIONS.
            -------------------

          Section 9.1  Injunctive Relief and Additional Remedy.  The Executive
                       ---------------------------------------
acknowledges that the injury that would be suffered by the Employer as a result
of a breach of the provisions of this Agreement (including any provision of
Articles 7 and 8) would be irreparable and that an award of monetary damages to
the Employer for such a breach would be an inadequate remedy. Consequently, the
Employer will have the right, in addition to any other rights it may have, to
obtain injunctive relief to restrain any breach or threatened breach or
otherwise to specifically enforce any provision of this Agreement, and the
Employer will not be obligated to post bond or other security in seeking such
relief.

                                      -9-
<PAGE>

          Section 9.2  Essential and Independent Covenants.  The covenants by
                       -----------------------------------
the Executive in Articles 7 and 8 are essential elements of this Agreement, and
without the Executive's agreement to comply with such covenants, the Employer
would not have entered into the Purchase Agreement and the Employer would not
have entered into this Agreement or employed or continued the employment of the
Executive.  The Employer and the Executive have independently consulted their
respective counsel and have been advised in all respects concerning the
reasonableness and propriety of such covenants, with specific regard to the
nature of the business conducted by the Employer.

          If the Executive's employment hereunder expires or is terminated, this
Agreement will continue in full force and effect as is necessary or appropriate
to enforce the covenants and agreements of the Executive in Articles 7 and 8.

          Section 9.3  Duty to Mitigate.  The Executive shall not be required to
                       ----------------
mitigate damages or the amount of any payment required under this Agreement, nor
shall the payments due Executive hereunder be reduced or offset by reason of any
payments Executive receives from any other source.

          Section 9.4  Representations and Warranties by the Executive.  The
                       -----------------------------------------------
Executive represents and warrants to the Employer that the execution and
delivery by the Executive of this Agreement do not, and the performance by the
Executive of the Executive's obligations hereunder will not, with or without the
giving of notice or the passage of time, or both: (a) violate any judgment,
writ, injunction, or order of any court, arbitrator, or governmental agency
applicable to the Executive; or (b) conflict with, result in the breach of any
provisions of or the termination of, or constitute a default under, any
agreement to which the Executive is a party or by which the Executive is or may
be bound.

          Section 9.5  Waiver.  The rights and remedies of the parties to this
                       ------
Agreement are cumulative and not alternative.  Neither the failure nor any delay
by any party in exercising any right, power, or privilege under this Agreement
will operate as a waiver of such right, power, or privilege, and no single or
partial exercise of any such right, power, or privilege will preclude any other
or further exercise of such right, power, or privilege or the exercise of any
other right, power, or privilege.

          Section 9.6  Binding Effect; Delegation of Duties Prohibited.  This
                       -----------------------------------------------
Agreement shall inure to the benefit of, and shall be binding upon, the parties
hereto and their respective successors, assigns, heirs, and legal
representatives, including any entity with which the Employer may merge or
consolidate or to which all or substantially all of its assets may be
transferred.  The duties and covenants of the Executive under this Agreement,
being personal, may not be delegated.

          Section 9.7  Notices.  All notices, consents, waivers, and other
                       -------
communications under this Agreement must be in writing and will be deemed to
have been duly given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by telecopier (with written confirmation of receipt),
provided that a copy is mailed by registered mail, return receipt requested, or
(c) when received by the addressee, if sent by a nationally recognized overnight

                                      -10-
<PAGE>

delivery service (receipt requested), in each case to the appropriate addresses
and telecopier numbers set forth below (or to such other addresses and
telecopier numbers as a party may designate by notice to the other parties):

          If to the Employer:       Endo Pharmaceuticals Inc.
          ------------------
                                    223 Wilmington West Chester Pike
                                    Chadds Ford, PA 19317
                                    Attention:  Board of Directors

          If to the Executive:      Carol A. Ammon
          -------------------
                                    1019 Kent Road
                                    Wilmington, DE 19807

          Section 9.8  Entire Agreement; Amendments.  This Agreement contains
                       ----------------------------
the entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior agreements and understandings, oral or written,
between the parties hereto with respect to the subject matter hereof.  This
Agreement may not be amended orally, but only by an agreement in writing signed
by the parties hereto.

          Section 9.9  Governing Law.  This Agreement will be governed by and
                       -------------
construed under the laws of the State of Delaware without regard to conflicts of
laws principles.

          Section 9.10  Section Headings, Construction.  The headings of
                        ------------------------------
Sections in this Agreement are provided for convenience only and will not affect
its construction or interpretation.  All references to "Section" or "Sections"
refer to the corresponding Section or Sections of this Agreement unless
otherwise specified.  All words used in this Agreement will be construed to be
of such gender or number as the circumstances require.  Unless otherwise
expressly provided, the word "including" does not limit the preceding words or
terms.

          Section 9.11  Severability.  If any provision of this Agreement is
                        ------------
held invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Agreement will remain in full force and effect.  Any
provision of this Agreement held invalid or unenforceable only in part or degree
will remain in full force and effect to the extent not held invalid or
unenforceable.

          Section 9.12  Counterparts.  This Agreement may be executed in one or
                        ------------
more counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.

                              [SIGNATURES FOLLOW]

                                      -11-
<PAGE>

     IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.

                                   ENDO PHARMACEUTICALS INC.

                                   By: /s/ Jeffrey R. Black
                                      -----------------------------------------
                                      Name:  Jeffrey R. Black
                                      Title: Chief Financial Officer

                                   /s/ Carol A. Ammon
                                   -------------------------------------------
                                   CAROL A. AMMON

                                      -12-

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