SCHEDULE 14A INFORMATION
            PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
                    SECURITIES EXCHANGE ACT OF 1934
                     (Amendment No. ______________)


Filed by the Registrant    /X/
Filed by a party other than the Registrant   / /

Check the appropriate box:
/ /  Preliminary proxy statement
/ /  Confidential, for use of the Commission only (as permitted by
     Rule 14a-6(e)(2))
/X/  Definitive proxy statement
/ /  Definitive additional materials
/ /  Soliciting material pursuant to Sec. 240.14a-11(c) or Sec. 240.14a-12

                         ATLANTIC PHARMACEUTICALS, INC.
                ------------------------------------------------
                (Name of Registrant as Specified in Its Charter)

                         ATLANTIC PHARMACEUTICALS, INC.
    ------------------------------------------------------------------------
    (Name of Person(s) Filing Proxy Statement, if other than the Registrant)


Payment of filing fee (Check the appropriate box):

/X/  $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
     or Item 22(a)(2) or Schedule 14A

/ /  $500 per each party to the controversy pursuant to Exchange Act Rule
     14a-6(i)(3).

/ /  Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.


(1)  Title of each class of securities to which transactions applies:

- ----------------------------------------------------------------------------

(2)  Aggregate number of securities to which transactions applies:

- ----------------------------------------------------------------------------

(3)  Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is calculated and state how it was determined):

- ----------------------------------------------------------------------------

(4)  Proposed maximum aggregate value of transaction:

- ----------------------------------------------------------------------------

(5)  Total fee paid:

- ----------------------------------------------------------------------------

/ /  Fee paid previously with preliminary materials.
/ /  Check box if any part of the fee is offset as provided by Exchange Act
     Rule 0-11(a)(2) and identify the filing for which the offsetting fee
     was paid previously.  Identify the previous filing by registration
     statement number, or the Form or Schedule and the date of its filing.

(1)  Amount previously paid:

- ----------------------------------------------------------------------------

(2)  Form, Schedule or Registration Statement No.:

- ----------------------------------------------------------------------------

(3)  Filing party:

- ----------------------------------------------------------------------------

(4)  Date filed:

- ----------------------------------------------------------------------------



<PAGE>



                         ATLANTIC PHARMACEUTICALS, INC.
                             142 CYPRESS POINT ROAD
                         HALF MOON BAY, CALIFORNIA 94019

                                  JUNE 20, 1996

Dear Stockholder:

         You are cordially  invited to attend the Annual Meeting of Stockholders
("Annual Meeting") of Atlantic Pharmaceuticals, Inc. (the "Company"), which will
be held at 9:00  A.M.  New York time on  Wednesday,  July 24,  1996,  at the law
offices of Brobeck,  Phleger & Harrison LLP,  1301 Avenue of the Americas,  30th
Floor, New York, New York 10019.

         At the Annual Meeting,  you will be asked to consider and vote upon the
following proposals:

            (i)   to elect a  Board of  four directors to serve for the  ensuing
                  year or until their successors are elected and qualified;

           (ii)   to approve an  amendment  to the  Company's  1995 Stock Option
                  Plan to increase  the total  number of shares  authorized  for
                  issuance  thereunder  by 300,000  shares and to  increase  the
                  number of shares  subject to options  granted to  non-employee
                  directors pursuant to the automatic grant program  thereunder;
                  and

          (iii)   to ratify  the  appointment  of KPMG Peat  Marwick  LLP as the
                  Company's  independent  auditors for the year ending  December
                  31, 1996.

         The enclosed Proxy  Statement  more fully  describes the details of the
business to be conducted at the Annual Meeting.

         After  careful  consideration,  the  Company's  Board of Directors  has
unanimously approved the proposals and recommends that you vote IN FAVOR OF each
such proposal.

         After reading the Proxy  Statement,  please mark, date, sign and return
the enclosed proxy card in the accompanying reply envelope no later than July 8,
1996. If you hold your shares of the Company in street name and decide to attend
the Annual Meeting and vote your shares in person,  please notify your broker to
obtain a ballot so that you may vote your shares.  If you are a holder of record
of shares of the  Company and vote by ballot at the Annual  Meeting,  your proxy
vote will be revoked automatically and only your vote at the Annual Meeting will
be counted.  YOUR SHARES CANNOT BE VOTED UNLESS YOU MARK,  DATE, SIGN AND RETURN
THE ENCLOSED PROXY OR ATTEND THE ANNUAL MEETING AND VOTE IN PERSON.

         A copy of the  Company's  1995 Annual  Report to  Stockholders  is also
enclosed.

         We look forward to seeing you at the Annual Meeting.

                                           Sincerely,

                                           /s/ Jon D. Lindjord

                                           Jon D. Lindjord
                                           President and Chief Executive Officer
    



================================================================================
                                    IMPORTANT

         PLEASE MARK,  DATE,  SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE
ACCOMPANYING  POSTAGE-PAID  RETURN ENVELOPE SO THAT, IF YOU ARE UNABLE TO ATTEND
THE ANNUAL MEETING, YOUR SHARES MAY BE VOTED.
================================================================================




<PAGE>



                         ATLANTIC PHARMACEUTICALS, INC.
              -----------------------------------------------------


                    NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
                            TO BE HELD JULY 24, 1996
              -----------------------------------------------------

TO THE STOCKHOLDERS OF ATLANTIC PHARMACEUTICALS, INC.:

         NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders ("Annual
Meeting")  of  Atlantic  Pharmaceuticals,  Inc.,  a  Delaware  corporation  (the
"Company"), will be held at 9:00 A.M. New York Time on Wednesday, July 24, 1996,
at the law  offices of  Brobeck,  Phleger &  Harrison  LLP,  1301  Avenue of the
Americas, 30th floor, New York, New York 10019 for the following purposes:

         1.       To elect a Board of four  Directors  to serve for the  ensuing
                  year or until their successors are elected and qualified.  The
                  four nominees are Jon D. Lindjord;  Steve H. Kanzer; John K.A.
                  Prendergast, Ph.D. and Lindsay A. Rosenwald, M.D.;

         2.       To approve an  amendment  to the  Company's  1995 Stock Option
                  Plan (a) to increase the total number of shares authorized for
                  issuance  thereunder  by 300,000  shares to a total of 950,000
                  shares,  (b) to  increase  the number of shares  subject to an
                  option  that a  non-employee  Board  member  is  automatically
                  granted   thereunder  on  the  initial  date  of  election  or
                  appointment  to the Board from 5,000  shares to 10,000  shares
                  and  (c)  commencing  with  this  year's  Annual  Meeting,  to
                  increase  the  number of shares  subject  to an option  that a
                  continuing  non-employee Board member is automatically granted
                  thereunder  on the  date of each  annual  meeting  from  1,000
                  shares to 2,000 shares;

         3.       To ratify  the  appointment  of KPMG Peat  Marwick  LLP as the
                  Company's  independent  auditors for the year ending  December
                  31, 1996; and

         4.       To transact  such other  business as may properly  come before
                  the  Annual  Meeting  and  any   adjournment  or  adjournments
                  thereof.

         The foregoing  items of business are more fully  described in the Proxy
Statement accompanying this Notice.

         The record date for determining those  stockholders  entitled to notice
of, and to vote at, the Annual Meeting and any  adjournment  thereof is June 17,
1996. A list of the stockholders  entitled to vote at the Annual Meeting will be
available for inspection at the Company's offices,  142 Cypress Point Road, Half
Moon Bay, California 94019, for at least 10 days prior to the Annual Meeting.

         All  stockholders  are cordially  invited to attend the Annual Meeting.
However, to assure your representation at the meeting, please carefully read the
accompanying  Proxy  Statement,  which describes the matters to be voted upon at
the Annual Meeting,  and mark,  date, sign and return the enclosed proxy card in
the reply envelope provided. Should you receive more than one proxy because your
shares are  registered in different  names and  addresses,  each proxy should be
returned to ensure  that all your shares will be voted.  If you hold your shares
of the Company in street  name and decide to attend the Annual  Meeting and vote
your shares in person,  please notify your broker to obtain a ballot so that you
may vote your shares. If you are a holder of record of shares of the Company and
vote  by  ballot  at the  Annual  Meeting,  your  proxy  vote  will  be  revoked
automatically  and only your vote at the Annual  Meeting  will be  counted.  The
prompt  return of your proxy  card will  assist us in  preparing  for the Annual
Meeting.

                                           Sincerely,

                                           /s/ Jon D. Lindjord
                                           Jon D. Lindjord
                                           President and Chief Executive Officer

Half Moon Bay, California
J
une 20, 1996

YOUR VOTE IS VERY IMPORTANT. PLEASE READ THE ATTACHED PROXY STATEMENT CAREFULLY.
WHETHER OR NOT YOU EXPECT TO ATTEND IN PERSON,  PLEASE COMPLETE,  SIGN, DATE AND
RETURN THE  ENCLOSED  PROXY CARD IN THE  ACCOMPANYING  ENVELOPE  AS  PROMPTLY AS
POSSIBLE.


<PAGE>



                         ATLANTIC PHARMACEUTICALS, INC.
                             142 Cypress Point Road
                         Half Moon Bay, California 94019
                         -------------------------------

                                 PROXY STATEMENT
                         -------------------------------

                     FOR THE ANNUAL MEETING OF STOCKHOLDERS
                           TO BE HELD ON JULY 24, 1996


                      GENERAL INFORMATION FOR STOCKHOLDERS

         THE  ENCLOSED  PROXY  ("PROXY")  IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS   (THE  "BOARD")  OF  ATLANTIC   PHARMACEUTICALS,   INC.,  A  DELAWARE
CORPORATION (THE "COMPANY"),  FOR USE AT THE 1996 ANNUAL MEETING OF STOCKHOLDERS
(THE "ANNUAL MEETING") TO BE HELD AT 9:00 A.M. NEW YORK TIME ON WEDNESDAY,  JULY
24, 1996, AT THE LAW OFFICES OF BROBECK,  PHLEGER & HARRISON LLP, 1301 AVENUE OF
THE  AMERICAS,  30TH FLOOR,  NEW YORK,  NEW YORK 10019,  AND AT ANY  ADJOURNMENT
THEREOF.

         This Proxy Statement and the accompanying form of Proxy are to be first
mailed to the  stockholders  entitled to vote at the Annual  Meeting on or about
June 20, 1996.

RECORD DATE AND VOTING

         Stockholders  of record at the close of  business  on June 17, 1996 are
entitled  to notice of, and to vote at, the Annual  Meeting.  As of the close of
business  on such date,  there were  2,663,880  shares of the  Company's  common
stock, par value $0.001 per share (the "Common Stock"), outstanding and entitled
to vote,  and held by 73  stockholders  of  record.  No shares of the  Company's
preferred stock are  outstanding.  Each  stockholder is entitled to one vote for
each share of Common Stock held by such  stockholder as of the record date. If a
choice as to the matters  coming before the Annual Meeting has been specified by
a stockholder on the Proxy, the shares will be voted  accordingly.  If no choice
is specified, the shares will be voted IN FAVOR OF the approval of the proposals
described  in the  Notice  of  Annual  Meeting  and  in  this  Proxy  Statement.
Abstentions and broker non-votes (i.e., the submission of a Proxy by a broker or
nominee specifically  indicating the lack of discretionary  authority to vote on
the matter) are counted for purposes of determining the presence or absence of a
quorum for the transaction of business.  Abstentions will be counted towards the
tabulation  of votes cast on proposals  presented to the  stockholders  and will
have the same effect as negative  votes,  whereas  broker  non-votes will not be
counted for purposes of determining whether a proposal has been approved or not.

         Any  stockholder  or  stockholder's  representative  who,  because of a
disability,  may need special assistance or accommodation to allow him or her to
participate  at  the  Annual  Meeting  may  request  reasonable   assistance  or
accommodation  from the Company by contacting  Investor  Relations in writing at
142 Cypress Point Road, Half Moon Bay, California 94019 or by telephone at (415)
726-1327.  To provide the  Company  sufficient  time to arrange  for  reasonable
assistance, please submit such requests by July 8, 1996.





<PAGE>



                                    IMPORTANT

         PLEASE  MARK,   DATE,  SIGN  AND  RETURN  THE  ENCLOSED  PROXY  IN  THE
ACCOMPANYING  POSTAGE-PREPAID,  RETURN  ENVELOPE  NO LATER  THAN JULY 8, 1996 SO
THAT, IF YOU ARE UNABLE TO ATTEND THE ANNUAL MEETING, YOUR SHARES MAY BE VOTED.

REVOCABILITY OF PROXIES

         Any stockholder giving a Proxy pursuant to this solicitation may revoke
it at any time prior to its  exercise.  Stockholders  of record may revoke their
proxy by filing with the  Secretary  of the Company at its  principal  executive
offices  at 142  Cypress  Point  Road,  Half Moon Bay,  California  94019 a duly
executed  Proxy  bearing a later date or by  attending  the Annual  Meeting  and
voting  their shares in person.  Persons who hold their shares of the  Company's
stock in street name may revoke their proxy by contacting their broker to obtain
a legal ballot and filing such ballot bearing a later date with the Secretary of
the  Company  at its  principal  executive  offices or by  attending  the Annual
Meeting and voting such legal ballot in person.

SOLICITATION

         The Company will bear the entire cost of  solicitation,  including  the
preparation,  assembly,  printing  and mailing of the Notice of Annual  Meeting,
this  Proxy  Statement,  the Proxy  and any  additional  solicitation  materials
furnished to stockholders. Copies of solicitation materials will be furnished to
brokerage houses,  fiduciaries and custodians holding shares in their names that
are  beneficially  owned by others so that they may  forward  this  solicitation
material to such beneficial  owners.  To assure that a quorum will be present in
person  or by proxy at the  Annual  Meeting,  it may be  necessary  for  certain
officers, directors, employees or other agents of the Company to solicit proxies
by  telephone,  facsimile  or other  means or in person.  The  Company  will not
compensate  such  individuals  for any  such  services.  The  Company  does  not
presently intend to solicit proxies other than by mail.

         Whether  or not you  expect to attend  the  Annual  Meeting  in person,
please  mark,  date,  sign and return  the  enclosed  Proxy in the  accompanying
postage prepaid, return envelope no later than July 8, 1996.

         THE COMPANY'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER
31, 1995 (THE "ANNUAL REPORT") HAS BEEN MAILED  CONCURRENTLY WITH THE MAILING OF
THE NOTICE OF ANNUAL MEETING AND PROXY STATEMENT TO ALL STOCKHOLDERS ENTITLED TO
NOTICE  OF  AND  TO  VOTE  AT THE  ANNUAL  MEETING.  THE  ANNUAL  REPORT  IS NOT
INCORPORATED  INTO THIS PROXY STATEMENT AND IS NOT CONSIDERED  PROXY  SOLICITING
MATERIAL.




                                       2.


<PAGE>



                 MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING


                      PROPOSAL ONE - ELECTION OF DIRECTORS


         At the Annual  Meeting,  a Board of four  directors  will be elected to
serve for one year and until their  successors  shall have been duly elected and
qualified or until their earlier resignation or removal.  The Board has selected
four  nominees,  all of whom are current  directors of the Company.  Each person
nominated  for election has agreed to serve if elected,  and  management  has no
reason  to  believe  that any  nominee  will be  unavailable  to  serve.  Unless
otherwise  instructed,  the Proxy holders will vote the Proxies received by them
IN FAVOR OF the nominees named below. The four candidates  receiving the highest
number of affirmative votes of the shares entitled to vote at the Annual Meeting
will be elected. If any nominee is unable to or declines to serve as a director,
the  Proxies may be voted for a  substitute  nominee  designated  by the current
Board.  As of the date of this  Proxy  Statement,  the Board is not aware of any
nominee who is unable or will decline to serve as a director.

 
        THE  BOARD  RECOMMENDS  THAT  THE  STOCKHOLDERS  VOTE IN  FAVOR  OF THE
ELECTION OF EACH OF THE FOLLOWING  NOMINEES TO SERVE AS DIRECTORS OF THE COMPANY
UNTIL THE NEXT ANNUAL MEETING OF STOCKHOLDERS,  UNTIL THEIR SUCCESSORS HAVE BEEN
DULY ELECTED AND QUALIFIED OR UNTIL THEIR EARLIER RESIGNATION OR REMOVAL.

INFORMATION WITH RESPECT TO NOMINEES

   Set forth below is information regarding the nominees.

Name of Nominees               Age  Position(s) with the Company  Director Since
- ---------------                ---  ----------------------------  --------------

Jon D. Lindjord                47   Director, President and Chief     1995
                                    Executive Officer

Steve H. Kanzer                32   Director                          1993

John K.A. Prendergast, Ph.D.   41   Director                          1994

Lindsay A. Rosenwald, M.D.     41   Director                          1993


BUSINESS EXPERIENCE OF NOMINEES

         JON D.  LINDJORD  assumed the position of Chief  Executive  Officer and
President of the Company  effective August 1, 1995 and was elected a director of
the Company in December 1995. Since August 1, 1995, Mr. Lindjord also has served
as Chief Executive Officer and President of each of the Company's  subsidiaries,
Optex   Ophthalmologics,   Inc.,   Gemini  Gene  Therapies,   Inc.  and  Channel
Therapeutics,  Inc. From 1988 to 1994, Mr.  Lindjord worked for G.D.  Searle,  a
pharmaceutical  company,  in a variety of positions  including  Vice  President,
Corporate   Marketing   Planning;   Vice  President,   International   Marketing
Operations;  and, most recently,  Managing Director,  Eastern Europe and Russia.
During  the  period  from  1985  to  1988,  Mr.  Lindjord  instituted  and ran a
department at Pfizer Pharmaceuticals which increased the efficacy and efficiency
of two-way  communications among the marketing,  licensing and business units at
the New York City  headquarters  and the  research and  development  division in
Groton,  Connecticut.  During 1984 to 1985, Mr.  Lindjord  served as Director of
Business Development, Medicinal Products at Bristol-Myers International Group, a
conglomerate.   Mr.  Lindjord  currently  serves  as  a  director  of  Lutinvest
Management  Company,  an emerging markets growth fund. Mr. Lindjord received his
A.B. from Princeton  University in 1970 and his M.B.A. from the Darden School at
the University of Virginia in 1972.


                                       3.


<PAGE>



         STEVE H.  KANZER  has  served as a director  of the  Company  since its
inception.  Mr.  Kanzer has been a Managing  Director  of The  Castle  Group,  a
venture capital and merchant  banking firm,  since November 1991, and a Managing
Director of Paramount Capital,  Incorporated, an investment bank specializing in
the  biotechnology  industry,  since  February 1992. Mr. Kanzer is a director of
Boston Life  Sciences,  Inc.  and several  other  privately  held  biotechnology
companies.   Prior  to  joining  The  Castle   Group  and   Paramount   Capital,
Incorporated,  Mr. Kanzer was an attorney with Skadden,  Aarps, Slate, Meagher &
Flom in New York,  New York from  September  1988 to October  1991.  Mr.  Kanzer
received  his J.D.  from  New  York  University  School  of Law and a B.B.A.  in
Accounting from Baruch College. 

         JOHN K.A. PRENDERGAST, PH.D. is a co-founder of the Company, as well as
of  two  of  its   subsidiaries,   Optex   Ophthalmologics,   Inc.  and  Channel
Therapeutics,  Inc.  Dr.  Prendergast  has served as a  director  of each of the
Company, Optex Ophthalmologics, Inc. and Channel Therapeutics, Inc. since August
1994.  Dr.  Prendergast  has been a Managing  Director  of The Castle  Group,  a
venture capital and merchant  banking firm, since January 1993. Prior to joining
The  Castle  Group,  Dr.  Prendergast  worked  as an  investment  banker  in the
Corporate  Finance  division of the firm D.H.  Blair & Co.,  Inc., an investment
bank,  from May 1991 to September 1991. Dr.  Prendergast  received his M.Sc. and
Ph.D.  from the  University of New South Wales,  Sydney,  Australia and a CSS in
Administration and Management from Harvard University. 

         LINDSAY A. ROSENWALD,  M.D. has been a member of the Board of Directors
of the  Company  since  its  inception  and  served as its  President  and Chief
Executive  Officer  until July 1993.  Dr.  Rosenwald has been Chairman and Chief
Executive  Officer of The Castle Group, a venture  capital and merchant  banking
firm,  since its inception in 1991.  Since February 1992, Dr. Rosenwald also has
been  the  Chairman   and  Chief   Executive   Officer  of  Paramount   Capital,
Incorporated,  an investment bank specializing in the biotechnology industry. In
June  1994  Dr.  Rosenwald  founded  Aries  Financial  Services,  Inc.,  a money
management firm specializing in the health sciences industry. From 1987 to 1991,
Dr.  Rosenwald was Managing  Director of Corporate  Finance of D.H. Blair & Co.,
Inc.,  an  investment  bank.  Dr.  Rosenwald  is also  Chairman  of the Board of
Directors of Interneuron Pharmaceuticals,  Inc., which he  co-founded in 1988; a
director  of each of the  following  publicly  traded  biotechnology  companies:
Ansan, Inc., Arigen, Inc., BioCryst  Pharmaceuticals,  Inc., Neose Technologies,
Inc., Sparta Pharmaceuticals,  Inc., Titan Pharmaceuticals, Inc. and Xenometrix,
Inc.; and a director of several other privately held  pharmaceutical  companies.
Dr. Rosenwald holds an M.D. from Temple University School of Medicine and a B.S.
in Finance from Pennsylvania State University.

NUMBER OF DIRECTORS; RELATIONSHIPS

         The  Company's  Bylaws  authorize  the Board to fix by  resolution  the
number of directors  serving on the Board,  provided  that such number is one or
more.  Since  December 5, 1995,  the number of directors has been fixed at four.
All directors hold office until the annual meeting of stockholders following the
initial  election or appointment of such  director,  and until their  successors
have been duly elected and  qualified,  or until their  earlier  resignation  or
removal. Officers are appointed to serve at the discretion of the Board.

         There are no family relationships among executive officers or directors
of the Company.

BOARD MEETINGS AND COMMITTEES

         The Board held one meeting during the 1995 fiscal year, and each of the
four directors  participated in or attended such meeting. In addition, the Board
acted several times by unanimous written consent during the 1995 fiscal year.

         The Board has an Audit Committee and a Compensation Committee,  but not
a standing  Nominating  Committee.  The Audit  Committee,  which is  composed of
Messrs.  Kanzer and Prendergast,  reviews the professional  services provided by
the  Company's  independent  auditors  and monitors the scope and results of the
annual audit; reviews proposed changes in the Company's financial and accounting
standards and principles; reviews the

                                       4.


<PAGE>



Company's  policies and  procedures  with  respect to its  internal  accounting,
auditing and financial controls; makes recommendations to the Board of Directors
on the engagement of the  independent  auditors and addresses other matters that
may come before it or as directed by the Board of Directors. The Audit Committee
held one meeting  during the 1995 fiscal year, at which both Messrs.  Kanzer and
Prendergast were in attendance.

         The  Compensation  Committee,  which is composed of Messrs.  Kanzer and
Rosenwald,  sets the  compensation  for certain of the  Company's  personnel and
administers  the Company's  1995 Stock Option Plan. The  Compensation  Committee
held two meetings during the 1995 fiscal year, at which both Messrs.  Kanzer and
Rosenwald were in attendance.

DIRECTOR COMPENSATION

         Non-employee  Board  members are  reimbursed  for  reasonable  expenses
incurred  in  connection  with  attendance  at  meetings  of  the  Board  and of
Committees of the Board.  Non-employee Board members are eligible to participate
in the automatic stock option grant program pursuant to the Company's 1995 Stock
Option Plan.  Upon approval of Proposal Two by the  stockholders  at this Annual
Meeting,  non-employee  directors will be granted an option for 10,000 shares of
the Company's  common stock upon their initial  election or  appointment  to the
Board, and, beginning with the Annual Meeting, an option for 2,000 shares of the
Company's  common  stock on the date of each  annual  meeting of the Company for
those  non-employee  directors  continuing  to  serve  after  such  meeting.  No
non-employee  Board member has received  any grants under the  automatic  option
grant program.

         Each employee of the Company who is also a director of the Company does
not receive any additional compensation for his service on the Board.



                                       5.


<PAGE>




                      PROPOSAL TWO - APPROVAL OF AMENDMENTS
                     TO THE COMPANY'S 1995 STOCK OPTION PLAN


INTRODUCTION

         The  stockholders  are  being  asked  to  vote on an  amendment  to the
Company's  1995 Stock Option Plan (the "Plan") that would (a) increase the total
number of shares authorized for issuance thereunder by 300,000 shares to a total
of 950,000 shares,  (b) increase the number of shares that a non-employee  Board
member  is  automatically  granted  under the  Automatic  Option  Grant  Program
thereunder  on the initial  date of election  or  appointment  to the Board from
5,000  shares to 10,000  shares  and to the number of shares  that a  continuing
non-employee  Board member is  automatically  granted  thereunder on the date of
each annual  meeting  beginning  with this Annual  Meeting  from 1,000 shares to
2,000  shares.  The Board  adopted the  amendment on June 10,  1996,  subject to
stockholder approval at the Annual Meeting.

         The Plan,  pursuant to which 950,000 shares of Common Stock,  including
those to be approved by the Company's  stockholders at the Annual Meeting,  have
been  reserved  for  issuance was adopted by the Board of Directors in July 1995
and  subsequently  approved  by the  Company's  stockholders.  The  Plan  became
effective  upon its adoption by the Board.  A total of 950,000  shares of Common
Stock,  including the 300,000  shares of Common Stock subject to approval by the
Company's  stockholders at the Annual  Meeting,  have been reserved for issuance
under the Plan. The amendment to the Plan subject to stockholder  approval under
this Proposal Two was adopted by the Board on June 10, 1996.

         The principal  terms and provisions of the Plan are  summarized  below.
The summary is not,  however,  intended to be a complete  description of all the
terms of the Plan.  A copy of the Plan will be furnished  without  charge to any
stockholder  upon written  request to the attention of the  Company's  corporate
secretary at 142 Cypress Point Road, Half Moon Bay, California 94019.

DESCRIPTION OF THE PLAN

         Equity  Incentive  Programs.  The Plan  contains  two  separate  equity
incentive  programs:  (i) a  Discretionary  Option  Grant  Program  and  (ii) an
Automatic  Option Grant  Program.  The principal  features of these programs are
described  below.  The Plan (other than the Automatic  Option Grant  Program) is
administered  by the  Compensation  Committee of the Board.  This committee (the
"Plan  Administrator") has complete discretion (subject to the provisions of the
Plan) to authorize option grants under the  Discretionary  Option Grant Program.
However,  all grants under the  Automatic  Option Grant  Program will be made in
strict  compliance  with the provisions of that program,  and no  administrative
discretion  will be  exercised  by the Plan  Administrator  with  respect to the
grants made thereunder.

         Share Reserve. A total of 950,000 shares of Common Stock (including the
300,000-share  increase  subject  to  approval  under  this  Proposal  Two)  has
initially  been  reserved  for issuance  over the term of the Option  Plan.  The
number of shares  available for issuance  under the Option Plan will increase on
the first trading day of each calendar  year,  beginning  with the 1997 calendar
year,  by an  amount  equal  to  one  percent  of the  shares  of  Common  Stock
outstanding  on December 31 of the  immediately  preceding  calendar year. In no
event may any one  participant  in the Option Plan be granted  stock options and
separately exercisable stock appreciation rights for more than 180,000 shares in
the aggregate per calendar year, beginning with the 1995 calendar year.

         In the event any  change  is made to the  outstanding  shares of Common
Stock  by  reason  of  any  recapitalization,   stock  dividend,   stock  split,
combination of shares, exchange of shares or other change in corporate structure
effected without the Company's receipt of consideration, appropriate adjustments
will be made to the

                                       6.


<PAGE>



securities  issuable (in the aggregate and to each  participant)  under the Plan
and to the securities and exercise price under each outstanding option.

         Eligibility. Officers and other employees of the Company and its parent
or subsidiaries (whether now existing or subsequently established), non-employee
members of the Board  (other than those  serving as members of the  Compensation
Committee)  and the  board  of  directors  of its  parent  or  subsidiaries  and
consultants  and  independent  advisors  of  the  Company  and  its  parent  and
subsidiaries  are  eligible to  participate  in the  Discretionary  Option Grant
Program.   Non-employee   members  of  the  Board  (including   members  of  the
Compensation Committee) are also eligible to participate in the Automatic Option
Grant Program.

         As  of  May  31,  1996,  four  executive   officers  were  eligible  to
participate  in the Plan and three  non-employee  Board members were eligible to
participate  in the  Automatic  Option  Grant  Program.  No other  employees  or
non-employee Board members were eligible to participate in the Plan or Automatic
Option Grant Program.

         Valuation.  The fair  market  value per  share of  Common  Stock on any
relevant  date under the Option  Plan will be the average of the highest bid and
lowest asked prices per share on that date on the Nasdaq SmallCap Market.
On May 31, 1996, the fair market value per share was $8.00.

         Amendment  and  Termination.  The Board may amend or modify the Plan in
any or all respects whatsoever subject to any required stockholder approval. The
Board  may  terminate  the Plan at any  time,  and the Plan  will in all  events
terminate on June 30, 2005.

DISCRETIONARY OPTION GRANT PROGRAM

         Options may be granted under the Discretionary  Option Grant Program at
an exercise price per share less than,  equal to or greater than the fair market
value per share of Common Stock on the option grant date. No granted option will
have a term in excess of ten years.

         Upon  cessation of service,  the optionee will have a limited period of
time in which to exercise  any  outstanding  option to the extent such option is
exercisable  for  vested  shares.  The Plan  Administrator  will  have  complete
discretion to extend the period  following the  optionee's  cessation of service
during  which  his  or  her  outstanding  options  may be  exercised  and/or  to
accelerate  the  exercisability  or vesting of such options in whole or in part.
Such  discretion  may  be  exercised  at  any  time  while  the  options  remain
outstanding, whether before or after the optionee's actual cessation of service.

         The  Plan  Administrator  is  authorized  to issue  two  types of stock
appreciation   rights  in   connection   with  option   grants  made  under  the
Discretionary Option Grant Program:

         Tandem stock appreciation  rights provide the holders with the right to
surrender their options for an appreciation  distribution from the Company equal
in amount to the excess of (a) the fair  market  value of the  vested  shares of
Common Stock subject to the surrendered  option over (b) the aggregate  exercise
price  payable  for such  shares.  Such  appreciation  distribution  may, at the
discretion  of the Plan  Administrator,  be made in cash or in  shares of Common
Stock.

         Limited  stock  appreciation  rights may be granted to  officers of the
Company as part of their  option  grants.  Any option with such a limited  stock
appreciation  right in effect for at least six months may be  surrendered to the
Company upon the successful completion of a hostile take-over of the Company. In
return for the  surrendered  option,  the  officer  will be  entitled  to a cash
distribution from the Company in an amount per surrendered option share equal to
the  excess of (a) the  take-over  price per share over (b) the  exercise  price
payable for such share.


                                       7.


<PAGE>



         The Plan  Administrator has the authority to effect the cancellation of
outstanding  options  under the  Discretionary  Option Grant  Program which have
exercise  prices in excess of the then current  market price of Common Stock and
to issue replacement options with an exercise price based on the market price of
Common Stock at the time of the new grant.

AUTOMATIC OPTION GRANT PROGRAM

         Under the Automatic  Option Grant  Program,  as amended by the Board on
June 10, 1996 and as subject to  stockholder  approval  at this Annual  Meeting,
each individual who first becomes a non-employee  Board member after the initial
public offering of the Common Stock will  automatically  be granted at that time
an option grant for 10,000 shares of Common Stock,  provided such individual has
not previously been in the Company's  employ.  In addition,  on the date of each
Annual  Stockholders  Meeting,  beginning  with the 1996  Annual  Meeting,  each
individual who is to continue to serve as a non-employee Board member after such
meeting  will  automatically  be granted an option to purchase  2,000  shares of
Common Stock, provided such individual has served as a non-employee Board member
for at  least  six  months.  There  will  be no  limit  on the  number  of  such
2,000-share options which any one non-employee Board member may receive over the
period of Board service.  However,  in no event will a non-employee Board member
be eligible to receive an option grant under the Automatic  Option Grant Program
if such  individual  is,  directly  or  indirectly,  the  holder of stock of the
Company  possessing more than five percent of the voting power of all classes of
stock of the Company or is a  representative  of, or affiliated with such a five
percent stockholder.

         Each option will have an exercise  price per share equal to 100% of the
fair  market  value per share of Common  Stock on the  option  grant  date and a
maximum term of ten years measured from the option grant date.

         Each option will be immediately  exercisable for all the option shares,
but any purchased  shares will be subject to  repurchase by the Company,  at the
exercise price paid per share,  upon the optionee's  cessation of Board service.
Each initial  option grant will vest (and the Company's  repurchase  rights will
lapse) in four equal annual  installments  over the  optionee's  period of Board
service, with the first such installment to vest upon the completion of one year
of Board service  measured from the option grant date.  Each annual option grant
will vest (and the Company's  repurchase  rights will lapse) upon the completion
of one year of Board service measured from the option grant date.

         The shares subject to each automatic option grant will immediately vest
upon the  optionee's  death or permanent  disability  or an  acquisition  of the
Company  by merger or asset sale or a hostile  change in control of the  Company
(whether by successful tender offer for more than 50% of the outstanding  voting
stock or by proxy contest for the election of Board members). In addition,  upon
the successful  completion of a hostile  take-over,  each automatic option grant
which has been  outstanding  for at least six months may be  surrendered  to the
Company for a cash distribution per surrendered  option share in an amount equal
to the excess of (a) the take-over  price per share over (b) the exercise  price
payable for such share.

GENERAL PROVISIONS

         Acceleration.  In the event that the  Company is  acquired by merger or
asset sale, each outstanding option under the Discretionary Option Grant Program
which is not to be assumed  by the  successor  corporation  or  replaced  with a
comparable  option to  purchase  shares of the  capital  stock of the  successor
corporation  will  automatically  accelerate  in full.  Any  options  assumed or
replaced  in  connection  with such  acquisition  will be subject  to  immediate
acceleration in the event the  individual's  service is subsequently  terminated
within 18 months  following  the  acquisition.  The Plan  Administrator  has the
discretion to provide for the acceleration of all outstanding  options under the
Discretionary  Grant  Program  upon a hostile  change in control of the  Company
(whether by successful tender offer for more than 50% of the outstanding  voting
stock  or by proxy  contest  for the  election  of  Board  members)  or upon the
termination of the individual's  service within a specified period following the
change in control.


                                       8.


<PAGE>



         The Plan Administrator may also grant options with terms different than
those  described  above in connection  with an  acquisition or hostile change in
control of the Company.

         Financial  Assistance.  The Plan  Administrator  may permit one or more
optionees to pay the exercise  price of  outstanding  options  under the Plan by
delivering a promissory  note payable in  installments.  The Plan  Administrator
will  determine  the terms of any such  promissory  note.  However,  the maximum
amount of financing  provided any optionee may not exceed the cash consideration
payable for the issued shares plus all  applicable  taxes incurred in connection
with the  acquisition of the shares.  Any such promissory note may be subject to
forgiveness  in whole or in part, at the  discretion of the Plan  Administrator,
over the optionee's period of service.

         Special Tax Election.  The Plan  Administrator  may provide one or more
holders of options with the right to have the Company  withhold a portion of the
shares  otherwise  issuable  to  such  individuals  in  satisfaction  of the tax
liability  incurred by such individuals in connection with the exercise of those
options.  Alternatively,  the Plan  Administrator  may allow such individuals to
deliver  previously  acquired  shares of  Common  Stock in  payment  of such tax
liability.


                                       9.


<PAGE>


<TABLE>

STOCK AWARDS

         The table below shows, as to each of the Company's  executive  officers
named in the Summary  Compensation  Table and the various indicated  individuals
and  groups,  the number of shares of Common  Stock  subject to options  granted
between June 30, 1995 and June 1, 1996 under the Option Plan  together  with the
weighted average exercise price payable per share.

<CAPTION>

======================================================================================================================
                                                OPTION TRANSACTIONS
- ----------------------------------------------------------------------------------------------------------------------
                                                                                                  WEIGHTED
                                                                      NUMBER OF OPTION             AVERAGE
                    NAME AND POSITION                                       SHARES             EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                      <C>   

Jon D. Lindjord
Director, President and Chief Executive Officer                            240,000                  $3.39
- ----------------------------------------------------------------------------------------------------------------------
Stephen R. Miller, M.D.
Vice President, Chief Medical Officer                                      139,959                  $5.22
- ----------------------------------------------------------------------------------------------------------------------
Margaret A. Schalk
Senior Director, Project Management                                        116,639                  $5.34
- ----------------------------------------------------------------------------------------------------------------------
Shimshon Mizrachi
Controller                                                                  50,000                  $5.81
- ----------------------------------------------------------------------------------------------------------------------
H. Laurence Shaw, M.D.
Chief Executive Officer                                                     23,557                  $1.00
- ----------------------------------------------------------------------------------------------------------------------
All current executive officers as a group
(4 persons)                                                                546,598                  $4.50
- ----------------------------------------------------------------------------------------------------------------------
Steve H. Kanzer
Director                                                                         0                   N/A
- ----------------------------------------------------------------------------------------------------------------------
John K.A. Prendergast, Ph.D.
Director                                                                         0                   N/A
- ----------------------------------------------------------------------------------------------------------------------
Lindsay A. Rosenwald
Director                                                                         0                   N/A
- ----------------------------------------------------------------------------------------------------------------------
All non-employee directors as a group
(3 persons)                                                                      0                   N/A
- ----------------------------------------------------------------------------------------------------------------------
All employees, including current officers who are not executive
officers, as a group                                                             0                   N/A
(0 persons)
======================================================================================================================

</TABLE>


NEW PLAN BENEFITS

         The Company has not  granted  any stock  options or stock  appreciation
rights from the pool of 300,000  shares of Common Stock  subject to  stockholder
approval in this Proposal Two.


                                       10.


<PAGE>



FEDERAL INCOME TAX CONSEQUENCES

Option Grants

         Options  granted under the Plan may be either  incentive  stock options
which satisfy the  requirements  of Section 422 of the Internal  Revenue Code or
non-statutory  options  which are not  intended to meet such  requirements.  The
Federal income tax treatment for the two types of options differs as follows:

         Incentive  Options.  No taxable income is recognized by the optionee at
the time of the option grant,  and no taxable income is generally  recognized at
the time the option is exercised. The optionee will, however,  recognize taxable
income in the year in which the purchased shares are sold or otherwise  disposed
of. For Federal tax purposes,  dispositions are divided into two categories: (i)
qualifying and (ii) disqualifying.  A qualifying  disposition occurs if the sale
or other  disposition  is made after the  optionee  has held the shares for more
than two years  after the  option  grant  date and more than one year  after the
exercise date. If either of these two holding  periods is not satisfied,  then a
disqualifying disposition will result.

         If the optionee  makes a  disqualifying  disposition  of the  purchased
shares,  then the Company will be entitled to an income tax  deduction,  for the
taxable year in which such  disposition  occurs,  equal to the excess of (i) the
fair  market  value of such  shares on the  option  exercise  date over (ii) the
exercise  price paid for the shares.  In no other  instance  will the Company be
allowed a deduction with respect to the optionee's  disposition of the purchased
shares.

         Non-Statutory  Options.  No taxable income is recognized by an optionee
upon the grant of a non-statutory option. The optionee will in general recognize
ordinary  income,  in the year in which the  option is  exercised,  equal to the
excess of the fair market value of the  purchased  shares on the  exercise  date
over the exercise  price paid for the shares,  and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.

         If the shares  acquired upon exercise of the  non-statutory  option are
unvested and subject to repurchase by the Company in the event of the optionee's
termination of service prior to vesting in those shares,  then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when the Company's repurchase right lapses, an amount
equal to the excess of (i) the fair  market  value of the shares on the date the
repurchase  right lapses over (ii) the exercise  price paid for the shares.  The
optionee may, however, elect under Section 83(b) of the Internal Revenue Code to
include as ordinary income in the year of exercise of the option an amount equal
to the  excess  of (i) the fair  market  value of the  purchased  shares  on the
exercise date over (ii) the exercise price paid for such shares.  If the Section
83(b) election is made, the optionee will not recognize any additional income as
and when the repurchase right lapses.

         The Company  will be entitled to an income tax  deduction  equal to the
amount of  ordinary  income  recognized  by the  optionee  with  respect  to the
exercised non-statutory option. The deduction will in general be allowed for the
taxable year of the Company in which such  ordinary  income is recognized by the
optionee.

Stock Appreciation Rights

         An optionee who is granted a stock  appreciation  right will  recognize
ordinary income in the year of exercise equal to the amount of the  appreciation
distribution.  The Company will be entitled to an income tax deduction  equal to
the appreciation  distribution for the taxable year in which the ordinary income
is recognized by the optionee.


                                       11.


<PAGE>



ACCOUNTING TREATMENT

         Option grants with  exercise  prices less than the fair market value of
the shares on the grant or issue date will result in a  compensation  expense to
the Company's  earnings equal to the  difference  between the exercise price and
the fair market  value of the shares on the grant  date.  Such  expense  will be
accruable  by the Company  over the period  that the option  shares are to vest.
Option  grants at 100% of fair market value will not result in any charge to the
Company's earnings but the Company must disclose, in pro-forma statements to the
Company's  financial  statements,  the impact those  options would have upon the
Company's reported earnings were the value of those options at the time of grant
treated as  compensation  expense.  Whether or not  granted at a  discount,  the
number of  outstanding  options  may be a factor in  determining  the  Company's
earnings per share on a fully-diluted basis.

         Should one or more optionees be granted stock appreciation rights which
have no  conditions  upon  exercisability  other  than a service  or  employment
requirement,  then such  rights  will  result in a  compensation  expense to the
Company's earnings.

STOCKHOLDER APPROVAL

         The  affirmative  vote of the holders of a majority of the  outstanding
Common Stock present in person or represented by Proxy at the Annual Meeting and
entitled to vote on this  Proposal  Two is required for approval of the proposed
amendment to the Plan. If such  stockholder  approval is not obtained,  then the
Plan will terminate once the existing share reserve available under the Plan has
been  issued.  In  addition,  if  stockholder  approval of this  proposal is not
obtained, under the Automatic Option Grant Program,  eligible non-employee Board
members will  receive a 5,000 share  option  grant upon the initial  election or
appointment to the Board and continuing  non-employee Board members will receive
a  1,000-share  option  grant on the date of each  Annual  Stockholders  Meeting
beginning with this Annual Meeting.

RECOMMENDATION OF THE BOARD OF DIRECTORS

 
        The Board of Directors  recommends that the  stockholders  vote FOR the
approval of the  amendments  to the Plan as described in this  Proposal Two. The
Board  believes  that the  amendments to the Plan are essential to the Company's
efforts in attracting and retaining the services of highly qualified individuals
who  can  contribute   significantly   to  the  Company's   financial   success.
ACCORDINGLY,  THE BOARD  RECOMMENDS THAT THE  STOCKHOLDERS  VOTE IN FAVOR OF THE
APPROVAL OF THE AMENDMENTS TO THE PLAN.



                                       12.


<PAGE>




                   PROPOSAL THREE - RATIFICATION OF SELECTION
                             OF INDEPENDENT AUDITORS


         Upon the recommendation of the Audit Committee, the Board has appointed
the firm of KPMG Peat Marwick LLP, independent  auditors, to audit the financial
statements of the Company for the year ending  December 31, 1996,  and is asking
the stockholders to ratify this appointment.

         In the event the stockholders fail to ratify the appointment, the Board
will reconsider its selection.  Even if the selection is ratified,  the Board in
its discretion may direct the  appointment of a different  independent  auditing
firm at any time during the year if the Board feels that such a change  would be
in the best interests of the Company and its stockholders.  The affirmative vote
of the holders of a majority of the Common Stock present or represented by Proxy
at the Annual  Meeting and entitled to vote is required to ratify the  selection
of KPMG Peat Marwick LLP.

         KPMG Peat  Marwick  LLP  commenced  its annual  audit of the  Company's
financial statements in December 1995. A representative of KPMG Peat Marwick LLP
is  expected  to be  present at the  Annual  Meeting  to respond to  appropriate
questions, and will be given the opportunity to make a statement if he or she so
desires.

 
        THE  BOARD  RECOMMENDS  THAT  THE  STOCKHOLDERS  VOTE IN  FAVOR  OF THE
RATIFICATION OF THE SELECTION OF KPMG PEAT MARWICK LLP TO SERVE AS THE COMPANY'S
INDEPENDENT AUDITORS FOR THE YEAR ENDING DECEMBER 31, 1996.




                                       13.


<PAGE>




                  EXECUTIVE COMPENSATION AND OTHER INFORMATION


EXECUTIVE OFFICERS

         Certain information about the Company's executive officers is set forth
below (information  concerning the Company's  directors is contained in Proposal
One above):

               Name            Age                 Position
              -----            ---                 --------
     
     Stephen R. Miller, M.D.   38     Vice President and Chief Medical Officer

     Margaret A. Schalk        38     Senior Director, Project Management

     Shimshon Mizrachi         43     Controller

         STEPHEN R.  MILLER,  M.D.  assumed the position of Vice  President  and
Chief Medical Officer  effective  September 19, 1995.  Since September 19, 1995,
Dr. Miller also has served as Vice  President and Chief Medical  Officer of each
of  the  Company's  subsidiaries,  Optex  Ophthalmologics,   Inc.,  Gemini  Gene
Therapies,  Inc. and Channel Therapeutics,  Inc. From December 1985 to September
1995,  Dr. Miller served in a variety of positions of increasing  responsibility
in the research and development and the marketing  divisions of G.D.  Searle,  a
pharmaceutical company,  including Senior Director,  Technology Planning; Senior
Director,   International   Marketing   Operations;   Director,   Cardiovascular
Marketing; and Associate Director, Clinical Research and Development. Dr. Miller
is board  certified in Internal  Medicine and has been an Instructor of Clinical
Medicine at the Chicago Medical School since 1985.

         MARGARET A. SCHALK  assumed the  position of Senior  Director,  Project
Management  effective  September 19, 1995.  Since September 19, 1995, Ms. Schalk
also has served as Senior Director,  Project Management of each of the Company's
subsidiaries,  Optex  Ophthalmologics,  Inc.,  Gemini Gene  Therapies,  Inc. and
Channel  Therapeutics,  Inc.  From  1987 to  September  1995,  Ms.  Schalk  held
positions of increasing responsibility in the areas of project management,  drug
development and marketing at G.D. Searle, a  pharmaceutical  company,  including
Senior Product Manager, International Marketing Operations;  Director of Project
Management,  Corporate Medical and Scientific  Affairs;  and Associate Director,
Drug Development, Corporate Medical and Scientific Affairs.

         SHIMSHON MIZRACHI assumed the position of Controller effective November
15, 1995. Since November 15, 1995, Mr. Mizrachi also has served as Controller of
each of the Company's  subsidiaries,  Optex  Ophthalmologics,  Inc., Gemini Gene
Therapies, Inc. and Channel Therapeutics, Inc. From April 1994 to November 1995,
Mr.  Mizrachi  served in a management  position for the Caldor Corp., a regional
retail company.  From 1987 to April 1994 Mr. Mizrachi held management  positions
of increasing  responsibility for MidIsland Department Stores, a regional retail
company. Mr. Mizrachi is a Certified Public Accountant and received his MBA from
Adelphi University.

COMPENSATION OF EXECUTIVE OFFICERS

         The following table sets forth the  compensation  earned,  for services
rendered  in all  capacities  to the  Company,  for the last  fiscal year by the
Company's Chief Executive Officer, the two other highest paid executive officers
serving as such at the end of 1995 whose  compensation  for that fiscal year was
in excess of $100,000,  and the  Company's  former Chief  Executive  Officer who
resigned  as of July  31,  1995.  The  individuals  named in the  table  will be
hereinafter  referred to as the "Named  Officers." No other executive officer of
the Company received compensation in excess of $100,000 during fiscal year 1995.
Other than Dr. Shaw, who resigned as the Company's Chief Executive  Officer,  no
other executive  officer who would otherwise have been included in such table on
the basis of 1995 salary and bonus resigned or terminated  employment during the
year.

                                       14.


<PAGE>


<TABLE>



                                            SUMMARY COMPENSATION TABLE
<CAPTION>

====================================================================================================================================
                                                                                                          Long-Term
                                                                                                           Compen-
                                                                 Annual Compensation                       sation
                                               -------------------------------------------------------------------------
                                                                                                           Awards
                                                                                                     -------------------

                                                                                         Other          Securities         All Other
                                                                                         Annual         Underlying          Compen-
                                                                                        Compen-         Options/SARs       sation($)
    Name and Principal Position        Year(1)     Salary ($)(2)         Bonus ($)      sation($)            (#)
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>          <C>                   <C>           <C>              <C>             <C>

Jon D. Lindjord                         1995         72,717(3)             --               --            180,000             --
  President and Chief
  Executive Officer

Stephen R. Miller, M.D.                 1995         40,278(4)             --               --             39,959             --
  Vice President,
  Chief Medical Officer

Margaret A. Schalk                      1995         27,777(5)             --            1,420(6)          26,639             --
  Senior Director,
  Project Management

H. Laurence Shaw, M.D.                  1995        125,819(9)             --               --             23,557         45,000(10)
  Chief Executive Officer

====================================================================================================================================
<FN>

(1)      The Company was not a reporting  company  pursuant to Section  13(a) or
         15(d)  of  the  Securities  Exchange  Act of  1934,  as  amended,  (the
         "Exchange  Act")  at any time  during  1994 and  1993.  Therefore,  the
         Summary Compensation Table will include 1995 data only.

(2)      Includes  amounts deferred under the Company's  Retirement  Income Plan
         (Internal  Revenue  Code Section  401(k)).  

(3)      Mr.   Lindjord's   annual   compensation   is  $175,000.   The  Summary
         Compensation  Table sets forth compensation paid to Mr. Lindjord by the
         Company commencing August 1, 1995, when he first became Chief Executive
         Officer of the Company.

(4)      Dr. Miller's annual compensation is $145,000.  The Summary Compensation
         Table  sets  forth  compensation  paid  to Dr.  Miller  by the  Company
         commencing  September  21, 1995,  when he first became  employed by the
         Company.

(5)      Ms. Schalk's annual compensation is $100,000.  The Summary Compensation
         Table sets forth  compensation paid to Ms. Schalk commencing  September
         21, 1995, when she first became employed by the Company.

(6)      Represents the  reimbursement by the Company of certain moving expenses
         incurred by Ms. Schalk in relocating to Half Moon Bay, California.

(7)      Mr. Mizrachi's annual compensation is $90,000. The Summary Compensation
         Table sets forth compensation paid to Mr. Mizrachi  commencing November
         15, 1995, when he first became employed by the Company.

(8)      Represents the  reimbursement by the Company of certain moving expenses
         incurred by Mr. Mizrachi in relocating to Half Moon Bay, California.

(9)      Dr. Shaw  resigned from his position as Chief  Executive  Officer as of
         July 31, 1995. The Summary  Compensation  Table sets forth compensation
         paid to Dr. Shaw by the Company through July 31, 1995.

(10)     Represents amounts received as severance pay.

</FN>
</TABLE>


                                       15.


<PAGE>



<TABLE>

OPTIONS AND STOCK APPRECIATION RIGHTS

         The following table contains information  concerning the grant of stock
options under the Plan to the Named Officers during the 1995 fiscal year. Except
as described in footnote (1) below,  no stock  appreciation  rights were granted
during the 1995 fiscal year.



                                                OPTION/SAR GRANTS IN LAST FISCAL YEAR

================================================================================================================================

<CAPTION>

                                                          Individual Grants
- --------------------------------------------------------------------------------------------------------------------------------


                                        Number of Securities      % of Total Options
                                         Underlying Options/     Granted to Employees      Exercise Price       Expiration
                Name                     SARs Granted(#)(1)         in Fiscal Year          ($/Share)(2)           Date
- --------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>                        <C>                    <C>               <C>   
                                                                                                          
Jon D. Lindjord                               110,000                    40.7                   3.75              7/30/02
                                               70,000                    25.9                    .75              7/30/02
                                                                                                          
Stephen R. Miller, M.D.                        39,959                    14.8                   3.75              9/20/05
                                                                                                          
Margaret A. Schalk                             26,639                     9.9                   3.75              9/20/05
                                                                                                          
H. Laurence Shaw, M.D.                         23,557                     8.7                   1.00              8/31/00
================================================================================================================================
<FN>


(1)      Each  option  has a  maximum  term  of 10  years,  subject  to  earlier
         termination  in the event of the  optionee's  cessation of service with
         the  Company.  The grant dates for each option are as follows:  for Mr.
         Lindjord,  August 1, 1995; for Mr. Miller and Ms. Schalk,  December 19,
         1995;  and  for  Mr.  Shaw,   August  31,  1995.  Each  option  becomes
         exercisable in four equal annual  installments  upon completion of each
         year of  service  measured  from the grant  date.  However,  the option
         granted to Mr. Shaw was  immediately  exercisable for all the shares on
         the date of grant. Each option will become  immediately  exercisable in
         full upon an acquisition of the Company by merger or asset sale, unless
         the option is assumed by the successor  entity.  Each option includes a
         limited  stock  appreciation  right  pursuant to which the optionee may
         surrender the option, to the extent exercisable for vested shares, upon
         the successful completion of a hostile tender for securities possessing
         more than 50% of the combined voting power of the Company's outstanding
         voting securities.  In return for the surrendered  option, the optionee
         will receive a cash distribution per surrendered  option share equal to
         the excess of (i) the  highest  price  paid per share of the  Company's
         common stock in such hostile  tender offer over (ii) the exercise price
         payable per share under the cancelled option.

(2)      The  exercise  price may be paid in cash or in  shares of Common  Stock
         (valued  at fair  market  value  on the  exercise  date) or  through  a
         cashless exercise procedure  involving a same-day sale of the purchased
         shares. The Company may also finance the option exercise by loaning the
         optionee  sufficient  funds to pay the exercise price for the purchased
         shares and the federal and state income tax  liability  incurred by the
         optionee  in  connection  with  such  exercise.  The  optionee  may  be
         permitted, subject to the approval of the Plan Administrator,  to apply
         a portion  of the  shares  purchased  under the  option  (or to deliver
         existing shares of common stock) in satisfaction of such tax liability.

</FN>
</TABLE>


                                       16.


<PAGE>


<TABLE>

OPTION EXERCISES AND HOLDINGS

         The  following  table  provides  information  with respect to the Named
Officers  concerning  the  exercise  of options  during the last fiscal year and
unexercised  options  held as of the end of the fiscal year (as of December  31,
1995). No stock appreciation rights were exercised during such fiscal year, and,
except for the limited rights  described in footnote (1) to the preceding table,
no stock appreciation rights were outstanding at the end of that fiscal year.


                                           AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                                                      AND FY-END OPTION VALUES

====================================================================================================================================

<CAPTION>
     
     
     
                                              Value                                              Value of Unexercised In-the-Money  
                                             Realized                                           Options at FY-End (Market price of  
                                          (Market price       No. of Securities Underlying     shares at FY-End less exercise price)
                             Shares        at exercise     Unexercised Options at FY-End (#)                   ($)(1)               
                           Acquired on      date less     --------------------------------------------------------------------------
                          Exercise (#)       exercise     
     Name                                 price) ($)(2)    Exercisable         Unexercisable        Exercisable        Unexercisable
                                                          
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                          <C>              <C>               <C>               <C>                   <C>               <C>

Jon D. Lindjord              --               --                --                180,000                --               525,000
- ------------------------------------------------------------------------------------------------------------------------------------
Stephen R. Miller,           --               --                --                39,959                 --               69,928
M.D.
- ------------------------------------------------------------------------------------------------------------------------------------
Margaret A. Schalk           --               --                --                26,639                 --               46,618
- ------------------------------------------------------------------------------------------------------------------------------------
H. Laurence Shaw,            --               --              23,557                --                106,007               --
M.D.
====================================================================================================================================
<FN>

(1)      Based  on the  fair  market  value  of the  Company's  Common  Stock on
         December  29, 1995 of $5.50 per share,  the closing  selling  price per
         share on that date on the Nasdaq SmallCap Market.

(2)      Equal to the  closing  selling  price of the  purchased  shares  on the
         option exercise date less the exercise price paid for such shares.
</FN>
</TABLE>



EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL AGREEMENTS

         Effective  January 1,  1995,  the  Company  entered  into a  Consulting
Agreement  with John K.A.  Prendergast,  M.D.,  a director of the  Company.  Dr.
Prendergast  advises the Company on the  marketability  of its  technologies and
provides  referrals  for  potential  partnering  arrangements  with the Company.
Pursuant to such Consulting Agreement, Dr. Prendergast receives a consulting fee
of $2,500 per month.  The  Agreement is for a term of one year,  is renewable at
the  discretion  of both parties and may be  terminated  upon 10 days' notice by
either party. As of January 1, 1996, the parties  extended such agreement for an
additional one year period.

         The Company  entered into a severance  agreement dated as of August 31,
1995 with Dr. H. Laurence Shaw, the Company's former Chief Executive Officer and
President,  pursuant to which the Company  made a one time payment of $45,000 to
Dr. Shaw and granted Dr. Shaw  certain  options for common  stock of the Company
and of each of the subsidiaries of the Company.

         Effective  August 1, 1995, Mr. Lindjord became Chief Executive  Officer
and  President  of the  Company  and  each of the  subsidiaries  of the  Company
pursuant to a Letter Agreement,  dated July 7, 1995. Pursuant to such Agreement,
the  Company  agreed to pay Mr.  Lindjord an annual  salary of $175,000  payable
semi-monthly, in addition to a $25,000 discretionary bonus payable at the end of
Mr. Lindjord's first year of employment with the Company.

                                       17.


<PAGE>



In the event that the  Company  terminates  Mr.  Lindjord's  employment  without
cause,  the  Company is  obligated  to  continue to pay his salary for one year,
subject to Mr.  Lindjord's  duty to  mitigate  damages  by  seeking  alternative
employment.  Further,  pursuant to such  Agreement and under the Company's  1995
Stock Option Plan,  the Company has issued to Mr.  Lindjord  options to purchase
180,000 shares of Common Stock  exercisable at a weighted average price of $2.58
per share.  Furthermore,  Mr.  Lindjord and his  dependents  will be eligible to
receive paid medical and  long-term  disability  insurance and such other health
benefits  as the  Company  makes  available  to its other  senior  officers  and
directors.

         Effective  September 21, 1995, Dr. Miller became Vice President,  Chief
Medical  Officer  of the  Company  and of  each  of the  Company's  subsidiaries
pursuant to a Letter  Agreement,  dated  September  21,  1995.  Pursuant to such
Agreement, the Company agreed to pay Dr. Miller an annual salary of $145,000 and
to reimburse Dr. Miller for up to $8,000 of expenses incurred by him to relocate
to Half Moon Bay,  California.  In the event  that the  Company  terminates  Dr.
Miller's  employment  without cause, the Company is obligated to continue to pay
his salary for nine months,  subject to Dr. Miller's duty to mitigate damages by
seeking alternative employment. In addition, the Company issued Dr. Miller under
the Company's 1995 Stock Option Plan an option to purchase  39,959 shares of the
Company's  Common Stock at an exercise  price of $3.75 per share.  Finally,  Dr.
Miller and his dependents will be eligible to receive paid medical and long-term
disability  insurance  and such  other  health  benefits  as the  Company  makes
available to its other senior officers and directors.

         Effective  September  21, 1995,  Ms.  Schalk  became  Senior  Director,
Project  Management  of the  Company and of each of the  Company's  subsidiaries
pursuant to a Letter  Agreement,  dated  September  21,  1995.  Pursuant to such
Agreement, the Company agreed to pay Ms. Schalk an annual salary of $100,000 and
to reimburse Ms. Schalk for up to $8,000 of expenses incurred by her to relocate
to Half Moon Bay,  California.  In the event  that the  Company  terminates  Ms.
Schalk's  employment  without cause, the Company is obligated to continue to pay
her salary for nine months,  subject to Ms. Schalk's duty to mitigate damages by
seeking alternative employment. In addition, the Company issued Ms. Schalk under
the 1995 Stock Option Plan an option to purchase  26,639 shares of the Company's
Common Stock at an exercise  price of $3.75 per share.  Finally,  Ms. Schalk and
her dependents will be eligible to receive paid medical and long-term disability
insurance and such other health  benefits as the Company makes  available to its
other senior officers and directors.

         Effective  November 15, 1995,  Mr.  Mizrachi  became  Controller of the
Company  and  of  each  of  the  Company's  subsidiaries  pursuant  to a  Letter
Agreement,  dated  November  6, 1995.  Pursuant to such  Agreement,  the Company
agreed to pay Mr.  Mizrachi  an annual  salary of $90,000 and to  reimburse  Mr.
Mizrachi  for up to $8,000 of expenses  incurred by him to relocate to Half Moon
Bay,  California.  In the  event  that the  Company  terminates  Mr.  Mizrachi's
employment without cause, the Company is obligated to continue to pay his salary
for six months,  subject to Mr.  Mizrachi's duty to mitigate  damages by seeking
alternative  employment.  Finally,  Mr.  Mizrachi  and  his  dependents  will be
eligible to receive paid medical and  long-term  disability  insurance  and such
other  health  benefits  as the  Company  makes  available  to its other  senior
officers and directors.

         The  Compensation  Committee  has  the  discretion  under  the  Plan to
accelerate  options granted in the Named Officers in connection with a change in
control  of the  Company or upon the  subsequent  termination  of the  officer's
employment following the change and control.

CHANGE OF CONTROL TRANSACTIONS

         In December 1995, the Company  completed an initial public  offering of
1,872,750 of its Units,  with each Unit consisting of one share of the Company's
Common  Stock  and one  redeemable  Warrant  exercisable  for one  share  of the
Company's  Common Stock.  The net proceeds of the initial  public  offering were
$6,050,400.


                                       18.


<PAGE>

C
ERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company's Restated  Certificate of Incorporation and Bylaws provide
for indemnification of directors, officers and other agents of the Company. Each
of the current  directors and certain  officers of the Company have entered into
separate indemnification agreements with the Company.

         Prior  to a  private  financing  consummated  in  September  1995,  the
Company's  operations  had been financed  primarily  through  loans  provided by
Lindsay A. Rosenwald, M.D., a director and principal stockholder of the Company,
and VentureTek,  L.P.  ("VentureTek"),  a principal stockholder and affiliate of
Dr. Rosenwald (the "Stockholder Loans"). On December 31, 1995, Stockholder Loans
aggregating  $2,442,304  in  principal  and  interest  were  converted  into  an
aggregate of 785,234 shares of the Company's  Common Stock.  The Company granted
to Dr. Rosenwald and VentureTek  unlimited  "piggyback"  registration rights and
rights  exercisable  twice each year for registration on Form S-2 of such shares
of Common Stock, as well as any shares hereafter  acquired by such stockholders.
The  registration  rights are  subject to certain  limitations  and  conditions,
including the right of the  underwriter to restrict the number of shares offered
in a  registration.  In  addition,  the  shares of Common  Stock are  subject to
certain lockup restrictions.

         In addition to the Stockholder Loans described above, VentureTek,  L.P.
made a loan to the  Company  in July 1995 in an  aggregate  principal  amount of
$125,000,  bearing  interest at the rate of 10% annually.  This loan, as well as
$115,011 accrued interest,  were repaid on January 15, 1996 from the proceeds of
the Company's initial public offering.

         On June 4, 1996,  the  Company  entered  into a letter  agreement  with
Paramount  Capital  Incorporated  ("Paramount"),  which  is  controlled  by  Dr.
Rosenwald,  pursuant  to which  Paramount  agreed to render  financial  advisory
services to the  Company.  Pursuant to the letter  agreement,  the Company  will
compensate  Paramount for such services by paying Paramount $5,000 per month and
a retainer payable in warrants to purchase 25,000 shares of the Company's Common
Stock at an exercise  price of $10.00.  The Company has agreed to pay  Paramount
additional consideration upon the occurrence of certain events.

         The Company  believes that all of the transactions set forth above were
made on terms no less  favorable  to the Company  than could have been  obtained
from  unaffiliated  third parties.  All future  transactions,  including  loans,
between Atlantic and its officers,  directors,  principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested  outside directors on the Board of
Directors,  and will be on terms no less  favorable  to  Atlantic  than could be
obtained from unaffiliated third parties.




                                       19.


<PAGE>



 
                       COMPLIANCE WITH SECTION 16(A) OF
                       THE SECURITIES EXCHANGE ACT OF 1934


         Section  16(a) of the Exchange Act  requires  the  Company's  officers,
directors  and  persons  who are the  beneficial  owners of more than 10% of the
Company's  Common  Stock to file  initial  reports of  ownership  and reports of
changes in ownership of the Common Stock with the United States  Securities  and
Exchange Commission (the "Commission"). Officers, directors and greater than 10%
stockholders are required by Commission  regulations to furnish the Company with
copies of all Section 16(a) forms they file.

         Based solely on its review of the copies of such forms furnished to the
Company and the written representations that no other reports were required, the
Company  believes  that,  during the period from January 1, 1995 to December 31,
1995,  all  officers,  directors and  beneficial  owners of more than 10% of the
Company's Common Stock complied with all Section 16(a) requirements.


                                       20.


<PAGE>



 
                     SECURITY OWNERSHIP OF MANAGEMENT AND

                            CERTAIN BENEFICIAL OWNERS


         The following table sets forth certain information known to the Company
with respect to the  beneficial  ownership of the  Company's  Common Stock as of
June 1, 1996 by (i) all persons  who are  beneficial  owners of five  percent or
more of the Company's  Common Stock,  (ii) each director and nominee,  (iii) the
Named  Officers  in the  Summary  Compensation  Table above and (iv) all current
directors and executive  officers as a group. The number of shares  beneficially
owned by each  director or executive  officer is  determined  under rules of the
Commission  and the  information  is not  necessarily  indicative  of beneficial
ownership for any other purpose. Shares of the Company's Common Stock subject to
convertible  securities  that are currently  exercisable  or convertible or that
will  become  exercisable  or  convertible  within  60  days  are  deemed  to be
beneficially owned by the person holding such convertible security for computing
the percentage  ownership of such person, but are not treated as outstanding for
computing the percentage of any other person. Except as otherwise indicated, the
Company believes that the beneficial owners of the Company's Common Stock listed
below,  based  upon  such  information  furnished  by  such  owners,  have  sole
investment power with respect to such shares, subject to community property laws
where applicable.


<TABLE>
<CAPTION>


 
                                                                   Number               Percent of Total
          Name and Address                                         of Shares           Shares Outstanding(1)
          ----------------                                         ---------           ---------------------
     <S>                                                             <C>                      <C>   
     VentureTek, L.P.(2).....................................        438,493                  17.96%
        39 Broadway
        New York, NY  10006

     Lindsay A. Rosenwald, M.D.(3)...........................        350,458                  14.36%
        375 Park Avenue, Suite 1501
        New York, NY  10152

     Steve H. Kanzer.........................................            121                       *

     John K.A. Prendergast, Ph.D.(4).........................            156                       *

     Jon D. Lindjord.........................................            ---                       *

     Stephen R. Miller, M.D..................................            ---                       *

     Margaret A. Schalk......................................            ---                       *

     H. Laurence Shaw, M.D.(5)...............................         23,682                       *

     All current executive officers and directors
        as a group (8 persons)...............................        350,830                  14.37%
<FN>

- -----------------------------
*        Less than 1.0%

(1)      Percentage of beneficial  ownership is  calculated  assuming  2,663,880
         shares of Common  Stock were  outstanding  on June 1, 1996.  Beneficial
         ownership is determined in accordance  with the rules of the Commission
         and  includes  voting and  investment  power with  respect to shares of
         Common Stock.

(2)      The general partner of VentureTek,  L.P. is Mr. C. David Selingut.  Mr.
         Selingut may be  considered  a beneficial  owner of the shares owned by
         VentureTek,  L.P. by virtue of his authority as general partner to vote
         and/or  dispose  of  such  shares.   VentureTek,   L.P.  is  a  limited
         partnership,  the  limited  partners of which  include Dr.  Rosenwald's
         wife, children,  sisters of Dr. Rosenwald's wife and their husbands and
         children. Dr. Rosenwald disclaims beneficial ownership of such shares.


                                       21.


<PAGE>


(3)      Includes 570 shares owned by Dr.  Rosenwald's  wife and trusts in favor
         of his minor children.  Dr. Rosenwald disclaims beneficial ownership of
         such  shares.  Does not  include  86 shares  collectively  owned by Dr.
         Rosenwald's mother and two brothers,  of which Dr. Rosenwald  disclaims
         beneficial  ownership.  Includes 380 shares  owned by two  companies of
         which Dr. Rosenwald is the sole stockholder.

(4)      Includes 53 shares of Common Stock held in trust for the benefit of the
         children  of Dr.  Prendergast.  Dr.  Prendergast  disclaims  beneficial
         ownership of such shares.

(5)      Includes   23,557  shares  of  Common  Stock   underlying   immediately
         exercisable options which were granted to Dr. Shaw upon consummation of
         the Company's  initial public offering.  Dr. Shaw resigned his position
         as the  Company's  President  and Chief  Executive  Officer,  effective
         August 1, 1995.
</FN>
</TABLE>



                  DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS


         Under  the  present   rules  of  the   Commission,   the  deadline  for
stockholders to submit proposals to be considered for inclusion in the Company's
Proxy  Statement for the next year's Annual Meeting of  Stockholders is expected
to be January 20,  1997.  Such  proposals  may be included in next year's  Proxy
Statement if they comply with certain rules and  regulations  promulgated by the
Commission.


                                  ANNUAL REPORT


         A copy of the  Company's  Annual  Report to  Stockholders  for the year
ended December 31, 1995 has been mailed  concurrently  with this Proxy Statement
to all stockholders entitled to notice of and to vote at the Annual Meeting. The
Annual  Report  is  not  incorporated  into  this  Proxy  Statement  and  is not
considered proxy soliciting material.


                                    FORM 10-K


         The Company  filed an Annual  Report on Form 10-K with the  Commission.
Stockholders  may obtain a copy of this report,  without  charge,  by writing to
Investor Relations, Atlantic Pharmaceuticals, Inc., 142 Cypress Point Road, Half
Moon Bay, California 94019.


                                  OTHER MATTERS


         The  Company  knows of no other  matters  that  will be  presented  for
consideration  at the Annual Meeting.  If any other matters properly come before
the Annual  Meeting,  it is the  intention of the persons  named in the enclosed
form of Proxy to vote the  shares  they  represent  as the Board may  recommend.
Discretionary  authority  with  respect to such other  matters is granted by the
execution of the enclosed Proxy.


                                                  THE BOARD OF DIRECTORS

Dated:  June 20, 1996




                                      22.

<PAGE>




                         ATLANTIC PHARMACEUTICALS, INC.
                             1995 STOCK OPTION PLAN
                      as amended and restated June 9, 1996


                                   ARTICLE ONE

                               GENERAL PROVISIONS


        I.        PURPOSE OF THE PLAN

                  This  1995  Stock  Option  Plan is  intended  to  promote  the
interests  of  Atlantic  Pharmaceuticals,   Inc.,  a  Delaware  corporation,  by
providing  eligible  persons  with the  opportunity  to  acquire  a  proprietary
interest,  or otherwise increase their proprietary  interest, in the Corporation
as an incentive for them to remain in the service of the Corporation.

                  Capitalized  terms  shall have the  meanings  assigned to such
terms in the attached Appendix.

       II.        STRUCTURE OF THE PLAN

                  A.  The  Plan  shall  be  divided  into  two  separate  equity
programs:

                          (i)     the  Discretionary Option Grant Program  under
         which   eligible   persons   may,  at  the   discretion   of  the  Plan
         Administrator,  be granted  options to purchase shares of Common Stock,
         and

                         (ii)     the Automatic Option Grant Program under which
         Eligible  Directors  shall  automatically   receive  option  grants  at
         periodic intervals to purchase shares of Common Stock.

                  B. The  provisions of Articles One and Four shall apply to all
equity programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.

      III.        ADMINISTRATION OF THE PLAN

                  A.  The  Primary  Committee  shall  have  sole  and  exclusive
authority to administer the  Discretionary  Option Grant Program with respect to
Section 16 Insiders.  No non-employee Board member shall be eligible to serve on
the Primary  Committee  if such  individual  has,  during the twelve  (12)-month
period immediately preceding the date of his or her appointment to the Committee
or (if shorter) the period commencing with the




<PAGE>



Section  12(g)  Registration  Date  and  ending  with  the  date  of  his or her
appointment to the Primary  Committee,  received an option grant or direct stock
issuance  under the Plan or any other stock option,  stock  appreciation,  stock
bonus or other  stock plan of the  Corporation  (or any  Parent or  Subsidiary),
other than pursuant to the Automatic Option Grant Program.

                  B.  Administration of the  Discretionary  Option Grant Program
with respect to all other persons  eligible to  participate in that program may,
at the Board's  discretion,  be vested in the Primary  Committee  or a Secondary
Committee,  or the Board may retain the power to administer  those programs with
respect to all such persons. The members of the Secondary Committee may be Board
members who are  Employees  eligible to receive  discretionary  option grants or
direct  stock  issuances  under  the  Plan  or any  other  stock  option,  stock
appreciation,  stock bonus or other stock plan of the Corporation (or any Parent
or Subsidiary).

                  C. Members of the Primary Committee or any Secondary Committee
shall  serve  for such  period of time as the  Board  may  determine  and may be
removed by the Board at any time.  The Board may also at any time  terminate the
functions of any  Secondary  Committee  and  reassume  all powers and  authority
previously delegated to such committee.

                  D.  Each Plan  Administrator  shall,  within  the scope of its
administrative  functions  under the  Plan,  have full  power and  authority  to
establish  such  rules and  regulations  as it may deem  appropriate  for proper
administration  of the  Discretionary  Option  Grant  Program  and to make  such
determinations  under, and issue such interpretations of, the provisions of such
program and any  outstanding  options  thereunder  as it may deem  necessary  or
advisable.  Decisions  of  the  Plan  Administrator  within  the  scope  of  its
administrative  functions  under  the Plan  shall be final  and  binding  on all
parties who have an interest in the Discretionary Option Grant Program under its
jurisdiction or any option thereunder.

                  E. Service on the Primary Committee or the Secondary Committee
shall constitute  service as a Board member,  and members of each such committee
shall accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee.  No member of the Primary Committee
or the Secondary  Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants under the Plan.

                  F.  Administration of the Automatic Option Grant Program shall
be  self-executing  in accordance  with the terms of that  program,  and no Plan
Administrator shall exercise any discretionary  functions with respect to option
grants made thereunder.


                                       2.



<PAGE>



IV. ELIGIBILITY

       A.  The persons eligible to participate in the Discretionary Option Grant
Program are as follows:

                   (i)   Employees,

                  (ii)   non-employee members  of the Board  (other  than  those
         serving as members of the Primary  Committee) or the board of directors
         of  any  Parent  or  Subsidiary,   and

                  (iii)  consultants and other independent  advisors who provide
         services to the  Corporation (or any Parent or Subsidiary)



                  B.  Each Plan  Administrator  shall,  within  the scope of its
administrative  jurisdiction under the Plan, have full authority (subject to the
provisions  of the Plan) to  determine,  with respect to the option grants under
the  Discretionary  Option Grant Program,  which eligible persons are to receive
option  grants,  the time or times when such option  grants are to be made,  the
number of shares to be covered  by each such  grant,  the status of the  granted
option as either an  Incentive  Option or a  Non-Statutory  Option,  the time or
times at which each option is to become exercisable and the vesting schedule (if
any)  applicable  to the option shares and the maximum term for which the option
is to remain outstanding.

                  C. The  individuals  eligible to  participate in the Automatic
Option  Grant  Program  shall  be  (i)  those   individuals   who  first  become
non-employee  Board members after the Automatic  Option Grant Program  Effective
Date, whether through  appointment by the Board or election by the Corporation's
stockholders,  and (ii) those  individuals who continue to serve as non-employee
Board  members  after one or more Annual  Stockholders  Meetings  held after the
Automatic  Option Grant Program  Effective  Date,  including  those  individuals
serving as  non-employee  Board  members on the  Automatic  Option Grant Program
Effective  Date.  A  non-employee  Board member who has  previously  been in the
employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to
receive an initial option grant under the Automatic  Option Grant Program at the
time he or she first becomes a non-employee  Board member,  but such  individual
shall be eligible to receive  periodic option grants under the Automatic  Option
Grant Program upon his or her continued  service as a non-employee  Board member
following one or more Annual Stockholders Meetings. However, in no event shall a
non-employee  Board  member be  eligible  to  receive  option  grants  under the
Automatic  Option Grant Program if such  individual is a 5%  Stockholder or is a
representative of, or affiliated with, a 5% Stockholder.


                                       3.


<PAGE>



        V.        STOCK SUBJECT TO THE PLAN

                  A. The  stock  issuable  under  the Plan  shall be  shares  of
authorized but unissued or reacquired Common Stock, including shares repurchased
by the  Corporation  on the open market.  The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall  initially  not exceed
950,000 shares.

                  B. The number of shares of Common Stock available for issuance
under the Plan shall  automatically  increase  on the first  trading day of each
calendar  year  during the term of the Plan,  beginning  with the 1997  calendar
year,  by an amount  equal to one  percent  (1%) of the  shares of Common  Stock
outstanding  on December  31 of the  immediately  preceding  calendar  year.  No
Incentive Options may be granted on the basis of the additional shares of Common
Stock resulting from such annual increases.

                  C. No one person participating in the Plan may receive options
and  separately  exercisable  stock  appreciation  rights for more than  100,000
shares of Common Stock in the aggregate per calendar  year,  beginning  with the
1995 calendar year; provided,  however, that for the calendar year in which such
person first commences Service, the limit shall be increased to 200,000 shares.

                  D. Shares of Common Stock subject to outstanding options shall
be  available  for  subsequent  issuance  under the Plan to the  extent  (i) the
options expire or terminate for any reason prior to exercise in full or (ii) the
options are cancelled in accordance with the cancellation-regrant  provisions of
Article Two. All shares  issued under the Plan,  whether or not those shares are
subsequently  repurchased by the Corporation  pursuant to its repurchase  rights
under the Plan, shall reduce on a share-for-share  basis the number of shares of
Common Stock  available  for  subsequent  issuance  under the Plan. In addition,
should the  exercise  price of an option  under the Plan be paid with  shares of
Common Stock or should shares of Common Stock otherwise  issuable under the Plan
be withheld by the Corporation in satisfaction of the withholding taxes incurred
in connection  with the exercise of an option under the Plan, then the number of
shares of Common Stock available for issuance under the Plan shall be reduced by
the gross number of shares for which the option is exercised, and not by the net
number of shares of Common Stock issued to the holder of such option.

                  E. Should any change be made to the Common  Stock by reason of
any stock  split,  stock  dividend,  recapitalization,  combination  of  shares,
exchange of shares or other change  affecting the outstanding  Common Stock as a
class  without  the   Corporation's   receipt  of   consideration,   appropriate
adjustments  shall be made to (i) the maximum  number and/or class of securities
issuable under the Plan,  (ii) the maximum number and/or class of securities for
which the share reserve is to increase automatically each year, (iii) the number
and/or class of securities  for which any one person may be granted  options and
separately  exercisable  stock  appreciation  rights per calendar year, (iv) the
number and/or class of securities  for which  automatic  option grants are to be
made subsequently per

                                       4.


<PAGE>



Eligible  Director  under the Automatic  Option Grant Program and (v) the number
and/or class of securities and the exercise price per share in effect under each
outstanding  option in order to prevent the dilution or  enlargement of benefits
thereunder. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive, absent manifest error.

                                       5.



<PAGE>




                                   ARTICLE TWO

                       DISCRETIONARY OPTION GRANT PROGRAM


I.       OPTION TERMS

                  Each option shall be evidenced by one or more documents in the
form  approved  by the Plan  Administrator;  provided,  however,  that each such
document shall comply with the terms specified below.  Each document  evidencing
an Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.

                  A.       Exercise Price.

                           1. The exercise price per share shall be fixed by the
Plan  Administrator  and may be less  than,  equal to or  greater  than the Fair
Market Value per share of Common Stock on the option grant date.

                           2. The exercise  price shall become  immediately  due
upon exercise of the option and shall, subject to the provisions of Section I of
Article  Four and the  documents  evidencing  the option,  be payable in cash or
check made  payable to the  Corporation.  After the Section  12(g)  Registration
Date, the exercise price may also be paid as follows:


                           (i) in shares of Common Stock held for the  requisite
         period  necessary to avoid a charge to the  Corporation's  earnings for
         financial  reporting  purposes  and valued at Fair Market  Value on the
         Exercise Date, or

                           (ii) to the extent the option is exercised for vested
         shares,  through a special sale and  remittance  procedure  pursuant to
         which the  Optionee  shall  concurrently  provide  irrevocable  written
         instructions to (a) a  Corporation-designated  brokerage firm to effect
         the  immediate   sale  of  the  purchased   shares  and  remit  to  the
         Corporation, out of the sale proceeds available on the settlement date,
         sufficient funds to cover the aggregate  exercise price payable for the
         purchased  shares plus all applicable  Federal,  state and local income
         and  employment  taxes  required to be withheld by the  Corporation  by
         reason  of such  exercise  and  (b)  the  Corporation  to  deliver  the
         certificates  for the purchased  shares directly to such brokerage firm
         in order to complete the sale.

                  Except to the extent  such sale and  remittance  procedure  is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.


                                       6.



<PAGE>



                  B.  Exercise  and  Term  of  Options.  Each  option  shall  be
exercisable  at such time or times,  during  such  period and for such number of
shares as shall be  determined  by the Plan  Administrator  and set forth in the
documents evidencing the option.  However, no option shall have a term in excess
of ten (10) years measured from the option grant date.

                  C.       Effect of Termination of Service.

                           1. The following provisions shall govern the exercise
of any  options  held by the  Optionee  at the time of  cessation  of Service or
death:
                                  (i)  Any option outstanding at the time of the
         Optionee's cessation of Service for any reason shall remain exercisable
         for such period of time  thereafter  as shall be determined by the Plan
         Administrator and set forth in the documents evidencing the option, but
         no such option shall be exercisable  after the expiration of the option
         term.

                                  (ii)  Any  option  exercisable  in whole or in
         part by the Optionee at the time of death may be exercised subsequently
         by the  personal  representative  of the  Optionee's  estate  or by the
         person or  persons to whom the option is  transferred  pursuant  to the
         Optionee's  will  or  in  accordance  with  the  laws  of  descent  and
         distribution.

                                  (iii)  During  the   applicable   post-Service
         exercise  period,  the option may not be exercised in the aggregate for
         more  than the  number  of  vested  shares  for  which  the  option  is
         exercisable  on the date of the Optionee's  cessation of Service.  Upon
         the expiration of the applicable  exercise  period or (if earlier) upon
         the expiration of the option term, the option shall terminate and cease
         to be  outstanding  for any vested  shares for which the option has not
         been  exercised.  However,  the  option  shall,  immediately  upon  the
         Optionee's cessation of Service,  terminate and cease to be outstanding
         to the extent the option is not otherwise at that time  exercisable for
         vested shares.

                                  (iv)   Should   the   Optionee's   Service  be
         terminated for  Misconduct,  then all  outstanding  options held by the
         Optionee shall terminate immediately and cease to be outstanding.

                                  (v) In the event of an Involuntary Termination
         following a Corporate Transaction,the provisions of Section III of this
         Article Two shall govern the period for which the  outstanding  options
         are to remain exercisable following the Optionee's cessation of Service
         and shall supersede any provisions to the contrary in this section.

                                       7.


<PAGE>



         2. The Plan Administrator shall have the discretion, exercisable either
at the time an  option  is  granted  or at any time  while  the  option  remains
outstanding, to:

                          (i)  extend the period of time for which the option is
         to remain  exercisable  following the  Optionee's  cessation of Service
         from the period  otherwise  in effect for that  option to such  greater
         period of time as the Plan Administrator shall deem appropriate, but in
         no event beyond the expiration of the option term, and/or

                        (ii)  permit  the  option  to  be  exercised, during the
         applicable  post-Service  exercise period, not only with respect to the
         number of  vested  shares of  Common  Stock  for which  such  option is
         exercisable at the time of the Optionee's cessation of Service but also
         with  respect  to one or more  additional  installments  in  which  the
         Optionee would have vested under the option had the Optionee  continued
         in Service.

                  D. Stockholder  Rights.  The holder of an option shall have no
stockholder  rights with respect to the shares  subject to the option until such
person shall have  exercised  the option,  paid the exercise  price and become a
holder of record of the purchased shares.

                  E. Repurchase Rights.  The Plan  Administrator  shall have the
discretion to grant options which are  exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation  shall have the right to repurchase,  at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable  (including the period and procedure for exercise and
the appropriate  vesting schedule for the purchased shares) shall be established
by the  Plan  Administrator  and  set  forth  in the  document  evidencing  such
repurchase right.

                  F. First Refusal Rights.  Until the Section 12(g) Registration
Date, the Corporation  shall have the right of first refusal with respect to any
proposed sale or other disposition by the Optionee (or any successor in interest
by reason of  purchase,  gift or other  transfer)  of any shares of Common Stock
issued  under the Plan.  Such right of first  refusal  shall be  exercisable  in
accordance with the terms and conditions  established by the Plan  Administrator
and set forth in the agreement evidencing such right.

                  G. Limited  Transferability of Options. During the lifetime of
the Optionee, the option shall be exercisable only by the Optionee and shall not
be assignable or  transferable  other than by will or by the laws of descent and
distribution following the Optionee's death. However, a Non-Statutory Option may
be  assigned in whole or in part during the  Optionee's  lifetime in  accordance
with the terms of a Qualified Domestic Relations Order. The assigned portion may
only be exercised by the person or persons who acquire a proprietary interest in
the option pursuant to such Qualified Domestic Relations

                                       8.



<PAGE>



Order.  The terms  applicable to the assigned portion shall be the same as those
in effect for the option  immediately  prior to such assignment and shall be set
forth in such  documents  issued to the assignee as the Plan  Administrator  may
deem appropriate.

       II.        INCENTIVE OPTIONS

                  The terms specified below shall be applicable to all Incentive
Options.  Except as  modified  by the  provisions  of this  Section  II, all the
provisions  of  Articles  One,  Two and Five shall be  applicable  to  Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.

                  A.  Eligibility.  Incentive  Options  may only be  granted  to
Employees.
                  B. Exercise  Price.  The exercise price per share shall not be
less  than one  hundred  percent  (100%) of the Fair  Market  Value per share of
Common Stock on the option grant date.

                  C. Dollar  Limitation.  The aggregate Fair Market Value of the
shares of Common Stock  (determined as of the respective date or dates of grant)
for which one or more  options  granted to any  Employee  under the Plan (or any
other option plan of the  Corporation or any Parent or  Subsidiary)  may for the
first time become  exercisable as Incentive  Options during any one (1) calendar
year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become  exercisable
for the first time in the same calendar  year,  the foregoing  limitation on the
exercisability  of such  options as  Incentive  Options  shall be applied on the
basis of the order in which such options are granted.

                  D.  10%  Stockholder.  If any  Employee  to whom an  Incentive
Option is granted is a 10% Stockholder,  then the exercise price per share shall
not be less than one  hundred ten  percent  (110%) of the Fair Market  Value per
share of Common  Stock on the option  grant date,  and the option term shall not
exceed five (5) years measured from the option grant date.

      III.        CORPORATE TRANSACTION/CHANGE IN CONTROL

                  A. In the event of any Corporate Transaction, each outstanding
option  shall   automatically   accelerate  so  that  each  such  option  shall,
immediately  prior to the effective  date of the Corporate  Transaction,  become
fully  exercisable  for all of the shares of Common Stock at the time subject to
such option and may be exercised for any or all of those shares as  fully-vested
shares of Common Stock.  However,  an outstanding option shall NOT so accelerate
if and to the  extent:  (i) such  option is, in  connection  with the  Corporate
Transaction,  either to be  assumed  by the  successor  corporation  (or  parent
thereof) or to be replaced  with a comparable  option to purchase  shares of the
capital stock of the successor

                                       9.



<PAGE>



corporation (or parent thereof),  (ii) such option is to be replaced with a cash
incentive  program  of the  successor  corporation  which  preserves  the spread
existing on the unvested option shares at the time of the Corporate  Transaction
and provides for subsequent  payout in accordance with the same vesting schedule
applicable to such option or (iii) the acceleration of such option is subject to
other  limitations  imposed by the Plan  Administrator at the time of the option
grant. The determination of option comparability under clause (i) above shall be
made by the Plan Administrator,  and its determination  shall be final,  binding
and conclusive, absent manifest error.

                  B. All  outstanding  repurchase  rights  shall also  terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall  immediately  vest in full,  in the  event of any  Corporate  Transaction,
except to the  extent:  (i) those  repurchase  rights are to be  assigned to the
successor  corporation  (or parent  thereof) in connection  with such  Corporate
Transaction or (ii) such accelerated  vesting is precluded by other  limitations
imposed by the Plan Administrator at the time the repurchase right is issued.

                  C.  Immediately  following the  consummation  of the Corporate
Transaction,   all   outstanding   options  shall  terminate  and  cease  to  be
outstanding,  except to the extent  assumed  by the  successor  corporation  (or
parent thereof).

                  D. Each option which is assumed in connection with a Corporate
Transaction  shall be appropriately  adjusted,  immediately after such Corporate
Transaction,  to apply to the number and class of  securities  which  would have
been issuable to the Optionee in consummation of such Corporate  Transaction had
the option  been  exercised  immediately  prior to such  Corporate  Transaction.
Appropriate  adjustments  shall  also be made to (i) the  number  and  class  of
securities  available for issuance under the Plan following the  consummation of
such Corporate Transaction, (ii) the exercise price payable per share under each
outstanding  option,  provided the  aggregate  exercise  price  payable for such
securities  shall  remain the same and (iii) the  maximum  number of  securities
and/or class of securities  for which any one person may be granted  options and
separately  exercisable  stock  appreciation  rights under the Plan per calendar
year.

                  E. Any options  which are assumed or replaced in the Corporate
Transaction and do not otherwise  accelerate at that time,  shall  automatically
accelerate (and any of the Corporation's  outstanding repurchase rights which do
not  otherwise  terminate  at  the  time  of  the  Corporate  Transaction  shall
automatically  terminate  and the  shares  of  Common  Stock  subject  to  those
terminated  rights shall  immediately  vest in full) in the event the Optionee's
Service should  subsequently  terminate by reason of an Involuntary  Termination
within  eighteen  (18) months  following the  effective  date of such  Corporate
Transaction.   Any  options  so  accelerated   shall  remain   exercisable   for
fully-vested  shares until the earlier of (i) the  expiration of the option term
or (ii) the  expiration of the one (1)-year  period  measured from the effective
date of the Involuntary Termination.


                                       10.


<PAGE>



                  F. The Plan  Administrator  shall have the discretion to grant
options  with  terms  different  from those  described  in this  Section  III in
connection with a Corporate Transaction.

                  G.  The  Plan   Administrator   shall  have  the   discretion,
exercisable  either at the time the  option is  granted or at any time while the
option remains outstanding, to (i) provide for the automatic acceleration of one
or more  outstanding  options  (and  the  automatic  termination  of one or more
outstanding repurchase rights with the immediate vesting of the shares of Common
Stock  subject to those  rights) upon the  occurrence  of a Change in Control or
(ii)  condition  any  such  option  acceleration  (and  the  termination  of any
outstanding  repurchase rights) upon the subsequent  Involuntary  Termination of
the Optionee's Service within a specified period following the effective date of
such Change in Control.  Any options  accelerated in connection with a Change in
Control  shall  remain  fully   exercisable   until  the  expiration  or  sooner
termination of the option term.

                  H.  The  portion  of  any  Incentive  Option   accelerated  in
connection  with a  Corporate  Transaction  or Change in  Control  shall  remain
exercisable as an Incentive Option only to the extent the applicable One Hundred
Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar
limitation  is  exceeded,  the  accelerated  portion  of such  option  shall  be
exercisable as a Non-Statutory Option under the Federal tax laws.

                  I. The grant of options under the  Discretionary  Option Grant
Program  shall  in no way  affect  the  right  of  the  Corporation  to  adjust,
reclassify,  reorganize or otherwise change its capital or business structure or
to merge, consolidate,  dissolve,  liquidate or sell or transfer all or any part
of its business or assets.

       IV.        CANCELLATION AND REGRANT OF OPTIONS

                  The Plan Administrator  shall have the authority to effect, at
any time and from time to time, with the consent of the affected option holders,
the  cancellation  of any or all  outstanding  options  under the  Discretionary
Option Grant Program and to grant in substitution  new options covering the same
or  different  number of shares of Common  Stock but with an exercise  price per
share based on the Fair Market Value per share of Common Stock on the new option
grant date.

        V.        STOCK APPRECIATION RIGHTS

                  A. The Plan Administrator  shall have full power and authority
to grant to selected Optionees tandem stock  appreciation  rights and/or limited
stock appreciation rights.

                  B. The following  terms shall govern the grant and exercise of
tandem stock appreciation rights:


                                       11.



<PAGE>


                  (i)  One  or  more   Optionees   may  be  granted  the  right,
         exercisable upon such terms as the Plan Administrator may establish, to
         elect  between  the  exercise  of the  underlying  option for shares of
         Common  Stock  and the  surrender  of that  option  in  exchange  for a
         distribution  from the  Corporation in an amount equal to the excess of
         (a) the Fair Market Value (on the option  surrender date) of the number
         of  shares  in which  the  Optionee  is at the time  vested  under  the
         surrendered  option  (or  surrendered  portion  thereof)  over  (b) the
         aggregate exercise price payable for such shares.


                  (ii) No such option  surrender shall be effective unless it is
         approved by the Plan  Administrator.  If the  surrender is so approved,
         then the  distribution  to which the Optionee  shall be entitled may be
         made in shares  of Common  Stock  valued  at Fair  Market  Value on the
         option surrender date, in cash, or partly in shares and partly in cash,
         as  the  Plan   Administrator   shall  in  its  sole   discretion  deem
         appropriate.

                  (iii) If the  surrender  of an option is  rejected by the Plan
         Administrator,  then the  Optionee  shall  retain  whatever  rights the
         Optionee  had under the  surrendered  option  (or  surrendered  portion
         thereof) on the option  surrender  date and may exercise such rights at
         any time  prior to the later of (a) five (5)  business  days  after the
         receipt of the rejection notice or (b) the last day on which the option
         is otherwise  exercisable in accordance with the terms of the documents
         evidencing  such  option,  but in no event may such rights be exercised
         more than ten (10) years after the option grant date.

         C. The  following  terms shall govern the grant and exercise of limited
stock appreciation rights:

                  (i) One or more  Section 16  Insiders  may be granted  limited
         stock appreciation rights with respect to their outstanding options.

                  (ii) Upon the  occurrence  of a Hostile  Take-Over,  each such
         individual  holding  one or more  options  with  such a  limited  stock
         appreciation right in effect for at least six (6) months shall have the
         unconditional right (exercisable for a thirty (30)-day period following
         such  Hostile   Take-Over)  to  surrender   each  such  option  to  the
         Corporation,  to the extent the option is at the time  exercisable  for
         vested shares of Common Stock.  In return for the  surrendered  option,
         the Optionee shall receive a cash  distribution from the Corporation in
         an amount equal to the excess of (a) the Take-Over  Price of the shares
         of Common  Stock  which are at the time vested  under each  surrendered
         option (or surrendered portion thereof) over (b) the aggregate exercise
         price  payable for such shares.  Such cash  distribution  shall be paid
         within five (5) days following the option surrender date.

                                       12.


<PAGE>




                  (iii) Neither the approval of the Plan  Administrator  nor the
         consent of the Board shall be required in  connection  with such option
         surrender  and cash  distribution. 

                  (iv) The balance of the option (if any) shall continue in full
         force and  effect in  accordance  with the  documents  evidencing  such
         option.

                                       13.


<PAGE>




                                  ARTICLE THREE

                         AUTOMATIC OPTION GRANT PROGRAM


        I.        OPTION TERMS

         A. GRANT  DATES.  Option  grants  shall be made on the dates  specified
below:
            1. Each  Eligible  Director  who is first  elected or appointed as a
non-employee  Board member after the Automatic  Option Grant  Program  Effective
Date shall  automatically  be granted,  on the date of such initial  election or
appointment  (as the case may be), a  Non-Statutory  Option to  purchase  10,000
shares of Common Stock.

            2. On the date of each Annual  Stockholders  Meeting  held after the
Automatic  Option  Grant  Program  Effective  Date,  each  individual  who is to
continue  to  serve  as  an  Eligible   Director   after  such  meeting,   shall
automatically  be  granted,  whether  or not such  individual  is  standing  for
re-election as a Board member at that Annual Meeting, a Non-Statutory  Option to
purchase an additional  2,000 shares of Common Stock,  provided such  individual
has served as a  non-employee  Board  member for at least six (6) months.  There
shall  be no limit on the  number  of such  2,000-share  option  grants  any one
Eligible  Director  may  receive  over his or her  period of Board  service. 

         B. EXERCISE PRICE.

            1. The  exercise  price  per  share  shall  be equal to one  hundred
percent  (100%) of the Fair Market Value per share of Common Stock on the option
grant date.

            2.  The  exercise  price  shall  be  payable  in one or  more of the
alternative  forms  authorized  under the  Discretionary  Option Grant  Program.
Except to the extent the sale and remittance  procedure specified  thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.

         C.  OPTION  TERM.  Each  option  shall  have a term of ten  (10)  years
measured from the option grant date.

         D.  EXERCISE AND VESTING OF OPTIONS.  Each option shall be  immediately
exercisable for any or all of the option shares.  However,  any shares purchased
under the option  shall be  subject to  repurchase  by the  Corporation,  at the
exercise price paid per share,  upon the  Optionee's  cessation of Board service
prior to vesting  in those  shares.  Each  initial  grant  shall  vest,  and the
Corporation's repurchase right shall lapse, in a series of three

                                       14.


<PAGE>



(3)  successive  and equal annual  installments  over the  Optionee's  period of
continued  service as a Board member,  with the first such  installment  to vest
upon the  Optionee's  completion of one (1) year of Board service  measured from
the option  grant date.  Each annual  grant  shall vest,  and the  Corporation's
repurchase right shall lapse, upon the Optionee's  completion of one (1) year of
Board service measured from the option grant date.

            E. EFFECT OF TERMINATION OF BOARD SERVICE.  The following provisions
shall  govern the  exercise of any options  held by the Optionee at the time the
Optionee ceases to serve as a Board member:

                           (i) The  Optionee  (or,  in the  event of  Optionee's
         death,  the personal  representative  of the  Optionee's  estate or the
         person or  persons to whom the option is  transferred  pursuant  to the
         Optionee's  will  or  in  accordance  with  the  laws  of  descent  and
         distribution) shall have a twelve (12)-month  period following the date
         of such  cessation  of Board  service  in which to  exercise  each such
         option.

                           (ii) During the twelve  (12)-month  exercise  period,
         the  option may not be  exercised  in the  aggregate  for more than the
         number of  vested  shares  of  Common  Stock  for  which the  option is
         exercisable at the time of the Optionee's cessation of Board service.

                           (iii) Should the  Optionee  cease to serve as a Board
         member by reason of death or Permanent  Disability,  then all shares at
         the time  subject to the  option  shall  immediately  vest so that such
         option may, during the twelve (12)-month exercise period following such
         cessation  of Board  service,  be  exercised  for all or any portion of
         those shares as fully-vested shares of Common Stock.

                           (iv) In no event shall the option remain  exercisable
         after the  expiration  of the option term.  Upon the  expiration of the
         twelve  (12)-month  exercise period or (if earlier) upon the expiration
         of the  option  term,  the  option  shall  terminate  and  cease  to be
         outstanding  for any  vested  shares  for which the option has not been
         exercised.  However, the option shall,  immediately upon the Optionee's
         cessation of Board service for any reason other than death or Permanent
         Disability,  terminate  and cease to be  outstanding  to the extent the
         option is not otherwise at that time exercisable for vested shares.


                                       15.


<PAGE>



            II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER

                  A. In the event of any  Corporate  Transaction,  the shares of
Common Stock at the time subject to each  outstanding  option but not  otherwise
vested  shall  automatically  vest  in  full so that  each  such  option  shall,
immediately  prior to the effective  date of the Corporate  Transaction,  become
fully  exercisable  for all of the shares of Common Stock at the time subject to
such  option and may be  exercised  for all or any  portion  of those  shares as
fully-vested shares of Common Stock.  Immediately  following the consummation of
the Corporate Transaction, each automatic option grant shall terminate and cease
to be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

                  B. In  connection  with any Change in  Control,  the shares of
Common Stock at the time subject to each  outstanding  option but not  otherwise
vested  shall  automatically  vest  in  full so that  each  such  option  shall,
immediately  prior to the effective date of the Change in Control,  become fully
exercisable  for all of the shares of Common  Stock at the time  subject to such
option  and  may  be  exercised  for  all or  any  portion  of  such  shares  as
fully-vested  shares of Common Stock. Each such option shall remain  exercisable
for such fully-vested  option shares until the expiration or sooner  termination
of the option term or the surrender of the option in  connection  with a Hostile
Take-Over.

                  C. Upon the  occurrence of a Hostile  Take-Over,  the Optionee
shall have a thirty  (30)-day  period in which to surrender  to the  Corporation
each  automatic  option  held by him or her for a  period  of at  least  six (6)
months. The Optionee shall in return be entitled to a cash distribution from the
Corporation  in an amount equal to the excess of (i) the Take-Over  Price of the
shares of Common Stock at the time subject to the surrendered option (whether or
not the Optionee is otherwise at the time vested in those  shares) over (ii) the
aggregate  exercise price payable for such shares.  Such cash distribution shall
be paid  within  five (5) days  following  the  surrender  of the  option to the
Corporation. No approval or consent of the Board or any Plan Administrator shall
be required in connection with such option surrender and cash distribution.

                  D. Each option which is assumed in connection with a Corporate
Transaction  shall be appropriately  adjusted,  immediately after such Corporate
Transaction,  to apply to the number and class of  securities  which  would have
been issuable to the Optionee in consummation of such Corporate  Transaction had
the option  been  exercised  immediately  prior to such  Corporate  Transaction.
Appropriate  adjustments  shall also be made to the exercise  price  payable per
share under each  outstanding  option,  provided the  aggregate  exercise  price
payable for such securities shall remain the same.

                  E. The grant of  options  under  the  Automatic  Option  Grant
Program  shall  in no way  affect  the  right  of  the  Corporation  to  adjust,
reclassify,  reorganize or otherwise change its capital or business structure or
to merge, consolidate,  dissolve,  liquidate or sell or transfer all or any part
of its business or assets.

                                       16.


<PAGE>




      III.        AMENDMENT OF THE AUTOMATIC OPTION GRANT PROGRAM

                  The  provisions  of  this  Automatic   Option  Grant  Program,
together with the option grants  outstanding  thereunder,  may not be amended at
intervals  more  frequently  than once every six (6)  months,  other than to the
extent  necessary  to  comply  with  applicable  Federal  income  tax  laws  and
regulations.

       IV.        REMAINING TERMS

                  The remaining terms of each option granted under the Automatic
Option Grant  Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.


                                       17.



<PAGE>




                                  ARTICLE FOUR

                                  MISCELLANEOUS


        I.        FINANCING

                  A. The Plan  Administrator  may permit any Optionee to pay the
option exercise price under the Discretionary Option Grant Program by delivering
a  promissory  note payable in one or more  installments.  The terms of any such
promissory note  (including the interest rate and the terms of repayment)  shall
be  established by the Plan  Administrator  in its sole  discretion.  Promissory
notes may be authorized with or without  security or collateral.  In all events,
the maximum  credit  available to the Optionee may not exceed the sum of (i) the
aggregate  option exercise price payable for the purchased  shares plus (ii) any
Federal,  state and local income and  employment  tax liability  incurred by the
Optionee in connection with the option exercise.

                  B. The Plan  Administrator  may, in its discretion,  determine
that one or more such  promissory  notes shall be subject to  forgiveness by the
Corporation  in whole or in part upon such terms as the Plan  Administrator  may
deem appropriate.

       II.        TAX WITHHOLDING

                  A. The  Corporation's  obligation to deliver  shares of Common
Stock upon the exercise of options or stock  appreciation  rights under the Plan
shall be subject to the satisfaction of all applicable Federal,  state and local
income and employment tax withholding requirements.

                  B. The Plan Administrator may, in its discretion,  provide any
or all holders of  Non-Statutory  Options under the Plan (other than the options
granted under the Automatic  Option Grant  Program) with the right to use shares
of Common  Stock in  satisfaction  of all or part of the Taxes  incurred by such
holders in  connection  with the  exercise of their  options.  Such right may be
provided to any such holder in either or both of the following formats:

                         (i)  Stock  Withholding:   The  election  to  have  the
         Corporation  withhold,  from  the  shares  of  Common  Stock  otherwise
         issuable upon the exercise of such  Non-Statutory  Option, a portion of
         those  shares  with  an  aggregate  Fair  Market  Value  equal  to  the
         percentage  of the Taxes (not to exceed  one  hundred  percent  (100%))
         designated by the holder.

                         (ii) Stock  Delivery:  The  election  to deliver to the
         Corporation,  at the time the Non-Statutory Option is exercised, one or
         more

                                      18.



<PAGE>



         shares of Common Stock  previously  acquired by such holder (other than
         in connection  with the option  exercise  triggering the Taxes) with an
         aggregate  Fair Market Value equal to the  percentage of the Taxes (not
         to exceed one hundred percent (100%)) designated by the holder.

      III.        EFFECTIVE DATE AND TERM OF THE PLAN

                  A.  The  Discretionary   Option  Grant  Program  shall  became
effective  on the Plan  Effective  Date and  options  may be  granted  under the
Discretionary  Option Grant Program at any time after the Plan  Effective  Date.
The Automatic  Option Grant  Program  became  effective on the Automatic  Option
Grant Program  Effective Date and option grants under the Automatic Option Grant
Program  may be made to the  Eligible  Directors  after such date.  However,  no
options  granted  under the Plan may be exercised  until the Plan is approved by
the  Corporation's  stockholders.  If such stockholder  approval is not obtained
within  twelve  (12)  months  after the Plan  Effective  Date,  then all options
previously  granted under this Plan shall terminate and cease to be outstanding,
and no further  options shall be granted and no shares shall be issued under the
Plan.

                  B. The Plan was  amended on June 9, 1995 to (i)  increase  the
total  number of shares of Common  Stock  available  for  issuance  from 650,000
shares to  950,000  shares and (ii) to  increase  the number of shares of Common
Stock subject to the options  granted  under the Automatic  Option Grant Program
upon the initial  election or  appointment  of an Eligible  Director  from 5,000
shares to 10,000 and to increase the number of shares of Common Stock subject to
the  annual  option  grants  thereunder  to be made on the  date of each  Annual
Stockholders  Meeting to  continuing  non-employee  Board  members from 1,000 to
2,000 shares. The amendment is subject to stockholder at the 1996 Annual Meeting
of Stockholders.

                  C. The Plan shall  terminate upon the earliest of (i) June 30,
2005,  (ii) the date on which all shares  available for issuance  under the Plan
shall have been issued pursuant to the exercise of the options under the Plan or
(iii) the termination of all outstanding  options in connection with a Corporate
Transaction.  Upon such Plan termination, all outstanding options shall continue
to have force and effect in  accordance  with the  provisions  of the  documents
evidencing such options.

       IV.        AMENDMENT OF THE PLAN

                  A. The Board  shall  have  complete  and  exclusive  power and
authority to amend or modify the Plan in any or all  respects.  However,  (i) no
such amendment or modification shall adversely affect any rights and obligations
with  respect to options or stock  appreciation  rights at the time  outstanding
under the Plan unless the Optionee  consents to such amendment or  modification,
and (ii) any  amendment  made to the  Automatic  Option  Grant  Program  (or any
options  outstanding  thereunder) shall be in compliance with the limitations of
that program. In addition, the Board shall not, without the approval of the

                                       19.


<PAGE>



Corporation's stockholders, (i) materially increase the maximum number of shares
issuable  under the Plan,  the number of shares for which options may be granted
under the  Automatic  Option Grant  Program or the maximum  number of shares for
which any one person may be granted  options  or  separately  exercisable  stock
appreciation  rights in the aggregate per calendar year,  except for permissible
adjustments in the event of certain changes in the Corporation's capitalization,
(ii) materially  modify the eligibility  requirements for Plan  participation or
(iii) materially increase the benefits accruing to Plan participants.

                  B.  Options to purchase  shares of Common Stock may be granted
under the Discretionary Option Grant Program that are in excess of the number of
shares then  available for issuance  under the Plan,  provided any excess shares
actually  issued under those programs are held in escrow until there is obtained
stockholder  approval  of an  amendment  sufficiently  increasing  the number of
shares  of  Common  Stock  available  for  issuance  under  the  Plan.  If  such
stockholder  approval is not obtained  within  twelve (12) months after the date
the first such excess grants are made, then (i) any unexercised  options granted
on the basis of such excess shares shall  terminate and cease to be  outstanding
and (ii) the  Corporation  shall  promptly  refund to the Optionees the exercise
price  paid for any  excess  shares  issued  under the Plan and held in  escrow,
together  with  interest (at the  applicable  Short Term  Federal  Rate) for the
period the shares  were held in  escrow,  and such  shares  shall  thereupon  be
automatically cancelled and cease to be outstanding.

        V.        USE OF PROCEEDS

                  Any cash proceeds received by the Corporation from the sale of
shares  of  Common  Stock  under the Plan  shall be used for  general  corporate
purposes.

       VI.        REGULATORY APPROVALS

                  A. The  implementation of the Plan, the granting of any option
or stock  appreciation  right  under the Plan and the  issuance of any shares of
Common Stock upon the exercise of any option or stock  appreciation  right shall
be  subject  to the  Corporation's  procurement  of all  approvals  and  permits
required  by  regulatory  authorities  having  jurisdiction  over the Plan,  the
options and stock appreciation  rights granted under it and the shares of Common
Stock issued pursuant to it.

                  B. No shares of Common  Stock or other  assets shall be issued
or  delivered  under the Plan unless and until there shall have been  compliance
with all applicable  requirements  of Federal and state  securities laws and all
applicable  listing  requirements  of any stock exchange (or the Nasdaq National
Market, if applicable) on which Common Stock is then listed for trading.

      VII.        NO EMPLOYMENT/SERVICE RIGHTS


                                       20.



<PAGE>



                  Nothing in the Plan shall  confer upon the  Optionee any right
to continue in Service for any period of specific  duration or interfere with or
otherwise  restrict in any way the rights of the  Corporation  (or any Parent or
Subsidiary employing or retaining such person) or of the Optionee,  which rights
are hereby expressly reserved by each, to terminate such person's Service at any
time for any reason, with or without cause.

                                       21.


<PAGE>



                                    APPENDIX


            The following definitions shall be in effect under the Plan:

         B. AUTOMATIC OPTION GRANT PROGRAM EFFECTIVE DATE shall mean the date on
which the  Underwriting  Agreement is executed and the initial  public  offering
price of the Common Stock is established.

         C. BOARD shall mean the Corporation's Board of Directors.

         D. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:

                         (i) the  acquisition,  directly or  indirectly,  by any
         person or related  group of persons  (other than the  Corporation  or a
         person that directly or indirectly  controls,  is controlled  by, or is
         under common control with, the  Corporation),  of beneficial  ownership
         (within  the  meaning  of Rule  13d-3  of the 1934  Act) of  securities
         possessing  more than fifty percent (50%) of the total combined  voting
         power of the Corporation's  outstanding securities pursuant to a tender
         or exchange offer made directly to the Corporation's stockholders which
         the Board does not recommend such stockholders to accept, or

                        (ii) a change in the  composition  of the  Board  over a
         period  of  thirty-six  (36)  consecutive  months  or less  such that a
         majority  of the  Board  members  ceases,  by  reason  of  one or  more
         contested   elections  for  Board   membership,   to  be  comprised  of
         individuals who either (A) have been Board members  continuously  since
         the  beginning of such period or (B) have been elected or nominated for
         election as Board members  during such period by at least a majority of
         the Board  members  described in clause (A) who were still in office at
         the time the Board approved such election or nomination.

         E. CODE shall mean the Internal Revenue Code of 1986, as amended.

         F. COMMON STOCK shall mean the Corporation's common stock.

         G. CORPORATE   TRANSACTION   shall  mean   either  of   the   following
stockholder-approved transactions to which the Corporation is a party:

                                      A-1.


<PAGE>



                         (i) a  merger  or  consolidation  in  which  securities
         possessing  more than fifty percent (50%) of the total combined  voting
         power of the Corporation's  outstanding securities are transferred to a
         person or persons  different from the persons holding those  securities
         immediately prior to such transaction; or

                         (ii) the sale,  transfer or other disposition of all or
         substantially all of the Corporation's  assets in complete  liquidation
         or dissolution of the Corporation.

         H. CORPORATION  shall mean Atlantic  Pharmaceuticals,  Inc., a Delaware
corporation,  and any  corporate  successor to all or  substantially  all of the
assets  or  voting  stock  of  Atlantic  Pharmaceuticals,  Inc.  which  shall by
appropriate action adopt the Plan. 

         I.  DISCRETIONARY  OPTION GRANT  PROGRAM  shall mean the  discretionary
option grant program in effect under the Plan.

         J. DOMESTIC  RELATIONS  ORDER shall mean any judgment,  decree or order
(including  approval  of a property  settlement  agreement)  which  provides  or
otherwise  conveys,   pursuant  to  applicable  State  domestic  relations  laws
(including  community  property laws),  marital property rights to any spouse or
former spouse of the Optionee.

         K. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
participate  in the  Automatic  Option  Grant  Program  in  accordance  with the
eligibility provisions of Article One.

         L.  EMPLOYEE  shall  mean an  individual  who is in the  employ  of the
Corporation (or any Parent or Subsidiary),  subject to the control and direction
of the employer  entity as to both the work to be  performed  and the manner and
method of performance.

         M.  EXERCISE  DATE shall mean the date on which the  Corporation  shall
have received written notice of the option exercise.

         N. FAIR MARKET  VALUE per share of Common  Stock on any  relevant  date
shall be determined in accordance with the following provisions:

                         (i) If the  Common  Stock is at the time  traded on the
         Nasdaq National Market, then the Fair Market Value shall be the closing
         selling  price per share of Common  Stock on the date in  question,  as
         such  price is  reported  by the  National  Association  of  Securities
         Dealers on the Nasdaq National Market or any successor system. If there
         is no  closing  selling  price  for the  Common  Stock  on the  date in
         question, then the Fair Market Value shall be the closing selling price
         on the last preceding date for which such quotation exists.

                                      A-2.



<PAGE>




                        (ii) If the  Common  Stock is at the time  traded on the
         Nasdaq SmallCap Market or the  over-the-counter  market,  then the Fair
         Market  Value shall be the average of the highest bid and lowest  asked
         prices per share of Common  Stock on the date in question on the Nasdaq
         SmallCap  Market or the  over-the-counter  market,  as such  prices are
         reported by the National  Association of Securities Dealers through its
         Nasdaq system or any successor system. If there are no reported bid and
         asked  prices for the Common  Stock on the date in  question,  then the
         Fair  Market  Value  shall be the average of the highest bid and lowest
         asked  prices  on the last  preceding  date for which  such  quotations
         exist.

                       (iii) If the  Common  Stock is at the time  listed on any
         Stock Exchange, then the Fair Market Value shall be the closing selling
         price per share of Common  Stock on the date in  question  on the Stock
         Exchange  determined by the Plan Administrator to be the primary market
         for the  Common  Stock,  as such  price  is  officially  quoted  in the
         composite tape of transactions on such exchange. If there is no closing
         selling  price for the Common Stock on the date in  question,  then the
         Fair  Market  Value  shall  be the  closing  selling  price on the last
         preceding date for which such quotation exists.

                        (iv) For purposes of any option  grants made on the date
         the Underwriting  Agreement is executed and the initial public offering
         price of the Common Stock is  established,  the Fair Market Value shall
         be deemed to be equal to the  established  initial  offering  price per
         share.  For purposes of option grants made prior to such date, the Fair
         Market Value shall be determined by the Plan Administrator after taking
         into  account  such  factors  as  the  Plan  Administrator  shall  deem
         appropriate.

         O. 5% STOCKHOLDER  shall mean the owner of stock (as  determined  under
Code  Section  424(d))  possessing  more  than  five  percent  (5%) of the total
combined  voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

         P.  HOSTILE   TAKE-OVER  shall  mean  a  change  in  ownership  of  the
Corporation effected through the following transaction:

                         (i) the  acquisition,  directly or  indirectly,  by any
         person or related  group of persons  (other than the  Corporation  or a
         person that directly or indirectly  controls,  is controlled  by, or is
         under common control with,  the  Corporation)  of beneficial  ownership
         (within  the  meaning  of Rule  13d-3  of the 1934  Act) of  securities
         possessing  more than fifty percent (50%) of the total combined  voting
         power of the Corporation's  outstanding securities pursuant to a tender
         or exchange offer made directly to the Corporation's

                                      A-3.


<PAGE>



         stockholders which the Board does not recommend such stockholders to
         accept, and

                        (ii) more than fifty percent (50%) of the  securities so
         acquired are accepted from persons other than Section 16 Insiders.

         Q.  INCENTIVE   OPTION  shall  mean  an  option  which   satisfies  the
requirements of Code Section 422.

         R. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of
:
                        (i) such individual's involuntary dismissal or discharge
         by the Corporation for reasons other than Misconduct, or

                        (ii) such individual's  voluntary  resignation following
         (A) a  change  in  his or  her  position  with  the  Corporation  which
         materially reduces his or her level of responsibility,  (B) a reduction
         in his or her level of  compensation  (including  base  salary,  fringe
         benefits  and  participation  in  corporate-performance  based bonus or
         incentive  programs)  by  more  than  fifteen  percent  (15%)  or (C) a
         relocation of such individual's  place of employment by more than fifty
         (50) miles,  provided and only if such change,  reduction or relocation
         is effected by the Corporation without the individual's consent.

         S.  MISCONDUCT   shall  mean  the  commission  of  any  act  of  fraud,
embezzlement or dishonesty by the Optionee,  any  unauthorized use or disclosure
by such person of  confidential  information or trade secrets of the Corporation
(or any  Parent or  Subsidiary),  or any other  intentional  misconduct  by such
person  adversely  affecting the business or affairs of the  Corporation (or any
Parent or Subsidiary) in a material manner.  The foregoing  definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee or other person in the Service of the Corporation (or any Parent
or Subsidiary).

         T. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.

         U.  NON-STATUTORY  OPTION  shall mean an option not intended to satisfy
the requirements of Code Section 422.

         V.  OPTIONEE  shall mean any person to whom an option is granted  under
the Discretionary Option Grant or Automatic Option Grant Program.

                                      A-4.


<PAGE>



         W. PARENT shall mean any corporation (other than the Corporation) in an
unbroken  chain of  corporations  ending  with the  Corporation,  provided  each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination,  stock possessing fifty percent (50%) or more of the total
combined  voting power of all classes of stock in one of the other  corporations
in such  chain.  For  purposes of the grant of  Non-Statutory  Options and stock
appreciation  rights  under the  Discretionary  Option Grant  Program,  the term
Parent shall also include any corporation,  partnership,  joint venture or other
business  entity which,  directly or  indirectly,  controls the  management  and
policies of the Corporation, whether through the ownership of voting securities,
by contract or otherwise.

         X.  PERMANENT   DISABILITY  OR  PERMANENTLY  DISABLED  shall  mean  the
inability  of the  Optionee  to engage in any  substantial  gainful  activity by
reason of any medically  determinable  physical or mental impairment expected to
result in death or to be of  continuous  duration of twelve (12) months or more.
However,  solely  for  the  purposes  of the  Automatic  Option  Grant  Program,
Permanent  Disability or  Permanently  Disabled  shall mean the inability of the
non-employee  Board  member to perform his or her usual duties as a Board member
by reason of any medically  determinable  physical or mental impairment expected
to result in death or to be of  continuous  duration  of twelve  (12)  months or
more.

         Y. PLAN shall mean the  Corporation's  1995 Stock Option  Plan,  as set
forth in this document.

         Z. PLAN  ADMINISTRATOR  shall mean the particular  entity,  whether the
Board, the Primary Committee or the Secondary Committee,  which is authorized to
administer  the  Discretionary  Option Grant Program with respect to one or more
classes of eligible  persons,  to the extent  such  entity is  carrying  out its
administrative  functions under those programs with respect to the persons under
its jurisdiction.

         AA.  PLAN  EFFECTIVE  DATE  shall  mean the  date on which  the Plan is
adopted by the Board.

         AB. PRIMARY  COMMITTEE shall mean the committee of two (2) or more non-
employee Board members  appointed by the Board to administer  the  Discretionary
Option Grant Program with respect to Section 16 Insiders.

         AC. QUALIFIED  DOMESTIC RELATIONS ORDER shall mean a Domestic Relations
Order which substantially complies with the requirements of Code Section 414(p).
The Plan  Administrator  shall have the sole  discretion to determine  whether a
Domestic Relations Order is a Qualified Domestic Relations Order.

         AD. SECONDARY COMMITTEE shall mean a committee of two (2) or more Board
members  appointed by the Board to  administer  the  Discretionary  Option Grant
Program with respect to eligible persons other than Section 16 Insiders.

                                      A-5.


<PAGE>



         AE.  SECTION 16  INSIDER  shall  mean an  officer  or  director  of the
Corporation  subject to the short-swing  profit liabilities of Section 16 of the
1934 Act.

         AF. SECTION 12(G)  REGISTRATION DATE shall mean the first date on which
the Common Stock is registered under Section 12(g) of the 1934 Act.

         AG. SERVICE shall mean the provision of services to the Corporation (or
any  Parent  or  Subsidiary)  by a person  in the  capacity  of an  Employee,  a
non-employee  member of the board of directors or a  consultant  or  independent
advisor,  except to the extent otherwise  specifically provided in the documents
evidencing the option grant.


         AI. SUBSIDIARY shall mean any corporation  (other than the Corporation)
in an unbroken chain of corporations  beginning with the  Corporation,  provided
each corporation  (other than the last  corporation) in the unbroken chain owns,
at the time of the  determination,  stock possessing fifty percent (50%) or more
of the total  combined  voting power of all classes of stock in one of the other
corporations in such chain. For purposes of the grant of  Non-Statutory  Options
and stock appreciation rights under the Discretionary  Option Grant Program, the
term Subsidiary shall also include any corporation,  partnership,  joint venture
or other  business  entity in which the  Corporation,  directly  or  indirectly,
controls the  management and policies,  whether  through the ownership of voting
securities, by contract or otherwise.

         AJ. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value
per  share  of  Common  Stock  on the  date the  option  is  surrendered  to the
Corporation in connection with a Hostile  Take-Over or (ii) the highest reported
price per share of Common  Stock paid by the tender  offeror in  effecting  such
Hostile  Take-Over.  However,  if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.

         AK. TAXES shall mean the Federal, state and local income and employment
tax  liabilities  incurred  by the holder of  Non-Statutory  Options or unvested
shares of Common Stock in  connection  with the exercise of those options or the
vesting of those shares.

         AL. 10% STOCKHOLDER  shall mean the owner of stock (as determined under
Code  Section  424(d))  possessing  more  than ten  percent  (10%) of the  total
combined  voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

         AM.  UNDERWRITING  AGREEMENT  shall  mean  the  agreement  between  the
Corporation  and the  underwriter  or  underwriters  managing the initial public
offering of the Common Stock.
                                      A-6.


<PAGE>

                                                                      APPENDIX B


                         ATLANTIC PHARMACEUTICALS, INC.
                                     PROXY

                 Annual Meeting of Stockholders, June 20, 1996

               This Proxy is Solicited on Behalf of the Board of
                         Atlantic Pharmaceuticals, Inc.


     The undersigned revokes all previous proxies,  acknowledges  receipt of the
Notice of the Annual  Meeting of  Stockholders  to be held June 20, 1996 and the
Proxy Statement and appoints Jon D. Lindjord and Margaret A. Schalk, and each of
them, the Proxy of the undersigned, with full power of substitution, to vote all
shares of Common Stock of Atlantic  Pharmaceuticals,  Inc. (the "Company") which
the  undersigned  is  entitled  to vote,  either on his or her own  behalf or on
behalf of any entity or entities,  at the Annual Meeting of  Stockholders of the
Company to be held at the law offices of Brobeck,  Phleger & Harrison  LLP, 1301
Avenue of the Americas,  30th Floor, New York, New York 10019 on Thursday,  June
20,  1996  at 9:00  A.M.  New  York  Time  (the  "Annual  Meeting"),  and at any
adjournment  or  postponement  thereof,  with the same  force and  effect as the
undersigned  might  or  could  do if  personally  present  thereat.  The  shares
represented  by this Proxy shall be voted in the manner set forth on the reverse
side.


1.   To elect four directors to serve on the Board of Directors for the  ensuing
     year or until their respective successors are duly elected and qualified:

                                                       WITHHOLD AUTHORITY
                                             FOR            TO VOTE
     John D. Lindjord                        ___              ___
     Steve H. Kanzer                         ___              ___
     John K.A. Prendergast, Ph.D.            ___              ___
     Lindsay A. Rosenwald, M.D               ___              ___


2.   FOR AGAINST ABSTAIN  To approve an  amendment to the  Company's  1995 Stock
                          Option Plan (a) to increase the total number of shares
                          authorized  for issuance  thereunder by 300,000 shares
                          to a total of  950,000  shares,  (b) to  increase  the
                          number  of  shares   subject  to  an  option   that  a
                          non-employee  Board  member is  automatically  granted
                          thereunder   on  the  initial   date  of  election  or
                          appointment  to the Board from 5,000  shares to 10,000
                          shares and (c) to incrase the number of shares subject
                          to an  option  that a  continuing  non-employee  Board
                          member is automatically granted thereunder on the date
                          of each  annual  meeting  beginning  with this  Annual
                          Meeting from 1,000 shares to 2,000 shares, and


3.   FOR AGAINST ABSTAIN  To ratify the Board of  Director's  selection  of KPMG
                          Peat Marwick LLP to serve as the Company's independent
                          auditors for the year ending December 31, 1996.

     The Board of Directors  recommends a vote IN FAVOR OF each of the directors
listed  above  and a vote IN FAVOR  OF the  other  proposals.  This  Proxy, when
properly  executed,  will be voted as specified  above. If no  specification  is
made, this Proxy will be voted IN FAVOR OF the election of the directors  listed
above and IN FAVOR OF the other proposals.


     Please print the name(s) appearing on each share  certificate(s) over which
     you have voting authority:

     ___________________________________________________________________________
                              (Print name(s) on certificate)

Please sign your name:                                      Date:
                       _____________________________________     _______________
                              (Authorized Signature(s))