EXHIBIT 10.1

DEBENTURE AND SHARE PURCHASE AGREEMENT

This Debenture and Share Purchase Agreement ("Agreement") is made as of February 6, 2004 by and among Halsey Drug Co., Inc., a New York corporation ("Company"), Essex Woodlands Health Ventures V, L.P., a Delaware limited partnership ("Essex"), Care Capital Investments, L.P., a Delaware limited partnership ("Care Capital"), Galen Partners III, L.P., a Delaware limited partnership ("Galen and, together with Essex, Care Capital, Galen and the Additional Investors joining the Agreement in accordance with its terms, the "Purchasers").

PRELIMINARY STATEMENTS

The Company desires to sell to the Purchasers, and the Purchasers desire to purchase from the Company, the Convertible Senior Secured Debentures in the aggregate principal amount of up to $14 million, subject to increase as provided herein, substantially in the form of Exhibit A attached to this Agreement (as they may be amended, supplemented or otherwise modified from time to time in accordance with their terms, the "Debentures"), all on the terms and subject to the conditions set forth in this Agreement.

AGREEMENT

In consideration of the mutual covenants contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

ARTICLE I

INTENTIONALLY OMITTED

ARTICLE II

SALE AND PURCHASE OF DEBENTURES; SECURITY DOCUMENTS

2.1. SALE AND PURCHASE OF DEBENTURES

At the initial Closing, on the terms and subject to the conditions and in reliance on the representations and warranties contained in this Agreement, or made pursuant to this Agreement, the Company shall issue, sell and deliver to each Purchaser and such Purchaser's designees, and each Purchaser, severally and not jointly, will purchase from the Company, the Debentures for the purchase prices set forth opposite such Purchaser's name on Exhibit B. Such purchase price may be paid in a combination of cash payments and the exchange of Bridge Notes plus accrued and unpaid interest, in each case as specified on Exhibit B.

2.2 COMPANY SECURITY DOCUMENTS

All of the obligations of the Company under the Transaction Documents to or for the benefit of the Purchasers (or their agents and representatives) shall be secured by the following items (collectively, the "Company Debenture Collateral"), each of which, except for Permitted Liens, shall be (i) junior and subordinate to the lien granted to the holders of the Senior Notes, and (ii) senior and superior to those liens granted to the investors in the Existing Debentures, all as more specifically set forth in the Subordination Agreement:

(a) a lien on all the personal property and assets of the Company now existing or hereinafter acquired granted pursuant to the Company General Security Agreement, including, without limitation, a lien on and security interest in all of the issued and outstanding shares of common stock of the Guarantors pursuant to a separate Stock Pledge Agreement; and

(b) collateral assignments of all leases, contracts, patents, copyrights, trademarks and service marks of the Company.

Notwithstanding the foregoing, each of the Purchasers acknowledge and agree that the liens and security interests granted by the Company to secure the Company's obligations under the Debentures and the Transaction Documents shall be released upon the written consent of the holders of at least 60% of the outstanding principal amount of the Debentures, and that upon receipt of such consent, the Company shall be authorized to file UCC-3 Termination Statements (or such other filings as shall be necessary) in the appropriate jurisdictions to release the lien and security interests granted by the Company in favor of the Purchasers under the Transaction Documents.

2.3. GUARANTIES

All of the obligations of the Company under the Debentures shall be guaranteed pursuant to the Guaranties by the Guarantors.

2.4. GUARANTOR SECURITY DOCUMENTS

All of the obligations of the Guarantors under the Guaranties shall be secured by the following (collectively, the "Guarantor Debenture Collateral") each of which, except for Permitted Liens, shall be a lien ranking (i) junior and subordinate to the lien granted to the holders of the Senior Notes, and (ii) senior and superior to those liens granted to the investors in the Existing Debentures, all as more specifically set forth in the Subordination Agreement:

(a) a lien on all of the personal property and assets of the respective Guarantors now existing or hereinafter acquired, granted pursuant to the Guarantors General Security Agreement; and

(b) collateral assignments of all leases, contracts, patents, copyrights, trademarks and service marks of the Guarantors.

Notwithstanding the foregoing, each of the Purchasers acknowledge and agree that the liens and security interests granted by the Guarantors to secure each such Guarantor's obligations under the Transaction Documents shall be released upon the written consent of the holders of at least 60% of the outstanding principal amount of the Debentures, and that upon receipt of such consent, the Company shall be authorized to file UCC-3 Termination Statements (or such other filings as shall be necessary) in the appropriate jurisdictions to release the liens and security interests granted by the Guarantors in favor of the Purchasers under the Transaction Documents.

ARTICLE III

CLOSING; ADJUSTMENTS TO CONVERSION PRICE

3.1. CLOSING

The initial Closing will take place at the offices of St. John & Wayne, L.L.C., Two Penn Plaza East, Newark, New Jersey 07105 simultaneously with the execution of this Agreement, or such other place, time and date as shall be mutually agreed to by the Company and the Purchasers. The Company and the Purchasers acknowledge and agree that the Debentures may be sold by the Company on one or more Closing Dates; provided, however, that (i) the aggregate principal amount of the Debentures shall not exceed $14 million without the prior written consent of the holders of at least 60% of the principal amount of the Debentures then held by Capital Investment II, LP, Essex Woodlands Health Ventures V, L.P., Galen Partners III, L.P. and (ii) that no Debentures shall be issued after the Termination Date. Upon the issuance of additional Debentures under this Agreement, any additional Purchaser (each an "Additional Investor") shall be required to execute a Joinder Agreement, which Joinder Agreement shall include the aggregate principal amount of the Debentures issued to such Purchaser. Any Additional Investors in the Debentures executing a Joinder Agreement shall be deemed a "Purchaser" for all purposes of this Agreement. Each issuance to an Additional Investor shall be made on the terms and conditions of this Agreement.

3.2. CLOSING DELIVERIES

On the Closing Date, the Company shall deliver to each Purchaser a Debenture, dated the Closing Date, in the principal amount set forth opposite the name of such Purchaser in Exhibit B. The Company shall deliver the foregoing Debentures against receipt by the Company from each Purchaser of an amount equal to the aggregate purchase price for the Debentures to be purchased by such Purchaser at the Closing, as set forth opposite the name of such Purchaser on Exhibit B, in each case by surrender of Bridge Notes and/or wire transfer in immediately available funds in U.S. dollars to an account designated by the Company or a certified or official bank check payable to the order of the Company drawn upon or issued by a bank which is a member of the New York Clearinghouse for banks.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

As a material inducement to each Purchaser to enter into and perform its obligations under this Agreement, except as set forth in the Schedule of Exceptions, the Company hereby represents and warrants to each Purchaser as follows:

4.1. ORGANIZATION AND EXISTENCE

The Company is a corporation duly organized, validly existing and in good standing under the laws of New York and is qualified to do business in such other jurisdictions as the nature or conduct of its operations or the ownership of its properties require such qualification. The Company does not own or lease any property or engage in any activity in any jurisdiction that might require qualification to do business as a foreign corporation in such jurisdiction and where the failure to so qualify could reasonably be expected to have a Material Adverse Effect or subject the Company to a material liability. The Company has furnished the Purchasers with true, correct and complete copies of its Certificate of Incorporation, By-Laws and all amendments thereto, as of the date hereof.

4.2. SUBSIDIARIES AND AFFILIATES

Section 4.2 of the Schedule of Exceptions sets forth the name, jurisdiction of incorporation and authorized and outstanding capitalization of each Subsidiary. Except as disclosed in Section 4.2 of the Schedule of Exceptions, all of the outstanding shares of capital stock of each of the Subsidiaries are duly and validly authorized, are validly issued and are fully paid and nonassessable and have been offered, issued, sold and delivered in compliance with applicable federal and state securities laws. Except as set forth in Section 4.2 of the Schedule of Exceptions, the Company has, and upon the Closing will have, no Subsidiaries and will not own of record or beneficially any capital stock or equity interest or investment in any corporation, association or business entity. Except as disclosed in Section 4.2 of the Schedule of Exceptions, each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and authority to carry on its business as now conducted and proposed to be conducted. Except as set forth in Section 4.2 of the Schedule of Exceptions, no Subsidiary owns or leases any property or engages in any activity in any jurisdiction which might require such Subsidiary to qualify to do business as a foreign corporation in such jurisdiction and where the failure to so qualify could reasonably be expected to have a Material Adverse Effect or subject such Subsidiary to a material liability.

4.3. CAPITALIZATION

(a) As of the date hereof, the Company's authorized capital stock consists of 80,000,000 shares of Common Stock, of which 21,601,704 shares are outstanding and approximately 239,200,000 shares are reserved for issuance for the purposes set forth in Section 4.3 of the Schedule of Exceptions. Set forth in Section 4.3 of the Schedule of Exceptions is a complete and correct list, as of the date hereof, and as of the Closing Date, of the number of shares of Common Stock held by the Company's public stockholders generally, stockholders

holding in excess of 5% of the Company's Common Stock and all holders of options, warrants, debentures and other securities convertible or exercisable for Common Stock. Such schedule is complete and correct in all material respects.

(b) Upon the effectiveness of the Charter Amendment, the Company's authorized capital stock will consist of (i) 650,000,000 shares of Common Stock, and (ii) 290,000,000 shares of Preferred Stock, of which (1) 45,000,000 shares will be Series A Preferred, (2) 25,000,000 shares will be Series B Preferred,
(3) 70,000,000 shares will be Series C-1 Preferred, (4) 50,000,000 shares will be Series C-2 Preferred and (5) 100,000,000 shares will be Series C-3 Preferred.

(c) All the issued and outstanding shares of capital stock of the Company are (i) duly authorized and validly issued, (ii) fully paid and nonassessable and (iii) have been offered, issued, sold and delivered by the Company in compliance with applicable federal and state securities laws. Other than as set forth in Section 4.3 of the Schedule of Exceptions, there are no outstanding preemptive, conversion or other rights, options, warrants, calls, agreements or commitments granted or issued by or binding upon the Company or any Subsidiary, for the purchase or acquisition of any shares of its capital stock or securities convertible into or exercisable or exchangeable for capital stock.

4.4. AUTHORIZATION

(a) Each of the Company and the Guarantors has all requisite corporate power and authority (i) to execute and deliver, and to perform and observe their respective obligations under, the Transaction Documents to which it is a respective party, and (ii) to consummate the transactions contemplated hereby and thereby, including, without limitation, the grant of any security interest, mortgage, payment trust, guaranty or other security arrangement by the Company in, on or in respect of the Company Debenture Collateral, and by any and all of the Guarantors in, on or in respect of the Guarantor Debenture Collateral.

(b) All corporate action on the part of (i) the Company and the directors and, except as set forth in Section 4.4(b) of the Schedule of Exceptions or as otherwise provided in Sections 9.7 and 9.17 of this Agreement, the stockholders of the Company necessary for the authorization, execution, delivery and performance by the Company of the Transaction Documents and the transactions contemplated therein, and for the authorization, issuance and delivery of the Debentures and Shares, has been taken and (ii) each Guarantor and their respective directors and stockholders necessary for the authorization, execution, delivery and performance by each Guarantor of the Guarantors General Security Document, the Guaranties and the transactions contemplated therein or in any other Transaction Document with respect to the Guarantors, has been taken.

4.5. BINDING OBLIGATIONS; NO MATERIAL ADVERSE CONTRACTS

The Transaction Documents constitute valid and binding obligations of the Company and the Guarantors enforceable in accordance with their respective terms. Except as set forth in Section 4.5 of the Schedule of Exceptions and as provided in Section 9.17 of this Agreement, the execution, delivery and performance by the Company and the Guarantors of the Transaction

Documents and compliance therewith will not result in any violation of and will not conflict with, or result in a breach of any of the terms of, or constitute a default, or accelerate or permit the acceleration of any rights or obligations, under, any provision of state, local, federal or foreign law to which the Company or either of the Guarantors is subject, the Certificate of Incorporation, as amended, or the By-Laws, as amended, of the Company or either of the Guarantors, the Watson Term Loan and the Existing Debentures or any other mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation or other restriction to which the Company or either of the Guarantors is a party or by which it is bound, and except for Permitted Liens, result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or either of the Guarantors pursuant to any such term. Except as set forth in Section 4.3 of the Schedule of Exceptions, no stockholder of the Company or either Guarantor has or will have any preemptive rights or rights of first refusal by reason of the issuance of the Debentures or Shares issuable upon conversion or exercise of the Debentures.

4.6. COMPLIANCE WITH INSTRUMENTS

Neither the Company nor any Subsidiary (a) is in violation of its organizational documents, (b) is in default, and no event has occurred which, with the giving of notice, or the lapse of time, or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any material agreement, including, without limitation, the Watson Term Loan, and the Existing Debentures, any license, indenture or other instrument to which it is a party or by which it is bound or to which any of its property or assets is subject or (c) is in violation of any law, ordinance, governmental rule, regulation or court decree to which it or its property may be subject (including without limitation any Legal Requirements relating to the biotechnology and pharmaceutical industry) except for (x) such defaults and violations set forth in Section 4.6 of the Schedule of Exceptions, and (y) such violations under clause (b) and (c) that would not, individually or in the aggregate, have a Material Adverse Effect.

4.7. LITIGATION

Except as set forth in Section 4.7 of the Schedule of Exceptions, there are no actions, suits or proceedings (including governmental or administrative proceedings), investigations, third-party subpoenas or inquiries by any regulatory agency, body or other governmental authority, to which the Company or any of the Subsidiaries is a party or is subject, or to which any of their authorizations, consents and approvals or other properties or assets, is subject, which is pending, or, to the best knowledge of the Company, threatened or contemplated against the Company or any Subsidiary, or any of such property or assets, that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. The Company is not subject to any actions, suits or proceedings (including governmental or administrative proceedings), investigation, third-party subpoenas or inquiries by any regulatory agency, body or other governmental authority or any third Person regarding its accounting practices or policies.

4.8. FINANCIAL INFORMATION; SEC DOCUMENTS

(a) The Company has furnished to the Purchasers complete and correct copies of the

consolidated financial statements of the Company and its Subsidiaries, including consolidated balance sheets as of December 31, 2002 and 2001 and consolidated statements of operations, changes in cash flows and stockholders' equity, covering the three years ended December 31, 2002, all of which statements have been certified by Grant Thornton LLP, independent accountants within the meaning of the Securities Act and the rules and regulations thereunder, and all of which statements are included or incorporated by reference in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 filed with the SEC under the Exchange Act. Such financial statements have been prepared in conformity with GAAP applied on a consistent basis throughout the periods involved, except as otherwise stated therein and fairly present the consolidated financial position of the Company and its Subsidiaries as of the dates thereof and their consolidated results of operations for such periods. The Company's auditors have raised no material issues nor delivered any material correspondence with respect to any of the Company's financial statements or financial affairs.

(b) The Company has also furnished to the Purchasers the unaudited consolidated balance sheet of the Company and its Subsidiaries as of September 30, 2003, and the related unaudited consolidated statements of operations, consolidated statements of cash flow and consolidated statements of stockholders' equity for the nine months ended September 30, 2003. Such financial statements were prepared in conformity with GAAP applied on a basis consistent with the financial statements referred to in Section 4.8(a) and fairly present the consolidated financial position of the Company and its Subsidiaries as of such date and their consolidated results of operations for such periods (subject to normal year-end adjustments).

(c) None of the documents filed by the Company with the SEC since December 31, 1997 contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements contained therein not false or misleading in light of the circumstances in which they were made. There are no facts which the Company has not disclosed to the Purchasers which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

(d) Except as set forth in Section 4.8 of the Schedule of Exceptions or in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, subsequent to December 31, 2002, (i) none of the Company or any Guarantor has incurred any liability or obligations, direct or indirect, or entered into any transactions not in the ordinary course of business, in either case which is material to the Company or any Guarantor, as a whole, (ii) there has not been any material change in the short-term debt or long-term debt of any of the Company or any Guarantor, (iii) there has been no material change in the Company's accounting principles and (iv) none of the Company or any Guarantor has taken any actions which would have been prohibited under Article X if taken after the date hereof.

(e) Except as set forth in Section 4.8 of the Schedule of Exceptions or in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, since December 31, 2002, there has been no Material Adverse Effect with respect to the Company and its Subsidiaries.

4.9. OFFERING EXEMPTION

(a) None of the Company, its Affiliates or any Person acting on its or their behalf has engaged or will engage, in connection with the offering and sale of the Debentures, in any form in general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act, and none of the Company, or any of its Affiliates has, directly or indirectly, solicited any offer to buy, sell or offer to sell or otherwise negotiate in respect of, in the United States or to any United States citizen or resident, any security which is or would be integrated with the sale of the Debentures in a manner that would require the Debentures to be registered under the Securities Act. Assuming the accuracy of the representations and warranties given by the Purchasers in Article V below, the offering, sale and issuance of the Debentures and Shares have been, are, and will be exempt from registration under the Securities Act, and such offering, sale and issuance is also exempt from registration under applicable state securities and "blue sky" laws.

(b) None of the Company or any Guarantor is, or upon consummation of the transactions contemplated under the Transaction Documents, will be, subject to registration as an "investment company" under the 1940 Act.

4.10. PERMITS; GOVERNMENTAL AND OTHER APPROVALS

(a) Other than as set forth in Section 4.10 of the Schedule of Exceptions or in the Company Reports, each of the Company and its Subsidiaries possesses all necessary consents, approvals, authorizations, orders, registrations, stamps, filings, qualifications, licenses, permits or other analogous acts by, of, from or with all public, regulatory or governmental agencies, bodies and authorities and all other third parties, to own, lease and operate its respective properties and to carry on its business as now conducted and proposed to be conducted except to the extent that the failure to obtain any such consents, approvals, authorizations, orders, registrations, stamps, filings, qualifications, licenses or permits would not have a Material Adverse Effect. Other than as set forth in Section 4.10 of the Schedule of Exceptions, or as otherwise contemplated in Article VI and IX hereof, no approval, consent, authorization or other order of, and no designation, filing, registration, qualification or recording with, any governmental authority or any other Person is required in connection with the Company's valid execution, delivery and performance of this Agreement or the offer, issuance and sale of the Debentures by the Company to the Purchasers or the consummation of any other transaction contemplated on the part of the Company hereby.

(b) Without limiting the generality of the representations and warranties made in Section 4.10(a), the Company represents and warrants that (i) it and the Guarantors are in compliance with all applicable provisions of the FDC Act, except where any such noncompliance could not reasonably be expected to have a Material Adverse Effect; (ii) its products and those of the Guarantors are not adulterated or misbranded and are in lawful distribution; and (iii) it and the Guarantors are, and will be, in compliance with the following specific requirements: (A) the Company and the Guarantors have registered all of their facilities with the FDA, (B) the Company and the Guarantors have listed their drug products with the FDA, (C) each drug product marketed by the Company or any Guarantor is the subject of an

application approved by the FDA, (D) all drug products marketed by the Company or either Guarantor comply with any conditions of approval and the terms of the application submitted to the FDA, (E) all of the Company's and the Guarantors' drug products are manufactured in compliance with the FDA's good manufacturing practice regulations, (F) all of the Company's and the Guarantors' products are labeled and promoted in accordance with the terms of the marketing application and the provisions of the FDC Act, (G) all adverse events relating to the Company and the Guarantors that were required to be reported to the FDA have been reported to the FDA in a timely manner, (H) each of the Company and the Guarantors is in compliance with the terms of the consent agreement entered into by the Company with the United States Attorney for the Eastern District of New York on behalf of the FDA on June 29, 1993, as amended, (I) to the Company's best knowledge, neither the Company nor any Guarantor is employing or utilizing the services of any individual who has been debarred under the FDC Act, (J) all stability studies required to be performed for products distributed by the Company or a Guarantor have been completed or are ongoing in accordance with the applicable FDA requirements, (K) none of the Company's or a Guarantor's products have been exported for sale outside the United States, and (L) each of the Company and the Guarantors is in compliance with the provisions of the Prescription Drug Marketing Act, to the extent applicable; except, with respect to subclauses (iii)(E), (iii)(H), (iii)(G), (iii)(K) and (iii)(L) above, where any such noncompliance could not reasonably be expected to have a Material Adverse Effect.

(c) Without limiting the generality of the representations and warranties made in Section 4.10(a), the Company also represents and warrants that it and the Guarantors are in compliance with all applicable provisions of the CSA and that the Company and the Guarantors are in compliance with the following specific requirements, except where such noncompliance could not reasonably be expected to have a Material Adverse Effect: (i) the Company and the Guarantors are registered with the DEA at each facility where controlled substances are exported, imported, manufactured or distributed; (ii) all controlled substances are stored and handled pursuant to DEA security requirements; (iii) all records and inventories of receipt and distributions of controlled substances are maintained in the manner and form as required by DEA regulations; (iv) all reports, including, but not limited to, ARCOS, manufacturing quotas, production quotas, and disposals, have been submitted to the DEA in a timely manner; (v) all adverse events, including thefts or significant losses of controlled substances, have been reported to the DEA in a timely manner; (vi) to the Company's best knowledge, neither the Company nor any Guarantor is employing any individual, with access to controlled substances, who has previously been convicted of a felony involving controlled substances; and
(vii) any imports or exports of controlled substances have been conducted in compliance with the CSA and DEA regulations.

4.11. SALES REPRESENTATIVES; CUSTOMERS AND KEY EMPLOYEES

(a) Except as set forth in Section 4.11 of the Schedule of Exceptions, to the best knowledge of the Company, no independent sales representatives, customers, officers or key employees or group of key employees of the Company or any Guarantor has any intention to terminate his, her or its relationship with the Company or such Guarantor on or after the Closing or, in the case of employees, leave the employ of the Company or any of the Guarantors on and after the Closing, nor has the Company or any of the Guarantors discussed or taken any steps to

terminate the employment of any officer or key employee or group of key employees. Other than as set forth in Section 4.11 of the Schedule of Exceptions, all personnel of the Company and any of the Guarantors are employed on an "at will" basis and may be terminated upon notice of not more than 30 days.

(b) To the Company's best knowledge, no employee of the Company or any of the Guarantors, or any consultant (including any scientific advisor) with whom the Company or any of the Guarantors has contracted, is in violation of any term of any employment contract, proprietary information agreement, licenses, or any other agreement relating to the right of any such individual to be employed by, or to contract with, the Company or any of the Guarantors because of the nature of the business conducted by the Company and the Guarantors; and the continued employment by the Company or any of the Guarantors of their present employees, and the performance of the Company's and the Guarantor's contracts with its independent contractors, will not result in any such violation, except where any such violation could not reasonably be expected to have a Material Adverse Effect. None of the Company or any of the Guarantors has received any written, or to the best knowledge of the Company, oral notice alleging that any such violation has occurred.

(c) All of the Company's and any of the Guarantor's consultants (including scientific advisors), officers and key employees are subject to customary non-disclosure, non-competition and assignment of invention agreements.

4.12. COPYRIGHTS, TRADEMARKS AND PATENTS; LICENSES

(a) Section 4.12 of the Schedule of Exceptions sets forth a list of all of the Company's and any Guarantor's Intellectual Property Rights. The Intellectual Property Rights are, to the best of the Company's best knowledge, fully valid and are in full force and effect.

(b) The Company or a Guarantor owns outright all of the Intellectual Property Rights listed on Section 4.12 of the Schedule of Exceptions attached hereto free and clear of all liens and encumbrances except for the Permitted Liens, and does not pay, and is not required to pay, any royalty to anyone under or with respect to any of them.

(c) Neither the Company nor any Guarantor has licensed anyone to use any of such Intellectual Property Rights and has no knowledge of, nor has it received any notice relating to, the infringing use by the Company or any Guarantor of any Intellectual Property Rights.

(d) The Company has no knowledge, nor has it received any notice
(i) of any conflict with the asserted rights of others with respect to any Intellectual Property Rights used in, or useful to, the operation of the business conducted by the Company and the Guarantors or with respect to any license under which the Company or a Guarantor is licensor or licensee; or (ii) that the Intellectual Property Rights infringe upon the rights of any third party.

(e) Except as set forth in Section 4.12 of the Schedule of Exceptions, neither the Company nor any Guarantor is a party to any license agreement pursuant to which the Company is the licensor or licensee of any Intellectual Property Rights.

4.13. INVENTORY

All inventory of the Company and the Subsidiaries consists of a quality and quantity usable and salable in the ordinary course of business, except for obsolete items and items of below-standard quality, all of which have been written off or written down to net realizable value on the consolidated balance sheet of the Company and its Subsidiaries as of September 30, 2003. The quantities of each type of inventory (whether raw materials, work-in-process, or finished goods) are not excessive, but are reasonable and warranted in the present circumstances of the Company.

4.14. REGISTRATION RIGHTS

Except as provided for in this Agreement or as set forth in Section 4.14 of the Schedule of Exceptions, neither the Company nor any Guarantor is under any obligation to register any of its currently outstanding securities or any of its securities which may hereafter be issued under the Securities Act in connection with any sale thereof.

4.15. NO DISCRIMINATION; LABOR MATTERS

Neither the Company nor any Guarantor in any manner or form discriminates, fosters discrimination or permits discrimination against any Person based on gender or age, or belonging to any minority race or believing in any minority creed or religion. No charge of discrimination in employment, whether by reason of age, gender, race, religion or other legally protected category that has been asserted or is now pending or, to the best knowledge of the Company and the Guarantors, threatened before the United States Equal Employment Opportunity Commission or other federal or governmental authorities. The Company and each Guarantor is in compliance with all applicable Legal Requirements respecting employment practices, terms and conditions of employment and wages and hours and is not and has not engaged in any unfair labor practice. The Company and each Guarantor has withheld and paid to the appropriate governmental authorities or is holding for payment not yet due to governmental authorities, all amounts required to be withheld from such employees of the Company or the Guarantors and is not liable for any arrears of wages, taxes, penalties or other sums for failure to comply with any of the foregoing. Except as set forth in Section 4.15 of the Schedule of Exceptions, in connection with the operation of the Company's and each Guarantor's business, (a) there is no unfair labor practice charge or complaint against the Company or any Guarantor pending before the National Labor Relations Board or any other governmental agency arising out of the Company's or any Guarantor's activities and the Company has no knowledge, nor has it received notice of any facts or information that would give rise thereto; (b) there is no significant labor trouble, labor strike, material controversy, material unsettled grievance, dispute, request for representation, slowdown or stoppage actually pending against or affecting the Company or any of the Guarantors and, to the best knowledge of the Company, none is or has been threatened; and (c) none of the Company or any of the Guarantors has any collective bargaining agreements with respect to any personnel nor is the Company aware of any current attempts to organize or establish any labor union or employee association with respect to any personnel, nor is there any certification, interim certifications or voluntary recognition of any such union with regard to a bargaining unit.

4.16. ENVIRONMENTAL MATTERS

(a) Without limiting the generality of the representations and warranties given in Section 4.10(a), each of the Company and the Subsidiaries has obtained all environmental, health and safety permits, licenses and other authorizations necessary or required for the operation of its business, except where the failure to possess such franchises, licenses, permits or other authority could not reasonably be expected to have a Material Adverse Effect, and all such permits, licenses and other authorizations are in full force and effect and each of the Company and, except as set forth in Section 4.16 of the Schedule of Exceptions, the Subsidiaries is in compliance with all terms and conditions of such permits, except where such noncompliance could not reasonably be expected to have a Material Adverse Effect.

(b) There is no proceeding pending or, to the best knowledge of the Company, threatened, which may result in the denial, rescission, termination, modification or suspension of any environmental or health or safety permits, licenses or other authorizations necessary for the operation of the business of the Company and the Subsidiaries.

(c) During the occupancy by the Company or any Subsidiary of any real property owned or leased by the Company or such Subsidiary, neither the Company nor any Subsidiary, and to the best knowledge of the Company, no other Person, has caused or permitted materials to be generated, released, stored, treated, recycled, disposed of on, under or at such parcels, which materials, if known to be present, would require cleanup, removal or other remedial or responsive action under any environmental Legal Requirements. To the best knowledge of the Company, there are no underground storage tanks and no PCB, PCB contaminated oil or asbestos on any property leased by the Company or any Subsidiary.

(d) Except as set forth in Section 4.16 of the Schedule of Exceptions, neither the Company nor any Subsidiary is subject to any judgment, decree, order or citation related to or arising out of environmental Legal Requirements, or has received notice that it has been named or listed as a potentially responsible party by any Person in any matter arising under environmental Legal Requirements.

(e) To the Company's best knowledge, each of the Company and the Subsidiaries has disposed of all waste in full compliance with all environmental Legal Requirements.

4.17. TAXES

The Company and each of the Guarantors have (a) filed all necessary income, franchise and other material tax returns, domestic and foreign, (b) paid all taxes shown as due thereunder and (c) withheld and paid to the appropriate tax authorities all amounts required to be withheld from wages, salaries and other remuneration to employees. The Company has no knowledge, nor has it received notice, of any tax deficiency which might be assessed against the Company or any Guarantor which, if so assessed, could reasonably be expected to have a Material Adverse Effect.

4.18. EMPLOYEE BENEFIT PLANS AND SIMILAR ARRANGEMENTS

(a) Section 4.18 of the Schedule of Exceptions lists all employee benefit plans and collective bargaining, labor and employment agreements or other similar arrangements in effect to which the Company, the Guarantors, and any of their respective ERISA Affiliates are a party or by which the Company, the Guarantors, and any of respective ERISA Affiliates are bound, legally or otherwise, including, without limitation, (i) any profit-sharing, deferred compensation, bonus, stock option, stock purchase, pension, retainer, consulting, retirement, severance, welfare or incentive plan, agreement or arrangement; (ii) any plan, agreement or arrangement providing for fringe benefits or perquisites to employees, officers, directors or agents, including but not limited to benefits relating to employer-supplied automobiles, clubs, medical, dental, hospitalization, life insurance and other types of insurance, retiree medical, retiree life insurance and any other type of benefits for retired and terminated employees; (iii) any employment agreement; or (iv) any other "employee benefit plan" (within the meaning of Section 3(3) of ERISA) (herein referred to individually as "Plan" and collectively as "Plans").

(b) True and complete copies of the following documents with respect to any Plan of the Company, its Subsidiaries, and each ERISA Affiliate, as applicable, have been made available to each of the Purchasers: (i) the most recent Plan document and trust agreement (including any amendments thereto and prior plan documents, if amended within the last two years), (ii) the last two Form 5500 filings and schedules thereto, (iii) the most recent IRS determination letter, (iv) all summary plan descriptions, (v) a written description of each material non-written Plan, (vi) each written communication to employees intended to describe a Plan or any benefit provided by such Plan, (vii) the most recent actuarial report, and (viii) all correspondence with the IRS, the Department of Labor and the PBGC concerning any controversy. Each report described in clause
(vii) accurately reflects the funding status of the Plan to which it relates and subsequent to the date of such report there has been no adverse change in the funding status or financial condition of such Plan.

(c) Each Plan is and has been maintained in compliance with applicable Legal Requirements, including but not limited to ERISA and the Code, and with any applicable collective bargaining agreements or other contractual obligations.

(d) With respect to any 412 Plan, there has been no failure to make any contribution or pay any amount due as required by Section 412 of the Code, Section 302 of ERISA or the terms of any such Plan, and no funding waiver has been requested or received from the IRS. The assets of the Company, its Subsidiaries, or any ERISA Affiliates are not now, nor will they after the passage of time be, subject to any lien imposed under Section 412(n) of the Code by reason of a failure of the Company, any Subsidiary, or any ERISA Affiliate to make timely installments or other payments required under Section 412 of the Code.

(e) No Plan subject to Title IV of ERISA has any Unfunded Pension Liability.

(f) Except as shown on Section 4.18 of the Schedule of Exceptions, there are no pending, or to the best knowledge of the Company, its Subsidiaries, and ERISA Affiliates, threatened claims, investigations, actions or lawsuits, other than routine claims for benefits in the ordinary course, asserted or instituted against (i) any Plan or its assets, (ii) any ERISA Affiliate

with respect to any 412 Plan, or (iii) any fiduciary with respect to any Plan for which the Company, its Subsidiaries, or any ERISA Affiliate may be directly or indirectly liable, through indemnification obligations or otherwise.

(g) Except as set forth in Section 4.18 of the Schedule of Exceptions, none of the Company, any Subsidiary, or any ERISA Affiliate has incurred and or reasonably expects to incur (i) any Withdrawal Liability and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in Withdrawal Liabilities, or any liability under Section 4063, 4064, or 4243, or (ii) any outstanding liability under Title IV of ERISA with respect to any 412 Plan.

(h) Except as shown on Section 4.18 of the Schedule of Exceptions, within the last five years, none of the Company, any Subsidiary or any ERISA Affiliate has transferred any assets or liabilities of a 412 Plan subject to Title IV of ERISA which had, at the date of such transfer, an Unfunded Pension Liability or has engaged in a transaction which may reasonably be subject to
Section 4212(c) or Section 4069 of ERISA.

(i) None of the Company, any Subsidiary, or any ERISA Affiliate has engaged, directly or indirectly, in a non-exempt prohibited transaction (as defined in Section 4975 of the Code or Section 406 of ERISA) in connection with any Plan.

(j) No "reportable event" (within the meaning of Section 4043 of ERISA) has occurred with respect to any Plan.

(k) Neither the Company nor any of its Subsidiaries provides, or has provided, retiree welfare benefits for the benefit of any present or former employee or director.

(l) Neither the Company nor any of its Subsidiaries has made any commitment or any formal plan to create any additional Plan or to modify or terminate (except to the extent required by applicable law) any existing Plan.

(m) Neither the Company nor any of its Subsidiaries is a party to any plan, agreement or arrangement pursuant to the terms of which the consummation or announcement of any transaction contemplated by this Agreement will result (either alone or in connection with the occurrence of any additional or further acts or events) in any benefit under any Plan being established or becoming accelerated or immediately vested and payable.

(n) The provisions of Section 280G of the Code will not apply with respect to any payment made or to be made pursuant to or in connection with any Plan.

4.19. PERSONAL PROPERTY

The Company and the Guarantors have good and marketable title to each item of equipment, machinery, furniture, fixtures, vehicles, structures and other personal property, tangible and intangible, included as an asset in the Financial Statements filed as part of the Company Reports, free and clear of any security interests, options, liens, claims, charges or encumbrances whatsoever, except as set forth in Section 4.19 of the Schedule of Exceptions and

as disclosed in the Company General Security Agreement and the Guarantors General Security Agreement. The tangible personal property owned or used by the Company and each of the Guarantors on the date hereof in the operation of its business is adequate for the business conducted by the Company and each of the Guarantors.

4.20. REAL PROPERTY

(a) The Company and the Guarantors do not own any fee simple interest in real property other than as set forth in Section 4.20 of the Schedule of Exceptions (the "Owned Property"). The Company and the Guarantors do not lease or sublease any real property other than as set forth on Schedule 4.20 (the "Leased Property"). The Company has previously made available to the Purchasers a true and complete copy of all Leases. The Company and each Guarantor enjoys a peaceful and undisturbed possession of the Owned Property and Leased Property. No Person other than the Company or any Guarantor has any right to use or occupy any part of the Owned Property and the Leased Property. Except as set forth in Section 4.20 of the Schedule of Exceptions, the Leases are valid, binding and in full force and effect, all rent and other sums and charges payable thereunder are current, no notice of default or termination under any of the Leases is outstanding, no termination event or condition or uncured default on the part of the Company or, to the best of the Company's knowledge, on the part of the landlord, sublandlord, as the case may be, thereunder, exists under the Leases, and no event has occurred and no condition exists which, with the giving of notice, or the lapse of time, or both, would constitute such a default or termination event or condition. There are no subleases, licenses or other agreements granting to any Person other than the Company or the Guarantors any right to possession, use, occupancy or enjoyment of the Premises demised by the Leases. Each Owned Property and Leased Property is used in the conduct of the Company's or the Guarantors' business.

(b) Without limiting the generality of the representations and warranties given in Section 4.10(a), all required permits, licenses, franchises, approvals and authorizations of all governmental authorities having jurisdiction over each Leased Property and from all insurance companies and fire rating and other similar boards and organizations have been issued to the Company and the Guarantors to enable each Leased Property or Owned Property to be lawfully occupied and used for all the purposes for which they are currently occupied and used and have been lawfully issued and are in full force and effect, except where the failure to possess such permits, licenses, franchises, approvals and authorizations, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

(c) Neither the Company nor the Guarantors have received any notice nor have they any knowledge of any pending, threatened or contemplated condemnation proceeding affecting any Leased Property or the Owned Property or any part thereof.

4.21. DISCLOSURE

The information heretofore provided and to be provided in connection with this Agreement, including, without limitation, the Schedule of Exceptions and the Exhibits hereto, the Transaction Documents and each of the agreements, documents, certificates and writings previously furnished to the Purchasers or their representatives, do not and will not contain any

untrue statement of a material fact and do not and will not omit to state a material fact necessary in order to make the statements and writings contained herein and therein not false or misleading in the light of the circumstances under which they were made. There are no facts that (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect, which has not been set forth herein or in the Company Reports.

4.22. SOLVENCY

On the Closing Date (both before and after giving effect to its Guaranty and the transactions contemplated by the Transaction Documents), the Guarantors will be Solvent.

4.23. INSURANCE

(a) Each of the Company and the Guarantors maintains, with financially sound and reputable insurers, insurance against loss or damage by theft, fire, explosion and other risks customarily insured against by companies in the line of business of the Company or the Guarantors, in amounts sufficient to prevent the Company or the Guarantors from becoming a co-insurer of the property insured as well as insurance against other hazards and risks and liability to Persons and property to the extent and in the manner customary for companies in similar businesses similarly situated or as may be required by law, including, without limitation, general liability, fire and business interruption insurance, and product liability insurance as may be required pursuant to any license agreement to which the Company or the Guarantors is a party or by which it is bound.

(b) The Company maintains D&O Insurance as detailed in Section 4.23(b) of the Schedule of Exceptions, which D&O Insurance is in full force and effect and as to which the Company has not received any notice of default, termination, change in terms, change in coverage or similar notice.

4.24. NON-COMPETES

Except as set forth in Section 4.24 of the Schedule of Exceptions, and as contemplated by Section 4.11(c), the Company and its Subsidiaries are not subject to any non-compete or similar arrangements with any Persons that restrict or may restrict the Company and its Subsidiaries from carrying on its business as now conducted and as it is proposed to be conducted.

4.25. PRODUCT WARRANTY

Except as set forth in Section 4.25 of the Schedule of Exceptions, or as reflected or reserved against in the Financial Statements, (a) to the knowledge of the Company, each product manufactured by the Company or any Subsidiary has been in material conformity with all applicable contractual commitments of the Company or any Subsidiary, and (b) no product currently manufactured by the Company or any Subsidiary is subject to any guaranty, warranty or indemnity of a contractual nature other than the applicable standard terms and conditions, if any, applicable to the sale or delivery of such product.

4.26. MINUTE BOOKS

The minute books of the Company and the Subsidiaries furnished to the Purchasers for review are accurate and complete.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS

As a material inducement to the Company to enter into and perform its obligations under this Agreement, each Purchaser severally (as to itself and not with respect to any other Purchaser) represents and warrants to the Company as follows:

5.1. ORGANIZATION AND GOOD STANDING

The Purchaser, if a corporation, partnership, trust or other form of business entity, is duly organized, validly existing and in good standing under the laws of the state of its incorporation, formation or organization, as the case may be, and has, in all material respects, full power, authority and legal right to own its properties and conduct its business as such properties are presently owned and such business is presently conducted, and to execute, deliver and perform its obligations under this Agreement.

5.2. DUE QUALIFICATION

The Purchaser, if a corporation, partnership, trust or other form of business entity, is duly qualified to do business and, where necessary, is in good standing as a foreign corporation or company, as the case may be, (or is exempt from such requirement) and has obtained all necessary licenses and approvals in each jurisdiction in which the conduct of its business requires such qualification except where the failure to so qualify or obtain licenses or approvals would not have a material adverse effect on its ability to perform its obligations hereunder.

5.3. DUE AUTHORIZATION

The execution and delivery of this Agreement and the consummation of the transactions provided for or contemplated by this Agreement have been duly authorized by Purchaser if a corporation, partnership, trust or other form of business entity, by all necessary corporate or company (as the case may be) action on the part of Purchaser.

5.4. INVESTMENT EXPERIENCE; ACCREDITED INVESTOR

(a) The Purchaser must bear the economic risk of investment in the Debentures for an indefinite period of time, since neither the Debentures nor the Shares have been registered under the Securities Act or applicable state securities laws, and, therefore, cannot be resold or otherwise disposed of unless either they are subsequently registered under the Securities Act and applicable state securities laws or an exemption from registration is available.

(b) The Purchaser will only have those limited rights to register the Shares under the

Securities Act and applicable state securities laws as are provided in the Transaction Documents.

(c) There is presently no established public market for the Debentures and the holders of the Debentures have no registration rights with respect to such securities.

(d) The Purchaser and his, her or its purchaser representative(s), if any, have carefully reviewed and understand the risks of and other considerations relating to a purchase of the Debentures.

(e) The Purchaser and his, her or its purchaser representative(s), if any, have been afforded the opportunity to obtain any information necessary to verify the accuracy of any representations or information set forth in the Term Sheet and this Agreement and have had all of their inquiries to the Company answered in full, and have been furnished all requested materials relating to the Company, the offering and sale of the Debentures and any other matter described in the Term Sheet and this Agreement.

(f) Neither the Purchaser nor his, her or its purchaser representative(s), if any, have been furnished any offering literature by the Company or any of its Affiliates, other than the Term Sheet (including the exhibits and attachments thereto) and this Agreement (including the exhibits and attachments hereto), and the Purchaser has not received or heard any print or electronic media advertising with respect to the offering and sale of the Debentures.

(g) The Purchaser is acquiring the Debentures as principal for its own investment account, and not (i) with a view to the resale or distribution of all or any part thereof, or (ii) on behalf of another Person who has not made the foregoing representations. The Purchaser agrees not to resell or otherwise dispose of the Debentures or the Shares except as permitted by applicable law, including, without limitation, any and all provisions of this Agreement and any applicable regulation under the Securities Act or any state securities laws.

(h) The Purchaser is an "accredited investor," as defined in Rule 501(a) of Regulation D promulgated pursuant to the Securities Act.

(i) The Purchaser has evaluated the risks of investing in the Company and has substantial experience in making investment decisions of this type or is relying on his, her or its professional advisors or purchaser representative(s), if applicable, in making this investment decision.

(j) The Purchaser understands the fundamental aspects of and risks involved in an investment in the Company, including (i) the speculative nature of the investment, (ii) the financial hazards involved, including the risk of losing the entire investment, (iii) the lack of liquidity and the restrictions on transferability of the Debentures and Shares, (iv) the limited registration rights regarding the Shares, and (v) the fact that the Company has a history of losses and limited capital resources.

(k) The address set forth in the signature page to this Agreement is the Purchaser's true and correct principal address, and the Purchaser has no present intention of becoming a resident of any other state or jurisdiction.

(l) The Purchaser, if a corporation, partnership, trust or other form of business entity, has not been formed for the specific purpose of acquiring the Debentures

(m) All of the information that the Purchaser has heretofore furnished to the Company, or that is set forth herein with respect to itself, its financial position, and its business and investment experience, is correct and complete as of the date hereof.

(n) The Purchaser consents to the placement of a legend on any certificate or other document evidencing the Debentures as well as the Shares stating that they have not been registered under the Securities Act and setting forth or referring to the restrictions on transferability and sale thereof. The Purchaser is aware that the Company will make a notation in its appropriate records with respect to the restrictions on the transferability of such securities.

(o) The Purchaser acknowledges that the Company will rely upon the representations made by such Purchaser in this Agreement in connection with the issuance of the Debentures to be sold hereunder.

ARTICLE VI

CONDITIONS TO CLOSING OF THE PURCHASERS

The obligation of each Purchaser to purchase the Debentures at the Closing is subject to the fulfillment to such Purchaser's satisfaction on or prior to the Closing Date of each of the following conditions, unless otherwise waived by such Purchaser:

6.1. REPRESENTATIONS AND WARRANTIES CORRECT; NO DEFAULT

The representations and warranties of the Company set forth in Article IV hereof shall be true and correct when made, and shall be true and correct on the Closing Date with the same force and effect as if they had been made on and as of the Closing Date. No Event of Default, or any other event which, with the giving of notice, the lapse of time, or both, would constitute an Event of Default, shall have occurred and be continuing on the date of this Agreement or on the Closing Date.

6.2. PERFORMANCE

All covenants, agreements and conditions contained in this Agreement to be performed or complied with by the Company on or prior to the Closing Date shall have been performed or complied with by the Company.

6.3. COMPLIANCE CERTIFICATE

The Company shall have delivered to the Purchaser a certificate of the Company, executed by the Company's President, dated the Closing Date, certifying to the fulfillment of the conditions specified in Sections 6.1 and 6.2 of this Agreement and other matters as the Purchaser shall reasonably request.

6.4. NO IMPEDIMENTS

None of the Company, or any of the Guarantors, or any Purchaser shall be subject to (a) any order, decree or injunction of a court or administrative or governmental body or agency of competent jurisdiction directing that the transactions provided for in the Transaction Documents or any material aspect thereof not be consummated as contemplated by the Transaction Documents or (b) there shall not be any action, suit, proceeding, complaint, charge, hearing, inquiry or investigation before or by any court or administrative or governmental body or agency pending or, to the Company's best knowledge, threatened, wherein an unfavorable order, decree or injunction would prevent the performance of any of the Transaction Documents or the consummation of any material aspect of the transactions or events contemplated thereby, declare unlawful any aspect of the transactions or events contemplated by the Transaction Documents, cause any material aspect of the transactions contemplated by the Transaction Documents to be rescinded or have a Material Adverse Effect.

6.5. WAIVERS/ELECTIONS OF RIGHTS OF FIRST REFUSAL

The Company shall have obtained from each Person other than a Purchaser and who has any current effective right of first refusal with respect to the Debentures, a written waiver or election of such right in form and substance reasonably satisfactory to the Purchasers.

6.6. WATSON DOCUMENTS

The Company shall have obtained and delivered to each Purchaser copies of (a) the Watson Umbrella Agreement; (b) the amendment to the Watson Term Loan;
(c) the Senior Notes; and (d) the Noteholder Agreement. The initial Purchasers shall have purchased the amended Senior Notes from Watson on terms acceptable to them.

6.7. CONSENT OF HOLDERS OF EXISTING DEBENTURES; AGREEMENT TO CONVERT

(a) The Company shall have obtained and delivered to each Purchaser (i) the Existing Debentureholders Consent; (ii) the Existing Debentureholders Waiver; (iii) the Debenture and Warrant Dilution Waiver and
(iv) the Conversion Agreement, each fully executed and in form and substance acceptable to the Purchasers.

6.8. CONSENT OF GALEN ENTITIES

The Company shall have obtained from the Galen Entities and delivered to each Purchaser the Debenture and Warrant Dilution Waiver.

6.9. OTHER AGREEMENTS AND DOCUMENTS

The Company shall have executed and delivered to each Purchaser this Agreement, issued to such Purchaser all of the Debentures, and the Company and each of the Guarantors, as applicable, shall have executed and delivered the following agreements and documents:

(a) the Conversion Agreement;

(b) the Investors Rights Agreement;

(c) the Voting Agreement;

(d) the amendment to the Registration Rights Agreement;

(e) the Company General Security Agreement;

(f) the Guaranties;

(g) the Guarantors Security Agreement;

(h) the Stock Pledge Agreement;

(i) the Subordination Agreement;

(j) a secretary's certificate of the Company, (i) attaching a certified copy of the Certificate of Incorporation and current bylaws of the Company and certifying the same as not having been amended and as being in being in full force and effect, (ii) attaching and certifying resolutions by the Board of Directors approving the execution, delivery and performance of the Transaction Documents and the transactions contemplated thereby, and (iii) certifying as to the incumbency, and attaching specimen signatures of, the officers or representatives of the Company signing the Transaction Documents to which the Company is a party;

(k) a secretary's certificate of each of the Guarantors, (i) attaching a certified copy of the certificate of incorporation and current bylaws of such Guarantor and certifying the same as not having been amended and as being in being in full force and effect, (ii) attaching and certifying resolutions by the board of directors of such Guarantor approving the execution, delivery and performance of the Transaction Documents and the transactions contemplated thereby, and (iii) certifying as to the incumbency, and attaching specimen signatures of, the officers or representatives of such Guarantor signing the Transaction Documents to which such Guarantor is a party;

(l) a Certificate of Good Standing and Tax Status from the state of incorporation of the Company and each Guarantor and from every state in which any of them is qualified to do business; and

(m) Financing Statements and Termination Statements on Form UCC-1 (or the applicable form) with respect to all personal property and assets of the Company and each Guarantor.

6.10. CONSENTS

In addition to the consents and waivers described in Sections 6.6, 6.7 and 6.8, the Company shall have obtained all necessary consents or waivers, if any, from all parties governmental and private to any other material agreements to which the Company is a party or

by which it is bound immediately prior to the Closing in order that the transactions contemplated by the Transaction Documents may be consummated and the business of the Company may be conducted by the Company after the Closing without adversely affecting the Company.

6.11. LEGAL INVESTMENT

As of the Closing Date, there shall not have been any change in any Legal Requirements applicable to any of the Purchasers that would prevent the performance of this Agreement or any other Transaction Document or the consummation of any material aspect of the transactions contemplated hereby or thereby by such Purchaser, in each case to the extent that it would deprive such Purchaser of the principal benefits of such transactions.

6.12. PROCEEDINGS AND OTHER DOCUMENTS

All corporate and other proceedings taken or required to be taken by the Company and any Guarantor in connection with the transactions contemplated by this Agreement and the other Transaction Documents to be consummated prior to the Closing shall have been taken, except as otherwise provided in Sections 9.7, 9.11, 9.15 and 9.17 of this Agreement, and the Purchasers shall have received such other documents, in form and substance reasonably satisfactory to the Purchasers and their counsel, as to such other matters incident to the transactions contemplated hereby as the Purchasers may reasonably request.

6.13. OPINION OF COUNSEL

The Purchasers shall have received the opinion of St. John & Wayne, L.L.C., counsel to the Company, dated the Closing Date, substantially in the form of Exhibit C attached hereto.

6.14. INDEPENDENT COMMITTEE OF BOARD OF DIRECTORS

The Company's independent committee of the Board of Directors (the "Independent Committee") shall deliver to each of the Purchasers the Independent Committee's resolutions approving the execution, delivery and performance of the Transaction Documents to which the Company is a party and the transactions contemplated thereby, each in form and substance reasonably acceptable to the Purchasers.

ARTICLE VII

CONDITIONS TO CLOSING OF THE COMPANY

The Company's obligation to sell the Debentures at the Closing is subject to the fulfillment to its satisfaction on or prior to the Closing Date of each of the following conditions, unless otherwise waived by the Company:

7.1. REPRESENTATIONS AND WARRANTIES CORRECT

The representations and warranties of each of the Purchasers set forth in Article V of this Agreement shall be true and correct when made, and shall be true and correct on the Closing Date with the same force and effect as if they had been made on and as of the Closing Date.

7.2. LEGAL INVESTMENT

As of the Closing Date, there shall not have been any change in any Legal Requirements applicable to the Company that would prevent the performance of this Agreement or any other Transaction Document or the consummation of any material aspect of the transactions contemplated hereby or thereby by the Company, in each case to the extent that it would deprive the Company of the principal benefits of such transactions.

7.3. PAYMENT OF PURCHASE PRICE

The Company shall have received payment in full of the purchase price for the Debentures.

ARTICLE VIII

PREPAYMENT

Without limiting the Company's conversion rights as provided in Section 3.1 of the Debentures, the Company may not at any time prepay any Debenture, the Watson Term Loan, the Existing Debentures or any other indebtedness for borrowed money, in whole or in part, without the prior written consent of the holders of 60% of the then outstanding principal amount of the Debentures.

ARTICLE IX

AFFIRMATIVE COVENANTS

The Company hereby covenants and agrees, so long as any Debentures remain outstanding, as follows:

9.1. MAINTENANCE OF CORPORATE EXISTENCE; PROPERTIES AND LEASES; TAXES; INSURANCE

(a) The Company shall, and shall cause each of the Guarantors to, maintain in full force and effect its corporate existence, rights and franchises and all terms of licenses and other rights to use licenses, trademarks, trade names, service marks, copyrights, patents, processes or any other Intellectual Property Rights owned or possessed by it and necessary to the conduct of its business, except where failure to maintain such rights, franchises and terms of licenses and other rights to use such Intellectual Property Rights could not reasonably be expected to have a Material Adverse Effect.

(b) The Company shall, and shall cause the Guarantors to, keep each of its properties necessary to the conduct of its business in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needful and proper repairs, renewals, replacements, additions and improvements thereto; and the Company shall, and shall cause the Guarantors to, at all times comply with each provision of all leases to which it is a party or under which it occupies property, except where any such noncompliance could not reasonably be expected to have a Material Adverse Effect.

(c) The Company shall, and shall cause each of the Guarantors to,
(i) promptly pay and discharge, or cause to be paid and discharged when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon the income, profits, assets, property or business of the Company and the Guarantors, (ii) withhold and promptly pay to the appropriate tax authorities all amounts required to be withheld from wages, salaries and other remuneration to employees, and (iii) promptly pay all claims or Indebtedness (including, without limitation, claims or demands of workmen, materialmen, vendors, suppliers, mechanics, carriers, warehousemen and landlords) which, if unpaid might become a lien upon the assets or property of the Company or the Guarantors; provided, however, that any such tax, lien, assessment, charge or levy need not be paid if (1) the validity thereof shall be contested timely and in good faith by appropriate proceedings, (2) the Company or the Guarantors shall have set aside on its books adequate reserves with respect thereto, and
(3) the failure to pay shall not be prejudicial in any material respect to the holders of the Debentures, and provided further that the Company or the Guarantors will pay or cause to be paid any such tax, lien, assessment, charge or levy forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefore. The Company shall, and shall cause the Guarantors to, pay or cause to be paid all other Indebtedness incident to the operations of the Company or the Guarantors.

(d) The Company shall, and shall cause each of the Guarantors to, keep its assets which are of an insurable character insured by financially sound and reputable insurers against loss or damage by theft, fire, explosion and other risks customarily insured against by companies in the line of business of the Company or the Guarantors, in amounts sufficient to prevent the Company or the Guarantors from becoming a co-insurer of the property insured; and the Company shall, and shall cause the Guarantors to, maintain, with financially sound and reputable insurers, insurance against other hazards and risks and liability to Persons and property to the extent and in the manner customary for companies in similar businesses similarly situated or as may be required by law, including, without limitation, general liability, fire and business interruption insurance, and product liability insurance as may be required pursuant to any license agreement to which the Company or the Guarantors is a party or by which it is bound.

9.2. BASIC FINANCIAL INFORMATION

The Company shall furnish the following reports to each Holder, so long as such Person is a holder of any Debentures:

(a) within 45 days after the end of each quarterly accounting period in each fiscal year, a certificate of the Chief Financial Officer of the Company stating that the Company is in compliance with the terms of this Agreement and any other material contract or commitment to

which the Company or any of its Subsidiaries is a party or by which any of them is bound, or if the Company or any of its Subsidiaries is not in compliance, specifying the nature and period of noncompliance, and what actions the Company or such Subsidiary has taken and proposes to take with respect thereto. Notwithstanding the foregoing, the certificate delivered at the end of each fiscal year of the Company shall be signed by both the Chief Executive Officer and the Chief Financial Officer of the Company and shall be delivered within 90 days after the end of the fiscal year; and

(b) with reasonable promptness such other information and financial data concerning the Company as any Person entitled to receive materials under this Section 9.2 may reasonably request. Notwithstanding the foregoing, all confidential information furnished at any time by or on behalf of the Company or its Subsidiaries to any Holder shall be subject to the provisions of Section 19.14.

9.3. NOTICE OF ADVERSE CHANGE

The Company shall promptly give notice to all Holders of the Debentures (but in any event within two days) after becoming aware of the existence of any condition or event which constitutes, or the occurrence of, any of the following:

(a) any Event of Default or any default that with the passage of time or the giving of notice would constitute an Event of Default;

(b) the institution or threatening of institution of any action, suit or proceeding against the Company or any Subsidiary before any court, administrative agency or arbitrator, including, without limitation, any action of a foreign government or instrumentality, which, if adversely decided, could reasonably be expected to have a Material Adverse Effect;

(c) any information relating to the Company or any Subsidiary which could reasonably be expected to have a Material Adverse Effect; or

(d) any failure by the Company or any of its Subsidiaries to comply with the provisions of Section 9.4 below.

Any notice given under this Section 9.3 shall specify the nature and period of existence of the condition, event, information, development or circumstance, the anticipated effect thereof and what actions the Company or any Guarantor, as the case may be, has taken and proposes to take with respect thereto.

9.4. COMPLIANCE WITH AGREEMENTS; COMPLIANCE WITH LAWS

The Company shall, and shall cause its Subsidiaries to, comply with the terms and conditions of all material agreements, commitments or instruments to which the Company or any of its Subsidiaries is a party or by which it or they may be bound. The Company shall, and shall cause each of its Subsidiaries to, duly comply with any Legal Requirements relating to the conduct of their respective businesses, properties or assets, including, but not limited to, the requirements of the FDA Act, the Prescription Drug Marketing Act, the CSA, ERISA, the

Environmental Protection Act, the Occupational Safety and Health Act, the Foreign Corrupt Practices Act, the Sarbanes-Oxley Act of 2002 and the rules and regulations of each of the agencies administering such acts, in each case except for any such noncompliance that could not reasonably be expected to have a Material Adverse Effect.

9.5. PROTECTION OF LICENSES

The Company shall, and shall cause its Subsidiaries to, maintain, defend and protect to the best of their ability licenses and sublicenses (and to the extent the Company or a Subsidiary is a licensee or sublicensee under any license or sublicense, as permitted by the license or sublicense agreement), trademarks, trade names, service marks, patents and applications therefore and other proprietary information or Intellectual Property Rights owned or used by it or them and shall keep duplicate copies of any licenses, trademarks, service marks or patents owned or used by it, if any, at a secure place selected by the Company.

9.6. ACCOUNTS AND RECORDS; INSPECTIONS

(a) The Company shall keep true records and books of account in which full, true and correct entries will be made of all dealings or transactions in relation to the business and affairs of the Company and its Subsidiaries in accordance with GAAP applied on a consistent basis.

(b) The Company (subject to the terms and conditions contained in
Section 19.14) shall permit each Holder of Debentures or any of such Holder's officers, employees or representatives during regular business hours of the Company, upon reasonable notice and as often as such Holder may reasonably request, to visit and inspect the offices and properties of the Company and its Subsidiaries and to make extracts or copies of the books, accounts and records of the Company or its Subsidiaries, and to discuss the affairs, finances and accounts of the Company and its Subsidiaries, with the Company's (or Subsidiary's) directors and officers, its independent public accountants, consultants and attorneys.

(c) Nothing contained in this Section 9.6 shall be construed to limit any rights that a Holder of Debentures may have with respect to the books and records of the Company and its Subsidiaries, to inspect its properties or to discuss its affairs, finances and accounts.

(d) The Company will retain an Approved Accounting Firm to audit the Company's financial statements at the end of each fiscal year. In the event the services of an Approved Accounting Firm or any firm of independent public accountants hereafter employed by the Company are terminated, the Company will promptly thereafter request the firm of independent public accountants whose services are terminated to deliver to the Holders of the Debentures a letter of such firm setting forth its understanding as to the reasons for the termination of their services and whether there were, during the two most recent fiscal years or such shorter period during which said firm had been retained by the Company any disagreements between them and the Company on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. In its notice, the Company shall state whether the change of accountants was recommended or approved by the Board of Directors or any committee thereof. In the event of such termination, the Company will promptly thereafter engage another Approved Accounting Firm.

9.7. BOARD MEMBERS AND MEETINGS

(a) So long as the Purchasers own any Debentures, the Board of Directors shall be comprised in accordance with the Voting Agreement. The Company agrees to hold meetings of its Board of Directors at least four times a year, at no more than three month intervals. Directors shall be reimbursed for their reasonable travel and related expenses in attending meetings of the Board of Directors.

(b) So long as the Purchasers own any Debentures, each of Care Capital and Essex shall have the right to have a representative join the Company's Scientific Advisory Board.

9.8. MAINTENANCE OF OFFICE

The Company will maintain its principal office at the address of the Company set forth in Section 19.6 of this Agreement where notices, presentments and demands in respect of this Agreement and any of the Debentures may be made upon the Company, until such time as the Company shall notify the Holders of the Debentures in writing, at least 30 days prior thereto, of any change of location of such office.

9.9. USE OF PROCEEDS

The Company shall use $4.3 million of the proceeds received from the sale of the Debentures pursuant to this Agreement to retire approximately $16.4 Million of indebtedness owing by the Company to Watson in the aggregate principal amount of approximately $21.4 Million pursuant to the Watson Term Loans, on terms and conditions acceptable to the Purchasers. The Company shall use the remainder of the proceeds received from the sale of the Debentures pursuant to this Agreement for general working capital.

9.10. PAYMENT OF DEBENTURES

The Company shall pay the principal of and interest on the Debentures in the time, the manner and the form provided in the Debentures.

9.11. CONVERSION OF DEBENTURES

Upon the Conversion Event, the Company shall take all necessary actions to convert the Debentures and the Existing Debentures into Preferred Stock, subject to the terms and conditions in the Conversion Agreement.

9.12. INDEPENDENT COMMITTEE

The review and approval of the Independent Committee shall be required as a condition to the completion of (a) any transaction between or among the Company and the Purchasers, and (b) any Liquidation Event.

9.13. DIRECTOR AND OFFICER INSURANCE COVERAGE

The Company shall maintain with financially sound and reputable insurers D&O Insurance substantially identical to its existing D&O Insurance (without any material change thereto, including, without limitation, any decrease in coverage or additional limitations).

9.14. FURTHER ASSURANCES

From time to time the Company shall execute and deliver to the Purchasers and the Purchasers shall execute and deliver to the Company such other instruments, certificates, agreements and documents and take such other action and do all other things as may be reasonably requested by the other party in order to implement or effectuate the terms and provisions of this Agreement and the transactions contemplated hereby and any of the Debentures or Shares.

9.15. PROXY STATEMENT

As promptly as practicable after the execution of this Agreement, the Company will prepare and file with the SEC a Proxy Statement (the "Proxy Statement"), which will include for submission to a vote of the stockholders and Existing Debentureholders of the Company the Charter Amendment. The Purchasers will provide the Company with any information which may be required in order to effectuate the preparation and filing of the Proxy Statement pursuant to this
Section 9.15. The Company will promptly respond to any comments from the SEC, and file amendments or supplements to the Proxy Statement as promptly as practicable after its receipt of any comments from the SEC. The Company will notify the Purchasers promptly upon the receipt of any comments from the SEC or its staff in connection with the filing of the Proxy Statement or any amendments or supplements thereto. Whenever any event occurs which is required to be set forth in an amendment or supplement to the Proxy Statement, the Company will promptly inform the Purchasers of such occurrence and cooperate in filing with the SEC or its staff, and mailing to the stockholders and Existing Debentureholders of the Company, such amendment or supplement. The Company will cooperate and provide to each of Essex, Care Capital and Galen (and their respective counsel) with an adequate and reasonable opportunity to review, comment upon and consent to Proxy Statement, including any amendment or supplement, prior to filing such with the SEC, and will provide such Purchasers with a copy of all such filings made with the SEC. The Company will cause the Proxy Statement to be mailed to the stockholders and Existing Debentureholders of the Company at the earliest practicable time after the definitive Proxy Statement is filed with the SEC and the SEC does not have any comments to the Proxy Statement.

9.16. DISCLOSURE

The Company agrees that none of the information in the Proxy Statement will, (a) at the time the Proxy Statement is filed with the SEC, (b) at the time the Proxy Statement is mailed to the stockholders and Existing Debentureholders of the Company, and (c) on the Stockholders Meeting Date, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. The Company agrees that the

Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act.

9.17. MEETING OF STOCKHOLDERS; BOARD RECOMMENDATION

(a) As promptly as practicable after the execution of this Agreement, the Company will take all action necessary in accordance with the New York Act and its Certificate of Incorporation and By-Laws to call, hold and convene the Stockholders Meeting to be held as promptly as practicable after clearance by the SEC of the Company's definitive Proxy Statement as filed pursuant to Section 9.15 hereof. The Company will use its best efforts to solicit from its stockholders and Existing Debentureholders proxies in favor of the Charter Amendment, and will take all other action necessary or advisable to secure the vote or consent of its stockholders and Existing Debentureholders required by the rules of any applicable securities exchange, the New York Act or other Legal Requirements to obtain such approval. Notwithstanding anything to the contrary contained in this Agreement, the Company may adjourn or postpone its Stockholders Meeting to the extent necessary to ensure that any necessary supplement or amendment to the Proxy Statement is provided to its stockholders and Existing Debentureholders in advance of a vote on the Charter Amendment or, if as of the time for which the Stockholders Meeting is originally scheduled (as set forth in the Proxy Statement) there are insufficient shares of the Company's capital stock represented (either in person or by proxy) to constitute a quorum necessary to conduct the business of such Stockholders Meeting. The Company will ensure that its Stockholders Meeting is called, noticed, convened, held and conducted, and that all proxies solicited by its in connection with the Stockholders Meeting are solicited in compliance with the New York Act, its Certificate of Incorporation and By-Laws, the rules of any applicable securities exchange and other Legal Requirements.

(b) Unless the Board of Directors receives a written opinion of counsel to the Company stating that its recommendation of the Charter Amendment will violate the directors' fiduciary duties to the Company's stockholders (a copy of which written opinion of counsel will promptly be delivered by the Company to the Purchasers and their respective counsel): (i) the Board of Directors will recommend that the stockholders and Existing Debentureholders of the Company vote in favor of the Charter Amendment at its Stockholders Meeting,
(ii) the Proxy Statement will include a statement to the effect that the Board of Directors has recommended that the Company's stockholders and Existing Debentureholders vote in favor of the Charter Amendment at the Stockholders Meeting, and (iii) neither the Board of Directors nor any committee thereof will withdraw, amend or modify, or propose or resolve to withdraw, amend or modify the recommendation of its Board of Directors that the stockholders and Existing Debentureholders of the Company vote in favor of the Charter Amendment.

(c) Notwithstanding anything to the contrary contained in this Agreement, the obligation of the Company to call, give notice of, convene and hold its Stockholders Meeting will not be limited or otherwise affected by any change of recommendation by the Board of Directors or by any other matter.

9.18. SEC REPORTS

The Company will file, on a timely basis, any SEC Reports and keep all such SEC Reports and public information current. The Company agrees that none of the SEC Reports filed by the Company will, at the time of filing, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading.

9.19. PUBLIC DISCLOSURE

Without limiting any other provision of this Agreement, the Company will consult with each of Essex, Care Capital, and Galen before issuing, and will provide such Purchasers the opportunity to review, comment upon and consent to, any press release or public statement with respect to this Agreement and the transactions contemplated hereby, and will not issue any such press release or make any such public statement prior to such consultation and (to the extent practicable) agreement, except as may be required by any applicable securities exchange or Legal Requirements.

ARTICLE X

NEGATIVE COVENANTS

The Company hereby covenants and agrees, so long as any Debentures remain outstanding, it will not (and not allow any of the Guarantors to), directly or indirectly, without the prior written consent of the holders of 60% of the then outstanding principal amount of the Debentures, as follows:

10.1. STAY, EXTENSION AND USURY LAWS

At any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereinafter in force, which may affect the covenants or the performance of the Debentures, the Company hereby expressly waiving all benefit or advantage of any such law, or by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holders of the Debentures but will suffer and permit the execution of every such power as though no such law had been enacted.

10.2. RECLASSIFICATION

Effect any reclassification, combination or reverse stock split of the Preferred Stock or Common Stock of the Company.

10.3. LIENS

Except as otherwise provided in this Agreement or any other Transaction Document, create, incur, assume or permit to exist any mortgage, pledge, lien, security interest or encumbrance on any part of its properties or assets, or on any interest it may have therein, now

owned or hereafter acquired, nor acquire or agree to acquire property or assets under any conditional sale agreement or title retention contract, except that the foregoing restrictions shall not apply to:

(a) liens for taxes, assessments and other governmental charges, if payment thereof shall not at the time be required to be made, and provided such reserve as shall be required by GAAP consistently applied shall have been made therefore;

(b) liens of workmen, materialmen, vendors, suppliers, mechanics, carriers, warehouseman and landlords or other like liens, incurred in the ordinary course of business for sums not then due or that are being contested in good faith and provided that an adverse decision in such contest would not materially affect the business of the Company;

(c) liens securing Indebtedness of the Company or any Subsidiary which are permitted under Sections 10.4(b) or 10.4(g);

(d) statutory liens of landlords, statutory liens of banks and rights of set-off, and other liens imposed by law, in each case incurred in the ordinary course of business (i) for amounts not yet overdue or (ii) for amounts that are overdue and that are being contested in good faith by appropriate proceedings, so long as reserves or other appropriate provisions, if any, as shall be required by GAAP, shall have been made for any such contested amounts;

(e) liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money);

(f) any attachment or judgment lien not otherwise constituting an Event of Default, or an event which, with the giving of notice, the lapse of time, or both, would not otherwise constitute an Event of Default;

(g) easements, rights-of-way, restrictions, encroachments, and other minor defects or irregularities in title, in each case which do not and will not interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries, except where such interference could not reasonably be expected to have a Material Adverse Effect;

(h) any (i) interest or title of a lessor or sublessor under any lease, (ii) restriction or encumbrance that the interest or title of such lessor or sublessor may be subject to, or (iii) subordination of the interest of the lessee or sublessee under such lease to any restriction or encumbrance referred to in the preceding clause (ii), so long as the holder of such restriction or encumbrance agrees to recognize the rights of such lessee or sublessee under such lease;

(i) liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods;

(j) any zoning or similar law or right reserved to or vested in any governmental

office or agency to control or regulate the use of any real property;

(k) liens securing obligations (other than obligations representing Indebtedness for borrowed money) under operating, reciprocal easement or similar agreements entered into in the ordinary course of business of the Company and its Subsidiaries;

(l) the Permitted Liens; and

(m) the replacement, extension or renewal of any lien permitted by this Section 10.3 upon or in the same property theretofore subject or the replacement, extension or renewal (without increase in the amount or change in any direct or contingent obligor) of the Indebtedness secured thereby.

10.4. INDEBTEDNESS

Create, incur, assume, suffer, permit to exist, or guarantee, directly or indirectly, any Indebtedness, excluding:

(a) the endorsement of instruments for the purpose of deposit or collection in the ordinary course of business;

(b) Indebtedness which may, from time to time be incurred or guaranteed by the Company which in the aggregate principal amount does not exceed $500,000 and is subordinate to the Indebtedness under this Agreement on terms reasonably satisfactory to the Holders of the Debentures;

(c) Indebtedness existing on the date hereof and described in
Section 10.4 of the Schedule of Exceptions;

(d) Indebtedness relating to contingent obligations of the Company and its Subsidiaries under guaranties in the ordinary course of business of the obligations of suppliers, customers, and licensees of the Company and its Subsidiaries;

(e) Indebtedness relating to loans from the Company to its Subsidiaries or Indebtedness owed to any of the Guarantors;

(f) Indebtedness relating to capital leases in an amount not to exceed $500,000;

(g) Indebtedness relating to a working capital line of credit in an amount not to exceed $5,000,000;

(h) accounts or notes payable arising out of the purchase of merchandise or services in the ordinary course of business; or

(i) the Debentures.

10.5. ARM'S LENGTH TRANSACTIONS

Enter into any transaction, contract or commitment or take any action other than at Arm's Length.

10.6. IMMATERIAL SUBSIDIARIES

Permit any e Immaterial Subsidiary to commence any business operations of a type or scope not currently conducted by them, or permit any Immaterial Subsidiary to acquire any rights or property not currently owned by it.

10.7. LOANS AND ADVANCES

Except for loans and advances outstanding as of the Closing Date and set forth in Section 10.7 of the Schedule of Exceptions, directly or indirectly, make any advance or loan to, or guarantee any obligation of, any Person, except for intercompany loans or advances in the ordinary course of business and those provided for in this Agreement.

10.8. INTERCOMPANY TRANSFERS; TRANSACTIONS WITH AFFILIATES; DIVERSION OF CORPORATE OPPORTUNITIES

(a) Make any intercompany transfers of monies or other assets in any single transaction or series of transactions, except as otherwise permitted in this Agreement.

(b) Engage in any transaction with any of the officers, directors, employees or Affiliates of the Company or of its Subsidiaries, except on terms no less favorable to the Company or the Subsidiary as could be obtained at Arm's Length.

(c) Divert (or permit anyone to divert) any business or opportunity of the Company or any Subsidiary to any other corporate or business entity.

10.9. INVESTMENTS

Except as contemplated by Section 18.3, make any investments in, or purchase any stock, option, warrant, or other security or evidence of Indebtedness of, any Person (exclusive of any Subsidiary), other than obligations of the United States Government or certificates of deposit or other instruments maturing within one year from the date of purchase from financial institutions with capital in excess of $100 million.

10.10. OTHER BUSINESS

Enter into or engage, directly or indirectly, in any business other than the business currently conducted or proposed to be conducted as disclosed to the Purchasers prior to the date hereof by the Company or any Subsidiary.

10.11. EMPLOYEE BENEFIT PLANS AND COMPENSATION

Except as contemplated by this Agreement:

(a) enter into or materially amend any agreement to provide for or otherwise establish any written or unwritten employee benefit plan, program or other arrangement of any kind, covering current or former employees of the Company or its Subsidiaries except for any such plan, program or arrangement expressly permitted under an existing agreement listed in Section 4.18 the Schedule of Exceptions or as otherwise approved by the Board of Directors; provided, however, that no such plan, program or arrangement may be established or implemented if such action would have a material effect on the terms of employment of the employees of the Company or its Subsidiaries;

(b) except as otherwise approved by the Board of Directors, provide for or agree to any material increase in any benefit provided to current or former employees of the Company or its Subsidiaries over that which is provided to such individuals pursuant to a plan or arrangement disclosed in
Section 4.18 of the Schedule of Exceptions as of the Closing Date; or

(c) except as otherwise approved by the Board of Directors, provide for or agree to any increase in the annual compensation of any of the employees of the Company or its Subsidiaries, except for (i) annual salary increases in the ordinary cause of business consistent with past practice (not to exceed a 10% increase over such employee's annual salary compensation on the date hereof), and (ii) normal and customary annual bonuses to employees (not to exceed $350,000 in the aggregate in any fiscal year).

10.12. CAPITAL EXPENDITURES

Other than for capital expenditures contained in any budget approved by the Board of Directors, make or commit to make, or permit any of its Subsidiaries to make or commit to make, any capital expenditures in excess of $250,000 in the aggregate during any fiscal year of the Company.

10.13. AMENDMENTS OF CERTAIN DOCUMENTS

Except as otherwise specifically provided for herein or in the Transaction Documents, amend, modify, change in any manner any term or condition of the Watson Term Loan, the Existing Debentures or any agreement or other instrument or document entered into by the Company or any Guarantor in connection therewith or pursuant thereto, or give any consent, waiver or approval thereunder, waive any default under or any breach of any term or condition thereof, agree in any manner to any other amendment, modification or change of any term or condition thereof or take any other action in connection therewith that would impair the value of the interest or the rights of any Purchaser under this Agreement or any other Transaction Document, or permit any of the Guarantors to do any of the foregoing without the prior written consent of the holders of 60% of the then outstanding principal amount of Debentures.

10.14. FORMATION OF SUBSIDIARIES

Organize or invest, or permit any Subsidiary to organize or invest, in any new corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) (a) more than 50% of the issued and outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at

the time capital stock of any other class of such corporation shall or might have voting power upon the occurrence of any contingency), the interest in the capital or profits of such partnership, joint venture or limited liability company or the beneficial interest in such trust or estate, is at the time directly or indirectly owned or controlled by the Company, any of its Subsidiaries or any of their respective officers or directors, or (b) a material minority investment in any such entity is directly or indirectly owned or controlled by the Company, any of its Subsidiaries or any of their respective officers or directors.

10.15. CERTAIN CASH INTEREST PAYMENTS

Make any cash interest payments to the Existing Debentureholders, notwithstanding anything else to the contrary contained therein or elsewhere, without the prior written consent of the holders of all of the then outstanding Debentures (the "2004 Holders"), which consent shall be within their sole and absolute discretion.

ARTICLE XI

INTENTIONALLY OMITTED

ARTICLE XII

EVENTS OF DEFAULT

12.1. EVENTS OF DEFAULT

If any of the following events shall occur and be continuing on or before the Security Interest Termination Date, an "Event of Default" shall be deemed to have occurred:

(a) if the Company shall default in the payment of (i) any part of the principal of any Debenture, when the same shall become due and payable, whether at maturity or at a date fixed for prepayment or by acceleration or otherwise, or (ii) the interest on any Debenture, when the same shall become due and payable, and in the case of an interest payment such default shall have continued without cure for ten days from the scheduled date of payment of such interest;

(b) the Company shall fail to issue to a Holder the Shares issuable upon conversion of a Debenture pursuant to the instructions provided by such Holder and in accordance with the terms of such Debenture;

(c) except as provided in Section 12.1(b), if the Company shall default in the performance of any of the covenants contained in Articles IX or X, and, in the case of a default under Sections 9.1 through and including 9.8 or
Section 10.3 (exclusive of Section 10.3(c)), such default shall have continued without cure for 30 days after written notice (a "Default Notice") is given to the Company with respect to such covenant by any holder or holders of the Debentures (and the Company shall give to all other holders of the Debentures at the time outstanding prompt written notice of the receipt of such Default Notice, specifying the default referred to

therein); provided, however, that such 30-day grace period shall not apply in the event the Company fails to promptly give notice as provided in Section 9.3;

(d) except as provided in Sections 12.1(b) or 12.1(c), if the Company or any of the Guarantors shall default in the performance of any other agreement contained in any Transaction Document or in any other agreement executed in connection with this Agreement and such default shall not have been remedied to the satisfaction of the holders of 60% of the then outstanding principal amount of the Debentures, within 35 days after a Default Notice shall have been given to the Company (and the Company shall give to all other Holders of the Debentures at the time outstanding prompt written notice of the receipt of such Default Notice, specifying the default referred to therein); provided, however, that such thirty-five (35) day grace period shall not apply in the event the Company fails to give notice as provided in Section 9.3;

(e) if any representation or warranty made by the Company, any Guarantor or any of their officers in any Transaction Document or in or any certificate delivered pursuant thereto shall prove to have been incorrect in any material respect when made;

(f) if (i) any default shall occur under any indenture, mortgage, agreement, instrument or commitment evidencing, or under which there is at the time outstanding, any Indebtedness of the Company or a Subsidiary, in excess of $500,000, or which results in such Indebtedness, in an aggregate amount (with other defaulted Indebtedness) in excess of $1,000,000 becoming (or being declared by its holders or, on its behalf, by an agent or trustee therefore to be) due and payable prior to its due date; (ii) irrespective of the monetary thresholds specified in subclause (i) above, if any default, event of default or any other condition shall occur or exist under the Watson Term Loan or any Existing Debentures (as such term is defined in the Watson Term Loan and the Existing Debentures, respectively) which shall be continuing after the respective grace period, if any, specified in the Watson Term Loan and the Existing Debentures, and the effect of which is to permit the acceleration of the maturity of the Indebtedness outstanding thereunder; or (III) a Change of Control shall have occurred;

(g) if any of the Company or its Subsidiaries shall default in the observance or performance of any term or provision of an agreement to which it is a party or by which it is bound which default could reasonably be expected to have a Material Adverse Effect and such default is not waived or cured within the applicable grace period;

(h) if a final judgment which, either alone or together with other outstanding final judgments against the Company and its Subsidiaries, exceeds an aggregate of $2,000,000 shall be rendered against the Company or any Subsidiary and such judgment shall have continued undischarged or unstayed for 60 days after entry thereof;

(i) if the Company or any Subsidiary shall generally not pay its debts as such debts become due or shall make an assignment for the benefit of creditors generally, or shall admit in writing its inability to pay its debts generally; or if any proceeding shall be instituted by or against the Company or any Subsidiary seeking to adjudicate it as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or the reorganization or relief of debtors, or seeking entry of an order for relief or the appointment of a

receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of such proceeding instituted against it (but not instituted by it) that is being diligently contested by it in good faith, either such proceeding shall remain undismissed or unstayed for a period of 90 days or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or any substantial part of its property) shall occur; or if any writ of attachment or execution or any similar process shall be issued or levied against it or any substantial part of its property which is either not released, stayed, bonded or vacated within 90 days after its issue or levy or any of the actions sought or relief sought in any proceeding pursuant to which such writ or similar process shall be issued or initiated shall occur or be granted; or if the Company or any Subsidiary takes corporate action in furtherance of any of the aforesaid purposes or conditions;

(j) if any provision of any Transaction Document shall for any reason cease to be valid and binding on, or enforceable against, the Company or any Guarantor, or the Company or any Guarantor shall so assert in writing;

(k) any Transaction Document (or any financing statement) which purports:

(i) to create, perfect or evidence a lien on or security interest in any Company Debenture Collateral or Guarantor Debenture Collateral in favor of the Holders of the Debentures (or their agents and representatives), or to provide for the priority of any such lien or security interest over the interest of any other party in the same Collateral, shall cease to create, or to preserve the enforceability, perfection or first priority (subject to the Subordination Agreement) of, such lien and security interest; or

(ii) to provide for the priority in right of payment of the Company's obligations under the Transaction Documents to or in favor of the Holders of the Debentures (or their agents or representatives) shall cease to preserve such priority; or

(l) if the Conversion Event (and the conversion of the Debenture and Existing Debentures into Preferred Stock in connection therewith), shall not have occurred by November 1, 2004.

12.2. REMEDIES

(a) Except as provided in Section 12.2(b), upon the occurrence and during the continuance of an Event of Default, any holder or holders of 60% of the then outstanding principal amount of the Debentures may at any time (unless all defaults shall theretofore have been remedied) at its or their option, by written notice or notices to the Company (i) declare all the Debentures to be due and payable, whereupon the same shall forthwith mature and become due and payable, together with interest accrued thereon, without presentment, demand, protest or notice, all of which are hereby waived by the Company; and (ii) declare any other amounts payable to the Purchasers under this Agreement or as contemplated hereby due and payable; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Company under the U.S. Bankruptcy Code, the Debentures, together with interest accrued thereon, shall automatically become and be due and payable, without presentment,

demand, protest or notice of any kind, all of which are hereby waived by the Company.

(b) Notwithstanding anything to the contrary contained in Section 12.2(a), in the event that at any time after the principal of the Debentures shall so become due and payable and prior to the date of maturity stated in the Debentures all arrears of principal of and interest on the Debentures (with interest at the rate specified in the Debentures on any overdue principal and, to the extent legally enforceable, on any interest overdue) shall be paid by or for the account of the Company, then the holder or holders of 60% of the then outstanding principal amount of the Debentures, by written notice or notices to the Company, may (but shall not be obligated to) waive such Event of Default and its consequences and rescind or annul such declaration, but no such waiver shall extend to or affect any subsequent Event of Default or impair any right resulting therefrom. If any Holder of the Debentures shall give any notice or take any other action with respect to a claimed default, the Company, forthwith upon receipt of such notice or obtaining knowledge of such other action will give written notice thereof to all other Holders of the Debentures, describing such notice or other action and the nature of the claimed default.

12.3. ENFORCEMENT

In case any one or more Events of Default shall occur and be continuing, each Holder of the Debentures may proceed to protect and enforce the rights of such Holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement in favor of the Purchasers which is contained in any of the Transaction Documents or in such Debenture or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law (including, without limitation, the right to enforce the Company Debenture Collateral, the Guaranties and the Guarantor Debenture Collateral, each in accordance with its respective terms). Each such Holder agrees that it will give written notice to the other Holders of the Debentures prior to instituting any such action. In case of a default in the payment of any principal of or interest on any Debenture, the Company will pay to the holder thereof such further amount as shall be sufficient to cover the cost and the expenses of collection, including, without limitation, reasonable attorney's fees, expenses and disbursements. No course of dealing and no delay on the part of any Holder of the Debentures in exercising any rights shall operate as a waiver thereof or otherwise prejudice such Holder's rights. No right conferred hereby or by any Debenture upon any holder thereof shall be exclusive of any other right referred to herein or therein or now available at law or in equity, by statute or otherwise.

ARTICLE XIII

INDEMNIFICATION

13.1. COMPANY INDEMNIFICATION OF PURCHASERS

To the greatest extent permitted by applicable law, the Company agrees to indemnify each Purchaser, its Affiliates and respective legal counsel, and each of the officers, directors, partners and stockholders of each, against and hold it harmless from all Losses arising out of or resulting from: (i) the breach of any representation or warranty of the Company in any Transaction Document or in any agreement, certificate or instrument delivered pursuant thereto;

(ii) the breach of any agreement by the Company contained in any Transaction Document or any agreement, certificate of instrument delivered pursuant thereto; or (iii) the Purchasers' representation on the Board of Directors and any committees thereof or as an observer thereon.

13.2. NOTICE OF CLAIMS

Anything in Section 13.1 to the contrary notwithstanding, no claim may be asserted nor may any action be commenced against the Company for breach of any representation or warranty contained in this Agreement, unless notice of such Purchaser's intention to assert any such claim or commence any such action is received by the Company describing in writing in reasonable detail the facts and circumstances with respect to the subject matter of such claim or action on or prior to the date on which the representation or warranty on which such claim or action is based ceases to survive as set forth in Section 19.3. With respect to any claim or action as to which such notice shall have been given, the Purchasers shall be entitled to assert a claim or commence an action for indemnification with respect thereto at any time after the giving of such notice, regardless of whether any such claim or action may be asserted or commenced prior to or after the date on which the representation or warranty on which such claim or action is based ceases to survive as set forth in Section 19.3.

13.3. THIRD PARTY CLAIMS

Each Purchaser agrees to give the Company prompt written notice of any claim, assertion, event or proceeding by a third party of which it has actual knowledge concerning any Losses as to which it intends to request indemnification under this Agreement. The Company shall have the right to direct, through counsel of the Company's own choosing, the defense or settlement of any such claim or proceeding at the Company's own expense. If the Company elects to assume the defense of any such claim or proceeding, such Purchaser may participate in such defense, but in such case the expenses of such Purchaser shall be paid by such Purchaser. Such Purchaser shall cooperate with the Company in the defense or settlement thereof, and the Company shall reimburse such Purchaser for its reasonable out-of-pocket expenses in connection therewith. If the Company elects to direct the defense of any such claim or proceeding, such Purchaser shall not pay, or permit to be paid, any part of any claim or demand arising from such asserted liability, unless the Company consents in writing to such payment or unless the Company, subject to the last sentence of this Section 13.3, withdraws from the defense of such asserted liability, or unless a final judgment from which no appeal may be taken by or on behalf of the Company is entered against such Purchaser for such liability. If the Company shall fail to defend any such claim or proceeding, or if, after commencing or undertaking any defense, fails to prosecute or withdraws from such defense, such Purchaser shall have the right to undertake the defense or settlement thereof, at the Company's expense. If such Purchaser assumes the defense of any such claim or proceeding pursuant to this Section 13.3 and proposes to settle such claim or proceeding prior to a final judgment thereon or to forego appeal with respect thereto, then such Purchaser shall give the Company prompt written notice thereof and the Company shall have the right to participate in the settlement or assume or reassume the defense of such claim or proceeding.

13.4. PURCHASER INDEMNIFICATION OF THE COMPANY

Each Purchaser agrees to indemnify and hold harmless the Company, its Affiliates and respective legal counsel, and each of the officers, directors, partners and stockholders of each, from and against any Losses arising out of the breach of any representation or warranty of such Purchaser in Article V of this Agreement.

ARTICLE XIV

AMENDMENT AND WAIVER

14.1. AMENDMENT AND WAIVER

No amendment of any provision of this Agreement, including any amendment of this Article XIV, shall be valid unless the same shall be in writing and signed by the Company (and the Independent Committee) and the holders of 60% of the then outstanding principal amount of the Debentures. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder or under any other Transaction Document, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or thereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.

14.2. BINDING EFFECT OF AMENDMENT AND WAIVER

The Company and each Holder shall be bound by any amendment or waiver effected in accordance with the provisions of this Article XIV, whether or not such Debenture and Share, respectively, shall have been marked to indicate such modification, but any Debenture and Share, respectively, issued thereafter shall bear a notation as to any such modification. Promptly after obtaining the written consent of the Holders of the Debentures and the holders of Shares, respectively, herein provided, the Company shall transmit a copy of such modification to all of the holders of the Debentures and the holders of Shares, respectively, then outstanding.

ARTICLE XV

EXCHANGE OF DEBENTURES

At any time at the request of any Holder to the Company at its office provided under Section 19.6, the Company at its expense (except for any transfer tax or any other tax arising out of the exchange) will issue in exchange therefore new Debentures, in such denomination or denominations ($100,000 or any larger multiple of $100,000, plus one Debenture in a lesser denomination, if required) as such holder may request, in aggregate principal amount equal to the unpaid principal amount of the Debenture or Debentures surrendered and substantially in the form thereof, dated as of the date to which interest has been paid on the Debenture or Debentures surrendered (or, if no interest has yet been so paid thereon, then dated the date of the Debenture

or Debentures so surrendered) and payable to such Person or Persons or order as may be designated by such holder.

ARTICLE XVI

TRANSFER OF DEBENTURES

Subject to the next paragraph of this Article XVI, each Holder by acceptance thereof agrees that it will give the Company ten days written notice prior to selling or otherwise disposing of such Debenture. No such sale or other disposition shall be made unless (i) the holder shall have supplied to the Company an opinion of counsel for the holder reasonably acceptable to the Company to the effect that no registration under the Securities Act is required with respect to such sale or other disposition, or (ii) an appropriate registration statement with respect to such sale or other disposition shall have been filed by the Company and declared effective by the SEC.

If the Holder has obtained an opinion of counsel reasonably acceptable to the Company to the effect that the sale of its Debenture may be made without registration under the Securities Act pursuant to compliance with Rule 144 (or any successor rule under the Securities Act), the holder need not provide the Company with the notice required in the first paragraph of this Article XVI.

ARTICLE XVII

RIGHT OF FIRST REFUSAL; ADDITIONAL INVESTMENT

17.1. RIGHT OF FIRST REFUSAL

Each First Refusal Holder shall be entitled to the following right of first refusal:

(a) Except in the case of Excluded Securities, the Company shall not issue, sell or exchange, agree to issue, sell or exchange, or reserve or set aside for issuance, sale or exchange any Equity Securities unless in each case, the Company shall have first offered to sell to the First Refusal Holders the Equity Securities at a price and on such other terms as shall have been specified by the Company in writing delivered to each of the First Refusal Holders (the "Offer"), which Offer by its terms shall remain open and irrevocable for a period of 30 days from the date it is delivered by the Company to the First Refusal Holders; provided, however, that such issuance, sale or exchange of Equity Securities shall result in gross proceeds to the Company (whether at the time of issuance or upon conversion, exercise, or exchange thereof) of an amount in excess of $200,000 (the "Minimum Offering Threshold"). For purposes of computing the Minimum Offering Threshold, all offerings, issuances, sales and exchanges of Equity Securities during any rolling 12-month period shall be aggregated.

(b) Each of the First Refusal Holders shall have the right to purchase up to its pro rata share of the Equity Securities determined at the time of the consummation of the Company's issuance of Equity Securities. The "pro rata share" of each First Refusal Holder shall be that amount of the Equity Securities multiplied by a fraction,

(i) the numerator of which is the sum of (1) the number of shares of Common Stock underlying a Debenture held by such Person if such Person is the holder of a Debenture, (2) the number of shares of Common Stock underlying the 2002 Debentures held by such Person if such Person is an Existing 2002 Debentureholder, (3) the number of shares of Common Stock underlying the 1998 Debentures held by such Person if such Person is an Existing 1998 Debentureholder, and (4) the number of shares of Common Stock issued to such Old Common Holder upon conversion of a 2002 Existing Debenture or 1998 Existing Debenture (as the case may be) if such Person is an Old Common Holder and has converted the Debenture, and

(ii) the denominator of which is the sum of (1) the total number of shares of Common Stock underlying the Debentures issued pursuant to this Agreement and (2) the total number of shares of Common Stock underlying the 2002 Debentures and the 1998 Debentures.

(c) Notice of the intention of each First Refusal Holder to accept, in whole or in part, an Offer shall be evidenced by a writing signed by such Person, as the case may be and delivered to the Company prior to the end of the 30-day period commencing with the date of such Offer (or, if later, within ten days after the delivery or giving of any written notice of a material change in such Offer), setting forth such portion (specifying number of shares, principal amount or the like) of the Equity Securities such Person elects to purchase (the "Notice of Acceptance").

(d) In the event that all First Refusal Holders do not elect to purchase all of the Equity Securities, the Persons which have provided notice of their intention to exercise the refusal rights as provided in Section 17.1(c) shall have the right to purchase, on a pro rata basis, any unsubscribed portion of the Equity Securities during a period of ten days following the 30-day period provided in Section 17.1(c). Following such additional ten-day period, in the event the First Refusal Holders have not elected to purchase all of the Equity Securities, the Company shall have 90 days from the expiration of the foregoing 40-day period to sell all or any part of such Equity Securities as to which a Notice of Acceptance has not been given by any of such Persons (the "Refused Securities") to any other Person or Persons on the terms provided in the Offer. Upon the closing of the sale to such other Person or Persons of all the Refused Securities, which shall include payment of the purchase price to the Company in accordance with the terms of the Offer, if the First Refusal Holders have timely submitted a Notice of Acceptance, they shall purchase from the Company, and the Company shall sell to such Persons, as the case may be, the Equity Securities in respect of which a Notice of Acceptance was delivered to the Company, at the terms specified it the Offer. The purchase by the First Refusal Holders of any Equity Securities is subject in all cases to the preparation, execution and delivery by the Company to such Persons of a purchase agreement and other customary documentation relating to such Equity Securities as is satisfactory in form and substance to such Persons and each of their respective counsel.

(e) In each case, any Equity Securities not purchased by the First Refusal Holders or by a Person or Persons in accordance with Section 17.1(d) may not be sold or otherwise disposed of until they are again offered to such Persons under the procedures specified in Sections 17.1(a), 17.1(c) and 17.1(d) of this Agreement.

(f) The rights of the First Refusal Holders under this Section 17.1 shall not apply to the following securities (the "Excluded Securities"):

(i) Common Stock or options to purchase such Common Stock, issued to officers, employees or directors of, or consultants to, the Company, pursuant to any agreement, plan or arrangement approved by the Board of Directors;

(ii) Common Stock issued as a stock dividend or upon any stock split or other subdivision or combination of shares of Common Stock;

(iii) shares issued upon conversion of the Debentures or the Existing Debentures, exercise of the warrants issued in connection with the issuance of the Existing Debentures or conversion/exercise of other convertible securities outstanding on the date hereof;

(iv) any securities issued for consideration other than cash pursuant to a merger, consolidation, acquisition, strategic alliance or similar business combination approved by the Board of Directors and at the Company's Annual Meeting of Stockholders; or

(v) any debentures issued in satisfaction of interest payments under the Existing Debentures, including debentures instruments issued in satisfaction of interest payments on those debenture instruments.

(g) Notwithstanding anything to the contrary contained herein, a holder of a Debenture (other than an initial Purchaser) shall not be considered a First Refusal Holder for purposes of this Section 17.1 only, unless such Person then holds Debentures with an outstanding principal amount of at least $200,000.

ARTICLE XVIII

TRANSFER RESTRICTIONS

18.1. TRANSFER RESTRICTIONS

This Article XVIII shall apply to all Transfers of Restricted Securities. Notwithstanding any implication to the contrary set forth in this Agreement, no Transfer shall have any force or effect unless: (a) such a Transfer is made in accordance with each of the provisions of this Article XVIII, (b) such a Transfer would not result in the violation of applicable federal or state securities laws, (c) the transferee in any such Transfer is an Accredited Investor, and (d) the intended transferee of such Transfer executes the Joinder Agreement. Any attempt by a Holder to Transfer any Restricted Securities in violation of any provision of this Agreement will be void and have no force or effect. The Company will not be required (i) to transfer on its books any Restricted Securities that have been sold, gifted or otherwise Transferred in violation of this Agreement or (ii) to treat as the owner of such Restricted Securities, or to accord the right to vote or pay principal, interest or dividends to, any purchaser, donee or other transferee to whom such Restricted Securities may have been so Transferred in violation of this Agreement.

18.2. NOTICE OF PROPOSED TRANSFER

Before any Holder may effect any Transfer of any Offered Securities
(other than a Permitted Transfer), such Holder (the "Selling Security Holder")
must give written notice concurrently to the Company and the other Holders ("Seller Notice") stating (a) the Selling Security Holder's bona fide intention to transfer such Offered Securities, (b) the number of the Offered Securities to be Transferred, (c) the name, address and relationship to the Selling Security Holder, if any, of each proposed purchaser or other transferee (the "Proposed Transferee"), (d) the bona fide cash price per Offered Security (the "Offered Price"); and (e) the anticipated date of the proposed Transfer, which shall be a date not earlier than 30 days after the date the Seller Notice is delivered. Upon the request of the Company or a Holder, the Selling Security Holder will promptly furnish such information to the Company and to the Holder as may be reasonably requested to establish that the offer and proposed Transfer are bona fide.

18.3. PURCHASE RIGHTS

With respect to any Transfer by any Selling Security Holder (other than a Permitted Transfer), the Company and each Holder shall have the right to purchase ("Purchase Right") the Offered Securities, exercisable as set forth below:

(a) The Company shall have the right to purchase all, but not less than all, of the Offered Securities. If the Company desires to purchase all of the Offered Securities, the Company must, within the 10 day period (the "Company Refusal Period") commencing on the date of receipt of the Seller Notice, give written notice to the Selling Security Holder of the Company's election to purchase the Offered Securities. In the event that the Company elects not to purchase all of the Offered Securities, the Offered Securities may be purchased by the Holders as set forth in Section 18.3(b). On or before the expiration of the Company Refusal Period, the Company will give written notice (the "Company Waiver Notice") to the Holders specifying either (i) that all of the Offered Securities were subscribed by the Company's exercising its Purchase Right or
(ii) that the Company waived its Purchase Right. Notwithstanding any failure by the Company to deliver a Company Waiver Notice, a failure by the Company to exercise its Purchase Right within the Company Refusal Period shall be deemed a waiver of such right.

(b) In the event the Company does not purchase all of the Offered Securities, each Holder shall have the opportunity to purchase up to such Holder's pro rata share of the Offered Securities. For purposes of this Section 18.3(b), a Holder's pro rata share shall be determined by dividing the number of shares of Common Stock (inclusive of all Common Stock underlying the Restricted Securities) held by such Holder by the total number of shares of Common Stock (inclusive of all Common Stock underlying the Restricted Securities) held by all Holders purchasing Offered Securities pursuant to this Section 18.3(b). If any Holder, or its assignees who are Affiliates of such Holder, desires to purchase the Offered Securities, such Holder must, within a 5 day period (the "Holder Refusal Period") commencing on the later date of (i) the Company Waiver Notice or (ii) the 10th day after the Seller Notice, give written notice ("Holder Notice") to the Selling Security Holder and to the Company of such Holder's election to purchase such Holder's pro rata share of the remaining Offered Securities, or such lesser number as may be stated in such Holder's Holder Notice. The participating Holders also may allocate

the right to purchase the Offered Securities between or among them in any proportion they choose as reflected in a notice to the Selling Security Holder within the Holder Refusal Period. In the event that any Holder elects not to purchase any of the Offered Securities, such Holder shall, prior to the expiration of the Holder Refusal Period, give written notice ("Holder Waiver Notice") to the Selling Security Holder that the Holder is waiving such Holder's right to purchase all such Offered Securities under this Section 18.3(b). Notwithstanding any failure by a Holder to deliver a Holder Waiver Notice, a failure by a Holder to exercise such Holder's Purchase Right within the Holder Refusal Period shall be deemed a waiver of such right.

(c) The purchase price for the Offered Securities to be purchased by the Company or the Holders exercising their Purchase Right under this Agreement will be the Offered Price, and will be payable within 10 days after the date the Purchase Right is first exercised for all of the Offered Securities. Payment of the purchase price will be made by the exercising Company or Holders (as the case may be) by check or wire transfer of immediately available funds.

(d) If the Company or Holders exercise their Purchase Right to purchase all of the Offered Securities, then, upon consummation of such purchase, the Selling Security Holder will have no further rights as a holder of the Offered Securities except the right to receive payment for the Offered Securities in accordance with the terms of this Agreement, and the Selling Security Holder will promptly cause all certificate(s) or debentures (as the case may be) evidencing such Offered Securities, together with such other instruments and documents of transfer as the Persons acquiring the Offered Securities shall reasonably request, to be surrendered to the Company for Transfer to the Persons acquiring the Offered Securities (free and clear of any and all liens, claims and encumbrances whatsoever except those imposed by this Agreement and securities laws generally).

(e) If the Company or the Holders have not elected to purchase all of the Offered Securities, then, subject to the Co-Sale Rights set forth in
Section 18.4, the Selling Security Holder may Transfer the remaining Offered Securities to the Proposed Transferee, at the Offered Price or at a higher price, provided that such Transfer (i) is consummated within 90 days after the date of the Seller Notice and (ii) is in accordance with all the terms of this Agreement. Any proposed Transfer at a price or on terms and conditions more favorable than those described in the Seller Notice, as well as any subsequent proposed Transfer of any of the Offered Securities by the Selling Security Holder, shall again be subject to this Section 18.3 and shall require full compliance by the Selling Security Holder with the procedures in this Section 18.3.

18.4. CO-SALE RIGHTS

Notwithstanding Section 18.3(e), no Holder (each, a "Co-Sale Seller") shall Transfer any of the Offered Securities pursuant to Section 18.3(e) to a Proposed Transferee until such Co-Sale Seller has given written notice to each of the Holders of the right (the "Co-Sale Right"), exercisable either within 5 days after the date of such Person's Holder Waiver Notice or within 15 business days following receipt of the Seller Notice, whichever is later, to sell to a Proposed Transferee all or part of such Holder's Portion of the Offered Securities, on the same terms and conditions as set forth in the Seller Notice, on an as-converted-to-Common-Stock basis. A Holder may exercise the Co-Sale Right by delivering to the Co-Sale Seller at the closing of the

Transfer of Offered Securities to the Proposed Transferee one or more certificates or debentures (as the case may be), properly endorsed for Transfer, representing such Offered Securities to be Transferred by the Holder. At the closing of the Transfer of Offered Securities to the Proposed Transferee, such certificates, debentures or other instruments will be Transferred and delivered to the Proposed Transferee as set forth in the Seller Notice in consummation of the Transfer of the Offered Securities pursuant to the terms and conditions specified in such notice, and the Co-Sale Seller will remit, or will cause the Proposed Transferee to remit, to the participating Holder at closing that portion of the proceeds of the Transfer to which the Holder is entitled by reason of the Holder's participation in such Transfer pursuant to the Co-Sale Right. If the Offered Securities consist of debentures or more than one series or class or type of stock and the Proposed Transferee is not willing to purchase debentures or shares of a class of preferred stock held by the Holders, then the Holders exercising a Co-Sale Right will have the opportunity to convert such Existing Debentures, Debentures or shares of Preferred Stock into Common Stock, and the Company will cooperate to effect such conversion.

ARTICLE XIX

MISCELLANEOUS

19.1. REGULATORY FILINGS; BEST EFFORTS

(a) The Company and the Purchasers (acting severally and not jointly) will coordinate and cooperate with one another and will each use its respective best efforts to comply with, and will each refrain from taking any action that would impede compliance with, all Legal Requirements, and as promptly as practicable after the date hereof, each of the Company and the Purchasers will make all filings, notices, petitions, statements, registrations, submissions of information, application or submission of other documents required by any governmental entity in connection with this Agreement and the transactions contemplated hereby, including, without limitation: any filing necessary to obtain any consent or approval of any third party or governmental entity and any filings required under the Securities Act, the Exchange Act, any applicable state or securities or "blue sky" laws and the securities laws of any foreign country, any applicable securities exchange or any other Legal Requirements relating to this Agreement and the transactions contemplated hereby. In furtherance and not in limitation of the foregoing, promptly upon receipt of the approval of its stockholders and Existing Debentureholders of the Charter Amendment, the Company will file the Charter Amendment with the New York Secretary of State and with any other applicable governmental entity. Each of the Company and the Purchasers will cause all documents that it is responsible for filing with any governmental entity under this Section 19.1(a) to comply in all respects with all applicable Legal Requirements. The Company and the Purchasers each will promptly supply the other with any information which may be required in order to effectuate any filings or application pursuant to this
Section 19.1(a).

(b) The Company will notify Essex, Care Capital and Galen promptly upon the receipt of: (i) any comments from any officials of the SEC or any other governmental entity in connection with any filings made pursuant to this Agreement and (ii) any request by any officials of the SEC or any other governmental entity for amendments or supplements to any filings made

pursuant to, or information provided to comply in all material respects with, any Legal Requirements. Whenever any event occurs that is required to be set forth in an amendment or supplement to any filing made pursuant to Section 19.1(a) or otherwise pursuant to this Agreement, the Company will promptly inform Essex, Care Capital and Galen of such occurrence and will file with the applicable governmental entity such amendment or supplement. Before filing any document, including the Proxy Statement, with the SEC or other governmental entity pursuant to Section 19.1(a) or otherwise pursuant to this Agreement, the Company will provide Essex, Care Capital and Galen and their respective counsel with a copy of the draft document a reasonable time prior to the filing. Essex, Care Capital and Galen and their respective counsel will have an adequate and reasonable opportunity to review, comment upon and consent to the document prior to such document being filed by the Company with the SEC or other governmental entity.

(c) Each of the parties to this Agreement agrees to use its best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement, including using its best efforts to accomplish the following: (i) the taking of its best efforts necessary to cause the conditions precedent set forth in Articles VI and VII to be satisfied, (ii) the obtaining of all necessary actions or nonactions, waivers, consents, approvals, orders and authorizations from governmental entities and the making of all necessary registrations, declarations and filings (including registrations, declarations and filings with governmental entities, if any) and the taking of its best efforts as may be necessary to avoid any suit, claim, action, investigation or proceeding by any governmental entity, (iii) the obtaining of all necessary consents, approvals or waivers from third parties, (iv) the defending of any suits, claims, actions, investigations or proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including seeking to have any stay or temporary restraining order entered by any court or other governmental entity vacated or reversed, and (v) the execution, delivery and filing of any additional documents, instruments and certificates necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, this Agreement. In connection with and without limiting the foregoing, the Company and its Board of Directors will, if any takeover statute or similar Legal Requirement is or becomes applicable to this Agreement or the transactions contemplated by this Agreement, use its best efforts to ensure that the transactions contemplated by this Agreement may be consummated as promptly as practicable on the terms contemplated by this Agreement and otherwise to minimize the effect of such Legal Requirement on this Agreement and the transactions contemplated hereby.

19.2. GOVERNING LAW

This Agreement and the rights of the parties hereunder shall be governed in all respects by the laws of the State of New York wherein the terms of this Agreement were negotiated, excluding to the greatest extent permitted by law any rule of law that would cause the application of the laws of any jurisdiction other than the State of New York.

19.3. SURVIVAL OF REPRESENTATIONS

Subject to the terms of this Agreement, the representations, warranties, covenants and agreements contained, in the Transaction Documents and in any agreements, certificates or other instruments delivered pursuant thereto shall survive (a) any investigation made by or on behalf the Purchasers and (b) the Closing until the date that is 24 months after the Closing Date.

19.4. SUCCESSORS AND ASSIGNS

Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon and enforceable by and against, the parties hereto and their respective successors, assigns, heirs, executors and administrators. No party may assign any of its rights hereunder without the prior written consent of the other parties; provided, however, that any Purchaser may assign any of its rights under any of the Transaction Documents to (a) any Affiliate of such Purchaser or (b) any Person to whom such Purchaser shall Transfer any Debentures in accordance with the terms of Article XVIII; provided further, that notwithstanding anything herein or in the Transaction Documents to the contrary, no opinion of counsel shall be necessary for a transfer or assignment of the Debentures or any rights under any of the Transaction Documents (except for the Watson Warrant) by a Purchaser that is a partnership, corporation or limited liability company to any general partner, limited partner, retired partner, stockholder, member, retired member, officer, director or Affiliates of such Purchaser, or the members or retired members of the foregoing, as applicable, or the estates, beneficiaries and family members of any such general partner, limited partners, retired partners, stockholders, members, retired members, officers, directors and Affiliates and any trusts for the benefit of any of the foregoing Persons, provided, that in each case the transferee will be subject to the applicable terms of the Transaction Documents to the same extent as if such transferee were an original Purchaser hereunder.

19.5. ENTIRE AGREEMENT

This Agreement (including the Exhibits and Schedules hereto), the other Transaction Documents and any other documents delivered pursuant hereto and simultaneously herewith constitute the full and entire understanding and agreement between the parties with regard to the subject matter hereof and thereof.

19.6. NOTICES

All notices, demands or other communications given hereunder shall be in writing and shall be sufficiently given if transmitted by facsimile or delivered either personally or by a nationally recognized courier service marked for next business day delivery or sent in a sealed envelope by first class mail, postage prepaid and either registered or certified, return receipt requested, addressed as follows:

(a) if to the Company:

Halsey Drug Co., Inc. 695 N. Perryville Road Rockford, Illinois 61107 Attention: Mr. Andrew D. Reddick President and Chief Executive Officer Facsimile: (815) 399-9710

(b) if to a Purchaser, to the address set forth on the signature page hereto, or to such other address with respect to any party hereto as such party may from time to time notify (as provided above) the other parties hereto. Any such notice, demand or communication shall be deemed to have been given (i) on the date of delivery, if delivered personally, (ii) on the date of facsimile transmission, receipt confirmed, (iii) one business day after delivery to a nationally recognized overnight courier service, if marked for next day delivery, or (iv) five business days after the date of mailing, if mailed.

(c) Copies of any notice, demand or communication given to the Company shall also be delivered to St. John & Wayne, L.L.C., Two Penn Plaza East, Newark, New Jersey, 07105-2249 Attn.: John P. Reilly, Esq., or such other address as may be directed.

19.7. DELAYS, OMISSIONS OR WAIVERS

No delay or omission to exercise any right, power or remedy accruing to any Holder of the Debentures upon any breach or default of the Company under this Agreement shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence, therein, or of or in any similar breach or default thereafter occurring. Any permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. Notwithstanding anything set forth herein or in any Transaction Document, if the consent of or the waiver by any 2004 Holder is needed or otherwise desirable under any Transaction Document and the Company, or any Affiliate thereof, pays or other gives consideration to any 2004 Holder, or an Affiliate thereof, for such consent or waiver the Company shall offer the same to all other 2004 Holders.

19.8. INDEPENDENCE OF COVENANTS AND REPRESENTATIONS AND WARRANTIES

All covenants hereunder shall be given independent effect so that if a certain action or condition constitutes a default under a certain covenant, the fact that such action or condition is permitted by another covenant shall not affect the occurrence of such default. In addition, all representations and warranties hereunder shall be given independent effect so that if a particular representation or warranty proves to be incorrect or is breached, the fact that another representation or warranty concerning the same or similar subject matter is correct or is not

breached will not affect the incorrectness of or a breach of a representation and warranty hereunder.

19.9. RIGHTS AND OBLIGATIONS; SEVERABILITY

Unless otherwise expressly provided herein, each Purchaser's rights and obligations hereunder are several rights and obligations, not rights and obligations jointly held with any other Person. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

19.10. AGENT'S FEES

(a) The Company hereby (i) represents and warrants that the Company has not retained a finder or broker in connection with the transactions contemplated by this Agreement and (ii) agrees to indemnify and to hold the Purchasers harmless of and from any liability for commission or compensation in the nature of an agent's fee to any broker or other Person, and the costs and expenses of defending against such liability or asserted liability, including, without limitation, reasonable attorney's fees, arising from any act by the Company or any of the Company's employees or representatives.

(b) Each Purchaser (i) severally represents and warrants that it has retained no finder or broker in connection with the transactions contemplated by this Agreement and (ii) hereby severally agrees to indemnify and to hold the Company harmless from any liability for any commission or compensation in the nature of an agent's or finder's fee to any broker or other Person (and the costs, including reasonable legal fees, and expenses of defending against such liability or asserted liability) for which such Purchaser, or any of its employees or representatives, are responsible.

19.11. EXPENSES

(a) The Company shall bear its own expenses and legal fees incurred on its behalf with respect to the negotiation, execution and consummation of the transactions contemplated by this Agreement, and, subject to
Section 19.11(b), the Company will reimburse the Purchasers for all of the legal fees and expenses incurred by Baker & McKenzie on behalf of the Purchasers and their Affiliates with respect to the negotiation, execution and consummation of the transactions contemplated by this Agreement and the transactions contemplated hereby. In addition, subject to Section 19.11(b), the Company will reimburse each of Care Capital and Galen for up to $20,000 for legal fees and expenses which such Purchasers respectively incur with respect to the negotiation, execution and consummation of the transactions contemplated by this Agreement and the transactions contemplated hereby. Counsel for each of Essex, Care Capital and Galen shall deliver to the Company in advance of the Closing an invoice for their respective fees and expenses. Such reimbursement shall be paid on the Closing Date.

(b) If the transactions contemplated by this Agreement are not consummated, then each party shall bear its own expenses and legal fees incurred on its behalf with respect to the negotiation, execution and consummation of the transactions contemplated by this Agreement.

(c) The Company also agrees to reimburse each Purchaser for all reasonable legal fees and expenses subsequently incurred by the Purchaser and its Affiliates in connection with (i) the negotiation, execution and consummation of any amendment, waiver or consent with respect to any agreement to which the Company and the Purchaser are parties; provided, that such waiver, amendment or consent (A) is requested by the Company or (B) is required by the terms of the agreement or is required as a result of any action or inaction of the Company in violation of any such agreement, and (ii) the review of and cooperation with respect to the Proxy Statement and the conversion of the Debentures.

19.12. JURISDICTION

(a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or United States Federal court sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or any of the other Transaction Documents to which it is a party or to whose benefit it is entitled, or for recognition or enforcement of any judgment, and each of the parties hereto irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the fullest extent permitted by law, in such United States Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the right that any party may otherwise have to bring any action or proceeding relating to this Agreement or any of the other Transaction Documents in the courts of any other jurisdiction.

(b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or in relation to this Agreement or any other Transaction Document to which it is a party in any such New York State or United States Federal court sitting in New York City. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

19.13. WAIVER OF JURY TRIAL

EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY TRANSACTION DOCUMENT OR THE ACTIONS OF ANY PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.

19.14. CONFIDENTIALITY

(a) Each of the Purchasers hereby agrees to keep (and to cause its Affiliates, employees, agents, attorneys, accountants and other professional advisors to keep) confidential the confidential information provided to it by or on behalf of the Company or its Subsidiaries pursuant to or in connection with the Agreement or any other Transaction Document, provided

that, such information may be disclosed (i) solely in connection with the performance of the transactions contemplated by this Agreement and any other Transaction Document to (A) its Affiliates, directors, officers and employees who have a need to know such information and its agents, attorneys, accountants and other professional advisors or (B) the other Purchasers, (ii) in response to any order of any court or other governmental or administrative body or agency or as may be required by any law binding upon any of the Purchasers, (iii) in connection with the exercise of any remedies under any Transaction Document or the enforcement of rights hereunder and thereunder, (iv) with the consent of the Company or (v) to the extent such information (A) is on the date hereof, or at or before the time such disclosure becomes, publicly available other than as a result of a breach by such disclosing Person of the obligation set forth in this Agreement or (B) at or before the time of such disclosure becomes available to any Purchaser on a nonconfidential basis from a source other than the Company or its Subsidiaries, which source is not known to the recipient of such information to have breached a confidentiality agreement with the Company or its Subsidiaries in respect of such information.

(b) Each Purchaser hereby agrees that in the event such Purchaser is requested or required other than by applicable law (by interrogatory, request for information or documents, subpoena, deposition, civil investigative demand or other process) to disclose any information pursuant to Section 19.14(a)(ii), such Purchaser will, except to the extent such notice would cause such Purchaser to be in violation of law, provide the Company with prompt notice of any such request or requirement so that the Company may seek an appropriate protective order or other similar assurance to prevent disclosure of such information or waive compliance with the provisions of this Section 19.14. Such Purchaser may not oppose action by the Company to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded such information, provided that such Purchaser may oppose the Company's action to obtain an appropriate protective order or other reliable assurance in the event that, in connection with any action, suit or other legal or equitable proceeding (including any bankruptcy proceeding), such Purchaser reasonably believes that the failure to publicly disclose such information would materially and adversely affect such Purchaser's ability to protect or exercise its rights and remedies hereunder or under any other Transaction Document.

(c) The Purchasers may also disclose, subject to their compliance with the requirements of Section 19.14(b), such information to the extent the Purchasers reasonably believe it is appropriate to in connection with any action, suit or other legal or equitable proceeding (including any bankruptcy proceeding) to protect or otherwise exercise their rights and remedies hereunder or under any other Transaction Document in any legal or equitable proceeding.

(d) In furtherance to the foregoing, each of the Purchasers agrees that its right to request any information pursuant to Section 9.2(g) or to avail itself of the provisions of Section 9.6(b) shall be conditioned on its continuing compliance with the requirements of this Section 19.14.

19.15. TITLES AND SUBTITLES

The titles of the articles, sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

19.16. COUNTERPARTS

This Agreement may be executed in any number of counterparts, including by facsimile copy, each of which shall be deemed an original, but all of which together shall constitute one instrument.

19.17. TERMINATION OF CERTAIN PROVISIONS

Articles VIII, IX, X, XII, XV, XVI, XVII and XVIII of this Agreement shall terminate and be of no further force or effect immediately upon the conversion of the Debentures in accordance with their terms into Series A Preferred upon the Conversion Event.

ARTICLE XX

CERTAIN DEFINED TERMS

For purposes of this Agreement, the following terms have the meanings indicated (unless otherwise expressly provided herein):

"412 Plan" means a Plan that is subject to Section 412 of the Code.

"1940 Act" means the Investment Company Act of 1940, as amended, and any applicable rules and regulations thereunder, and any successor to such statute, rules or regulations. Any reference herein to a specific section, rule or regulation of the 1940 Act shall be deemed to include any corresponding provisions of future law.

"1998 Debentures" means the 5% convertible secured debentures due March 31, 2006 (as such debentures may be supplemented, amended, or otherwise modified from time to time) issued pursuant to that certain Debenture and Warrant Purchase Agreement dated March 10, 1998 between the Company and the purchasers listed on the signature page thereto.

"1999 Debentures" means the 5% convertible secured debentures due March 31, 2006 (as such debentures may be supplemented, amended, or otherwise modified from time to time) issued pursuant to that certain Debenture and Warrant Purchase Agreement dated May 26, 1999 between the Company and the purchasers listed on the signature page thereto.

"2002 Debentures" means the 5% convertible secured debentures due March 31, 2006 (as such debentures may be supplemented, amended, or otherwise modified from time to time) issued pursuant to that certain Debenture Purchase Agreement dated December 20, 2002 between the Company and the purchasers listed on the signature page thereto, other than the 2003 Debentures.

"2003 Debentures" means the 5% convertible secured debentures due March 31, 2006 (as such debentures may be supplemented, amended, or otherwise modified from time to time) purchased pursuant to that certain Debenture Purchase Agreement dated December 20, 2002 between the Company and the purchasers listed on the signature page thereto in accordance with certain Joinder Agreements dated June 16, 2003, July 1, 2003, July 15, 2003, August 5, 2003, August 19, 2003, September 5, 2003 and October 7, 2003.

"2004 Holders" has the meaning set forth in Section 10.15 of this Agreement.

"Accredited Investor" has the meaning specified in Rule 501(a) of Regulation D promulgated pursuant to the Securities Act.

"Additional Investor" has the meaning specified in Section 3.1 of this Agreement.

"Affiliate" has the meaning specified in Rule 501(b) under the Securities Act.

"AMEX" means the American Stock Exchange.

"Approved Accounting Firm" means any firm of independent certified public accountants reasonably acceptable to the Purchasers.

"ARCOS" means the Automation of Reports and Consolidated Orders System which monitors the flow of DEA controlled substances from their point of manufacture to point of sale or distribution.

"Arm's Length" means a transaction or negotiation in which each party is completely independent of the other, seeks to obtain terms which are most favorable to it and has no economic or other interest in making concessions to the other party.

"Board of Directors" means the board of directors of the Company.

"Bridge Lenders" means, collectively, Essex, Care Capital and the Galen Entities pursuant to the Bridge Notes.

"Bridge Lenders' Consent" means the consent of the Bridge Lenders to surrender and convert the Bridge Notes in exchange for and into Debentures in form and substance reasonably acceptable to the Purchasers.

"Bridge Notes" means the 2003 Debentures issued by the Company to the Bridge Lenders thereto in accordance with certain Joinder Agreements dated November 2, 2003, December 5, 2003 and December 29, 2003.

"Change of Control" means the occurrence of any of the following: (a) the consummation of any transaction the result of which is that any Person or group (as such term is used in Section 13(d)(3) of the Exchange Act), other than Galen or any Affiliate thereof or any group comprised of any of the foregoing, owns, directly or indirectly, 51% of the Common Equity of the Company, (b) the Company consolidates with, or merges with or into, another

Person (other than a direct or indirect wholly owned Subsidiary) or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of the Company's assets or the assets of the Company and its Subsidiaries taken as a whole to any Person, or any Person consolidates with, or merges with or into, the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company, as the case may be, is converted into or exchanged for cash, securities or other property, other than any such transaction where the outstanding Voting Stock of the Company, as the case may be, is converted into or exchanged for Voting Stock of the surviving or transferee corporation and the beneficial owners of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the surviving or transferee corporation immediately after such transaction, (c) the Company, either individually or in conjunction with one or more Subsidiaries sells, assigns, conveys, transfers, leases or otherwise disposes of, or the Subsidiaries sell, assign, convey, transfer, lease or otherwise dispose of, all or substantially all of the properties and assets of the Company and its Subsidiaries, taken as a whole (either in one transaction or a series of related transactions), including capital stock of the Subsidiaries, to any Person (other than the Company or a wholly owned Subsidiary of the Company), or (d) during any two year period commencing subsequent to the date of this Agreement, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved by the directors then still in office) who were either directors at the beginning of such period or whose election or nomination for election was previously so approved cease for any reason to constitute a majority of the Board of Directors then in office; provided, however, that a Person shall not be deemed to have ceased being a director for such purpose if such Person shall have resigned or died or if the involuntary removal of such Person was made at the direction of Persons holding a majority in principal amount of the outstanding Debentures. For purposes of this definition, (i) the term "Common Equity" of the Company means all capital stock of the Company that is generally entitled to vote in the election of members of the Board of Directors and (ii) the term "Voting Stock" of the Company means securities of any class of capital stock of the Company entitling the holders thereof to vote in the election of members of the Board of Directors.

"Charter Amendment" means the amended and restated Certificate of Incorporation of the Company in the form attached to this Agreement as Exhibit D.

"Closing" means the closing of the purchase and sale of the Debentures contemplated by Section 2.1 of this Agreement to take place on the date of this Agreement. The date and time of the Closing are hereinafter referred to as the "Closing Date."

"Code" means the Internal Revenue Code of 1986, as amended, and any applicable rules and regulations thereunder, and any successor to such statute, rules or regulations. Any reference herein to a specific section, rule or regulation of the Code shall be deemed to include any corresponding provisions of future law.

"Common Stock" means the common stock, $0.01 par value, of the Company (now or hereafter issued).

"Company Debenture Collateral" has the meaning specified in Section 2.2.

"Company General Security Agreement" means that certain Company General Security Agreement of even date herewith by and between the Company and Galen, as agent for the Purchasers, a copy of which is attached to this Agreement as Exhibit E, as such agreement may be supplemented, amended or otherwise modified from time to time in accordance with its terms.

"Company Refusal Period" has the meaning specified in Section 18.3 of this Agreement.

"Company Reports" means, collectively, (a) the Company's Annual Reports on Form 10-K for the fiscal years ended December 31, 2002, and (b) the Company's Quarterly Report on Form 10-Q for the nine months ended September 30, 2003.

"Company Waiver Period" has the meaning specified in Section 18.3 of this Agreement.

"Conversion Agreement" means that certain Debenture Conversion Agreement of even date herewith by and among the Company, Purchasers and the holders of the Existing Debentures, a copy of which is attached to this Agreement as Exhibit F, as such agreement may be supplemented, amended or otherwise modified from time to time in accordance with its terms.

"Conversion Event" means the conversion of the Existing Debentures and Debentures into Preferred Stock immediately upon the filing by the Company of the documents necessary to create the Preferred Stock.

"Co-Sale Right" has the meaning specified in Section 18.4 of this Agreement.

"Co-Sale Seller" has the meaning specified in Section 18.4 of this Agreement.

"CSA" means Controlled Substances Act, as amended, and any applicable rules and regulations thereunder, and any successor to such statute, rules or regulations. Any reference herein to a specific section, rule or regulation of the CSA shall be deemed to include any corresponding provisions of future law.

"D&O Insurance" means "directors and officers" insurance.

"DEA" means the United States Drug Enforcement Administration.

"Debentures" has the meaning specified in the Preliminary Statements.

"Debenture and Warrant Dilution Waiver" means the consent of the holders of the Existing Debentures to the waiver of the anti-dilution provisions contained in certain Equity Securities held by the holders of the Existing Debentures in form and substance reasonably acceptable to the Purchasers.

"Default Notice" has the meaning specified in Section 12.1(c) of this Agreement.

"Designee" means any member of the Board of Directors designated by the Purchasers as provided in Section 9.7 of this Agreement

"Equity Securities" means, collectively, (a) any shares of Common Stock, (b) any shares of Preferred Stock, (c) any other equity security of the Company, (d) any debt security of the Company which by its terms is convertible into or exchangeable for, with or without consideration, any equity security of the Company, (e) any security of the Company that is a combination of debt and equity, or (f) any option, warrant or other right to subscribe for, purchase or otherwise acquire any equity security or any such debt security of the Company.

"ERISA" means the Employee Retirement Income Security Act of 1974, as amended and any applicable rules and regulations thereunder, and any successor to such statute, rules or regulations. Any reference herein to a specific section, rule or regulation of ERISA shall be deemed to include any corresponding provisions of future law.

"ERISA Affiliates" means (a) any corporation which at any time on or before the Closing Date is or was a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Company, its Subsidiaries, or any ERISA Affiliate; (b) any partnership, trade or business (whether or not incorporated) which at any time on or before the Closing Date is or was under common control (within the meaning of Section 414(c) of the Code) with the Company, its Subsidiaries, or any ERISA Affiliate; and (c) any entity which at any time on or before the Closing Date is or was a member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as the Company, its Subsidiaries or any ERISA Affiliate, or any corporation described in clause (a) or any partnership, trade or business described in clause (b) of this paragraph.

"Event of Default" has the meaning specified in Section 12.1 of this Agreement.

"Exchange Act" means the Securities Exchange Act of 1934, as amended, and any applicable rules and regulations thereunder, and any successor to such statute, rules or regulations. Any reference herein to a specific section, rule or regulation of the Exchange Act shall be deemed to include any corresponding provisions of future law.

"Excluded Securities" has the meaning specified in Section 17.1(f) of this Agreement.

"Existing 1998 Debentureholders" means the holders of the 1998 Debentures.

"Existing 2002 Debentureholders" means the holders of the 2002 Debentures.

"Existing Debenture Amendments" means amendments to each of the Debenture and Warrant Purchase Agreements pursuant to which the Existing Debentures were issued, duly executed by the Company and each holder of the Existing Debentures.

"Existing Debentureholders" means the holders of the Existing Debentures.

"Existing Debentures" means, collectively, the 1998 Debentures, the 1999 Debentures, the 2002 Debentures, and the 2003 Debentures, as such debentures may be supplemented, amended or otherwise modified from time to time, including, without limitation, by the Existing Debenture Amendments.

"Existing Debentureholders Consent" means the consent of the Existing Debentureholders to waive the Indebtedness, lien, registration rights, and charter amendment restrictions contained in each of the Debenture and Warrant Purchase Agreements pursuant to which the Existing Debentures were issued.

"Existing Debentureholders Waiver" means the Consent, Waiver and Forbearance under the Debentureholders Agreement to be signed by each of the Existing Debentureholders prior to the Closing Date.

"FDA" means the United States Food and Drug Administration.

"FDC Act" means the federal Food, Drug, and Cosmetic Act, as amended, and any applicable rules and regulations thereunder, and any successor to such statute, rules or regulations. Any reference herein to a specific section, rule or regulation of the FDC Act shall be deemed to include any corresponding provisions of future law.

"First Refusal Holders" means, collectively, (a) the holders of the Debentures, (b) the Existing 1998 Debentureholders, (c) the Existing 2002 Debentureholders, and (d) the Old Common Holders.

"GAAP" means generally accepted accounting principles in the United States.

"Galen Entities" means, collectively, (a) Galen, (b) Galen Partners International III, L.P., and (c) Galen Employee Fund III, L.P.

"Guaranties" means the Continuing Unconditional Secured Guaranties of each of the Guarantors substantially in the form of Exhibit G attached hereto.

"Guarantor Debenture Collateral" has the meaning specified in Section 2.4 of this Agreement.

"Guarantors" means Houba, Inc. and Axiom Pharmaceutical Corporation.

"Guarantors Security Agreement" means that certain Guarantors General Security Agreement of even date herewith by and among the Guarantors and Galen, as agent for the Purchasers, a copy of which is attached to this Agreement as Exhibit H, as such agreement may be supplemented, amended or otherwise modified from time to time in accordance with its terms.

"Holder Notice" has the meaning specified in Section 18.3 of this Agreement.

"Holder Refusal Period" has the meaning specified in Section 18.3 of this Agreement.

"Holder's Portion" means, for purposes of Section 18.4 of this Agreement, an amount determined by multiplying, (a) in the case of a sale of shares of the Preferred Stock or Common Stock by the Selling Security Holder, the number of shares of Preferred Stock or Common Stock equal to the shares of Preferred Stock or Common Stock proposed to be sold in the Transfer, multiplied by a fraction, (i) the numerator of which shall be the number of shares of Common

Stock owned by a Holder (inclusive of all Common Stock underlying the Debentures or Preferred Stock) and (ii) the denominator of which shall be the sum of (1) the Company's outstanding shares of Common Stock, plus (2) the Common Stock underlying the Debentures, the Existing Debentures and the Preferred Stock, and
(b) in the case of the proposed sale of Existing Debentures or Debentures by such Selling Security Holder, the principal amount of the Existing Debentures or Debentures proposed to be sold in the Transfer multiplied by a fraction, the numerator of which shall be the aggregate principal amount of the Existing Debentures and Debentures owned by a Holder and the denominator of which shall be the aggregate principal amount of the Company's outstanding Existing Debentures and Debentures.

"Holders" shall mean the Purchasers or any Person to whom a Purchaser or transferee of a Purchaser has assigned, transferred or otherwise conveyed any Debenture.

"Holder Waiver Period" has the meaning specified in Section 18.3 of this Agreement.

"Immaterial Subsidiary" means The Medi-Gum Corporation.

"Indebtedness" means and includes (a) all items which would be included on the liability side of a balance sheet (but also shall include any "off-balance sheet financings") of the Company (or a Subsidiary) as of the date on which indebtedness is to be determined, excluding capital stock, surplus, capital and earned surplus reserves, which, in effect, were appropriations of surplus or offsets to asset values (other than reserves in respect of obligations, the amount, applicability or validity of which is, at such date, being contested in good faith by the Company or a Subsidiary, as applicable), deferred credits of amounts representing capitalization of leases; (b) the full amount of all indebtedness of others guaranteed or endorsed (otherwise than for the purpose of collection) by the Company (or a Subsidiary) for which the Company (or a Subsidiary) is obligated, contingently or otherwise, to purchase or otherwise acquire, or for the payment or purchase of which the Company (or a Subsidiary) has agreed, contingently or otherwise, to advance or supply funds, or with respect to which the Company (or a Subsidiary) is contingently liable, including, without limitation, indebtedness for borrowed money and indebtedness guaranteed or supported indirectly by the Company (or a Subsidiary) through an agreement, contingent or otherwise (i) to purchase the indebtedness, or (ii) to purchase, sell, transport or lease (as lessee or lessor) property, or to purchase or sell services at prices or in amounts designed to enable the debtor to make payment of the indebtedness or to assure the owner of the indebtedness against loss, or (iii) to supply funds to or in any other manner invest in the debtor; and (c) indebtedness secured by any mortgage, pledge, security interest or lien whether or not the indebtedness secured thereby shall have been assumed. "Indebtedness" will not mean and include any indebtedness (1) in respect to which monies sufficient to pay and discharge the same in full shall have been deposited with a depositary, agency or trustee in trust for the payment thereof, or (2) as to which the Company (or Subsidiary) is in good faith contesting, provided that an adequate reserve therefore has been set up on the books of the Company or any of its consolidated Subsidiaries.

"Independent Committee" has the meaning specified in Section 6.14 of this Agreement.

"Intellectual Property Rights" means any and all patents, patent applications, trademarks, copyrights, trademark registrations and applications therefore, patent, trademark or trade name

licenses, service marks, domain names, contracts with employees or others relating in whole or in part to disclosure, assignment or patenting of any inventions, discoveries, improvements, processes, formulae or other know-how, and all patent, trademark or trade names or copyright licenses which are in force.

"Investors Rights Agreement" means that certain Investors Rights Agreement of even date herewith by and among the Company, Purchasers and the holders of the Existing Debentures, a copy of which is attached to this Agreement as Exhibit I, as such agreement may be supplemented, amended or otherwise modified from time to time in accordance with its terms.

"IRS" means the Internal Revenue Service.

"Joinder Agreement" means a Joinder Agreement in the form attached to this Agreement as Exhibit J, as such agreement may be supplemented, amended or otherwise modified from time to time in accordance with its terms.

"Leased Property" has the meaning specified in Section 4.20 of this Agreement.

"Leases" any lease and sublease agreements, as amended to date, relating to the Owned Property and the Leased Property.

"Legal Requirements" means any federal, state, local, municipal, foreign or other law, statute, constitution, principle of common law, resolution, ordinance, code, order, edict, judgment, decree, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any governmental entity.

"Liquidation Event" has the meaning specified in the Charter Amendment.

"Losses" means any claims, losses, damages, liabilities (or actions in respect thereof), obligations, penalties, awards, judgments, expenses (including, without limitation, reasonable fees and expenses of counsel) or disbursements.

"Material Adverse Effect" means (a) a material adverse effect on, or change in, the business, prospects, properties, operations, condition (financial or other) or results of operations of the Company and its Subsidiaries, taken as a whole, or (b) a material adverse effect on (i) the ability of the Company or any of the Guarantors to perform its respective obligations or (ii) the rights or remedies of any Purchaser under any Transaction Document.

"Minimum Offering Threshold" has the meaning specified in Section 17.1(a) of this Agreement.

"NASDAQ" means the National Association of Securities Dealers Automated Quotation System.

"New York Act" means the New York Business Corporation Law, as amended, and any applicable rules and regulations thereunder, and any successor to such statute, rules or

regulations. Any reference herein to a specific section, rule or regulation of the New York Act shall be deemed to include any corresponding provisions of future law.

"Noteholder Agreement" means that certain Noteholder Agreement of even date herewith by and among the Company and the other parties thereto, as such agreement may be supplemented, amended or otherwise modified from time to time in accordance with its terms.

"Notice of Acceptance" has the meaning specified in Section 17.1(c) of this Agreement.

"Offer" has the meaning specified in Section 17.1(a) of this Agreement.

"Offered Price" has the meaning specified in Section 18.2 of this Agreement.

"Offered Securities" means the number of Restricted Securities set forth in a Seller Notice which a Holder proposes to Transfer.

"Old Common Holders" means the holders of shares of Preferred Stock or Common Stock issued upon the conversion of the Existing 1998 Debentures or Existing 2002 Debentures (provided any Existing 1998 Debentures and Existing 2002 Debentures remain outstanding and the shares of Preferred Stock or Common Stock received upon conversion have not been sold, transferred or otherwise disposed of).

"Owned Property" has the meaning specified in Section 4.20 of this Agreement.

"PBGC" means the Pension Benefit Guaranty Corporation.

"PCB" means polychlorinated biphenyls.

"Permitted Liens" means the liens listed in Section 10.3(l) of the Schedule of Exceptions.

"Permitted Transfers" means, collectively, (a) any Transfer of Restricted Securities by a Holder who is an individual to such Holder's spouse, lineal descendant or antecedent, father, mother, brother or sister of such Holder, the adopted child or adopted grandchild of such Holder, or the spouse of any child, adopted child, grandchild or adopted grandchild of such Holder, or to a trust or trusts or other entity (including family limited partnerships or family limited liability companies) for the exclusive benefit of or exclusively controlled by such Holder or such Holder's family members as described in this clause (a), or Transfers of Restricted Securities by the Holder by devise or descent so long as such Transfer complies with Section 18.1 of this Agreement;
(b) any Transfer of Restricted Securities by a Holder made pursuant to (i) a merger or consolidation of the Company with or into another corporation or corporations, or (ii) the winding up and dissolution of the Company; and (c) any Transfer of Restricted Securities by a Holder which is an entity to its Affiliates, partners, limited partners, members or stockholders or any Transfers to a family member or trust as described in clause (a) above of such partner, limited partner, member or stockholder so long as such Transfer complies with
Section 18.1 of this Agreement.

"Person" means any individual, corporation, limited liability company, partnership, association, trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

"Plan" has the meaning specified in Section 4.18(a) of this Agreement.

"Preferred Stock" means the Series A Preferred, the Series B Preferred, the Series C-1 Preferred, the Series C-2 Preferred and the Series C-3 Preferred.

"Proposed Transferee" has the meaning specified in Section 18.2 of this Agreement.

"Proxy Statement" has the meaning specified in Section 9.15 of this Agreement.

"Purchase Right" has the meaning specified in Section 18.3 of this Agreement.

"Refused Securities" has the meaning specified in Section 17.1(d) of this Agreement.

"Registration Rights Agreement" means that certain Amended and Restated Registration Rights Agreement dated the date of this Agreement by and among the Company, Watson, the holders of the 1998 Debentures, the holders of the 1999 Debentures, the holders of the 2002 Debentures, and the other parties listed on Schedule 1 thereto, as such agreement may be supplemented, amended or otherwise modified from time to time in accordance with its terms, including, without limitation, by the amendment to such agreement of even date herewith.

The terms "register," "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement.

"Restricted Securities" means any shares of the Preferred Stock or Common Stock or any Existing Debentures or Debentures owned by a Holder.

"Schedule of Exceptions" means the Schedule of Exceptions attached to this Agreement as Exhibit K.

"SEC" means the Securities and Exchange Commission.

"SEC Reports" means any reports, statements, releases or other documents required to be filed by the Company with the SEC under the Exchange Act.

"Securities Act" means the Securities Act of 1933, as amended, and any applicable rules and regulations thereunder, and any successor to such statute, rules or regulations. Any reference herein to a specific section, rule or regulation of the Securities Act shall be deemed to include any corresponding provisions of future law.

"Security Interest Termination Date" means the first date on which each of the following events shall have occurred: (a) the occurrence of the Conversion Event, and (b) Galen, acting as agent for the Purchasers under the applicable Transaction Documents, shall have delivered

written notification to the Company and the Guarantors of the satisfaction of the condition in subsection (a) above.

"Seller Notice" has the meaning specified in Section 18.2 of this Agreement.

"Selling Security Holder" has the meaning specified in Section 18.2 of this Agreement.

"Senior Notes" means that certain Amended and Restated Note in the principal amount of $5,000,000 issued by the Company as of the date hereof pursuant to the Watson Term Loan, and any other promissory notes issued by the Company pursuant to the Watson Term Loan from time to time.

"Series A Preferred" means the Series A Convertible Preferred Stock, $.01 par value, of the Company (now or hereafter issued).

"Series B Preferred" means the Series B Convertible Preferred Stock, $.01 par value, of the Company (now or hereafter issued).

"Series C-1 Preferred" means the Series C-1 Convertible Preferred Stock, $.01 par value, of the Company (now or hereafter issued).

"Series C-2 Preferred" means the Series C-2 Convertible Preferred Stock, $.01 par value, of the Company (now or hereafter issued).

"Series C-3 Preferred" means the Series C-3 Convertible Preferred Stock, $.01 par value, of the Company (now or hereafter issued).

"Shares" means the shares of Series A Preferred and Common Stock which may be issued upon conversion of all or a portion of the principal amount of the Debentures. The term "Shares" does not include any other shares of Series A Preferred, Common Stock or other capital stock of the Company.

"Solvent" means, with respect to each Guarantor on a particular date, that on and as of such date (a) the fair market value of the assets of such Guarantor is greater than the total amount of liabilities (including, without limitations, contingent liabilities) of such Guarantor, (b) the present fair saleable value of the assets of such Guarantor is greater than the amount that will be required to pay the probable liabilities of such Guarantor on its debts as they become absolute and matured, (c) such Guarantor is able to realize upon its assets, through sale, use or borrowing, and is able to pay its debts and other liabilities, including contingent obligations, as they mature, and (d) such Guarantor does not have unreasonably small capital.

"Stockholders Meeting" means the special meeting of the Company's stockholders and Existing Debentureholders to approve the Charter Amendment.

"Stockholders Meeting Date" means the date of the Stockholders Meeting.

"Stock Pledge Agreement" means the Stock Pledge Agreement substantially in the form attached to this Agreement as Exhibit L hereto, as supplemented, amended or otherwise modified from time to time in accordance with its terms.

"Subordination Agreement" means that certain Subordination Agreement of even date herewith by and among the Company, the Purchasers, the holders of the Existing Debentures and certain other parties signatory thereto, a copy of which is attached to this Agreement as Exhibit M, as supplemented, amended or otherwise modified from time to time in accordance with its terms.

"Subsidiary" means any entity in which the Company owns securities having a majority of the voting power in the election of directors or persons serving equivalent functions.

"Term Sheet" means that certain Confidential Private Place Term Sheet dated January 10, 2004 prepared by the Company and delivered to the Purchasers.

"Termination Date" means the earlier of (a) the 120th day following the date of this Agreement, or (b) the Conversion Event.

"Transaction Documents" means, collectively, (a) this Agreement, (b) the Debentures, (c) the Conversion Agreement, (d) the Charter Amendment, (e) the Investors Rights Agreement, (f) the Voting Agreement, (g) the Registration Rights Agreement; (h) the Subordination Agreement; (i) the Company General Security Agreement, (j) the Guaranties, (k) the Guarantors Security Agreement,
(l) the Stock Pledge Agreement, (m) the Existing Debentureholder Consent, (n) the Existing Debentureholder Waiver, (o) the Debenture and Warrant Dilution Waiver, (p) the Joinder Agreement, (q) the Watson Term Loan, (r) the Senior Notes, (s) the Noteholder Agreement; (t) the Watson Umbrella Agreement, and (u) the Bridge Lenders' Consent.

"Transfer" means and includes any sale, assignment, encumbrance, hypothecation, pledge, conveyance in trust, gift, transfer by bequest, devise or descent, or other transfer or disposition of any kind, including but not limited to transfers to receivers, levying creditors, trustees or receivers in bankruptcy proceedings or general assignees for the benefit of creditors, whether voluntary or by operation of law, directly or indirectly, including, without limitation, Permitted Transfers.

"Unfunded Pension Liability" means, as of any determination date, the amount, if any, by which the present value of all benefit liabilities (as that term is defined in Section 4001(a)(16) of ERISA) of a plan subject to Title IV of ERISA exceeds the fair market value of all assets of such plan, all determined using the actuarial assumptions that would be used by the PBGC in the event of a termination of the plan on such determination date.

"Voting Agreement" means the Voting Agreement in substantially the form attached to this Agreement as Exhibit I, as such agreement may be supplemented, amended or otherwise modified from time to time in accordance with its terms.

"Warrant Holders" means the holders of the Company's Common Stock purchase warrants.

"Watson" means Watson Pharmaceuticals, Inc., a Nevada corporation.

"Watson Umbrella Agreement" means the Umbrella Agreement dated the date of this Agreement by and among the Company, Watson, Essex, Care Capital, the Galen Entities and the other signatories thereto, in form and substance reasonably acceptable to the Purchasers.

"Watson Term Loan" means that certain Term Loan Agreement dated March 29, 2000 by and between the Company and Watson, as such agreement may be supplemented, amended or otherwise modified from time to time in accordance with its terms, including, without limitation, by the amendment to the Watson Term Loan as of the date hereof.

"Withdrawal Liability" has the meaning specified in Section 4201 of
ERISA.

[SIGNATURE PAGES TO FOLLOW]

IN WITNESS WHEREOF, the parties hereto have executed this Debenture and Share Purchase Agreement as of the date first written above.

                                     By:________________________________
                                        Name:
                                        Title:

GALEN PARTNERS III, L.P.                    CARE CAPITAL INVESTMENTS II, LP
By: Claudius, L.L.C., General Partner       By: Care Capital II, LLC, as
610 Fifth Avenue, 5th Fl.                   general partner
New York, New York 10019                    47 Hulfish St., Suite 310
                                            Princeton, NJ 08542

                                            By:_________________________________
___________________________________         Name:  David R. Ramsay
By: Srini Conjeevaram                       Title: Authorized Signatory
Its: General Partner

GALEN PARTNERS INTERNATIONAL, III, L.P.     ESSEX WOODLANDS HEALTH
By: Claudius, L.L.C., General Partner       VENTURES V, L.P.
610 Fifth Avenue, 5th Floor                 190 South LaSalle Street, Suite 2800
New York, New York 10020                    Chicago, IL 60603

___________________________________         ____________________________________
By: Srini Conjeevaram                       By: Immanuel Thangaraj
Its: General Partner                        Its: Managing Director

GALEN EMPLOYEE FUND III, L.P.               DENNIS ADAMS
By: Wesson Enterprises, Inc.                120 Kynlyn Road
610 Fifth Avenue, 5th Floor                 Radnor, Pennsylvania 19312
New York, New York 10020

___________________________________         ____________________________________
By: Bruce F. Wesson
Its: General Partner

MICHAEL WEISBROT                            SUSAN WEISBROT
1136 Rock Creek Road                        1136 Rock Creek Road
Gladwyne, Pennsylvania 19035                Gladwyne, Pennsylvania 19035

___________________________________         ____________________________________

                                       66

PETER STIEGLITZ                             GEORGE E. BOUDREAU
RJ Palmer LLC                               222 Elbow Lane
156 West 56th Street, 5th Floor             Haverford, PA 19041
New York, New York 10019
___________________________________         ___________________________________

JOHN E. HEPPE, JR.
237 W. Montgomery Avenue
Haverford, Pennsylvania 19041

___________________________________

EXHIBIT A

FORM OF DEBENTURE

See attached.

EXHIBIT B

LIST OF PURCHASERS AND

ALLOCATION OF DEBENTURES

See attached.

EXHIBIT C

LEGAL OPINION

See attached.

EXHIBIT D

CHARTER AMENDMENT

See attached.

EXHIBIT E

COMPANY GENERAL SECURITY AGREEMENT

See attached.

EXHIBIT F

CONVERSION AGREEMENT

See attached.

EXHIBIT G

GUARANTY AGREEMENT

See attached.

EXHIBIT H

GUARANTORS SECURITY AGREEMENT

See attached.

EXHIBIT I

INVESTORS RIGHTS AGREEMENT

See attached.

EXHIBIT J

JOINDER AGREEMENT

See attached.

EXHIBIT K

SCHEDULE OF EXCEPTIONS

See attached.

EXHIBIT L

STOCK PLEDGE AGREEMENT

See attached.

EXHIBIT M

SUBORDINATION AGREEMENT

See attached.

EXHIBIT N

VOTING AGREEMENT

See attached.

HALSEY DRUG CO., INC.

$ 14,000,000

CONVERTIBLE SENIOR SECURED DEBENTURE

HALSEY DRUG CO., INC.

DEBENTURE PURCHASE AGREEMENT

DATED AS OF FEBRUARY 6, 2004

EXHIBIT 10.2

DEBENTURE CONVERSION AGREEMENT

THIS DEBENTURE CONVERSION AGREEMENT (this "Agreement") is made as of February 6, 2004, by an among HALSEY DRUG CO., INC., a corporation organized under the laws of the State of New York (the "Company"), and the holders of certain debentures of the Company listed on Schedule I attached hereto (each, a "Holder" and collectively, the "Holders"). Certain capitalized terms used herein are defined in Article I hereto.

PRELIMINARY STATEMENTS

A. Each Holder owns beneficially and of record such debentures of the Company as is set forth opposite its name on Schedule I.

B. The Company and certain Holders are entering into the 2004 Purchase Agreement contemporaneously with the execution and delivery of this Agreement pursuant to which the Company will issue and sell to certain Holders certain 2004 Debentures.

C. As a condition to the consummation of the transactions contemplated by the 2004 Purchase Agreement, the Company and the Holders are entering into this Agreement.

AGREEMENT

In consideration of the mutual covenants contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

ARTICLE I

DEFINITIONS

As used in this Agreement, the following terms have the following respective meanings:

"1998 Collateral Documents" means, collectively, (a) that certain Stock Pledge Agreement dated March 10, 1998 between the Company and Galen Partners III, L.P. (in its capacity as agent) executed in connection with the 1998 Purchase Agreement, (b) that certain Real Estate Mortgage (With Future Advance Clause) dated March 10, 1998 granted by Houba, Inc. to Galen Partners III, L.P. (in its capacity as agent) executed in connection with the 1998 Purchase Agreement, and (c) that certain Deed of Trust With Assignment of Rents dated March 10, 1998 granted by H.R. Cendi Laboratories, Inc. and Cendi Power Products, Inc. to Galen Partners III, L.P. (in its capacity as agent) executed in connection with the 1998 Purchase Agreement, each as amended to date and as they may be supplemented, amended, or otherwise modified from time to time.

"1998 Debentures" means the 5% convertible secured debentures due March 31, 2006 issued pursuant to the 1998 Purchase Agreement (including any debentures issued in satisfaction of interest payments under the 1998 Debentures), each as amended to date and as they may be supplemented, amended, or otherwise modified from time to time.

"1998 Guaranties" means those certain Continuing Unconditional Secured Guaranties dated as of March 10, 1998 by each of Cenci Powder Products, Inc., Halsey Pharmaceuticals, Inc., Houba, Inc., H.R. Cenci Laboratories Inc. and Indiana Fine Chemicals, Inc. executed in connection with the 1998 Purchase Agreement, each as amended to date and as they may be supplemented, amended, or otherwise modified from time to time.

"1998 Guarantors Security Agreement" means that certain Guarantors General Security Agreement dated as of March 10, 1998 by and among Cenci Powder Products, Inc., Halsey Pharmaceuticals, Inc., Houba, Inc., H.R. Cenci Laboratories Inc., Indiana Fine Chemicals, Inc. and the Galen Partners III, L.P. (in its capacity as agent) executed in connection with the 1998 Purchase Agreement, as amended to date and as it may be supplemented, amended, or otherwise modified from time to time.

"1998 Purchase Agreement" means that certain Debenture and Warrant Purchase Agreement dated March 10, 1998 between the Company and the purchasers listed on the signature page thereto, as amended to date and as it may be supplemented, amended, or otherwise modified from time to time.

"1998 Security Agreement" means that certain Company General Security Agreement dated as of May 10, 1998 between the Company and Galen Partners III, L.P. (in its capacity as agent) executed in connection with the 1998 Purchase Agreement, as amended to date and as it may be supplemented, amended, or otherwise modified from time to time.

"1998 Security Documents" means the 1998 Security Agreement, the 1998 Guarantors Security Agreement, the 1998 Guaranties and the 1998 Collateral Documents.

"1999 Collateral Documents" means, collectively, (a) that certain Stock Pledge Agreement dated May 26, 1999 between the Company and Oracle Strategic Partners, L.P. (in its capacity as agent) executed in connection with the 1999 Purchase Agreement, and (b) that certain Real Estate Mortgage (With Future Advance Clause) dated May 26, 1999 granted by Houba, Inc. to Oracle Strategic Partners, L.P. (in its capacity as agent) executed in connection with the 1999 Purchase Agreement, executed in connection with the 1999 Purchase Agreement, each as amended to date and as they may be supplemented, amended, or otherwise modified from time to time.

"1999 Debentures" means the 5% convertible secured debentures due March 31, 2006 issued pursuant to the 1999 Purchase Agreement (including any debentures issued in satisfaction of interest payments under the 1999 Debentures), each as amended to date and as they may be supplemented, amended, or otherwise modified from time to time.

"1999 Guaranties" means those certain Continuing Unconditional Secured Guaranties dated as of May 26, 1999 by each of Houba, Inc. and Halsey Pharmaceuticals, Inc. executed in connection with the 1999 Purchase Agreement, each as amended to date and as they may be supplemented, amended, or otherwise modified from time to time.

"1999 Guarantors Security Agreement" means that certain Guarantors General Security Agreement dated as of May 26, 1999 by and among Houba, Inc., Halsey Pharmaceuticals, Inc. and Oracle Strategic Partners, L.P. (in its capacity as agent) executed in connection with the 1999 Purchase Agreement, as amended to date and as it may be supplemented, amended, or otherwise modified from time to time.

"1999 Purchase Agreement" means that certain Debenture and Warrant Purchase Agreement dated May 26, 1999 between the Company and the purchasers listed on the signature page thereto, as amended to date and as it may be supplemented, amended, or otherwise modified from time to time.

"1999 Security Agreement" means that certain Company General Security Agreement dated as of May 26, 1999 between the Company and Oracle Strategic Partners, L.P. (in its capacity as agent) executed in connection with the 1999 Purchase Agreement, as amended to date and as it may be supplemented, amended, or otherwise modified from time to time.

"1999 Security Documents" means the 1999 Security Agreement, the 1999 Guarantors Security Agreement, the 1999 Guaranties and the 1999 Collateral Documents.

"2002 Collateral Documents" means, collectively, (a) that certain Stock Pledge Agreement dated December 20, 2002 between the Company and Galen Partners III, L.P. (in its capacity as agent) executed in connection with the 2002 Purchase Agreement, (b) that certain Real Estate Mortgage (With Future Advance Clause) dated December 20, 2002 granted by Houba, Inc. to Galen Partners III, L.P. (in its capacity as agent) executed in connection with the 2002 Purchase Agreement, and (c) that certain Mortgage Subordination Agreement dated December 20, 2002 among Houba, Inc., Galen Partners III, L.P. (in its capacity as agent), Oracle Strategic Partners, L.P. (in its capacity as agent), and the other signatories thereto, executed in connection with the 2002 Purchase Agreement, each as amended to date and as they may be supplemented, amended, or otherwise modified from time to time.

"2002 Debentures" means the 5% convertible secured debentures due March 31, 2006 purchased on or before December 31, 2002 pursuant to the 2002 Purchase Agreement (including any debentures issued in satisfaction of interest payments under the 2002 Debentures), each as amended to date and as they may be supplemented, amended, or otherwise modified from time to time.

"2002 Guaranties" means those certain Continuing Unconditional Secured Guaranties dated as of December 20, 2002 by each of Houba, Inc. and Halsey Pharmaceuticals, Inc. executed in connection with the 2002 Purchase Agreement, each as amended to date and as they may be supplemented, amended, or otherwise modified from time to time.

"2002 Guarantors Security Agreement" means that certain Guarantors General Security Agreement dated as of December 20, 2002 by and among Houba, Inc., Halsey Pharmaceuticals, Inc. and Galen Partners III, L.P. (in its capacity as agent) executed in connection with the 2002 Purchase Agreement, as amended to date and as it may be supplemented, amended, or otherwise modified from time to time.

"2002 Purchase Agreement" means that certain Debenture Purchase Agreement dated December 20, 2002 between the Company and the purchasers listed on the signature page thereto, as amended to date and as it may be supplemented, amended, or otherwise modified from time to time.

"2002 Security Agreement" means that certain Company General Security Agreement dated as of December 20, 2002 between the Company and Galen Partners III, L.P. (in its capacity as agent) executed in connection with the 2002 Purchase Agreement, as amended to date and as it may be supplemented, amended, or otherwise modified from time to time.

"2002 Security Documents" means the 2002 Security Agreement, the 2002 Guarantors Security Agreement, the 2002 Guaranties and the 2002 Collateral Documents.

"2003 Debentures" means the 5% convertible secured debentures due March 31, 2006 purchased pursuant to the 2002 Purchase Agreement in accordance with certain Joinder Agreements dated June 16, 2003, July 1, 2003, July 15, 2003, August 5, 2003, August 19, 2003, September 5, 2003 and October 7, 2003 (including any debentures issued in satisfaction of interest payments under the 2003 Debentures), each as amended to date and as they may be supplemented, amended, or otherwise modified from time to time.

"2004 Debentures" means the convertible secured debentures issued pursuant to the 2004 Purchase Agreement, each as it may be supplemented, amended, or otherwise modified from time to time.

"2004 Purchase Agreement" means that certain Debenture and Share Purchase Agreement dated the date of this Agreement between the Company and the purchasers listed on the signature page thereto, as it may be supplemented, amended, or otherwise modified from time to time.

"Affiliate" has the meaning specified in Rule 501(b) under the Securities Act.

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

"Debentureholders Agreement" means that certain Debentureholders Agreement by and among the Company and the parties listed therein dated as of December 20, 2002, as amended to date.

"Existing Certificate" means the Restated Certificate of Incorporation of the Company filed with the Secretary of State of the State of New York on February 23, 1962, as the same may have been amended from time to time, as in effect on the date hereof.

"Existing Registration Rights Agreement" means that certain Registration Rights Agreement by and among the Company and the parties listed therein dated as of December 20, 2002, as amended to date.

"Existing Security Documents" means the 1998 Security Documents, the 1999 Security Documents and the 2002 Security Documents.

"Existing Subordination Agreement" means that certain Subordination Agreement by and among the Company and the parties listed therein dated as of December 20, 2002, as amended to date.

"Existing Voting Agreement" means that certain Voting Agreement by and among the Company and the parties listed therein dated as of December 20, 2002, as amended to date.

"Initial Closing" means the first "Closing" under the 2004 Purchase Agreement.

"Investor Rights Agreement" means that certain Investor Rights Agreement among the Company and the Holders and entered into pursuant to Section 3.3(g) below.

"Material Adverse Effect" means (i) a material adverse effect on, or change in, the business, prospects, properties, operations, condition (financial or other) or results of operations of the Company and its subsidiaries, taken as a whole, or (ii) a material adverse effect on the ability of the Company to perform its obligations hereunder or on the rights or remedies of any Holder hereunder.

"New Agency Agreement" means that certain Agency Agreement of even date herewith among the Company and the Holders and entered into pursuant to Section 2.1(a) below.

"New Registration Rights Agreement" means that certain Amended and Restated Registration Rights Agreement of even date herewith among the Company and the Holders and entered into pursuant to Section 2.1(b) below.

"New Subordination Agreement" means that certain Amended and Restated Subordination Agreement of even date herewith among the Company and the Holders and entered into pursuant to Section 2.1(c) below.

"New Voting Agreement" means that certain Amended and Restated Voting Agreement of even date herewith among the Company and the Holders and entered into pursuant to Section 2.1(d) below.

"Person" means any individual, corporation, limited liability company, partnership, association, trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

"Preferred Stock" means collectively, the Series A Preferred, Series B Preferred, Series C-1 Preferred, Series C-2 Preferred and Series C-3 Preferred.

"Restated Certificate" means the Restated Certificate of Incorporation of the Company, in the form attached hereto as Exhibit A, to be filed with the Secretary of State of New York upon approval by the stockholders of the Company.

"Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

"Series A Preferred" means the Series A Convertible Preferred Stock, $.01 par value per share, of the Company, as more fully described in the Restated Certificate.

"Series B Preferred" means the Series B Convertible Preferred Stock, $.01 par value per share, of the Company, as more fully described in the Restated Certificate.

"Series C-1 Preferred" means the Series C-1 Convertible Preferred Stock, $.01 par value per share, of the Company, as more fully described in the Restated Certificate.

"Series C-2 Preferred" means the Series C-2 Convertible Preferred Stock, $.01 par value per share, of the Company, as more fully described in the Restated Certificate.

"Series C-3 Preferred" means the Series C-3 Convertible Preferred Stock, $.01 par value per share, of the Company, as more fully described in the Restated Certificate.

"Support Letter" means that certain letter dated May 5, 2003 delivered to the Company by each of Care Capital Investments, LP, Essex Woodlands Health Ventures V, L.P. and Galen Partners III, L.P., as amended to date.

ARTICLE II

RELATED AGREEMENTS

2.1 RELATED AGREEMENTS

By executing and delivering this Agreement, each Holder severally and not jointly shall be deemed to have executed and delivered the following agreements, to have given the following consents to the following actions, and to have agreed to the following:

(a) The Existing Agency Letters are hereby terminated and replaced in their entirety by the New Agency Agreement in the form attached hereto as Exhibit B, and the Company and each Holder hereby consents to such termination and agrees that it is hereafter a party to and bound by the New Agency Agreement.

(b) The Existing Registration Rights Agreement is hereby amended and restated in its entirety in the form of the New Registration Rights Agreement attached hereto as Exhibit C,and

the Company and each Holder hereby consents to such amendment and agrees that it is hereafter a party to and bound by the New Registration Rights Agreement.

(c) The Existing Subordination Agreement is hereby amended and restated in its entirety in the form of the New Subordination Agreement attached hereto as Exhibit D, and the Company and each Holder hereby consents to such amendment and agrees that it is hereafter a party to and bound by the New Subordination Agreement.

(d) The Existing Voting Agreement is hereby amended and restated in its entirety in the form of the New Voting Agreement attached hereto as Exhibit E, and the Company and each Holder hereby consents to such amendment and agrees that it is hereafter a party to and bound by the New Voting Agreement.

(e) The Debentureholders Agreement is hereby terminated, and the Company and each Holder hereby consents to such termination and agrees that such agreement is of no further force or effect.

(f) The Support Letter is hereby terminated, and the Company and each Holder hereby consents to such termination and agrees that such agreement is of no further force or effect.

(g) Each 1998 Debenture, 1999 Debenture, 2002 Debenture and 2003 Debenture is hereby amended so that all interest payable thereunder (whether payable in cash or shares of stock, and including interest accrued but unpaid to date) shall hereafter be payable only in cash and shall accrue and not be payable before the applicable maturity date or earlier acceleration. The Company and each Holder hereby consents to such amendment and agrees that it is hereafter bound by such debentures, as applicable, as amended hereby. Notwithstanding the foregoing, the parties agree that such accrued interest is to be exchanged for shares of Preferred Stock pursuant to the terms of Article 3 below.

(h) Each Holder hereby agrees not to sell, exchange or otherwise transfer any interest in any 1998 Debenture, 1999 Debenture, 2002 Debenture or 2003 Debenture to any Person that is not a party to and bound by this Agreement, and the Company is hereby authorized to disregard any purported transfer in violation of this Section 2.1(h). Notwithstanding the foregoing, the parties agree that such dentures are to be exchanged for shares of Preferred Stock pursuant to the terms of Article 3 below.

2.2 EFFECT OF TERMINATIONS AND AMENDMENTS

Each agreement or document terminated pursuant to Section 2.1 is of no further force or effect hereafter, and each party thereto hereby releases, remises and discharges each other party thereto, its Affiliates, their respective successors and assigns, and each of their respective directors, officers, employees and agents from and any all claims, demands, actions, causes of action, suits, rights, debts, sums of money, covenants, contracts, agreements, promises, damages, judgments, executions, obligations, liabilities and expenses (including attorneys' fees and costs) of every kind and nature, whether known or unknown (collectively, "Claims") under such agreements and documents, which it ever had, now has or, to the extent arising from or in

connection with any act, omission or state of facts taken or existing on or prior to the date hereof, may have after the date hereof. Without limiting the generality of the foregoing, the Company and each Holder agrees that the signatories to the Support Letter have no further liability or obligation to the Company or any other Person thereunder.

2.3 POWER OF ATTORNEY

Each Holder hereby irrevocably constitutes and appoints the President of the Company, with full power of substitution and resubstitution, the undersigned's true and lawful attorney-in-fact and agent, to execute, acknowledge, verify, swear to and deliver, in such Holder's place and stead, all agreements and documents referred to in Section 2.1 above. The foregoing grant of authority is a special power of attorney, coupled with an interest, is irrevocable and shall survive the death, incapacity or incompetency of any Holder that is a natural person.

ARTICLE III

EXCHANGE OF EXISTING DEBENTURES

3.1 EXCHANGE UPON EFFECTIVE TIME

Upon the conversion of the 2004 Debentures into shares of Series A Preferred in accordance with the terms of the 2004 Debentures (the "Effective Time"), the following exchanges (the "Exchanges") shall immediately be deemed to have occurred without any further action on the part of the Company or any Holder:

(a) All of the principal of and accrued interest on each outstanding 1998 Debenture shall be exchanged for shares of Series C-1 Preferred at a purchase price of $.57 per share of Series C-1 Preferred. Such exchange shall occur automatically upon the Effective Time without further action on the part of the Company or any Holder. From and after the Effective Time the 1998 Debentures shall terminate and cease to represent indebtedness of the Company, and shall instead represent only the right to receive shares of Series C-1 Preferred pursuant to the terms of this Section 3.1(a) and Section 3.2. Without limiting the generality of the foregoing, the Holders agree that no interest will accrue under the 1998 Debentures after the Effective Time.

(b) All of the principal of and accrued interest on each outstanding 1999 Debenture shall be exchanged for shares of Series C-2 Preferred at a purchase price of $.60 per share of Series C-2 Preferred. Such exchange shall occur automatically upon the Effective Time without further action on the part of the Company or any Holder. From and after the Effective Time the 1999 Debentures shall terminate and cease to represent indebtedness of the Company, and shall instead represent only the right to receive shares of Series C-2 Preferred pursuant to the terms of this Section 3.1(b) and Section 3.2. Without limiting the generality of the foregoing, the Holders agree that no interest will accrue under the 1999 Debentures after the Effective Time.

(c) All of the principal of and accrued interest on each outstanding 2002 Debenture shall be exchanged for shares of Series C-3 Preferred at a purchase price of $.35 per share of Series C-3 Preferred. Such exchange shall occur automatically upon the Effective Time without further action on the part of the Company or any Holder. From and after the Effective Time the

2002 Debentures shall terminate and cease to represent indebtedness of the Company, and shall instead represent only the right to receive shares of Series C-3 Preferred pursuant to the terms of this Section 3.1(c) and Section 3.2. Without limiting the generality of the foregoing, the Holders agree that no interest will accrue under the 2002 Debentures after the Effective Time.

(d) All of the principal of and accrued interest on each outstanding 2003 Debenture shall be exchanged for shares of Series B Preferred at a purchase price of $.34 per share of Series B Preferred. Such exchange shall occur automatically upon the Effective Time without further action on the part of the Company or any Holder. From and after the Effective Time the 2003 Debentures shall terminate and cease to represent indebtedness of the Company, and shall instead represent only the right to receive shares of Series B Preferred pursuant to the terms of this Section 3.1(d) and Section 3.2. Without limiting the generality of the foregoing, the Holders agree that no interest will accrue under the 2003 Debentures after the Effective Time.

No fractional shares of Preferred Stock to which any Holder would otherwise be entitled resulting from the Exchanges shall be issued. In calculating the number of shares of Preferred Stock to be issued, such calculation shall be rounded to the nearest whole share of Preferred Stock.

3.2 EXCHANGE PROCEDURE.

(a) Each Holder shall deliver to the Company all 1998 Debentures, 1999 Debentures, 2002 Debentures and 2003 Debentures owned by such Holder promptly after the Company delivers the Holder notice of the effectiveness of the Exchanges. Upon receipt thereof from a Holder, the Company shall deliver to such Holder one or more stock certificates representing the series and number of shares of Preferred Stock to which such Holder is entitled. If any such debenture has been lost, stolen or destroyed, the Holder may instead deliver evidence reasonably satisfactory to the Company of such loss, theft or destruction and an indemnity, if requested, also reasonably satisfactory to it (but without requirement of posting any bond).

(b) The Company will pay any documentary stamp taxes attributable to the initial issuance of the Preferred Stock issuable upon the Exchanges; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificates for such stock in a name other than that of the Holder in respect of which such stock is issued, and in such case the Company shall not be required to issue or deliver any certificate for the stock until the person requesting the same has paid to the Company the amount of such tax or has established to the Company's reasonable satisfaction that such tax has been paid.

3.3 CERTAIN OTHER AGREEMENTS

By executing and delivering this Agreement, each Holder shall be deemed to have given the following consents to the following actions, and to have agreed to the following, in each case effective immediately upon the Effective Time:

(a) Each of the Existing Security Documents is hereby terminated, and the Company and each Holder hereby consents to each such termination and agrees that each such document is of no further force or effect from and after the Effective Time. Each Holder hereby authorizes the Company upon the Effective Time to file any and all termination statements or releases necessary to release the security interests and mortgages created by the Existing Security Documents. Each Holder agrees to execute any such statement or release upon reasonable request of the Company.

(b) The New Subordination Agreement is hereby terminated, and the Company and each Holder hereby consents to such termination and agrees that such agreement is of no further force or effect from and after the Effective Time.

(c) The New Agency Agreement is hereby terminated, and the Company and each Holder hereby consents to such termination and agrees that such agreement is of no further force or effect from and after the Effective Time.

(d) The 1998 Purchase Agreement is hereby terminated, and the Company and each Holder hereby consents to such termination and agrees that such agreement is of no further force or effect from and after the Effective Time.

(e) The 1999 Purchase Agreement is hereby terminated, and the Company and each Holder hereby consents to such termination and agrees that such agreement is of no further force or effect from and after the Effective Time.

(f) The 2002 Purchase Agreement is hereby terminated, and the Company and each Holder hereby consents to such termination and agrees that such agreement is of no further force or effect from and after the Effective Time.

(g) The Investor Rights Agreement in substantially the form attached hereto as Exhibit F is entered into by the Company and each Holder as of the Effective Time, and the Company and each Holder hereby agrees that it is thereafter a party to and bound by such Investor Rights Agreement.

3.4 EFFECT OF TERMINATIONS

Each agreement or document terminated pursuant to Section 3.3 is of no further force or effect from and after the Effective Time, and effective as of such time each party thereto hereby releases, remises and discharges each other party thereto, its Affiliates, their respective successors and assigns, and each of their respective directors, officers, employees and agents from and any all Claims under such agreements and documents, which it ever had, now has or, to the extent arising from or in connection with any act, omission or state of facts taken or existing on or prior to the Effective Time, may have after the date hereof.

3.5 POWER OF ATTORNEY

Each Holder hereby irrevocably constitutes and appoints the President of the Company, with full power of substitution and resubstitution, the undersigned's true and lawful attorney-in-fact and agent, to execute, acknowledge, verify, swear to and deliver, in such Holder's place and stead, all agreements and documents referred to in Section 3.3 above at one or more times on or after the Effective Time. The foregoing grant of authority is a special power of attorney, coupled with an interest, is irrevocable and shall survive the death, incapacity or incompetency of the Holder.

ARTICLE IV

CONSENT AND WAIVER OF CERTAIN RIGHTS

Each Holder hereby unconditionally and irrevocably (i) consents to the transactions (collectively, the "Transactions") contemplated by this Agreement,
(ii) waives any and all pre-emptive or similar rights that such Holder may have with respect to or in connection with any of the Transactions, (iii) waives any and all rights to receive notices that such Holder may have with respect to or in connection with any of the Transactions and (iv) waives any and all other rights that such Holder may have with respect to or in connection with any of the Transactions (other than rights arising under the Transaction Documents, as defined below).

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

As a material inducement to each Holder to enter into and perform its obligations under this Agreement, the Company represents and warrants to each Holder as follows:

5.1 ORGANIZATION AND EXISTENCE

The Company is a corporation duly organized, validly existing and in good standing under the laws of New York and is qualified to do business in such other jurisdictions as the nature or conduct of its operations or the ownership of its properties require such qualification. The Company does not own or lease any property or engage in any activity in any jurisdiction that might require qualification to do business as a foreign corporation in such jurisdiction and where the failure to so qualify could reasonably be expected to have a Material Adverse Effect or subject the Company to a material liability.

5.2 AUTHORIZATION

(a) The Company has all requisite corporate power and authority (i) to execute and deliver, and to perform and observe its obligations under, this Agreement and the other documents contemplated hereby (collectively the "Transaction Documents") to which it is a party, and (ii) to consummate the transactions contemplated hereby and thereby.

(b) All corporate action on the part of the Company and the directors and (except as to the approval of the Restated Certificate) the stockholders of the Company necessary for the authorization, execution, delivery and performance by the Company of the Transaction Documents and the transactions contemplated therein, and for the authorization, issuance and delivery of the Preferred Stock, has been taken.

5.3 BINDING OBLIGATIONS; NO MATERIAL ADVERSE CONTRACTS

The Transaction Documents constitute valid and binding obligations of the Company enforceable in accordance with their respective terms. The execution, delivery and performance by the Company of the Transaction Documents and compliance therewith will not result in any violation of and will not conflict with, or result in a breach of any of the terms of, or constitute a default, or accelerate or permit the acceleration of any rights or obligations, under, any provision of state, local, federal or foreign law to which the Company is subject, the Existing Certificate or the by-laws of the Company, or any mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation or other restriction to which the Company is a party or by which it is bound, and will not result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company. No stockholder of the Company has or will have any preemptive rights or rights of first refusal by reason of the issuance of the Preferred Stock or the Common Stock issuable upon conversion of the Preferred Stock.

5.4 FINANCIAL INFORMATION; SEC DOCUMENTS

(a) The Company has furnished to the Holders complete and correct copies of the consolidated financial statements of the Company and its subsidiaries, including consolidated balance sheets as of December 31, 2002 and 2001 and consolidated statements of operations, changes in cash flows and stockholders' equity, covering the three years ended December 31, 2002, all of which statements have been certified by Grant Thornton LLP, independent accountants within the meaning of the Securities Act and the rules and regulations thereunder, and all of which statements are included or incorporated by reference in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 filed with the Securities and Exchange Commission under the Exchange Act. Such financial statements have been prepared in conformity with generally accepted accounting principles in the United States applied on a consistent basis throughout the periods involved, except as otherwise stated therein and fairly present the consolidated financial position of the Company and its Subsidiaries as of the dates thereof and their consolidated results of operations for such periods. The Company's auditors have raised no material issues nor delivered any material correspondence with respect to any of the Company's financial statements or financial affairs.

(b) The Company has also furnished to the Holders the unaudited consolidated balance sheet of the Company and its subsidiaries as of September 30, 2003, and the related unaudited consolidated statements of operations, consolidated statements of cash flow and consolidated statements of stockholders' equity for the nine months ended September 30, 2003. Such financial statements were prepared in conformity with generally accepted accounting principles in the United States applied on a basis consistent with the financial statements referred to in Section 5.4(a) and fairly present the consolidated financial position of the Company and its

subsidiaries as of such date and their consolidated results of operations for such periods (subject to normal year-end adjustments).

(c) None of the documents filed by the Company with the Securities and Exchange Commission since December 31, 1997 contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements contained therein not false or misleading in light of the circumstances in which they were made. There are no facts which the Company has not disclosed to the Holders which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

(d) Except as set forth in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, since December 31, 2002, there has been no Material Adverse Effect with respect to the Company and its Subsidiaries.

5.5 OFFERING EXEMPTION

(a) None of the Company, its Affiliates or any Person acting on its or their behalf has engaged or will engage, in connection with the offering and issuance of the Preferred Stock, in any form in general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act, and none of the Company, or any of its Affiliates has, directly or indirectly, solicited any offer to buy, sell or offer to sell or otherwise negotiate in respect of, in the United States or to any United States citizen or resident, any security which is or would be integrated with the sale of the Preferred Stock in a manner that would require the Preferred Stock to be registered under the Securities Act. Assuming the accuracy of the representations and warranties given by the Holders in Article VI below, the offering and issuance of the Preferred Stock have been, are, and will be exempt from registration under the Securities Act, and such offering, sale and issuance is also exempt from registration under applicable state securities and "blue sky" laws.

(b) The Company is not, nor upon consummation of the transactions contemplated under the Transaction Documents, will it be, subject to registration as an "investment company" under the 1940 Act.

5.6 DISCLOSURE

The information heretofore provided and to be provided in connection with this Agreement, including, without limitation, the Exhibits hereto, the Transaction Documents and each of the agreements, documents, certificates and writings previously furnished to the Holders or their representatives, do not and will not contain any untrue statement of a material fact and do not and will not omit to state a material fact necessary in order to make the statements and writings contained herein and therein not false or misleading in the light of the circumstances under which they were made. There are no facts that (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect, which has not been set forth herein or in the Company's Annual Reports on Form 10-K for the fiscal year ended December 31, 2002, and/or the Company's Quarterly Report on Form 10-Q for the nine months ended September 30, 2003.

ARTICLE VI

REPRESENTATIONS AND WARRANTIES OF THE HOLDERS

As a material inducement to the Company to enter into and perform its obligations under this Agreement, each Holder severally (as to itself and not with respect to any other Holder) represents and warrants to the Company and each other Holder as follows:

6.1 ORGANIZATION AND GOOD STANDING

The Holder, if a corporation, partnership, trust or other form of business entity, is duly organized, validly existing and in good standing under the laws of the state of its incorporation, formation or organization, as the case may be, and has, in all material respects, full power, authority and legal right to own its properties and conduct its business as such properties are presently owned and such business is presently conducted, and to execute, deliver and perform its obligations under this Agreement.

6.2 DUE QUALIFICATION

The Holder, if a corporation, partnership, trust or other form of business entity, is duly qualified to do business and, where necessary, is in good standing as a foreign corporation or company, as the case may be, (or is exempt from such requirement) and has obtained all necessary licenses and approvals in each jurisdiction in which the conduct of its business requires such qualification except where the failure to so qualify or obtain licenses or approvals would not have a material adverse effect on its ability to perform its obligations hereunder.

6.3 DUE AUTHORIZATION

The execution and delivery of this Agreement and the consummation of the transactions provided for or contemplated by this Agreement have been duly authorized by Holder if a corporation, partnership, trust or other form of business entity, by all necessary corporate or company (as the case may be) action on the part of Holder. Upon the effectiveness of this Agreement, the Holder will be party to and bound by (i) this Agreement, (ii) the New Agency Agreement, (iii) the New Registration Rights Agreement, (iv) the New Subordination Agreement and (v) the New Voting Agreement, and each such agreement shall be enforceable against the Holder in accordance with its terms. Upon the Effective Time, the Holder will be party to and bound by the Investor Rights Agreement and such agreement shall be enforceable against the Holder in accordance with its terms.

6.4 INVESTMENT EXPERIENCE; ACCREDITED INVESTOR

(a) The Holder must bear the economic risk of investment in the Preferred Stock for an indefinite period of time, since the Preferred Stock has not been registered under the Securities Act or applicable state securities laws, and, therefore, cannot be resold or otherwise disposed of unless either they are subsequently registered under the Securities Act and applicable state securities laws or an exemption from registration is available.

(b) The Holder will only have those limited rights to register the shares issuable upon conversion of the Preferred Stock under the Securities Act and applicable state securities laws as are provided in the New Registration Agreement.

(c) The Holder and his, her or its purchaser representative(s), if any, have carefully reviewed and understand the risks of and other considerations relating to entering into this Agreement.

(d) The Holder and his, her or its purchaser representative(s), if any, have been afforded the opportunity to obtain any information necessary to verify the accuracy of any representations or information set forth in this Agreement and have had all of their inquiries to the Company answered in full, and have been furnished all requested materials relating to the Company and this Agreement.

(e) Neither the Holder nor his, her or its purchaser representative(s), if any, have been furnished any offering literature by the Company or any of its Affiliates, other than this Agreement (including the exhibits and attachments hereto), and the Holder has not received or heard any print or electronic media advertising with respect to the Exchanges.

(f) The Holder is acquiring the Preferred Stock as principal for its own investment account, and not (i) with a view to the resale or distribution of all or any part thereof, or (ii) on behalf of another Person who has not made the foregoing representations. The Holder agrees not to resell or otherwise dispose of the Preferred Stock except as permitted by applicable law, including, without limitation, any and all provisions of this Agreement and any applicable regulation under the Securities Act or any state securities laws.

(g) The Holder is an "accredited investor," as defined in Rule 501(a) of Regulation D promulgated pursuant to the Securities Act.

(h) The Holder has evaluated the risks of investing in the Company and has substantial experience in making investment decisions of this type or is relying on his, her or its professional advisors or purchaser representative(s), if applicable, in making this investment decision.

(i) The Holder understands the fundamental aspects of and risks involved in an investment in the Company, including (i) the speculative nature of the investment, (ii) the financial hazards involved, including the risk of losing the entire investment, (iii) the lack of liquidity and the restrictions on transferability of the Preferred Stock, (iv) the limited registration rights regarding the shares issuable upon conversion of the Preferred Stock, and (v) the fact that the Company has a history of losses and limited capital resources.

(j) The address set forth in Schedule I of this Agreement is the Holder's true and correct principal address, and the Holder has no present intention of becoming a resident of any other state or jurisdiction.

(k) The Holder, if a corporation, partnership, trust or other form of business entity, has not been formed for the specific purpose of acquiring the Preferred Stock.

(l) All of the information that the Holder has herein furnished to the Company with respect to itself, its financial position, and its business and investment experience, is correct and complete as of the date hereof.

(m) The Holder agrees to be bound by all of the terms and conditions of the offering made by this Agreement and the exhibits and attachments hereto.

(n) The Holder consents to the placement of a legend on any certificate or other document evidencing the Preferred Stock stating that it has not been registered under the Securities Act and setting forth or referring to the restrictions on transferability and sale thereof. The Holder is aware that the Company will make a notation in its appropriate records with respect to the restrictions on the transferability of such securities.

The Holder acknowledges that the Company will rely upon the representations made by such Holder in this Agreement in connection with the issuance of the Preferred Stock to be issued hereunder.

ARTICLE VII

MISCELLANEOUS

7.1 ENTIRE AGREEMENT

This Agreement and the other Transaction Documents constitute the full and entire understanding and agreement between the parties with regard to the subject matter hereof and thereof and supercede any prior agreements or understandings, written or oral, regarding the subject matter hereof and thereof.

7.2 ASSIGNMENT; BENEFIT

No party may assign its rights or obligations under this Agreement without the written consent of the Company and the holders of a majority of the principal amount of the 2004 Debentures. Subject to the foregoing, this Agreement and the rights and obligations set forth herein shall inure to the benefit of, and be binding upon the parties hereto, and each of their respective successors, heirs and permitted assigns.

7.3 COUNTERPARTS

This Agreement may be executed in any number of counterparts, including by facsimile copy, each of which shall be deemed an original, but all of which together shall constitute one instrument.

7.4 GOVERNING LAW

This Agreement and the rights of the parties hereunder shall be governed in all respects by the laws of the State of New York wherein the terms of this Agreement were negotiated,

excluding to the greatest extent permitted by law any rule of law that would cause the application of the laws of any jurisdiction other than the State of New York.

7.5 WAIVER OF JURY TRIAL

EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY TRANSACTION DOCUMENT OR THE ACTIONS OF ANY PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.

7.6 JURISDICTION

(a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or United States Federal court sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or any of the other Transaction Documents to which it is a party or to whose benefit it is entitled, or for recognition or enforcement of any judgment, and each of the parties hereto irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the fullest extent permitted by law, in such United States Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the right that any party may otherwise have to bring any action or proceeding relating to this Agreement or any of the other Transaction Documents in the courts of any other jurisdiction.

(b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or in relation to this Agreement or any other Transaction Document to which it is a party in any such New York State or United States Federal court sitting in New York City. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

7.7 RIGHTS AND OBLIGATIONS; SEVERABILITY

Unless otherwise expressly provided herein, each Holder's rights and obligations hereunder are several rights and obligations, not rights and obligations jointly held with any other Person. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

7.8 SPECIFIC PERFORMANCE

The rights and remedies of the parties hereto shall be cumulative. The transactions contemplated by this Agreement are unique transactions and any failure on the part of any party to complete the transactions contemplated by this Agreement on the terms of hereof or thereof will not be fully compensable in damages and the breach or threatened breach of the provisions of this Agreement would cause the other parties hereto irreparable harm. Accordingly, in addition to and not in limitation of any other remedies available to the parties hereto for a breach or threatened breach of this Agreement, the parties shall be entitled to seek specific performance of this Agreement and seek an injunction restraining any such party from such breach or threatened breach.

7.9 NOTICES

All notices, demands or other communications given hereunder shall be in writing and shall be sufficiently given if transmitted by facsimile or delivered either personally or by a nationally recognized courier service marked for next business day delivery or sent in a sealed envelope by first class mail, postage prepaid and either registered or certified, return receipt requested, addressed as follows:

(a) if to the Company:

Halsey Drug Co., Inc. 695 N. Perryville Road Rockford, Illinois 61107 Attention: President Facsimile: (815) 399-9710

(b) if to a Holder, to the address set forth on Schedule I attached hereto, or to such other address with respect to any party hereto as such party may from time to time notify (as provided above) the other parties hereto. Any such notice, demand or communication shall be deemed to have been given (i) on the date of delivery, if delivered personally, (ii) on the date of facsimile transmission, receipt confirmed, (iii) one business day after delivery to a nationally recognized overnight courier service, if marked for next day delivery, or (iv) five business days after the date of mailing, if mailed.

(c) Copies of any notice, demand or communication given to the Company shall also be delivered to St. John & Wayne, L.L.C., Two Penn Plaza East, Newark, New Jersey, 07105-2249 Attn.: John P. Reilly, Esq., or such other address as may be directed.

7.10 TITLES AND SUBTITLES

The titles of the articles, sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

7.11 REPRESENTATION BY COUNSEL

Each party hereto acknowledges that it has been advised by legal and any other counsel retained by such party in its sole discretion. Each party acknowledges that such party has had a full opportunity to review the Transaction Documents and to negotiate any and all such documents in its sole discretion, without any undue influence by any other party hereto or any third party.

7.12 CONSTRUCTION

The parties have participated jointly in the negotiations and drafting of the Transaction Documents and in the event of any ambiguity or question of intent or interpretation, no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of any of the Transaction Documents.

7.13 DELAYS, OMISSIONS OR WAIVERS

No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement shall impair any such right, power or remedy of such party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence, therein, or of or in any similar breach or default thereafter occurring. Any permit, consent or approval of any kind or character on the part of any party under this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.

7.14 THIRD PARTY BENEFICIARIES

Nothing express or implied in this Agreement is intended to confer, nor shall anything herein confer, upon any Person other than the parties and the respective successors or assigns of the parties, any rights, remedies, obligations or liabilities whatsoever.

7.15 FURTHER ASSURANCES

Each party hereto agrees to execute and deliver such other documents and instruments and to take such further action as may be reasonably required or desirable to carry out the provisions of this Agreement and the transactions contemplated hereby.

7.16 AMENDMENT

No amendment of any provision of this Agreement, including any amendment of this Section 7.16, shall be valid unless the same shall be in writing and signed by the Company and the holders of (i) a majority of the then outstanding principal amount of the 1998 Debentures, (ii) a majority of the then outstanding principal amount of the 1999 Debentures, (iii) a majority of the then outstanding principal amount of the 2002 Debentures, (iv) a majority of the then outstanding principal amount of the 2003 Debentures and (v) a majority of the then outstanding principal amount of the 2004 Debentures.

NOW THEREFORE, the parties hereto have executed, or caused to be executed, this Debenture Conversion Agreement as of the date first written above.

                                       By:______________________________________
                                       Name:
                                       Title:

                                    HOLDERS:

GALEN PARTNERS III, L.P.                 ORACLE STRATEGIC PARTNERS, L.P.
By: Claudius, L.L.C., General Partner    By: Oracle Strategic Capital L.L.C.,
610 Fifth Avenue, 5th Fl.                General Partner
New York, New York  10019                200 Greenwich Avenue
                                         3rd Floor
                                         Greenwich, Connecticut 06830
_______________________________________  _______________________________________
By: Srini Conjeevaram                    By: Joel Liffmann
Its: General Partner                     Its: Authorized Agent

GALEN PARTNERS INTERNATIONAL, III, L.P.  CARE CAPITAL INVESTMENTS II, LP
By: Claudius, L.L.C., General Partner    By:  Care Capital II, LLC, as general
610 Fifth Avenue, 5th Floor              partner
New York, New York  10020                47 Hulfish St., Suite 310
                                         Princeton, NJ 08542
_______________________________________
By: Srini Conjeevaram                    By:____________________________________
Its: General Partner                     Name:  David R. Ramsay
                                         Title: Authorized Signatory

GALEN EMPLOYEE FUND III, L.P.            ESSEX WOODLANDS HEALTH
By: Wesson Enterprises, Inc.             VENTURES V, L.P.
610 Fifth Avenue, 5th Floor              190 South LaSalle Street, Suite 2800
New York, New York 10020                 Chicago, IL 60603

_______________________________________  _______________________________________
By: Bruce F. Wesson                      By: Immanuel Thangaraj
Its: General Partner                     Its: Managing Director

ALAN SMITH                               PATRICK COYNE
21 Bedlow Avenue                         800 Merion Square Road
Newport, Rhode Island  02840             Gladwyne, Pennsylvania 19035

_______________________________________  _______________________________________

MICHAEL WEISBROT                         SUSAN WEISBROT
1136 Rock Creek Road                     1136 Rock Creek Road
Gladwyne, Pennsylvania  19035            Gladwyne, Pennsylvania  19035

_______________________________________  _______________________________________

GREG WOOD                                DENNIS ADAMS
1263 East Calavera Street                120 Kynlyn Road
Altadena, CA 91001                       Radnor, Pennsylvania  19312

_______________________________________  _______________________________________

STEFANIE HEITMEYER                       BERNARD SELZ
17759 Road, Route 66                     600 Fifth Avenue, 25th Floor
Fort Jennings, Ohio 45844                New York, New York 10020

_______________________________________  _______________________________________

PETER CLEMENS                            ROGER GRIGGS
c/o Halsey Drug Co., Inc.                c/o Tom Jennings
695 North Perryville Rd.                 7300 Turfway Road
Crimson Building #2                      Suite 300
Rockford, Illinois  61107                Florence, KY 41042

_______________________________________  _______________________________________

VARSHA H. SHAH                           HEMANT K. SHAH
29 Chrissy Drive                         29 Chrissy Drive
Warren, New Jersey  07059                Warren, New Jersey  07059

_______________________________________  _______________________________________

VARSHA H. SHAH AS CUSTODIAN               VARSHA H. SHAH AS CUSTODIAN
FOR SACHIN H. SHAH                        FOR SUMEET H. SHAH
29 Chrissy Drive                          29 Chrissy Drive
Warren, New Jersey  07059                 Warren, New Jersey  07059

_______________________________________   ______________________________________
By: Varshah H. Shah                       By: Varshah H. Shah
Its: Custodian                            Its: Custodian

MICHAEL RAINISCH                          ILENE RAINISCH
c/o Alvin Rainisch                        c/o Alvin Rainisch
300 Flower Lane                           300 Flower Lane
Morganville, New Jersey  07751            Morganville, New Jersey  07751

_______________________________________   ______________________________________

KENNETH GIMBEL, IRA ACCOUNT               KENNETH GIMBEL
FBO KENNETH GIMBEL                        2455 Montgomery Avenue
2455 Montgomery Avenue                    Highland Park, Illinois  60035
Highland Park, Illinois  60035

_______________________________________   ______________________________________
By: ___________________________________
Its: Trustee

JESSICA K. CLEMENS                        JAKE P. CLEMENS
C/o Halsey Drug Co., Inc.                 c/o Halsey Drug Co., Inc.
695 North Perryville Rd.                  695 North Perryville Rd.
Crimson Building #2                       Crimson Building #2
Rockford, Illinois  61107                 Rockford, Illinois  61107

_______________________________________   ______________________________________

MICHAEL REICHER TRUST
c/o Halsey Drug Co., Inc.
695 North Perryville Rd.
Crimson Building #2
Rockford, Illinois  61107

_______________________________________
By: Michael K. Reicher
Its: Trustee

PETER STIEGLITZ                           GEORGE E. BOUDREAU
RJ Palmer LLC                             222 Elbow Lane
156 West 56th Street, 5th Floor           Haverford, PA  19041
New York, New York 10019

_______________________________________   ______________________________________

JOHN E. HEPPE, JR.
237 W. Montgomery Avenue
Haverford, Pennsylvania 19041

_______________________________________

Schedule I        -        Holders and their respective addresses and Debentures

EXHIBITS:

Exhibit A         -        Restated Certificate
Exhibit B         -        New Agency Agreement
Exhibit C         -        New Registration Agreement
Exhibit D         -        New Subordination Agreement
Exhibit E         -        New Voting Agreement
Exhibit F         -        Investor Rights Agreement

                                   SCHEDULE I

See attached.

EXHIBIT 10.3

RESTATED CERTIFICATE OF INCORPORATION

OF

HALSEY DRUG CO., INC.

Under Section 807 of the Business Corporation Law

WE, THE UNDERSIGNED, Andrew D. Reddick and Peter A. Clemens, being respectively the President and the Secretary of Halsey Drug Co., Inc., hereby certify:

1. The name of the Corporation is Halsey Drug Co., Inc. The Corporation was originally incorporated under the name of Halsey Drug Co. Inc.

2. The Certificate of Incorporation was filed by the Department of State on April 10, 1935 and has been amended at various times by action of the Board of Directors and shareholders of the Corporation.

3. The Certificate of Incorporation, as amended heretofore, is further amended as follows:

(a) Article SECOND of the Certificate of Incorporation, relating to the purposes for which the Corporation is formed, is hereby amended to read as follows:

"SECOND: The purpose of the Corporation is to engage in any lawful act or activity for which Corporations may be organized under the Business Corporation Law of the State of New York; provided, however, that it is not formed to engage in any act or activity requiring the consent or approval of any state official, department, board, agency or any other body without such consent or approval first being obtained."

(b) Article THIRD of the Certificate of Incorporation, relating to the amount of authorized capital stock of the Corporation, is amended to (i) increase the authorized shares of capital stock of the Corporation from 80,000,000 to 940,000,000, consisting of 650,000,000 shares of common stock, par value $.01 per share, and 290,000,000 shares of preferred stock, par value $.01 per share; (ii) designate 45,000,000 shares of the Corporation's preferred stock as Series A Convertible Preferred Stock, par value $.01 per share, having the rights, preferences and limitations set forth herein; (iii) designate 25,000,000 shares of the Corporation's preferred stock as Series B Convertible Preferred Stock, par value $.01 per share, having the rights, preferences and limitations set forth herein;

designate 70,000,000 shares of the Corporation's preferred stock as Series C-1 Convertible Preferred Stock, par value $.01 per share, having the rights, preferences and limitations set forth herein; (v) designate 50,000,000 shares of the Corporation's preferred stock as Series C-2 Convertible Preferred Stock, par value $.01 per share, having the rights, preferences and limitations set forth herein; (vi) designate 100,000,000 shares of the Corporation's preferred stock as Series C-3 Convertible Preferred Stock, par value $.01 per share, having the rights, preferences and limitations set forth herein, and (vii) eliminate the voting rights of the holders of the Corporation's Debentures. To effect the foregoing, Article THIRD is hereby amended to read as follows:

"THIRD: The Corporation is authorized to issue two classes of stock, to be designated, respectively, "Common Stock" and "Preferred Stock". The total number of shares which the Corporation is authorized to issue is 940,000,000 of which (A) 290,000,000 shares shall be Preferred Stock (the "Preferred"), and (B) 650,000,000 shares shall be Common Stock, $.01 par value (the "Common"). Of the Preferred, 45,000,000 shares shall be designated Series A Convertible Preferred Stock, $.01 par value per share (the "Series A Preferred"), 25,000,000 shares shall be designated Series B Convertible Preferred Stock, $.01 par value per share (the "Series B Preferred"), 70,000,000 shares shall be designated Series C-1 Convertible Preferred Stock, $.01 par value per share (the "Series C-1 Preferred"), 50,000,000 shares shall be designated Series C-2 Convertible Preferred Stock, $.01 par value per share (the "Series C-2 Preferred") and 100,000,000 shares shall be designated Series C-3 Convertible Preferred Stock, $.01 par value per share (the "Series C-3 Preferred"). The Series C-1 Preferred, Series C-2 Preferred and Series C-3 Preferred are sometimes referred to collectively as the "Series C Preferred". The rights, preferences and privileges of and restrictions on the Series A Preferred, Series B Preferred, Series C Preferred and Common are as follows:

SECTION 1. PREFERRED STOCK

(a) Voting Rights. Except as otherwise require by law, each share of outstanding Series A Preferred, Series B Preferred and Series C Preferred shall entitle the record holder thereof to vote on each matter submitted to a vote of the stockholders of the Corporation and to have the number of votes equal to the number of whole shares of

Common into which such share of Series A Preferred, Series B Preferred or Series C Preferred, as the case may be, is then convertible pursuant to the provisions hereof at the record date for the determination of stockholders entitled to vote on such matters or, if no such record date is established, at the date such vote is taken or any written consent of stockholders becomes effective. Except as otherwise required by law or by this Certificate, the holders of shares of Common, Series A Preferred, Series B Preferred and Series C Preferred shall vote together and not as separate classes. Fractional votes shall not be permitted and any fractional voting rights resulting from the above formula shall be rounded to the nearest whole number (with one-half rounded upwards).

(b) Dividends. If any dividend or other distribution payable in cash, securities or other property is declared on the Common (other than in connection with Section 1(c) below), each holder of shares of Preferred on the record date for such dividend or distribution shall be entitled to receive, on the date of payment or distribution of such dividend or other distribution, the same cash, securities or other property which such holder would have received on such record date if such holder was the holder of record of the number of whole shares of Common into which the shares of Preferred then held by such holder are then convertible (with any resulting fractions rounded to the nearest whole share, with one-half rounded up).

(c) Liquidation Rights. If the Corporation shall be voluntarily or involuntarily liquidated, dissolved or wound up (each, a "Liquidation Event"):

(1) Prior and in preference to any payments or distributions under Sections 1(c)(2), 1(c)(3) and 1(c)(4) below, the holder of each then outstanding share of Series A Preferred shall be entitled to receive, out of the assets of the Corporation legally available for distribution to stockholders, and before any payment or declaration and setting apart for payment of any amount or dividend pursuant to Sections 1(c)(2) or 1(c)(3) below or with respect to the Common or any other junior equity security of the Corporation, the amount (the "Series A Preference") equal to [$______] per share [TO EQUAL THE PRODUCT OF (x) FIVE (5), MULTIPLIED BY (y) THE AVERAGE OF THE CLOSING BID AND ASKED PRICES OF THE COMPANY'S COMMON STOCK FOR THE TWENTY (20) TRADING DAYS ENDING TWO
(2) TRADING DAYS IMMEDIATELY PRIOR TO THE DATE OF THE DEBENTURE AND SHARE PURCHASE

AGREEMENT, AS SUCH PRICE MAY BE ADJUSTED PURSUANT TO
SECTION 3.4 OF THE FORM OF DEBENTURE] (such amount to be adjusted proportionally in the event the Series A Preferred is subdivided into a greater number or combined into a lesser number of shares). If the Corporation shall have insufficient assets and funds to pay such amounts in full to the holders of the Series A Preferred, then all assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred in proportion to the preferential amount each such holder is otherwise entitled to receive pursuant to this
Section 1(c)(1).

(2) After full payment of the distributions under Section 1(c)(1) above, but prior and in preference to any payments or distributions under Sections 1(c)(3) and 1(c)(4) below, the holder of each then outstanding share of Series B Preferred shall be entitled to receive, out of the assets of the Corporation legally available for distribution to stockholders, and before any payment or declaration and setting apart for payment of any amount or dividend pursuant to Section 1(c)(3) below or with respect to the Common or any other junior equity security of the Corporation, the amount (the "Series B Preference") equal to $.3420 per share (such amount to be adjusted proportionally in the event the Series B Preferred is subdivided into a greater number or combined into a lesser number of shares). If the Corporation shall have insufficient assets and funds to pay such amounts in full to the holders of the Series B Preferred (after payment in full of all amounts pursuant to Section 1(c)(1) above), then all remaining assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series B Preferred in proportion to the preferential amount each such holder is otherwise entitled to receive pursuant to this Section 1(c)(2).

(3) After full payment of the distributions under Sections 1(c)(1) and 1(c)(2) above, but prior and in preference to any payments or distributions under Section 1(c)(4) below, the holder of each then outstanding share of Series C Preferred shall be entitled to receive, out of the assets of the Corporation legally available for distribution to stockholders, and before any payment or declaration and setting apart for payment of any amount or dividend with respect to the Common or any other junior equity security of the Corporation, (i) in the case of Series C-1 Preferred, the amount (the "Series C-1 Preference") equal to $.5776 per share, (ii) in the case of Series C-2 Preferred, the amount (the

"Series C-2 Preference") equal to $.5993 per share, and
(iii) in the case of Series C-3 Preferred, the amount (the "Series C-3 Preference") equal to $.3481 per share, (in each case such amount to be adjusted proportionally in the event the Series C-1 Preferred, Series C-2 Preferred or Series C-3 Preferred, as applicable, is subdivided into a greater number or combined into a lesser number of shares). If the Corporation shall have insufficient assets and funds to pay such amounts in full to the holders of the Series C Preferred (after payment in full of all amounts pursuant to Sections 1(c)(1) and 1(c)(2) above), then all remaining assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series C Preferred in proportion to the preferential amount each such holder is otherwise entitled to receive pursuant to this Section 1(c)(3).

(4) After full payment has been made to the holders of Series A Preferred, Series B Preferred and Series C Preferred of the liquidation preferences in Sections 1(c)(1), 1(c)(2) and 1(c)(3), the entire remaining assets and funds, if any, shall be distributed ratably among the holders of Common and the Series A Preferred, in proportion to the number of shares of Common held by them on an as-converted basis; provided, that for purposes of calculating the distribution pursuant to this Section 1(c)(4), and for no other purposes whatsoever, each share of Series A Preferred shall be deemed to be convertible into only 30% of the shares of Common into which it is convertible pursuant to the terms of Section 1(d) below.

(5) For purposes of this Section
1(c), unless the holders of a majority of the then outstanding shares of Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) together as a single class, elect otherwise, (i) the consummation of any merger, consolidation or similar transaction or series of related transactions, the result of which is that the holders of the Corporation's capital stock outstanding immediately prior to such transaction own, immediately upon the consummation of such transaction(s), shares of capital stock possessing in the aggregate less than a majority of the voting power of the surviving entity or rights to liquidation distributions of less than 50% of the assets of the surviving entity, (ii) a sale, lease, exclusive license, transfer or other conveyance of all or substantially all of the assets of the Corporation, or (iii) the sale of 50% or more of the Corporation's voting stock in one or more series of transactions, shall (for purposes of the

distribution of such securities or other consideration to the holders of Common and Preferred) be treated as a Liquidation Event and shall entitle the holders of Common and Preferred to receive at closing in cash, securities or other property (valued as provided in
Section 1(c)(6) below) as specified above and in the order of preference as set forth in this Section 1(c).

(6) Whenever the distribution provided in this Section 1(c) shall be payable in property other than cash, subject to the provisions regarding valuation of securities set forth below, the value of such distribution shall be its fair market value as determined in good faith by the Board of Directors of the Corporation (the "Board"). The holders of a majority of the Series A Preferred will have 10 days from the determination of the valuation of any securities or other property pursuant this Section 1(c) to object to such valuation in writing to the Corporation. In the event of such objection, the Corporation and a majority in interest of the objecting stockholders will in good faith seek a resolution of any disputed valuation. If the Corporation and the objecting investors are unable to agree on a valuation within 5 days of the objection by the holders of the Series A Preferred, the valuation will be determined by an independent third party appraiser jointly selected by the Corporation and the holders of a majority of the then outstanding shares of Series A Preferred, whose written appraised value will be binding on the Corporation and its stockholders. Any distributions pursuant to this Section 1(c) will be delayed until after the delivery of the appraiser's report. Any securities shall be valued as follows:

(i) Securities not subject to investment letter or other similar restrictions on free marketability covered by (ii) below:

(A) If traded on a securities exchange or through the Nasdaq National Market or the Nasdaq SmallCap Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the 30-day period ending three (3) days prior to the date of determination;

(B) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty-day period ending three (3) days prior to the date of determination; and

(C) If there is no active public market, the value shall be determined by an independent third party appraiser jointly selected by the Corporation and the holders of a majority of the then outstanding shares of Series A Preferred.

(ii) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to apply an appropriate discount determined in good faith by the Board from the market value determined as above in (A), (B) or (C).

(7) The Corporation shall promptly provide to the holders of shares of Preferred such information concerning the terms of any event or transaction specified in Section 1(c)(5) and the value of the assets of the Corporation as may reasonably be determined by the Board. If the transaction is a sale of all or substantially all of the assets of the Corporation, the Corporation will give written notice of such transaction to each holder of Preferred not less than 20 or more than 60 days before the stockholders' meeting called to approve the transaction or, if no stockholders' meeting will be called, not less than 20 or more than 60 days before the date that the transaction is reasonably anticipated to be consummated, and will also notify the holders in writing of the final approval of the transaction. The initial notice will describe the material terms and conditions of the proposed transaction. The Corporation will give the holders of Preferred prompt notice of any material changes to the terms of the proposed transaction. The Corporation will not consummate the proposed transaction sooner than 20 days after the Corporation has given notice of any material changes. By written consent or vote, the holders of a majority of the shares of Series A Preferred outstanding may shorten the notice periods provided in this Section. In the event the requirements of this Section are not complied with, the Corporation will either: (i) cause the closing to be postponed until the requirements of this Section have been complied with; or (ii) cancel the transaction, in which event the rights, preferences, privileges and restrictions of the holders of the Preferred will revert to the rights, preferences, privileges and restrictions existing immediately before the date of the first notice referred to in this Section.

(d) Conversion.

(1) Terms of Conversion.

(i) Optional Conversion. The holder of each share of Series A Preferred, Series B Preferred and Series C Preferred shall have the right ("Conversion Right"), at such holder's option, to convert such share at any time, without cost, on the terms of this Section 1(d) and at the office of the Corporation or its transfer agent, into the number of fully paid and non-assessable shares of Common that results from dividing (A) in the case of the Series A Preferred, the Series A Preference by the Series A conversion price that is in effect at the time of conversion (the "Series A Conversion Price"), (B) in the case of the Series B Preferred, the Series B Preference by the Series B conversion price that is in effect at the time of conversion (the "Series B Conversion Price"), (C) in the case of the Series C-1 Preferred, the Series C-1 Preference by the Series C-1 conversion price that is in effect at the time of conversion (the "Series C-1 Conversion Price"), (D) in the case of the Series C-2 Preferred, the Series C-2 Preference by the Series C-2 conversion price that is in effect at the time of conversion (the "Series C-2 Conversion Price") and (E) in the case of the Series C-3 Preferred, the Series C-3 Preference by the Series C-3 conversion price that is in effect at the time of conversion (the "Series C-3 Conversion Price"). The initial Series A Conversion Price is equal to [$_____][TO EQUAL THE AVERAGE OF THE
CLOSING BID AND ASKED PRICES OF THE COMPANY'S COMMON STOCK FOR THE TWENTY (20) TRADING DAYS ENDING TWO (2) TRADING DAYS IMMEDIATELY PRIOR TO THE DATE OF THE DEBENTURE AND SHARE PURCHASE AGREEMENT, AS SUCH PRICE MAY BE ADJUSTED PURSUANT TO SECTION 3.4 OF THE FORM OF DEBENTURE]. The initial Series B Conversion Price is equal to the Series B Preference. The initial Series C-1 Conversion Price is equal to the Series C-1 Preference. The initial Series C-2 Conversion Price is equal to the Series C-2 Preference. The initial Series C-3 Conversion Price is equal to the Series C-3 Preference. The Series A Conversion Price, the Series B Conversion Price, the Series C-1 Conversion Price, the Series C-2 Conversion Price and the Series C-3 Conversion Price shall be subject to adjustment from time to time as provided in
Section 1(d)(3) below.

(ii) Mandatory Conversion.

(A) Upon the occurrence of a Qualified Trading Event, each share of Series A Preferred, Series B Preferred and Series C Preferred shall be automatically converted, without cost and on the terms of this

Section 1(d), into the number of whole shares of Common into which such share of Series A Preferred, Series B Preferred or Series C Preferred, as the case me be, would be convertible under Section 1(d)(1)(i) above immediately prior to such Qualified Trading Event (with any resulting fractions rounded to the nearest whole share, with one-half rounded up). "Qualified Trading Event" means the first such time that (A) the Common has a closing price of at least $2.80 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares) for thirty consecutive trading days, and (B) the average daily trading value of all shares of Common traded during such thirty consecutive trading day period is at least $1,750,000. For purposes of this test, (x) closing prices shall be determined as the average between the closing bid and ask prices at the close of each trading day (as reported by such exchange or over-the-counter market on which the Common may then be listed or admitted for trading), and (y) the trading value shall be determined by multiplying the number of shares so traded by such day's closing price as determined above.

(B) Without limiting subsection (ii)(A) above, each share of Series A Preferred, Series B Preferred and Series C Preferred shall be automatically converted without cost and on the terms of this Section 1(d), into the number of whole shares of Common into which such share of Series A Preferred, Series B Preferred or Series C Preferred, as the case may be, would be convertible under Section 1(d)(1)(i) above upon the receipt of the written consent of the holders of at least 51% of the shares of Series A Preferred.

(2) Mechanics of Conversion.

(i) Optional Conversion. A holder of any share of Convertible Preferred may exercise the Conversion Right of such share by surrendering the certificate therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the applicable Preferred, together with a written notice to the Corporation which shall state (A) that such holder elects to convert the same, and (B) the number of shares of Preferred being converted. Thereupon the Corporation shall issue and deliver to the holder of such shares within two (2) business days a certificate or certificates for the number of shares of Common to which such holder shall be entitled. If the certificate evidencing the Preferred being

converted shall also evidence shares of Preferred not being converted, then the Corporation shall also deliver to the holder of such certificate within such two (2) business day period a new stock certificate evidencing the Preferred not converted. The conversion of any shares of Preferred shall be deemed to have been made immediately prior to the close of business on the date that the shares to be converted are surrendered to the Corporation, and the person or persons entitled to receive the shares of Common issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common on such date. Any dividends or distributions declared but unpaid at the time of conversion with respect to the Preferred so converted shall be paid to the holder of Common issued upon conversion of the Preferred. If a stockholder notifies the Corporation or its transfer agent in writing that the stockholder's certificate has been lost, stolen or destroyed, and executes an agreement in a form reasonably satisfactory to the Corporation and its transfer agent to indemnify them from any loss incurred in connection with the lost, stolen or destroyed certificates (without requirement of posting any bond), then such actions shall be treated for purposes of this Section as delivery of such lost, stolen or destroyed certificate.

(ii) Mandatory Conversion. The Corporation shall give written notice to each holder of a share of Preferred not more than ten (10) days after the occurrence of a Qualified Trading Event or the receipt of the written consent required pursuant to
Section 1(d)(1)(ii)(B), as applicable. Following the conversion of such shares, each holder of shares so converted shall, if requested by the Corporation, surrender the certificate therefor at the office of the Corporation or any transfer agent for the applicable Preferred. Upon such surrender, the Corporation shall issue and deliver to each holder a certificate or certificates for the number of shares of Common to which such holder is entitled. The conversion of shares of Preferred shall be effective as of the occurrence of the Qualified Trading Event or upon receipt of the written consent provided in Section 1(d)(1)(ii)(B), as applicable, whether or not the certificates representing such shares of Preferred shall have been surrendered or new certificates representing the shares of Common into which such shares have been converted shall have been issued. Any dividends or distributions declared but unpaid at the time of a mandatory conversion with respect to the Preferred so converted shall be paid upon such mandatory conversion. If a stockholder notifies the Corporation or its transfer agent in

writing that the stockholder's certificate has been lost, stolen or destroyed, and executes an agreement in a form reasonably satisfactory to the Corporation and its transfer agent to indemnify them from any loss incurred in connection with the lost, stolen or destroyed certificates (without requirement of posting any bond), then such actions shall be treated for purposes of this Section as delivery of such lost, stolen or destroyed certificate.

(3) Adjustment of Conversion Prices.

The Series A Conversion Price, the Series B Conversion Price, the Series C-1 Conversion Price, the Series C-2 Conversion Price and the Series C-3 Conversion Price (each a "Conversion Price") and the kind of securities issuable upon the conversion of any share of Series A Preferred, Series B Preferred, Series C-1 Preferred, Series C-2 Preferred and Series C-3 Preferred (collectively, the "Convertible Preferred"), shall be adjusted from time to time after the Filing Date (as defined below) as follows:

(i) Subdivision or Combination of Shares. If the Corporation at any time after the date that this Amended and Restated Certificate of Incorporation was filed with the New York Secretary of State ("Filing Date") effects a subdivision or combination of the outstanding Common, the Conversion Price for each share of outstanding Convertible Preferred shall be decreased, in the case of a subdivision, or increased, in the case of a combination, in the same proportions as the Common is subdivided or combined, in each case effective automatically upon, and simultaneously with, the effectiveness of the subdivision or combination which gives rise to the adjustment.

(ii) Stock Dividends. If the Corporation at any time after the Filing Date pays a dividend, or makes any other distribution, to holders of Common payable in shares of Common, or fixes a record date for the determination of holders of Common entitled to receive a dividend or other distribution payable in shares of Common, the Conversion Price for each share of Convertible Preferred shall be decreased by multiplying it by a fraction: (A) the numerator of which shall be the total number of shares of Common outstanding immediately prior to the time of payment of such dividend or distribution; and (B) the

denominator of which shall be the total number of shares of Common outstanding immediately after such dividend or distribution, in each case effective automatically as of the date the Corporation shall take a record of the holders its Common for the purpose of receiving such dividend or distribution (or if no such record is taken, as of the effectiveness of such dividend or distribution).

(iii) Reclassification, Consolidation or Merger. If at any time after the Filing Date, as a result of (a) a capital reorganization or reclassification (other than a subdivision, combination or dividend which gives rise to an adjustment of a Conversion Price pursuant to clauses (i) or (ii) of this
Section 1(d)(3)); or (b) a merger or consolidation of the Corporation with another corporation (whether or not the Corporation is the surviving corporation), the Common issuable upon the conversion of the Convertible Preferred shall be changed into or exchanged for the same or a different number of shares of any class or classes of stock of the Corporation or any other corporation, or other securities convertible into such shares, then, as a part of such reorganization, reclassification, merger or consolidation, appropriate adjustments shall be made in the terms of the Convertible Preferred (or of any securities into which the Convertible Preferred is changed or for which the Convertible Preferred is exchanged), so that: (x) the holders of Convertible Preferred or of such substitute securities shall thereafter be entitled to receive, upon conversion of the Convertible Preferred or of such substitute securities, the kind and amount of shares of stock, other securities, money and property which such holders would have received at the time of such capital reorganization, reclassification, merger, or consolidation, if such holders had converted their Convertible Preferred immediately prior to such capital reorganization, reclassification, merger, or consolidation, and (y) the Convertible Preferred or such substitute securities shall thereafter be adjusted on terms as nearly equivalent as may be practicable to the adjustments theretofore provided in this Section
1(d)(3). No consolidation or merger in which the Corporation is not the surviving corporation shall be consummated unless the surviving corporation shall agree, in writing, to the provisions of this Section
1(d)(3)(iii). The provisions of this Section 1(d)(3)(iii) shall similarly apply to successive capital reorganizations, reclassifications, mergers, and consolidations.

(iv) Adjustment upon Certain Issuances.

(A) For purposes of this Section 1(d)(3)
(iv), "Additional Shares of Common" means all shares of Common issued by the Corporation after the Filing Date other than: (1) shares of Common issued in transactions giving rise to adjustments under Sections 1(d)(3)(i),
(ii), or (iii) above; (2) shares of Common issued upon conversion of shares of Convertible Preferred; (3) shares of Common which may be issued in the discretion of the Board to employees or directors of, or consultants or advisors to, strategic partners of the Corporation or any wholly-owned subsidiary of the Corporation, and options or warrants or other rights for the purchase of such shares; (4) options or warrants or other rights outstanding as of the Filing Date or issued under Section 1(d)(3)(iv)(3) above for the purchase of such shares; (5) securities issued pursuant to any anti-dilution rights of the Convertible Preferred or the warrants outstanding as of the Filing Date; and (6) shares of Common Stock issued in satisfaction of interest on the Corporation's indebtedness for borrowed money, provided the number of shares of Common Stock issuable is calculated based on the average closing bid and asked prices for the Common Stock for the twenty
(20) trading days preceding the interest payment.

(B) Except as otherwise provided in this
Section 1(d)(3)(iv) below, if at any time the Corporation issues or is deemed to issue Additional Shares of Common for a consideration per share less than the Conversion Price in effect for a given share at such issuance or deemed issuance:

(1) in the case of the Series A Preferred, the Conversion Price shall be reduced for such share to a price equal to a price determined by dividing: (x) the aggregate consideration received by or deemed to have been received by the Corporation upon such issue, by: (y) the number of shares of Additional Shares of Common issued or deemed to have been issued in such issue; and

(2) in the case of the Series B Preferred, Series C-1 Preferred, Series C-2 Preferred or Series C-3 Preferred, the Conversion Price shall be reduced

for such share to a price equal to a price determined by dividing:

(x) the sum of (a) the product derived by multiplying the Conversion Price in effect for such share immediately prior to such issue times the number of shares of Common (on a fully-diluted basis) outstanding immediately prior to such issue, plus (b) the aggregate consideration received by or deemed to have been received by the Corporation upon such issue; by

(y) the sum of (a) the number of shares of Common (on a fully-diluted basis) outstanding immediately prior to such issue, plus (b) the number of shares of Additional Shares of Common issued or deemed to have been issued in such issue;

provided, that no adjustment pursuant to this Section 1(d)(3)(iv)(B)(2) shall be made in connection with any issuance or deemed issuance of Additional Shares of Common for a consideration of at least the then applicable Series A Conversion Price.

(v) Convertible Securities.

(A) "Convertible Securities" means all rights or options for the purchase of, or stock or other securities convertible into, Additional Shares of Common or other Convertible Securities, whenever and each time issued.

(B) The "Effective Price" with respect to any Convertible Securities means the result of dividing:

(1) the sum of (x) the total consideration, if any, received by the Corporation for the issuance of such Convertible Securities, plus
(y) the minimum consideration, if any, payable to the Corporation upon exercise or conversion of such Convertible Securities (assuming that the full amount of securities issuable upon exercise or conversion are issued), plus (z) the minimum consideration, if any, payable to the Corporation upon exercise or conversion of any Convertible Securities issuable upon exercise or conversion of such Convertible Securities, by:

(2) the maximum number of Additional Shares of Common issuable upon exercise or conversion of such Convertible Securities or of any Convertible Securities issuable upon exercise or conversion of such Convertible Securities.

(C) If at any time after the Filing Date the Corporation issues or is deemed to issue a Convertible Security with respect to which the Effective Price is less than the Conversion Price for a share of Convertible Preferred in effect at such issuance or deemed issuance, the Conversion Price for such share of Convertible Preferred shall be reduced to the Effective Price.

(D) If Convertible Securities by their terms provide, with the passage of time or otherwise (including by operation of the anti-dilution provisions thereof), for any increase or decrease in the consideration payable to the Corporation or decrease or increase in the number of shares of Common issuable upon the exercise, conversion or exchange thereof (or if any such change is made by amending such Convertible Securities), the Conversion Price computed upon the original issue thereof, and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such the rights of conversion or exchange under such Convertible Securities. No readjustment pursuant to this clause (D) shall have the effect of increasing the applicable Conversion Price in effect to an amount which exceeds the lower of (1) the Conversion Price immediately following, and as adjusted to reflect, the Company's issuance of such Convertible Securities (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), or (2) the Conversion Price that would have resulted from any issuances of Additional Shares of Common or Convertible Securities between the date the Company adjusted the Conversion Price to reflect the issuance of such original Convertible Securities and such readjustment date.

(E) If an adjustment has been made under this Section 1(d)(3)(v) as a consequence of any issuance of a Convertible Security, then no further adjustment shall be made under Section 1(d)(3)(iv) above

upon the actual issuance of Additional Shares of Common upon the exercise or conversion of such Convertible Securities, or upon the issuance of Convertible Securities issuable upon exercise or conversion of the original Convertible Security.

(vi) Valuation of Consideration. For purposes of the operation of Sections 1(d)(3)(iv) and (v) above, the consideration received by the Corporation for any issue or sale of securities shall:

(A) to the extent it consists of cash, be computed as the aggregate net amount of cash received by the Corporation;

(B) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board in accordance with the terms of Section 1(c)(6) above; and

(C) to the extent Additional Shares of Common or Convertible Securities are issued or sold together with other stock or securities or other assets of the Corporation for a consideration that covers both, be such portion of the consideration so received that may be reasonably determined in good faith by the Board to be allocable to such Additional Shares of Common or Convertible Securities.

(vii) Other Action Affecting Common. If at any time the Corporation takes any action affecting its Common which, in the opinion of the Board, would have an adverse effect upon the Conversion Rights of a given share of the Convertible Preferred, the Conversion Price for such share and the kind of securities issuable upon the conversion of such share shall be adjusted in such manner and at such time as the Board may in good faith determine to be equitable in the circumstances.

(vii) Notice of Adjustments. Whenever the Conversion Price or the kind of securities issuable upon the conversion of any one of or all of the Convertible Preferred shall be adjusted pursuant to
Section 1(d)(3)(i) - (v) or (vii) above, the Corporation shall

make a certificate signed by its Chief Financial Officer, Secretary or Assistant Secretary, setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis on which the Board made any determination hereunder), and the Conversion Price and the kind of securities issuable upon the conversion of such share(s) of the Convertible Preferred after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by first class mail postage prepaid) to each holder of Convertible Preferred promptly after each adjustment.

(4) Full Consideration. All shares of Common which shall be issued upon the conversion of any Convertible Preferred (which is itself fully paid and non-assessable) will, upon issuance, be fully paid and non-assessable. The Corporation will pay such amounts and will take such other action as may be necessary from time to time so that all shares of Common which shall be issued upon the conversion of any Convertible Preferred will, upon issuance and without cost to the recipient, be free from all pre-emptive rights, taxes, liens and charges with respect to the issue thereof.

(5) No Impairment. The Corporation will not, by amendment of its Amended and Restated Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 1(d) and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of any holder of the Convertible Preferred against impairment. The Corporation shall at all times when the Convertible Preferred shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the Convertible Preferred, such number of its duly authorized shares of Common as shall from time to time be sufficient to effect the conversion of all outstanding shares of Convertible Preferred.

(6) No Reissuance of Preferred. No share of Preferred acquired by the Corporation upon conversion, redemption or purchase shall be reissued and all such shares shall be canceled, retired and eliminated from the shares which the Corporation may be authorized to issue. The Corporation shall take all such corporate action necessary or appropriate to reduce the authorized number of Preferred accordingly.

(7) Minimum Conversion Price. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common issuable upon conversion of the shares of Convertible Preferred, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common at such adjusted Conversion Price.

SECTION 2. COMMON STOCK

(a) Voting Rights. Except as otherwise required by law or by this Certificate, each share of Common shall entitle the holder thereof to one vote on each matter submitted to a vote of the stockholders of the Corporation, and the holders of shares of Common, Series A Preferred, Series B Preferred and Series C Preferred shall vote together and not as separate classes.

(b) Dividend Rights. Subject to the dividend rights of the holders of the Preferred set forth in Sections 1(b) and 1(c) above, the holders of the Common shall be entitled to receive, as, when and if declared by the Board, but only out of funds legally available therefor, cash dividends in such amounts as the Board may determine.

(c) Liquidation Rights. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation and the preferential amounts to which the holders of any outstanding shares of Preferred shall be entitled to receive upon dissolution, liquidation, or winding up, the holders of the Common shall be entitled to share on a share for share basis in the remaining assets of the Corporation (together with the holders of Series A Preferred as set forth in Section 1(c)(4) above).

(d) Residual Rights. All rights accruing to the outstanding shares of the Corporation not otherwise expressly provided for herein shall be vested in the Common.

(c) Article FOURTH of the Certificate of Incorporation, relating to the location of the Corporation's office in New York and its agent for service of process, is hereby amended to read as follows:

"FOURTH: The office of the Corporation is to be located in the County of New York, State of New York. The Secretary of State of the State of New York is designated as agent of the Corporation upon whom process in any action or proceeding against the Corporation may be served. The address to which the Secretary of State shall mail a copy of any such process so served is:

Halsey Drug Co., Inc. 695 North Perryville Road Rockford, Illinois 61107

Attention: President

(d) Articles SEVENTH, EIGHTH and NINTH, relating to the first directors and the original subscribers for shares of the Corporation are hereby deleted in their entirety.

(e) Article TENTH, relating to shareholder preemptive rights, is hereby renumbered as Article SEVENTH.

(f) Article ELEVENTH, relating to interested director transactions, is hereby renumbered as Article EIGHTH and amended to read as follows:

"EIGHTH: No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or

transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction."

(g) Article TWELFTH, relating to indemnification, is hereby renumbered as Article NINTH and amended to read as follows:

"NINTH: The Corporation shall, to the fullest extent possible permitted by Sections 721 through 726 of the Business Corporation Law of New York, indemnify any and all directors and officers whom it shall have the power to indemnify under said sections from and against any and all of the expenses, liabilities or other matters referred to in or covered by such sections of the Business Corporation Law, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which the person so indemnified may be entitled under any By-Law, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his/her official capacity and as to action in another capacity by holding such office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such person."

(h) Article TENTH, limiting the personal liability of the Corporation's directors to the Corporation and its shareholders, is hereby added to read:

"TENTH: A director of the Corporation shall not be personally liable to the Corporation or its shareholders for damages for any breach of duty as a director; provided that, except as hereinafter provided, this Article TENTH shall neither eliminate nor limit liability: (a) if a judgment or final adjudication adverse to the director establishes that (i) the director's acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of

law, (ii) the director personally gained in fact a financial profit or other advantage to which the director was not legally entitled, or (iii) the director's acts violated Section 719 of the New York Business Corporation Law; or (b) for any act or omission prior to the effectiveness of this Article TENTH. If the Corporation hereafter may by law be permitted to further eliminate or limit the personal liability of directors, then pursuant hereto the liability of a director of the Corporation shall, at such time, automatically be further eliminated or limited to the fullest extent permitted by law. Any repeal of or modification to the provisions of this Article TENTH shall not adversely affect any right or protection of a director of the Corporation existing pursuant to this Article TENTH immediately prior to such repeal or modification."

4. The text of the Certificate of Incorporation, as amended heretofore, is hereby restated as further amended to read as herein set forth in full:

FIRST: The name of the Corporation shall be HALSEY DRUG CO., INC.

SECOND: The purpose of the Corporation is to engage in any lawful act or activity for which Corporations may be organized under the Business Corporation Law of the State of New York; provided, however, that it is not formed to engage in any act or activity requiring the consent or approval of any state official, department, board, agency or any other body without such consent or approval first being obtained.

THIRD: The Corporation is authorized to issue two classes of stock, to be designated, respectively, "Common Stock" and "Preferred Stock". The total number of shares which the Corporation is authorized to issue is 940,000,000 of which (A) 290,000,000 shares shall be Preferred Stock (the "Preferred"), and (B) 650,000,000 shares shall be Common Stock, $.01 par value (the "Common"). Of the Preferred, 45,000,000 shares shall be designated Series A Convertible Preferred Stock, $.01 par value per share (the "Series A Preferred"), 25,000,000 shares shall be designated Series B Convertible Preferred Stock, $.01 par value per share (the "Series B Preferred"), 70,000,000 shares shall be designated Series C-1 Convertible Preferred Stock, $.01 par value per share (the "Series C-1 Preferred"), 50,000,000 shares shall be designated Series C-2 Convertible Preferred Stock, $.01 par value per share (the "Series C-2 Preferred") and 100,000,000 shares shall be designated Series C-3 Convertible Preferred Stock, $.01 par value per share (the "Series C-3 Preferred"). The Series C-1 Preferred, Series C-2 Preferred and Series C-3 Preferred are sometimes referred to collectively as the "Series C Preferred". The rights, preferences and privileges of and restrictions on the Series A Preferred, Series B Preferred, Series C Preferred and Common are as follows:

SECTION 1. PREFERRED STOCK

(a) Voting Rights. Except as otherwise required by law, each share of outstanding Series A Preferred, Series B Preferred and Series C Preferred shall entitle the record holder thereof to

vote on each matter submitted to a vote of the stockholders of the Corporation and to have the number of votes equal to the number of whole shares of Common into which such share of Series A Preferred, Series B Preferred or Series C Preferred, as the case may be, is then convertible pursuant to the provisions hereof at the record date for the determination of stockholders entitled to vote on such matters or, if no such record date is established, at the date such vote is taken or any written consent of stockholders becomes effective. Except as otherwise required by law or by this Certificate, the holders of shares of Common, Series A Preferred, Series B Preferred and Series C Preferred shall vote together and not as separate classes. Fractional votes shall not be permitted and any fractional voting rights resulting from the above formula shall be rounded to the nearest whole number (with one-half rounded upwards).

(b) Dividends. If any dividend or other distribution payable in cash, securities or other property is declared on the Common (other than in connection with Section 1(c) below), each holder of shares of Preferred on the record date for such dividend or distribution shall be entitled to receive, on the date of payment or distribution of such dividend or other distribution, the same cash, securities or other property which such holder would have received on such record date if such holder was the holder of record of the number of whole shares of Common into which the shares of Preferred then held by such holder are then convertible (with any resulting fractions rounded to the nearest whole share, with one-half rounded up).

(c) Liquidation Rights. If the Corporation shall be voluntarily or involuntarily liquidated, dissolved or wound up (each, a "Liquidation Event"):

(1) Prior and in preference to any payments or distributions under Sections 1(c)(2), 1(c)(3) and 1(c)(4) below, the holder of each then outstanding share of Series A Preferred shall be entitled to receive, out of the assets of the Corporation legally available for distribution to stockholders, and before any payment or declaration and setting apart for payment of any amount or dividend pursuant to Sections 1(c)(2) or 1(c)(3) below or with respect to the Common or any other junior equity security of the Corporation, the amount (the "Series A Preference") equal to [$______] per share
[TO EQUAL THE PRODUCT OF (x) FIVE (5), MULTIPLIED BY (y) THE AVERAGE OF THE CLOSING BID AND ASKED PRICES OF THE COMPANY'S COMMON STOCK FOR THE TWENTY (20) TRADING DAYS ENDING TWO (2) TRADING DAYS IMMEDIATELY PRIOR TO THE DATE OF THE DEBENTURE AND SHARE PURCHASE AGREEMENT, AS SUCH PRICE MAY BE ADJUSTED PURSUANT TO SECTION 3.4 OF THE FORM OF DEBENTURE] (such amount to be adjusted proportionally in the event the Series A Preferred is subdivided into a greater number or combined into a lesser number of shares). If the Corporation shall have insufficient assets and funds to pay such amounts in full to the holders of the Series A Preferred, then all assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred in proportion to the preferential amount each such holder is otherwise entitled to receive pursuant to this Section 1(c)(1).

(2) After full payment of the distributions under Section 1(c)(1) above, but prior and in preference to any payments or distributions under Sections 1(c)(3) and 1(c)(4) below, the holder of each then outstanding share of Series B Preferred shall be entitled to receive, out of the assets of the Corporation legally available for distribution to stockholders, and before any payment or declaration and setting apart for payment of any amount or dividend pursuant to Section 1(c)(3) below or with respect to the Common or any other junior equity security of the Corporation, the amount (the "Series B Preference") equal to $.3420 per share (such amount to be adjusted proportionally in the

event the Series B Preferred is subdivided into a greater number or combined into a lesser number of shares). If the Corporation shall have insufficient assets and funds to pay such amounts in full to the holders of the Series B Preferred (after payment in full of all amounts pursuant to Section 1(c)(1) above), then all remaining assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series B Preferred in proportion to the preferential amount each such holder is otherwise entitled to receive pursuant to this Section 1(c)(2).

(3) After full payment of the distributions under Sections 1(c)(1) and 1(c)(2) above, but prior and in preference to any payments or distributions under Section 1(c)(4) below, the holder of each then outstanding share of Series C Preferred shall be entitled to receive, out of the assets of the Corporation legally available for distribution to stockholders, and before any payment or declaration and setting apart for payment of any amount or dividend with respect to the Common or any other junior equity security of the Corporation, (i) in the case of Series C-1 Preferred, the amount (the "Series C-1 Preference") equal to $.5776 per share, (ii) in the case of Series C-2 Preferred, the amount (the "Series C-2 Preference") equal to $.5993 per share, and (iii) in the case of Series C-3 Preferred, the amount (the "Series C-3 Preference") equal to $.3481 per share, (in each case such amount to be adjusted proportionally in the event the Series C-1 Preferred, Series C-2 Preferred or Series C-3 Preferred, as applicable, is subdivided into a greater number or combined into a lesser number of shares). If the Corporation shall have insufficient assets and funds to pay such amounts in full to the holders of the Series C Preferred (after payment in full of all amounts pursuant to Sections 1(c)(1) and 1(c)(2) above), then all remaining assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series C Preferred in proportion to the preferential amount each such holder is otherwise entitled to receive pursuant to this
Section 1(c)(3).

(4) After full payment has been made to the holders of Series A Preferred, Series B Preferred and Series C Preferred of the liquidation preferences in Sections 1(c)(1), 1(c)(2) and 1(c)(3), the entire remaining assets and funds, if any, shall be distributed ratably among the holders of Common and the Series A Preferred, in proportion to the number of shares of Common held by them on an as-converted basis; provided, that for purposes of calculating the distribution pursuant to this Section 1(c)(4), and for no other purposes whatsoever, each share of Series A Preferred shall be deemed to be convertible into only 30% of the shares of Common into which it is convertible pursuant to the terms of Section 1(d) below.

(5) For purposes of this Section 1(c), unless the holders of a majority of the then outstanding shares of Series A Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) together as a single class, elect otherwise, (i) the consummation of any merger, consolidation or similar transaction or series of related transactions, the result of which is that the holders of the Corporation's capital stock outstanding immediately prior to such transaction own, immediately upon the consummation of such transaction(s), shares of capital stock possessing in the aggregate less than a majority of the voting power of the surviving entity or rights to liquidation distributions of less than 50% of the assets of the surviving entity, (ii) a sale, lease, exclusive license, transfer or other conveyance of all or substantially all of the assets of the Corporation, or
(iii) the sale of 50% or more of the Corporation's voting stock in one or more series of transactions, shall (for purposes of the distribution of such securities or other consideration to the holders of Common and Preferred) be treated as a Liquidation Event and shall entitle the holders of Common and Preferred to receive at closing in cash, securities or other property (valued as provided

in Section 1(c)(6) below) as specified above and in the order of preference as set forth in this Section 1(c).

(6) Whenever the distribution provided in this
Section 1(c) shall be payable in property other than cash, subject to the provisions regarding valuation of securities set forth below, the value of such distribution shall be its fair market value as determined in good faith by the Board of Directors of the Corporation (the "Board"). The holders of a majority of the Series A Preferred will have 10 days from the determination of the valuation of any securities or other property pursuant this Section 1(c) to object to such valuation in writing to the Corporation. In the event of such objection, the Corporation and a majority in interest of the objecting stockholders will in good faith seek a resolution of any disputed valuation. If the Corporation and the objecting investors are unable to agree on a valuation within 5 days of the objection by the holders of the Series A Preferred, the valuation will be determined by an independent third party appraiser jointly selected by the Corporation and the holders of a majority of the then outstanding shares of Series A Preferred, whose written appraised value will be binding on the Corporation and its stockholders. Any distributions pursuant to this Section 1(c) will be delayed until after the delivery of the appraiser's report. Any securities shall be valued as follows:

(i) Securities not subject to investment letter or other similar restrictions on free marketability covered by (ii) below:

(A) If traded on a securities exchange or through the Nasdaq National Market or the Nasdaq SmallCap Market, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the 30-day period ending three (3) days prior to the date of determination;

(B) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty-day period ending three
(3) days prior to the date of determination; and

(C) If there is no active public market, the value shall be determined by an independent third party appraiser jointly selected by the Corporation and the holders of a majority of the then outstanding shares of Series A Preferred.

(ii) The method of valuation of securities subject to investment letter or other restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to apply an appropriate discount determined in good faith by the Board from the market value determined as above in (A), (B) or (C).

(7) The Corporation shall promptly provide to the holders of shares of Preferred such information concerning the terms of any event or transaction specified in Section 1(c)(5) and the value of the assets of the Corporation as may reasonably be determined by the Board. If the transaction is a sale of all or substantially all of the assets of the Corporation, the Corporation will give written notice of such transaction to each holder of Preferred not less than 20 or more than 60 days before the stockholders' meeting called to approve the transaction or, if no stockholders' meeting will be called, not less than 20 or more than 60 days before the date that the transaction is reasonably anticipated to be consummated, and will also notify the holders in writing of the final approval of the

transaction. The initial notice will describe the material terms and conditions of the proposed transaction. The Corporation will give the holders of Preferred prompt notice of any material changes to the terms of the proposed transaction. The Corporation will not consummate the proposed transaction sooner than 20 days after the Corporation has given notice of any material changes. By written consent or vote, the holders of a majority of the shares of Series A Preferred outstanding may shorten the notice periods provided in this Section. In the event the requirements of this Section are not complied with, the Corporation will either: (i) cause the closing to be postponed until the requirements of this Section have been complied with; or (ii) cancel the transaction, in which event the rights, preferences, privileges and restrictions of the holders of the Preferred will revert to the rights, preferences, privileges and restrictions existing immediately before the date of the first notice referred to in this Section.

(d) Conversion.

(1) Terms of Conversion.

(i) Optional Conversion. The holder of each share of Series A Preferred, Series B Preferred and Series C Preferred shall have the right ("Conversion Right"), at such holder's option, to convert such share at any time, without cost, on the terms of this Section 1(d) and at the office of the Corporation or its transfer agent, into the number of fully paid and non-assessable shares of Common that results from dividing (A) in the case of the Series A Preferred, the Series A Preference by the Series A conversion price that is in effect at the time of conversion (the "Series A Conversion Price"), (B) in the case of the Series B Preferred, the Series B Preference by the Series B conversion price that is in effect at the time of conversion (the "Series B Conversion Price"), (C) in the case of the Series C-1 Preferred, the Series C-1 Preference by the Series C-1 conversion price that is in effect at the time of conversion (the "Series C-1 Conversion Price"), (D) in the case of the Series C-2 Preferred, the Series C-2 Preference by the Series C-2 conversion price that is in effect at the time of conversion (the "Series C-2 Conversion Price") and (E) in the case of the Series C-3 Preferred, the Series C-3 Preference by the Series C-3 conversion price that is in effect at the time of conversion (the "Series C-3 Conversion Price"). The initial Series A Conversion Price is equal to [$_____][TO EQUAL THE AVERAGE OF THE CLOSING BID
AND ASKED PRICES OF THE COMPANY'S COMMON STOCK FOR THE TWENTY (20) TRADING DAYS ENDING TWO (2) TRADING DAYS IMMEDIATELY PRIOR TO THE DATE OF THE DEBENTURE AND SHARE PURCHASE AGREEMENT, AS SUCH PRICE MAY BE ADJUSTED PURSUANT TO SECTION 3.4 OF THE FORM OF DEBENTURE]. The initial Series B Conversion Price is equal to the Series B Preference. The initial Series C-1 Conversion Price is equal to the Series C-1 Preference. The initial Series C-2 Conversion Price is equal to the Series C-2 Preference. The initial Series C-3 Conversion Price is equal to the Series C-3 Preference. The Series A Conversion Price, the Series B Conversion Price, the Series C-1 Conversion Price, the Series C-2 Conversion Price and the Series C-3 Conversion Price shall be subject to adjustment from time to time as provided in Section 1(d)(3) below.

(ii) Mandatory Conversion.

(A) Upon the occurrence of a Qualified Trading Event, each share of Series A Preferred, Series B Preferred and Series C Preferred shall be automatically converted, without cost and on the terms of this Section 1(d), into the number of whole shares of Common into which such share of Series A Preferred, Series B Preferred or Series C Preferred, as the case me be, would be convertible under Section 1(d)(1)(i) above immediately prior to such Qualified

Trading Event (with any resulting fractions rounded to the nearest whole share, with one-half rounded up). "Qualified Trading Event" means the first such time that (A) the Common has a closing price of at least $2.80 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares) for thirty consecutive trading days, and (B) the average daily trading value of all shares of Common traded during such thirty consecutive trading day period is at least $1,750,000. For purposes of this test, (x) closing prices shall be determined as the average between the closing bid and ask prices at the close of each trading day (as reported by such exchange or over-the-counter market on which the Common may then be listed or admitted for trading), and (y) the trading value shall be determined by multiplying the number of shares so traded by such day's closing price as determined above.

(B) Without limiting subsection (ii)(A)
above, each share of Series A Preferred, Series B Preferred and Series C Preferred shall be automatically converted without cost and on the terms of this
Section 1(d), into the number of whole shares of Common into which such share of Series A Preferred, Series B Preferred or Series C Preferred, as the case may be, would be convertible under Section 1(d)(1)(i) above upon the receipt of the written consent of the holders of at least 51% of the shares of Series A Preferred.

(2) Mechanics of Conversion.

(i) Optional Conversion. A holder of any share of Convertible Preferred may exercise the Conversion Right of such share by surrendering the certificate therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the applicable Preferred, together with a written notice to the Corporation which shall state (A) that such holder elects to convert the same, and (B) the number of shares of Preferred being converted. Thereupon the Corporation shall issue and deliver to the holder of such shares within two (2) business days a certificate or certificates for the number of shares of Common to which such holder shall be entitled. If the certificate evidencing the Preferred being converted shall also evidence shares of Preferred not being converted, then the Corporation shall also deliver to the holder of such certificate within such two (2) business day period a new stock certificate evidencing the Preferred not converted. The conversion of any shares of Preferred shall be deemed to have been made immediately prior to the close of business on the date that the shares to be converted are surrendered to the Corporation, and the person or persons entitled to receive the shares of Common issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common on such date. Any dividends or distributions declared but unpaid at the time of conversion with respect to the Preferred so converted shall be paid to the holder of Common issued upon conversion of the Preferred. If a stockholder notifies the Corporation or its transfer agent in writing that the stockholder's certificate has been lost, stolen or destroyed, and executes an agreement in a form reasonably satisfactory to the Corporation and its transfer agent to indemnify them from any loss incurred in connection with the lost, stolen or destroyed certificates (without requirement of posting any bond), then such actions shall be treated for purposes of this Section as delivery of such lost, stolen or destroyed certificate.

(ii) Mandatory Conversion. The Corporation shall give written notice to each holder of a share of Preferred not more than ten (10) days after the occurrence of a Qualified Trading Event or the receipt of the written consent required pursuant to Section 1(d)(1)(ii)(B), as applicable. Following the conversion of such shares, each holder of shares so converted shall, if requested by the Corporation, surrender the certificate therefor at the office of the

Corporation or any transfer agent for the applicable Preferred. Upon such surrender, the Corporation shall issue and deliver to each holder a certificate or certificates for the number of shares of Common to which such holder is entitled. The conversion of shares of Preferred shall be effective as of the occurrence of the Qualified Trading Event or upon receipt of the written consent provided in Section 1(d)(1)(ii)(B), as applicable, whether or not the certificates representing such shares of Preferred shall have been surrendered or new certificates representing the shares of Common into which such shares have been converted shall have been issued. Any dividends or distributions declared but unpaid at the time of a mandatory conversion with respect to the Preferred so converted shall be paid upon such mandatory conversion. If a stockholder notifies the Corporation or its transfer agent in writing that the stockholder's certificate has been lost, stolen or destroyed, and executes an agreement in a form reasonably satisfactory to the Corporation and its transfer agent to indemnify them from any loss incurred in connection with the lost, stolen or destroyed certificates (without requirement of posting any bond), then such actions shall be treated for purposes of this Section as delivery of such lost, stolen or destroyed certificate.

(3) Adjustment of Conversion Prices.

The Series A Conversion Price, the Series B Conversion Price, the Series C-1 Conversion Price, the Series C-2 Conversion Price and the Series C-3 Conversion Price (each a "Conversion Price") and the kind of securities issuable upon the conversion of any share of Series A Preferred, Series B Preferred, Series C-1 Preferred, Series C-2 Preferred and Series C-3 Preferred (collectively, the "Convertible Preferred"), shall be adjusted from time to time after the Filing Date (as defined below) as follows:

(i) Subdivision or Combination of Shares. If the Corporation at any time after the date that this Amended and Restated Certificate of Incorporation was filed with the New York Secretary of State ("Filing Date") effects a subdivision or combination of the outstanding Common, the Conversion Price for each share of outstanding Convertible Preferred shall be decreased, in the case of a subdivision, or increased, in the case of a combination, in the same proportions as the Common is subdivided or combined, in each case effective automatically upon, and simultaneously with, the effectiveness of the subdivision or combination which gives rise to the adjustment.

(ii) Stock Dividends. If the Corporation at any time after the Filing Date pays a dividend, or makes any other distribution, to holders of Common payable in shares of Common, or fixes a record date for the determination of holders of Common entitled to receive a dividend or other distribution payable in shares of Common, the Conversion Price for each share of Convertible Preferred shall be decreased by multiplying it by a fraction: (A) the numerator of which shall be the total number of shares of Common outstanding immediately prior to the time of payment of such dividend or distribution; and (B) the denominator of which shall be the total number of shares of Common outstanding immediately after such dividend or distribution, in each case effective automatically as of the date the Corporation shall take a record of the holders its Common for the purpose of receiving such dividend or distribution (or if no such record is taken, as of the effectiveness of such dividend or distribution).

(iii) Reclassification, Consolidation or Merger. If at any time after the Filing Date, as a result of (a) a capital reorganization or reclassification (other than a subdivision,

combination or dividend which gives rise to an adjustment of a Conversion Price pursuant to clauses (i) or (ii) of this Section 1(d)(3)); or (b) a merger or consolidation of the Corporation with another corporation (whether or not the Corporation is the surviving corporation), the Common issuable upon the conversion of the Convertible Preferred shall be changed into or exchanged for the same or a different number of shares of any class or classes of stock of the Corporation or any other corporation, or other securities convertible into such shares, then, as a part of such reorganization, reclassification, merger or consolidation, appropriate adjustments shall be made in the terms of the Convertible Preferred (or of any securities into which the Convertible Preferred is changed or for which the Convertible Preferred is exchanged), so that: (x) the holders of Convertible Preferred or of such substitute securities shall thereafter be entitled to receive, upon conversion of the Convertible Preferred or of such substitute securities, the kind and amount of shares of stock, other securities, money and property which such holders would have received at the time of such capital reorganization, reclassification, merger, or consolidation, if such holders had converted their Convertible Preferred immediately prior to such capital reorganization, reclassification, merger, or consolidation, and (y) the Convertible Preferred or such substitute securities shall thereafter be adjusted on terms as nearly equivalent as may be practicable to the adjustments theretofore provided in this Section 1(d)(3). No consolidation or merger in which the Corporation is not the surviving corporation shall be consummated unless the surviving corporation shall agree, in writing, to the provisions of this Section 1(d)(3)(iii). The provisions of this Section 1(d)(3)(iii) shall similarly apply to successive capital reorganizations, reclassifications, mergers, and consolidations.

(iv) Adjustment upon Certain Issuances.

(A) For purposes of this Section
1(d)(3)(iv), "Additional Shares of Common" means all shares of Common issued by the Corporation after the Filing Date other than: (1) shares of Common issued in transactions giving rise to adjustments under Sections 1(d)(3)(i), (ii), or
(iii) above; (2) shares of Common issued upon conversion of shares of Convertible Preferred; (3) shares of Common which may be issued in the discretion of the Board to employees or directors of, or consultants or advisors to, strategic partners of the Corporation or any wholly-owned subsidiary of the Corporation, and options or warrants or other rights for the purchase of such shares; (4) options or warrants or other rights outstanding as of the Filing Date or issued under Section 1(d)(3)(iv)(3) above for the purchase of such shares; (5) securities issued pursuant to any anti-dilution rights of the Convertible Preferred or the warrants outstanding as of the Filing Date; and (6) shares of Common Stock issued in satisfaction of interest on the Corporation's indebtedness for borrowed money, provided the number of shares of Common Stock issuable is calculated based on the average closing bid and asked prices for the Common Stock for the twenty (20) trading days preceding the interest payment.

(B) Except as otherwise provided in this Section 1(d)(3)(iv) below, if at any time the Corporation issues or is deemed to issue Additional Shares of Common for a consideration per share less than the Conversion Price in effect for a given share at such issuance or deemed issuance:

(1) in the case of the Series A Preferred, the Conversion Price shall be reduced for such share to a price equal to a price determined by dividing: (x) the aggregate consideration received by or deemed to have been received by the

Corporation upon such issue, by: (y) the number of shares of Additional Shares of Common issued or deemed to have been issued in such issue; and

(2) in the case of the Series B Preferred, Series C-1 Preferred, Series C-2 Preferred or Series C-3 Preferred, the Conversion Price shall be reduced for such share to a price equal to a price determined by dividing:

(x) the sum of (a) the product derived by multiplying the Conversion Price in effect for such share immediately prior to such issue times the number of shares of Common (on a fully-diluted basis) outstanding immediately prior to such issue, plus (b) the aggregate consideration received by or deemed to have been received by the Corporation upon such issue; by

(y) the sum of (a) the number of shares of Common (on a fully-diluted basis) outstanding immediately prior to such issue, plus (b) the number of shares of Additional Shares of Common issued or deemed to have been issued in such issue;

provided, that no adjustment pursuant to this Section 1(d)(3)(iv)(B)(2) shall be made in connection with any issuance or deemed issuance of Additional Shares of Common for a consideration of at least the then applicable Series A Conversion Price.

(v) Convertible Securities.

(A) "Convertible Securities" means all rights or options for the purchase of, or stock or other securities convertible into, Additional Shares of Common or other Convertible Securities, whenever and each time issued.

(B) The "Effective Price" with respect to any Convertible Securities means the result of dividing:

(1) the sum of (x) the total consideration, if any, received by the Corporation for the issuance of such Convertible Securities, plus (y) the minimum consideration, if any, payable to the Corporation upon exercise or conversion of such Convertible Securities (assuming that the full amount of securities issuable upon exercise or conversion are issued), plus (z) the minimum consideration, if any, payable to the Corporation upon exercise or conversion of any Convertible Securities issuable upon exercise or conversion of such Convertible Securities, by:

(2) the maximum number of Additional Shares of Common issuable upon exercise or conversion of such Convertible Securities or of any Convertible Securities issuable upon exercise or conversion of such Convertible Securities.

(C) If at any time after the Filing Date the Corporation issues or is deemed to issue a Convertible Security with respect to which the Effective Price is

less than the Conversion Price for a share of Convertible Preferred in effect at such issuance or deemed issuance, the Conversion Price for such share of Convertible Preferred shall be reduced to the Effective Price.

(D) If Convertible Securities by their terms provide, with the passage of time or otherwise (including by operation of the anti-dilution provisions thereof), for any increase or decrease in the consideration payable to the Corporation or decrease or increase in the number of shares of Common issuable upon the exercise, conversion or exchange thereof (or if any such change is made by amending such Convertible Securities), the Conversion Price computed upon the original issue thereof, and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such the rights of conversion or exchange under such Convertible Securities. No readjustment pursuant to this clause (D) shall have the effect of increasing the applicable Conversion Price in effect to an amount which exceeds the lower of (1) the Conversion Price immediately following, and as adjusted to reflect, the Company's issuance of such Convertible Securities (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares), or (2) the Conversion Price that would have resulted from any issuances of Additional Shares of Common or Convertible Securities between the date the Company adjusted the Conversion Price to reflect the issuance of such original Convertible Securities and such readjustment date.

(E) If an adjustment has been made under this Section 1(d)(3)(v) as a consequence of any issuance of a Convertible Security, then no further adjustment shall be made under Section 1(d)(3)(iv) above upon the actual issuance of Additional Shares of Common upon the exercise or conversion of such Convertible Securities, or upon the issuance of Convertible Securities issuable upon exercise or conversion of the original Convertible Security.

(vi) Valuation of Consideration. For purposes of the operation of Sections 1(d)(3)(iv) and (v) above, the consideration received by the Corporation for any issue or sale of securities shall:

(A) to the extent it consists of cash, be computed as the aggregate net amount of cash received by the Corporation;

(B) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board in accordance with the terms of Section 1(c)(6) above; and

(C) to the extent Additional Shares of Common or Convertible Securities are issued or sold together with other stock or securities or other assets of the Corporation for a consideration that covers both, be such portion of the consideration so received that may be reasonably determined in good faith by the Board to be allocable to such Additional Shares of Common or Convertible Securities.

(vii) Other Action Affecting Common. If at any time the Corporation takes any action affecting its Common which, in the opinion of the Board, would

have an adverse effect upon the Conversion Rights of a given share of the Convertible Preferred, the Conversion Price for such share and the kind of securities issuable upon the conversion of such share shall be adjusted in such manner and at such time as the Board may in good faith determine to be equitable in the circumstances.

(vii) Notice of Adjustments. Whenever the Conversion Price or the kind of securities issuable upon the conversion of any one of or all of the Convertible Preferred shall be adjusted pursuant to Section
1(d)(3)(i) - (v) or (vii) above, the Corporation shall make a certificate signed by its Chief Financial Officer, Secretary or Assistant Secretary, setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated (including a description of the basis on which the Board made any determination hereunder), and the Conversion Price and the kind of securities issuable upon the conversion of such share(s) of the Convertible Preferred after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (by first class mail postage prepaid) to each holder of Convertible Preferred promptly after each adjustment.

(4) Full Consideration. All shares of Common which shall be issued upon the conversion of any Convertible Preferred (which is itself fully paid and non-assessable) will, upon issuance, be fully paid and non-assessable. The Corporation will pay such amounts and will take such other action as may be necessary from time to time so that all shares of Common which shall be issued upon the conversion of any Convertible Preferred will, upon issuance and without cost to the recipient, be free from all pre-emptive rights, taxes, liens and charges with respect to the issue thereof.

(5) No Impairment. The Corporation will not, by amendment of its Amended and Restated Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 1(d) and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of any holder of the Convertible Preferred against impairment. The Corporation shall at all times when the Convertible Preferred shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the Convertible Preferred, such number of its duly authorized shares of Common as shall from time to time be sufficient to effect the conversion of all outstanding shares of Convertible Preferred.

(6) No Reissuance of Preferred. No share of Preferred acquired by the Corporation upon conversion, redemption or purchase shall be reissued and all such shares shall be canceled, retired and eliminated from the shares which the Corporation may be authorized to issue. The Corporation shall take all such corporate action necessary or appropriate to reduce the authorized number of Preferred accordingly.

(7) Minimum Conversion Price. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value of the shares of Common issuable upon conversion of the shares of Convertible Preferred, the Corporation

will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common at such adjusted Conversion Price.

SECTION 2. COMMON STOCK

(a) Voting Rights. Except as otherwise required by law or by this Certificate, each share of Common shall entitle the holder thereof to one vote on each matter submitted to a vote of the stockholders of the Corporation, and the holders of shares of Common, Series A Preferred, Series B Preferred and Series C Preferred shall vote together and not as separate classes.

(b) Dividend Rights. Subject to the dividend rights of the holders of the Preferred set forth in Sections 1(b) and 1(c) above, the holders of the Common shall be entitled to receive, as, when and if declared by the Board, but only out of funds legally available therefor, cash dividends in such amounts as the Board may determine.

(c) Liquidation Rights. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation and the preferential amounts to which the holders of any outstanding shares of Preferred shall be entitled to receive upon dissolution, liquidation, or winding up, the holders of the Common shall be entitled to share on a share for share basis in the remaining assets of the Corporation (together with the holders of Series A Preferred as set forth in Section 1(c)(4) above).

(d) Residual Rights. All rights accruing to the outstanding shares of the Corporation not otherwise expressly provided for herein shall be vested in the Common.

FOURTH: The office of the Corporation is to be located in the County of New York, State of New York. The Secretary of State of the State of New York is designated as agent of the Corporation upon whom process in any action or proceeding against the Corporation may be served. The address to which the Secretary of State shall mail a copy of any such process so served is:

Halsey Drug Co., Inc. 695 North Perryville Road Rockford, Illinois 61107

Attention: President

FIFTH: The duration of said Corporation shall be perpetual.

SIXTH: The number of directors shall be not less than three (3) nor more than eleven (11), none of whom need be stockholders of the Corporation.

SEVENTH: Except as may be otherwise expressly provided in the Certificate of Incorporation, as from time to time amended, or in any duly adopted vote or resolution of the Board of Directors, no stockholder shall have any preemptive rights to subscribe to any issue of stock of the Corporation whether now or hereafter authorized or to any issue of any obligations of the Corporation convertible into stock of the Corporation, or to any issue of warrants for the issuance of or options for

the purchase of stock of the Corporation, for whatever consideration the same may be issued, whether or not such issue of stock, obligations, warrants or options are offered to any other holders of stock or obligations of the Corporation.

EIGHTH: No contract or transaction between the corporation and one or more of its directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction.

NINTH: The Corporation shall, to the fullest extent possible permitted by Sections 721 through 726 of the Business Corporation Law of New York, indemnify any and all directors and officers whom it shall have the power to indemnify under said sections from and against any and all of the expenses, liabilities or other matters referred to in or covered by such sections of the Business Corporation Law, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which the person so indemnified may be entitled under any By-Law, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his/her official capacity and as to action in another capacity by holding such office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such person.

TENTH: A director of the Corporation shall not be personally liable to the Corporation or its shareholders for damages for any breach of duty as a director; provided that, except as hereinafter provided, this Article TENTH shall neither eliminate nor limit liability: (a) if a judgment or final adjudication adverse to the director establishes that (i) the director's acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law, (ii) the director personally gained in fact a financial profit or other advantage to which the director was not legally entitled, or (iii) the director's acts violated Section 719 of the New York Business Corporation Law; or (b) for any act or omission prior to the effectiveness of this Article TENTH. If the Corporation hereafter may by law be permitted to further eliminate or limit the personal liability of directors, then pursuant hereto the liability of a director of the Corporation shall, at such time, automatically be further eliminated or limited to the fullest extent permitted by law. Any repeal of or modification to the provisions of this Article TENTH shall not adversely affect any right or protection of a director of the Corporation existing pursuant to this Article TENTH immediately prior to such repeal or modification.

5. The foregoing amendments and restatement of the Certificate of Incorporation were authorized by the unanimous written consent of the Board of Directors followed by an affirmative vote of the holders of a majority of the outstanding shares of common stock of the Corporation entitled to vote thereon.

IN WITNESS WHEREOF, we have signed this certificate on the 6th day of February, 2004 and we affirm the statements contained herein as true under penalties of perjury.

EXHIBIT 10.4

INVESTOR RIGHTS AGREEMENT

This Investor Rights Agreement ("Agreement") is made as of February 6, 2004 by and among Halsey Drug Co., Inc., a New York corporation ("Company"), Essex Woodlands Health Ventures V, L.P., a Delaware limited partnership ("Essex"), Care Capital Investments, L.P., a Delaware limited partnership ("Care Capital"), Galen Partners III, L.P., a Delaware limited partnership ("Galen" and, together with Essex and Care Capital, "Purchasers"), Oracle Strategic Partners L.P., a Delaware limited partnership ("Oracle"), and each of the holders of the Company's securities listed on the signature page attached to this Agreement.

PRELIMINARY STATEMENTS

A. The Company has concurrently herewith entered into that certain Debenture and Share Purchase Agreement (the "2004 Purchase Agreement;" capitalized terms used in this Agreement and not otherwise defined in this Agreement will have the meanings ascribed such term in the 2004 Purchase Agreement) with the Purchasers and pursuant to which the Company issued certain Convertible Senior Secured Debentures.

B. The Company and the holders of the Preferred Stock (and the Common Stock issuable upon conversion of such Preferred Stock) (the "Investors") desire to enter into this Agreement to provide for certain agreements and options with respect to the Preferred Stock (and the Common Stock issuable upon conversion of such Preferred Stock) all upon the terms, conditions and provisions set forth in this Agreement.

AGREEMENT

In consideration of the mutual covenants contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

ARTICLE I

BOARD OF DIRECTORS; INVESTOR APPROVAL FOR MATERIAL
TRANSACTIONS

1.1. BOARD MEMBERS AND MEETINGS

The Company hereby covenants and agrees, that so long as the Purchasers own any Series A Preferred, as follows:

(a) The Board of Directors shall be comprised of directors in full compliance with the Voting Agreement, so long as such agreement remains in effect. The Company agrees to hold meetings of its Board of Directors at least four times a year, at no more than three month intervals. Directors shall be reimbursed for their reasonable travel and related expenses in attending meetings of the Board of Directors.

(b) Each of Care Capital and Essex shall have the right to have a representative join the Company's Scientific Advisory Board, subject to the approval of the Board of Directors.

(c) The Company shall maintain D&O Insurance mutually acceptable to the Purchasers and the Company covering those persons who are directors and officers of the Company, which D&O Insurance shall provide at least a minimum of $5,000,000 of coverage per director, with financially sound and reputable insurers insuring the Company's directors and officers from the liability and expense customarily insured under such "director and officer" insurance policies.

1.2. CONSENT OF HOLDERS OF SERIES A PREFERRED

The Company hereby covenants and agrees, that so long as any of the Series A Preferred remains outstanding, it will not, directly or indirectly, without the prior written consent of the holders of 60% of the issued and outstanding Series A Preferred, take, or permit to be taken, any of the following actions or complete, or permit to be taken, any of the following transactions:

(a) make any amendment to the Company's certificate of incorporate (other than the Charter Amendment) or by-laws;

(b) make any alteration of the preferences, voting power, special rights or privileges of the Series A Preferred or the holders thereof;

(c) authorize, create or issue, or incur any obligation to issue, any securities of the Company having any preference or priority as to dividends or assets, whether in liquidation or otherwise, superior to, or pari passu with, any such preference or priority of the Series A Preferred;

(d) take any action that reclassifies any outstanding shares of any class of stock of the Company into shares having any preference or priority as to dividends or assets, whether in liquidation or otherwise, superior to, or pari passu with, any such preference or priority of the Series A Preferred;

(e) declare or pay any dividends or distributions on any securities of the Company ranking junior in priority to the Series A Preferred, other than dividends or distributions payable solely in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock;

(f) consummate any redemption or other acquisition of any securities; provided, however, that this restriction will not apply to the repurchase of shares of Common Stock (or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, shares of Common Stock) held by employees, officers, directors, consultants or other persons performing services for the Company or any of its Subsidiaries as approved by the Board;

(g) approve or consummate a merger, reorganization, consolidation or other business combination involving the Company, or a sale, transfer, lease, license or other disposition of all

or substantially all of the assets of the Company;

(h) approve or consummate the liquidation, dissolution, commencement of any bankruptcy or other proceeding of the type referred to in
Section 12.1(i) of the 2004 Purchase Agreement, recapitalization or reorganization of the Company (in each case whether or not they constitute transactions of the type referred to in Section 1.2(i) below);

(i) without limiting the generality of Section 1.2(g) above, consummate a strategic alliance, licensing arrangement or other corporate partnering arrangement involving the issuance by the Company of in excess of $10,000,000 in equity securities of the Company;

(j) enter into any transaction, contract or commitment or take any action other than at Arm's Length;

(k) enter into or engage, directly or indirectly, in any business other than the business currently conducted or proposed to be conducted as disclosed to the Purchasers prior to the date hereof by the Company or any Subsidiary;

(l) except as otherwise provided in the Transaction Document, create, incur, assume or permit to exist any mortgage, pledge, lien, security interest or encumbrance on any part of its properties or assets, or on any interest it may have therein, now owned or hereafter acquired, nor acquire or agree to acquire property or assets under any conditional sale agreement or title retention contract, except that the foregoing restrictions of this Section 1.2(l) shall not apply to:

(i) liens for taxes, assessments and other governmental charges, if payment thereof shall not at the time be required to be made, and provided such reserve as shall be required by GAAP consistently applied shall have been made therefore;

(ii) liens of workmen, materialmen, vendors, suppliers, mechanics, carriers, warehouseman and landlords or other like liens, incurred in the ordinary course of business for sums not then due or that are being contested in good faith and provided that an adverse decision in such contest would not materially affect the business of the Company;

(iii) liens securing Indebtedness of the Company or any Subsidiary which are permitted under Sections 1.2(m)(ii), 1.2(m)(vi) or 1.2(m)(vii);

(iv) statutory liens of landlords, statutory liens of banks and rights of set-off, and other liens imposed by law, in each case incurred in the ordinary course of business (A) for amounts not yet overdue or (B) for amounts that are overdue and that are being contested in good faith by appropriate proceedings, so long as reserves or other appropriate provisions, if any, as shall be required by GAAP, shall have been made for any such contested amounts;

(v) liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and

appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money);

(vi) easements, rights-of-way, restrictions, encroachments, and other minor defects or irregularities in title, in each case which do not and will not interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries, except where such interference could not reasonably be expected to have a Material Adverse Effect;

(vii) any (A) interest or title of a lessor or sublessor under any lease, (B) restriction or encumbrance that the interest or title of such lessor or sublessor may be subject to, or (C) subordination of the interest of the lessee or sublessee under such lease to any restriction or encumbrance referred to in the preceding clause (B), so long as the holder of such restriction or encumbrance agrees to recognize the rights of such lessee or sublessee under such lease;

(viii) liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods;

(ix) any zoning or similar law or right reserved to or vested in any governmental office or agency to control or regulate the use of any real property;

(x) liens securing obligations (other than obligations representing Indebtedness for borrowed money) under operating, reciprocal easement or similar agreements entered into in the ordinary course of business of the Company and its Subsidiaries;

(xi) the Permitted Liens; and

(xii) the replacement, extension or renewal of any lien permitted by this Section 1.2(l) upon or in the same property theretofore subject or the replacement, extension or renewal (without increase in the amount or change in any direct or contingent obligor) of the Indebtedness secured thereby.

(m) Create, incur, assume, suffer, permit to exist, or guarantee, directly or indirectly, any Indebtedness, excluding:

(i) the endorsement of instruments for the purpose of deposit or collection in the ordinary course of business;

(ii) Indebtedness which may, from time to time be incurred or guaranteed by the Company which in the aggregate principal amount does not exceed $500,000 and is subordinate to the Watson Term Loan;

(iii) Indebtedness existing on the date of the 2004 Purchase Agreement and described in Section 10.4 of such agreement's Schedule of Exceptions;

(iv) Indebtedness relating to contingent obligations of the Company and its Subsidiaries under guaranties in the ordinary course of business of the obligations of suppliers, customers, and licensees of the Company and its Subsidiaries;

(v) Indebtedness relating to loans from the Company to its Subsidiaries or Indebtedness owed to any of the Guarantors;

(vi) Indebtedness relating to capital leases in an amount not to exceed $500,000;

(vii) Indebtedness relating to a working capital line of credit in an amount not to exceed $5,000,000;

(viii) accounts or notes payable arising out of the purchase of merchandise or services in the ordinary course of business; or

(ix) the Watson Term Loan.

(n) issue, or incur any obligation to issue, (i) any Series A Preferred other than upon conversion of Convertible Senior Secured Debentures issued pursuant to the 2004 Purchase Agreement, or (ii) any Series B Preferred or Series C Preferred other than pursuant to the Conversion Agreement.

1.3. CONSENT OF HOLDERS OF SERIES B PREFERRED

The Corporation covenants and agrees that, so long as any of the Series B Preferred remains outstanding, it will obtain the consent of the holders of at least a majority of the issued and outstanding Series B Preferred prior to making any material adverse change to the rights, preferences or privileges of the Series B Preferred.

1.4. CONSENT OF HOLDERS OF SERIES C PREFERRED

The Corporation covenants and agrees that, so long as any of the Series C Preferred remains outstanding, it will obtain the consent of the holders of at least a majority of the issued and outstanding Series C Preferred prior to making any material adverse change to the rights, preferences or privileges of the Series C Preferred.

ARTICLE II

AFFIRMATIVE COVENANTS

The Company hereby covenants and agrees, so long as any Preferred Stock remains outstanding, as follows:

2.1. MAINTENANCE OF CORPORATE EXISTENCE; TAXES

(a) The Company shall maintain in full force and effect its corporate existence, rights and franchises and all terms of licenses and other rights to use licenses, trademarks, trade names,

service marks, copyrights, patents, processes or any other Intellectual Property Rights owned or possessed by it and necessary to the conduct of its business, except where failure to maintain such rights, franchises and terms of licenses and other rights to use such Intellectual Property Rights could not reasonably be expected to have a Material Adverse Effect.

(b) The Company shall (i) promptly pay and discharge, or cause to be paid and discharged when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon the income, profits, assets, property or business of the Company, (ii) withhold and promptly pay to the appropriate tax authorities all amounts required to be withheld from wages, salaries and other remuneration to employees, and (iii) promptly pay all Indebtedness incident to the operations of the Company.

2.2. COMPLIANCE WITH AGREEMENTS; COMPLIANCE WITH LAWS

The Company shall comply with the terms and conditions of all material agreements, commitments or instruments to which the Company or any of its Subsidiaries is a party or by which it or they may be bound. The Company shall, and shall cause each of its Subsidiaries to, duly comply with any Legal Requirements relating to the conduct of their respective businesses, properties or assets, including, but not limited to, the requirements of the FDA Act, the Prescription Drug Marketing Act, the CSA, ERISA, the Environmental Protection Act, the Occupational Safety and Health Act, the Foreign Corrupt Practices Act, the Sarbanes-Oxley Act of 2002 and the rules and regulations of each of the agencies administering such acts, in each case except for any such noncompliance that could not reasonably be expected to have a Material Adverse Effect.

2.3. PROTECTION OF LICENSES

The Company shall, and shall cause its Subsidiaries to, maintain, defend and protect to the best of their ability licenses and sublicenses (and to the extent the Company or a Subsidiary is a licensee or sublicensee under any license or sublicense, as permitted by the license or sublicense agreement), trademarks, trade names, service marks, patents and applications therefore and other proprietary information or Intellectual Property Rights owned or used by it or them and shall keep duplicate copies of any licenses, trademarks, service marks or patents owned or used by it, if any, at a secure place selected by the Company.

2.4. ACCOUNTS AND RECORDS; INSPECTIONS

(a) The Company shall keep true records and books of account in which full, true and correct entries will be made of all dealings or transactions in relation to the business and affairs of the Company and its Subsidiaries in accordance with GAAP applied on a consistent basis.

(b) Subject to the holder's execution of a confidentiality agreement in form and substance reasonably acceptable to the Company, the Company shall permit each holder of Preferred Stock or any of such Person's officers, employees or representatives during regular business hours of the Company, upon reasonable notice and as often as such Person may reasonably request, to visit and inspect the offices and properties of the Company and its Subsidiaries and to make extracts or copies of the books, accounts and records of the Company

or its Subsidiaries, and to discuss the affairs, finances and accounts of the Company and its Subsidiaries, with the Company's (or Subsidiary's) directors and officers, its independent public accountants, consultants and attorneys.

(c) Nothing contained in this Section 2.4 shall be construed to limit any rights that a holder of Preferred Stock may have with respect to the books and records of the Company and its Subsidiaries, to inspect its properties or to discuss its affairs, finances and accounts.

2.5. MAINTENANCE OF OFFICE

The Company will maintain its principal office at the address of the Company set forth in Section 4.7 of this Agreement where notices in respect of this Agreement may be made upon the Company, until such time as the Company shall notify the holders of Preferred Stock in writing, at least 30 days prior thereto, of any change of location of such office.

2.6. INDEPENDENT COMMITTEE

The review and approval of the Independent Committee shall be required as a condition to the completion of (a) any transaction between or among the Company and the Purchasers, and (ii) any Liquidation Event.

ARTICLE III

TRANSFER RESTRICTIONS

3.1. DEFINITIONS

As used in this Article III, the following terms shall have the following respective meanings:

"Accredited Investor" has the meaning specified in Rule 501(a) of Regulation D promulgated pursuant to the Securities Act.

"Fully-Diluted Stockholders" means the holders of all Shares.

"Investor's Portion" means for purposes of Section 3.5 below, an amount determined by multiplying (a) the number of shares of Offered Shares (as herein defined) subject to the Co-Sale Right (as herein defined) by (b) the ratio determined by dividing (i) the number of Restricted Shares (as herein defined) held by a Restricted Investor by (ii) the aggregate number of Restricted Shares held by all Restricted Investors.

"New Securities" means all shares of capital stock of the Company other than (a) any convertible securities that may be converted into shares of Common Stock, as set forth on Schedule 3.1 to this Agreement; (b) the shares of Common Stock issuable upon conversion of the convertible securities set forth on Schedule 3.1 to this Agreement; (c) Common Stock or options to purchase Common Stock issued to any officers, employees or directors of, or consultants to, the Company pursuant to any agreement, plan or arrangement approved by the Board of

Directors; (d) the shares of Common Stock issuable upon conversion of those shares of Preferred Stock that were issued on or before the date hereof; (e) the shares of any class of capital stock issued on a pro rata basis to all holders of such class as a stock dividend or upon any stock split or other subdivision of shares of capital stock; (f) any shares of Common Stock issued as consideration in any acquisition, approved by the Board of Directors, of all or substantially all of the capital stock or assets of any other entity; and (g) any shares of Common Stock issued as consideration for or in connection with a borrowing, approved by the Board of Directors, from an unaffiliated financial institution upon customary terms or other strategic transactions approved by the Board of Directors.

"New Securities Portion" means such number of shares of New Securities, which, when added to the number of Shares held by the Investors, shall be sufficient to maintain the aggregate ownership percentage of the Company by the Investors (on a fully-diluted basis) immediately following the issuance of New Securities as it was immediately before that issuance.

"Offered Shares" means the number of Shares set forth in a Seller Notice (as defined in Section 3.3) which a Restricted Investor proposes to Transfer.

"Pro Rata Amount" means, as of any date with respect to a specified Investor, the percentage equal to (a) the number of Shares held by such Investor as of that date, divided by (b) the aggregate number of Shares held by all Investors as of that date, each determined on an as converted and as if exercised basis.

"Public Shares" means any Shares that have at some point been sold pursuant to an effective registration statement under the Securities Act, sold through a broker pursuant to Rule 144 under the Securities Act or otherwise acquired in the publicly traded markets.

"Restricted Investor" means each of Essex, Care Capital, Galen, Oracle (and their respective Permitted Transferees), and each holder of Series A Preferred.

"Restricted Shares" means (a) with respect to each of Essex, Care Capital, Galen and Oracle (and their respective Permitted Transferees), all Shares held by such Restricted Investor other than Public Shares, and (b) with respect to each other Restricted Investor, all Series A Preferred held by such Restricted Investor.

"Shares" means and includes all shares of Common Stock and Preferred Stock of the Company issued and outstanding at the relevant time plus (a) all shares of Common Stock and Preferred Stock that may be issued upon exercise of any options, warrants and other rights of any kind that are then exercisable, and (b) all shares of Common Stock and Preferred Stock that may be issued upon conversion of (i) any convertible securities, including, without limitation, any debt securities then outstanding, which are by their terms then convertible into or exchangeable for Common Stock or Preferred Stock of the Company or (ii) any such convertible securities issuable upon exercise of options, warrants or other rights that are then exercisable.

"Transfer" means and includes any sale, assignment, encumbrance, hypothecation, pledge, conveyance in trust, gift, transfer by bequest, devise or descent, or other transfer or disposition of any kind, including but not limited to transfers to receivers, levying creditors,

trustees or receivers in bankruptcy proceedings or general assignees for the benefit of creditors, whether voluntary or by operation of law, directly or indirectly, including, without limitation, the following (provided that the following are "Permitted Transfers"):

(a) any Transfer of Shares by an Investor who is an individual to such Investor's spouse, lineal descendant or antecedent, father, mother, brother or sister of such Investor, the adopted child or adopted grandchild of such Investor, or the spouse of any child, adopted child, grandchild or adopted grandchild of such Investor, or to a trust or trusts or other entity (including family limited partnerships or family limited liability companies) for the exclusive benefit of or exclusively controlled by such Investor or such Investor's family members as described in this clause (a), or transfers of Shares by the Investor by devise or descent so long as such Transfer complies with Section 3.2 hereof;

(b) any Transfer of Shares by an Investor made pursuant to (i) a merger or consolidation of the Company with or into another corporation or corporations, or (ii) the winding up and dissolution of the Company; and

(c) any Transfer of Shares by an Investor which is an entity to its Affiliates, partners, limited partners, members or stockholders or any transfers to a family member or trust as described in clause (a) above of such partner, limited partner, member or stockholder so long as such Transfer complies with Section 3.2 hereof;

Transfers described in clauses (a), (b) or (c) of this definition of "Transfer" and complying with the requirements of Section 3.2 are referred to herein as "Permitted Transfers," and the transferees of Shares by virtue of such Permitted Transfers are referred to herein as "Permitted Transferees."

3.2. RESTRICTIONS ON TRANSFER OF PREFERRED STOCK

This Section 3.2 and Section 3.6 shall apply to all Transfers of Shares by an Investor and the remainder of Article III of this Agreement shall apply solely to Restricted Investors. Notwithstanding any implication to the contrary set forth in this Agreement, no Transfer shall have any force or effect unless:
(a) such a Transfer is made in accordance with each of the provisions of this Agreement, (b) such a Transfer would not result in the violation of applicable federal or state securities laws, (c) the transferee in any such Transfer is an Accredited Investor, and (d) the intended transferee of such Transfer executes a joinder to this Agreement pursuant to which such intended transferee agrees to be bound by the provisions of this Agreement. Any attempt by an Investor to transfer any Shares in violation of any provision of this Agreement will be void and have no force or effect. The Company will not be required (i) to transfer on its books any Shares that have been sold, gifted or otherwise Transferred in violation of this Agreement or (ii) to treat as the owner of such Shares, or to accord the right to vote or pay dividends to, any purchaser, donee or other transferee to whom such Shares may have been so Transferred in violation of this Agreement.

3.3. NOTICE OF PROPOSED TRANSFER

Before any Restricted Investor may effect any Transfer of any Offered Shares (other than a Permitted Transfer), such Restricted Investor (the "Proposed Transferor") must give written notice concurrently to the Company and the other Restricted Investors ("Seller Notice") stating (a) the Proposed Transferor's bona fide intention to transfer such Offered Shares, (b) the number of the Offered Shares to be Transferred, (c) the name, address and relationship to the Proposed Transferor, if any, of each proposed purchaser or other transferee (the "Proposed Transferee"), (d) the bona fide cash price per Offered Share (the "Offered Price"); and (e) the anticipated date of the proposed Transfer, which shall be a date not earlier than 30 days after the date the Seller Notice is delivered. Upon the request of the Company or a Restricted Investor, the Proposed Transferor will promptly furnish such information to the Company and to the Restricted Investor as may be reasonably requested to establish that the offer and proposed Transfer are bona fide.

3.4. RIGHT OF FIRST REFUSAL

With respect to any Transfer by any Proposed Transferor (other than a Permitted Transfer), the Company and each Restricted Investor shall have the right of first refusal ("Right of First Refusal") to purchase the Offered Shares, exercisable as set forth below:

(a) The Company shall have the right to purchase all, but not less than all, of the Offered Shares. If the Company desires to purchase all of the Offered Shares, the Company must, within the 10 day period (the "Company Refusal Period") commencing on the date of receipt of the Seller Notice, give written notice to the Proposed Transferor of the Company's election to purchase the Offered Shares. In the event that the Company elects not to purchase all of the Offered Shares, the Offered Shares may be purchased by the Restricted Investors as set forth in Section 3.4(b). On or before the expiration of the Company Refusal Period, the Company will give written notice (the "Company Waiver Notice") to the Restricted Investors specifying either (i) that all of the Offered Shares were subscribed by the Company's exercising its Right of First Refusal or (ii) that the Company waived its right to purchase the Offered Shares. Notwithstanding any failure by the Company to deliver a Company Waiver Notice, a failure by the Company to exercise its Right of First Refusal within the Company Refusal Period shall be deemed a waiver of such right.

(b) In the event the Company does not purchase all of the Offered Shares, each Restricted Investor shall have the opportunity to purchase up to such Restricted Investor's pro rata share of the Offered Shares. For purposes of this Section 3.4(b), a Restricted Investor's pro rata share shall be determined by dividing the number of Restricted Shares held by a Restricted Investor by the total number of Restricted Shares held by all Restricted Investors purchasing Offered Shares pursuant to this Section 3.4(b). If any Restricted Investor, or its assignees who are Affiliates of such Restricted Investor, desires to purchase the Offered Shares, such Restricted Investor must, within a 5 day period (the "Investor Refusal Period") commencing on the later date of (i) the Company Waiver Notice or (ii) the 10th day after the Seller Notice, give written notice ("Investor Notice") to the Proposed Transferor and to the Company of such Restricted Investor's election to purchase such Restricted Investor's pro rata share of the remaining Offered Shares, or such lesser number as may be stated in such Restricted Investor's Investor Notice.

The participating Restricted Investors also may allocate the right to purchase the Offered Shares between or among them in any proportion they choose as reflected in a notice to the Proposed Transferor within the Investor Refusal Period. In the event that any Restricted Investor elects not to purchase any of the Offered Shares, such Restricted Investor shall, prior to the expiration of the Investor Refusal Period, give written notice ("Investor Waiver Notice") to the Proposed Transferor that the Restricted Investor is waiving such Restricted Investor's right to purchase all such Offered Shares under this Section 3.4(b). Notwithstanding any failure by a Restricted Investor to deliver an Investor Waiver Notice, a failure by a Restricted Investor to exercise such Restricted Investor's Right of First Refusal within the Investor Refusal Period shall be deemed a waiver of such right. If any Restricted Investor does not exercise its right of first refusal in full with respect to the Offered Shares within the Investor Refusal Period, then each Restricted Investor who requested to purchase in excess of its pro rata share of such Offered Shares shall be allowed to purchase such excess. If the total number of shares to be purchased pursuant to the foregoing sentence exceeds the number of remaining Offered Shares available for purchase, then such remaining shares shall be allocated among such Requesting Investors in proportion to the number of Restricted Shares owned by each of them, or in any other manner to which they agree.

(c) The purchase price for the Offered Shares to be purchased by the Company or the Restricted Investors exercising their Right of First Refusal under this Agreement will be the Offered Price, and will be payable within 10 days after the date the Right of First Refusal is first exercised for all of the Offered Shares. Payment of the purchase price will be made by the exercising Company or Restricted Investors (as the case may be) by check or wire transfer of immediately available funds.

(d) If the Company or Restricted Investors exercise their Rights of First Refusal to purchase all of the Offered Shares, then, upon consummation of such purchase, the Proposed Transferor will have no further rights as a holder of the Offered Shares except the right to receive payment for the Offered Shares in accordance with the terms of this Agreement, and the Proposed Transferor will promptly cause all certificate(s) evidencing such Offered Shares, together with such other instruments and documents of transfer as the Persons acquiring the Offered Shares shall reasonably request, to be surrendered to the Company for Transfer to the Persons acquiring the Offered Shares (free and clear of any and all liens, claims and encumbrances whatsoever except those imposed by this Agreement and securities laws generally).

(e) If the Company or the Restricted Investors have not elected to purchase all of the Offered Shares, then, subject to the Co-Sale Rights set forth in Section 3.5, the Proposed Transferor may Transfer the remaining Offered Shares to the Proposed Transferee, at the Offered Price or at a higher price, provided that such Transfer (i) is consummated within 90 days after the date of the Seller Notice and (ii) is in accordance with all the terms of this Agreement. Any proposed Transfer at a price or on terms and conditions more favorable than those described in the Seller Notice, as well as any subsequent proposed Transfer of any of the Offered Shares by the Proposed Transferor, shall again be subject to this Section 3.4 and shall require full compliance by the Proposed Transferor with the procedures in this Section 3.4.

3.5. CO-SALE RIGHTS

Notwithstanding Section 3.4(e), no Proposed Transferor (each, a "Co-Sale Seller") shall Transfer any of the Offered Shares pursuant to Section 3.4(e) to a Proposed Transferee until such Co-Sale Seller has given written notice to each of the Restricted Investors of the right (the "Co-Sale Right"), exercisable either within 5 days after the date of such Person's Investor Waiver Notice or within 15 business days following receipt of the Seller Notice, whichever is later, to sell to a Proposed Transferee all or part of such Investor's Portion of the Offered Shares, on the same terms and conditions as set forth in the Seller Notice (including the same price per Share), on an as-converted-to-Common-Stock basis. A Restricted Investor may exercise the Right of Co-Sale by delivering to the Co-Sale Seller at the closing of the Transfer of Offered Shares to the Proposed Transferee one or more certificates, properly endorsed for Transfer, representing such stock to be Transferred by the Restricted Investor. At the closing of the Transfer of Offered Shares to the Proposed Transferee, such certificates or other instruments will be Transferred and delivered to the Proposed Transferee as set forth in the Seller Notice in consummation of the Transfer of the Offered Shares pursuant to the terms and conditions specified in such notice, and the Co-Sale Seller will remit, or will cause the Proposed Transferee to remit, to the participating Restricted Investor at closing that portion of the proceeds of the Transfer to which the Restricted Investor is entitled by reason of the Restricted Investor's participation in such Transfer pursuant to the Co-Sale Right. If the Offered Shares consists of more than one series or class or type of stock and the Proposed Transferee is not willing to purchase shares of a class of preferred stock held by the Restricted Investors, then the Restricted Investors exercising a Right of Co-Sale will have the opportunity to convert such shares of Preferred Stock into Common Stock, and the Company will cooperate to effect such conversion.

3.6. PREEMPTIVE RIGHT

For so long as any Preferred Stock remains outstanding, each Investor holding Preferred Stock shall have the right (the "Participation Right") to purchase such Investor's Pro Rata Amount of any New Securities Portion that the Company may from time to time propose to sell and issue after the date hereof, at the price and upon the general terms specified in the New Issue Notice (as defined below) regarding such New Securities and otherwise on the following terms:

(a) Whenever the Company proposes to issue and sell any New Securities, the Company shall give each Investor written notice (a "New Issue Notice") describing the type and amount of New Securities proposed to be issued and the price and general terms upon which the Company proposes to issue such New Securities, specifying a proposed closing date and specifying in each case the New Securities Portion and recipient's Pro Rata Amount as of the date of the New Issue Notice.

(b) Each Investor may exercise its Participation Right with respect to any proposed New Securities by notice to the Company, given within 15 days after the Investors shall have received the New Issue Notice describing the New Securities.

(c) If any Investor does not exercise its Participation Right with respect to any proposed New Securities within the 15 day period, then within 1 business day after the expiration of such 15 day period, the Company shall notify each Investor who proposed to purchase not less

than such Investor's Pro Rata Amount of such New Securities of the number of shares of New Securities which remain available for purchase. Upon receipt of the notice specified in the preceding sentence, each such Investor shall have the additional Participation Right to purchase such Investor's Pro Rata Amount of the remaining New Securities Portion (considering the Shares held by all Investors who purchased less than their Pro Rata Amount of the New Securities not to be issued and outstanding for purposes of computing the Pro Rata Amount), exercisable by written notice delivered to the Company within 2 business days after receipt of the notice of the availability of the balance of the New Securities. Such Investors also may allocate the right to purchase the New Securities between or among them in any proportion they choose as reflected in a written notice to the Company within such 15 day or 2 business day period, as the case may be.

(d) The Company may sell the New Securities not committed for by Investors at a price and upon general terms no more favorable to the purchasers than those specified in the New Issue Notice with regard to such New Securities, at any time during (and only during) the 90 days following the expiration of the last notice period specified in Section 3.6(c).

(e) The sale of any New Securities to Investors pursuant to this
Section 3.6 shall be closed on the same terms, at the same place as, and simultaneously with, the sale of any such New Securities to any other purchasers (provided that the closing shall not take place earlier than the proposed closing date specified in the applicable New Issue Notice without the consent of all participating Investors).

3.7. RESTRICTIVE LEGEND; STOP TRANSFER INSTRUCTIONS

(a) The Investors understand and agree that the Company will cause the legend set forth below, or a legend substantially equivalent thereto, to be placed upon any certificate(s) or other documents or instruments evidencing ownership of Shares by the Investors (and each Investor agrees to provide each of its certificates for Shares to the Company so that such legend may be affixed):

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER, CERTAIN RIGHTS OF FIRST REFUSAL AND RESTRICTIONS ON VOTING RIGHTS, AS SET FORTH IN AN INVESTOR RIGHTS AGREEMENT ENTERED INTO BY THE HOLDER OF THESE SHARES, THE COMPANY AND CERTAIN STOCKHOLDERS OF THE COMPANY. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. NO TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE SHALL BE MADE EXCEPT AS PERMITTED BY THE INVESTOR RIGHTS AGREEMENT.

(b) Stop-Transfer Instructions. The Investors agree, to ensure compliance with the restrictions referred to in this Agreement, that the Company may issue appropriate "stop transfer" certificates or instructions and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its records.

3.8. RIGHTS TO COMPEL SALE

(a) If Restricted Investors holding in excess of sixty-six and two-thirds percent (66 2/3%) of all Restricted Shares then held by all Restricted Investors (collectively the "Controlling Stockholders") wish to sell to any Independent Third Party (the "Compelled Sale Purchaser") all Restricted Shares held by the Controlling Stockholders in the aggregate (the "Compelled Sale Transfer Offer"), then each and every one of the Restricted Investors other than the Controlling Stockholders (the "Remaining Stockholders") agrees to sell all Restricted Shares then held by such Remaining Stockholders to such Compelled Sale Purchaser at the same time for the same price and on the same terms and conditions as the Controlling Stockholders.

(b) The Controlling Stockholders shall exercise their rights hereunder by written notice (the "Compelled Transfer Notice") to the Company, and the Company shall deliver the Compelled Transfer Notice to the Remaining Stockholders at least thirty (30) days prior to the expected closing date (the "Expected Closing Date") of the transactions contemplated by the Compelled Sale Transfer Offer. The Compelled Transfer Notice shall include the consideration per share of Restricted Shares to be paid by the Compelled Sale Purchaser and the other terms and conditions of the Compelled Sale Transfer Offer. On or before ten (10) days prior to the Expected Closing Date, each of the Remaining Stockholders shall deliver to a representative of the Controlling Stockholders designated in the Compelled Sale Transfer Notice certificates representing the Restricted Shares held by such Remaining Stockholder, free and clear of any and all liens and encumbrances whatsoever, together with such other documents and instruments of transfer that the Compelled Sale Purchaser may reasonably request. The Remaining Stockholders also agree to otherwise cooperate with and execute and deliver such other documents as may be reasonably requested in connection with the transactions contemplated by the Compelled Sale Transfer Offer including, without limitation, documents containing representations and warranties as to title, power and authority and such other representations and warranties as are appropriate in transactions of this type.

(c) If within one hundred twenty (120) days after the Expected Closing Date, the Controlling Stockholders have not completed the sale of all the relevant Restricted Shares (unless such failure is due to a Remaining Stockholders' failure to surrender for transfer his or its certificates), the Controlling Stockholders shall return to each of the Remaining Stockholders all certificates representing the Restricted Shares previously delivered by the Remaining Stockholders, and all the restrictions on Transfers contained in this Agreement with respect to the Shares of the Company shall again be in effect. Failure to complete the sale of all the Restricted Shares shall not be a breach of any Controlling Stockholder's obligations under this Agreement and shall not constitute a waiver of the rights of the Controlling Stockholders to again exercise their rights under this Section 3.8 at any time thereafter; provided, that the Controlling Stockholders may not exercise the rights under this Section 3.8 more than once in any 12 month period.

(d) Immediately upon consummation of the sale of Restricted Shares of the Controlling Stockholders and Remaining Stockholders pursuant to this
Section 3.8, the Controlling Stockholders shall give notice thereof to the Remaining Stockholders, shall remit to each of the Remaining Stockholders the net sales proceeds of the Restricted Shares of such

Remaining Stockholders sold pursuant thereto (after deduction of a pro rata amount among all Stockholders of amounts placed in escrow, reasonable fees and expenses incurred in connection with the transaction and other appropriate deductions), and shall furnish such other evidence of the completion of such sale as may be reasonably requested by such Remaining Stockholders.

Notwithstanding anything to the contrary in this Section 3.8, if the sale of Restricted Shares pursuant to this Section 3.8 would qualify under the Company's Certificate of Incorporation as a "Liquidation Event" giving rise to the rights of holders of Preferred Stock to receive liquidation preferences, then the proceeds of the sale of Restricted Shares pursuant to this
Section 3.8 shall be allocated and remitted among the Restricted Investors participating in such sale in proportion to the preferential amounts each would be entitled to receive based on the relative liquidation preferences and priorities of their respective Restricted Shares (after deduction of a pro rata amount among all Stockholders of amounts placed in escrow, reasonable fees and expenses incurred in connection with the transaction and other appropriate deductions).

ARTICLE IV

MISCELLANEOUS

4.1. REGULATORY FILINGS; BEST EFFORTS

Each of the parties to this Agreement agrees to use its best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement, including using its best efforts to accomplish the following: (i) the obtaining of all necessary actions or nonactions, waivers, consents, approvals, orders and authorizations from governmental entities and the making of all necessary registrations, declarations and filings (including registrations, declarations and filings with governmental entities, if any) and the taking of its best efforts as may be necessary to avoid any suit, claim, action, investigation or proceeding by any governmental entity, (ii) the obtaining of all necessary consents, approvals or waivers from third parties, (iii) the defending of any suits, claims, actions, investigations or proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including seeking to have any stay or temporary restraining order entered by any court or other governmental entity vacated or reversed, and (iv) the execution, delivery and filing of any additional documents, instruments and certificates necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, this Agreement. In connection with and without limiting the foregoing, the Company and its Board of Directors will, if any takeover statute or similar Legal Requirement is or becomes applicable to this Agreement or the transactions contemplated by this Agreement, use its best efforts to ensure that the transactions contemplated by this Agreement may be consummated as promptly as practicable on the terms contemplated by this Agreement and otherwise to minimize the effect of such Legal Requirement on this Agreement and the transactions contemplated hereby.

4.2. AMENDMENT AND WAIVER

Except as otherwise provided herein, no modification, amendment, termination or waiver of any provision of this Agreement shall be effective against the Company or the Investors unless such modification, amendment or waiver is approved in writing by the Company and the holders of sixty-six and two-thirds percent (66 2/3)% of the issued and outstanding shares of Preferred Stock; provided, that in addition to the foregoing, the prior written consent of
(a) the holders of at least sixty percent (60%) of the issued and outstanding shares of Series A Preferred will be required to modify, amend or waive any provision of Sections 1.1, 1.2 or 4.2(a) of this Agreement, (b) the holders of at least a majority of the issued and outstanding shares of Series B Preferred will be required to modify, amend or waive any provision of Sections 1.3 or 4.2(b) of this Agreement, (c) the holders of at least a majority of the issued and outstanding shares of Series C Preferred will be required to modify, amend or waive any provision of Sections 1.4 or 4.2(c) of this Agreement, and (d) the holders of at least sixty percent (60%) of the issued and outstanding Restricted Shares will be required to modify, amend or waive any provision of Sections 3.1, 3.2, 3.3, 3.4, 3.5, 3.8 or 4.2(d) of this Agreement. The failure of any party to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the right of such party thereafter to enforce each and every provision of this Agreement in accordance with its terms.

4.3. SEVERABILITY

Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

4.4. ENTIRE AGREEMENT

Except as otherwise expressly set forth in this Agreement, the 2004 Purchase Agreement, the Conversion Agreement and the exhibits and schedules hereto and thereto embody the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersede and preempt any prior agreements or understandings by or among the parties, written or oral, which may have related to the subject matter hereof.

4.5. SUCCESSORS AND ASSIGNS

Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of, and be enforceable by, (a) the Company and its successors and assigns and (b) the holders of the Preferred Stock (including any Common Stock issued upon conversion of such Preferred Stock) and any subsequent holders of the Preferred Stock (including any Common Stock issued upon conversion of such Preferred Stock) and the respective successors and assigns of each of them, so long as they hold the Preferred Stock (including any Common Stock issued upon conversion of such Preferred Stock).

4.6. COUNTERPARTS

This Agreement may be executed in separate counterparts, including by facsimile copy, each of which shall be deemed an original and all of which taken together shall constitute one and the same agreement.

4.7. NOTICES

All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement will be in writing and will be deemed to have been given when delivered personally, mailed by certified or registered mail, return receipt requested and postage prepaid, or sent via a nationally recognized overnight courier, or sent via facsimile to the recipient accompanied by a certified or registered mailing. Such notices, demands or other communications will be sent to the address indicated below:

To the Company:

Halsey Drug Co., Inc.
695 N. Perryville Road
Rockford, Illinois 61107

Attn: President
Fax: 815-399-9710

If to the holders of Preferred Stock:

To the address provided on the signature pages hereto

or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any such notice, demand or communication shall be deemed to have been given (a) on the date of delivery, if delivered personally, (a) on the date of facsimile transmission, receipt confirmed, (c) one business day after delivery to a nationally recognized overnight courier service, if marked for next day delivery, or (d) five business days after the date of mailing, if mailed.

Copies of any notice, demand or communication given the Company shall also be delivered to St. John & Wayne, L.L.C., Two Penn Plaza East, Newark, New Jersey, 07105-2249 Attn.: John P. Reilly, Esq., or such other address as may be directed.

4.8. GOVERNING LAW

This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York wherein the terms of this Agreement were negotiated, excluding to the

greatest extent permitted by law any rule of law that would cause the application of the laws of any jurisdiction other than the State of New York.

4.9. JURISDICTION

(a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or United States Federal court sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising our of or relating to this Agreement to which it is a party, or for recognition or enforcement of any judgment, and each of the parties hereto irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the fullest extent permitted by law, in such United States Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the right that any party may otherwise have to bring any action or proceeding relating to this Agreement in the courts of any other jurisdiction.

(b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or in relation to this Agreement to which it is a party in any such New York State or United States Federal court sitting in New York City. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

4.10. WAIVER OF JURY TRIAL

(a) EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF ANY PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.

4.11. AGREEMENT REGARDING MANDATORY CONVERSION

No party hereto shall take any action, including the voting its shares of the capital stock of the Company or the giving of any written consent, in furtherance of the mandatory conversion of the Preferred Stock pursuant to
Section 1(d)(1)(ii)(B) of the Charter Amendment unless such mandatory conversion has been approved by the holders of 75% of the Series A Preferred then held by Care Capital, Essex and Galen.

IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement as of the date first written above.

HALSEY DRUG CO., INC.
695 North Perryville Road
Crimson Building #2
Rockford, Illinois 61107

GALEN PARTNERS III, L.P.                   ORACLE STRATEGIC PARTNERS, L.P.
By: Claudius, L.L.C., General Partner      By: Oracle Strategic Capital L.L.C.,
610 Fifth Avenue, 5th Fl.                  General Partner
New York, New York  10019                  200 Greenwich Avenue
                                           3rd Floor
                                           Greenwich, Connecticut 06830

____________________________________       ____________________________________
By: Srini Conjeevaram                      By: Joel Liffmann
Its: General Partner                       Its: Authorized Agent

GALEN PARTNERS INTERNATIONAL, III, L.P.    CARE CAPITAL INVESTMENTS II, LP
By: Claudius, L.L.C., General Partner      By: Care Capital II, LLC, as general
610 Fifth Avenue, 5th Floor                partner
New York, New York  10020                  47 Hulfish St., Suite 310
                                           Princeton, NJ 08542

____________________________________
By: Srini Conjeevaram                      By:_________________________________
Its: General Partner                       Name:  David R. Ramsay
                                           Title: Authorized Signatory

GALEN EMPLOYEE FUND III, L.P.              ESSEX WOODLANDS HEALTH
By: Wesson Enterprises, Inc.               VENTURES V, L.P.
610 Fifth Avenue, 5th Floor                190 South LaSalle Street, Suite 2800
New York, New York 10020                   Chicago, IL 60603

____________________________________       ____________________________________
By: Bruce F. Wesson                        By: Immanuel Thangaraj
Its: General Partner                       Its: Managing Director

                                       20

ALAN SMITH                                PATRICK COYNE
21 Bedlow Avenue                          800 Merion Square Road
Newport, Rhode Island  02840              Gladwyne, Pennsylvania 19035

____________________________________      ____________________________________

MICHAEL WEISBROT                          SUSAN WEISBROT
1136 Rock Creek Road                      1136 Rock Creek Road
Gladwyne, Pennsylvania  19035             Gladwyne, Pennsylvania  19035

____________________________________      ____________________________________
GREG WOOD                                 DENNIS ADAMS
1263 East Calavera Street                 120 Kynlyn Road
Altadena, CA 91001                        Radnor, Pennsylvania  19312

____________________________________      ____________________________________

STEFANIE HEITMEYER                        BERNARD SELZ
17759 Road, Route 66                      600 Fifth Avenue, 25th Floor
Fort Jennings, Ohio 45844                 New York, New York 10020

____________________________________      ____________________________________

PETER CLEMENS                             ROGER GRIGGS
c/o Halsey Drug Co., Inc.                 c/o Tom Jennings
695 North Perryville Rd.                  7300 Turfway Road
Crimson Building #2                       Suite 300
Rockford, Illinois  61107                 Florence, KY 41042

____________________________________      ____________________________________

VARSHA H. SHAH                            HEMANT K. SHAH
29 Chrissy Drive                          29 Chrissy Drive
Warren, New Jersey  07059                 Warren, New Jersey  07059
____________________________________      ____________________________________

                                       21

VARSHA H. SHAH AS CUSTODIAN                VARSHA H. SHAH AS CUSTODIAN
FOR SACHIN H. SHAH                         FOR SUMEET H. SHAH
29 Chrissy Drive                           29 Chrissy Drive
Warren, New Jersey  07059                  Warren, New Jersey  07059

____________________________________       ____________________________________
By: Varshah H. Shah                        By: Varshah H. Shah
Its: Custodian                             Its: Custodian

MICHAEL RAINISCH                           ILENE RAINISCH
c/o Alvin Rainisch                         c/o Alvin Rainisch
300 Flower Lane                            300 Flower Lane
Morganville, New Jersey  07751             Morganville, New Jersey  07751

____________________________________       ____________________________________

KENNETH GIMBEL, IRA ACCOUNT                KENNETH GIMBEL
FBO KENNETH GIMBEL                         2455 Montgomery Avenue
2455 Montgomery Avenue                     Highland Park, Illinois  60035
Highland Park, Illinois  60035

____________________________________       ____________________________________
By: __________________________
Its: Trustee

JESSICA K. CLEMENS                         JAKE P. CLEMENS
C/o Halsey Drug Co., Inc.                  c/o Halsey Drug Co., Inc.
695 North Perryville Rd.                   695 North Perryville Rd.
Crimson Building #2                        Crimson Building #2
Rockford, Illinois  61107                  Rockford, Illinois  61107

____________________________________       ____________________________________

MICHAEL REICHER TRUST
c/o Halsey Drug Co., Inc.
695 North Perryville Rd.
Crimson Building #2
Rockford, Illinois 61107

PETER STIEGLITZ                           GEORGE E. BOUDREAU
RJ Palmer LLC                             222 Elbow Lane
156 West 56th Street, 5th Floor           Haverford, PA  19041
New York, New York 10019

____________________________________      ____________________________________

JOHN E. HEPPE, JR.
237 W. Montgomery Avenue
Haverford, Pennsylvania 19041

____________________________________

SCHEDULE 3.1

CONVERTIBLE SECURITIES

EXHIBIT 10.5

AMENDED AND RESTATED VOTING AGREEMENT

This AMENDED AND RESTATED VOTING AGREEMENT (this "Agreement") dated as of February 6, 2004, among the Parties signatory hereto (the "Parties"). Capitalized terms used herein and not otherwise defined shall have the meaning provided in the Purchase Agreement (as defined below).

WHEREAS, Halsey Drug Co., Inc., a New York corporation (the "Company"), has entered into the Debenture and Share Purchase Agreement dated of even date herewith (the "Purchase Agreement"), by and among the Company, Care Capital Investments II, LP ("Care Capital"), Essex Woodlands Health Ventures V, L.P. ("Essex"), Galen Partners III, LP ("Galen") and other signatories thereto, providing for the issuance by the Company of Convertible Senior Secured Debentures (the "2004 Debentures") in the aggregate principal amount of up to $14 million; and

WHEREAS, the 2004 Debentures are convertible into Series A Preferred in accordance with the terms of the Purchase Agreement; and

WHEREAS, the Company has entered into the Debenture Conversion Agreement dated of even date herewith (the "Conversion Agreement") by and among the Company, Care Capital, Essex, Galen and the other holders of the Company's 5% Convertible Senior Secured Debentures due March 31, 2006 (the "Outstanding Debentures"), providing for the conversion of all Outstanding Debentures into classes of Series B Preferred and/or Series C Preferred; and

WHEREAS, the Company's Certificate of Incorporation currently does not have authorized the Series A Preferred, Series B Preferred or Series C Preferred (collectively, the "Preferred Shares") for issuance upon conversion of the 2004 Debentures and the Outstanding Debentures pursuant to the terms of the Purchase Agreement and the Conversion Agreement, respectively; and

WHEREAS, the Preferred Shares are to be convertible into the Company's Common Stock, $.01 par value per share, (the "Common Stock") as provided in the Purchase Agreement and the Conversion Agreement; and

WHEREAS, the Company does not have enough authorized and unreserved shares of its Common Stock available for issuance upon the conversion of the Preferred Shares; and

WHEREAS, the Parties contemplate that upon the conversion of the 2004 Debentures into Series A Preferred and the exchange of the Outstanding Debentures for Series B Preferred and/or Series C Preferred, the holders of such Preferred Shares shall have the right to vote as part of the single class with all holders of the Company's Common Stock and other voting security holders on an as converted basis; and

WHEREAS, the Company desires to amend and restate its Certificate of Incorporation to provide for (a) the authorization and creation of each of the class of Series A

Preferred, Series B Preferred and Series C Preferred having the rights and preferences provided in the Company's Amended and Restated Certificate of Incorporation appended as an Exhibit to each of the Purchase Agreement and the Conversion Agreement and (b) the increase in the number of shares of Common Stock in order to reserve a sufficient number of shares for issuance upon the conversion of the Preferred Shares; and

WHEREAS, as additional consideration for the investment by Care Capital, Essex and Galen in the Debentures, the Parties intend that so long as each such party shall remain a holder of the Minimum Threshold (as hereinafter defined) of Series A Preferred, the Parties desire to vote their Securities (as defined below) in such a manner so as to elect a Care Capital nominee, an Essex nominee, a Galen nominee and a collective nominee of each of Care Capital, Essex and Galen, to the Board of Directors of the Company.

NOW, THEREFORE, in consideration of the foregoing and the mutual agreements herein contained, the Parties hereto agree as follows:

1. Amendment to Company's Certificate of Incorporation. At the Company's next upcoming meeting of Shareholders, each Party hereto will vote all (x) shares of Common Stock, (y) 5% Convertible Senior Secured Debentures issued pursuant to that certain Debenture and Warrant Purchase Agreement dated March 10, 1998 between the Company and the purchasers listed on the signature page thereto, as amended (the "1998 Debentures"), and (z) 5% Convertible Senior Secured Debentures issued pursuant to that certain Debenture and Warrant Purchase Agreement dated May 26, 1999 between the Company and the purchasers listed on the signature page thereto, as amended (the "1999 Debentures"), then owned by such Party in favor of the following proposed amendments to the Company's Certificate of Incorporation:

(a) Increasing the number of shares of the Company's Common Stock authorized for issuance from 80,000,000 to 650,000,000 shares;

(b) Providing authorization to issue up to 45,000,000 shares of Series A Preferred having the rights and preferences provided in the Amended and Restated Certificate of Incorporation attached as Exhibit D to the Purchase Agreement;

(c) Providing authorization to issue up to 25,000,000 shares of Series B Preferred having the rights and preferences provided in the Amended and Restated Certificate of Incorporation attached as Exhibit A to the Conversion Agreement; and

(d) Providing authorization to issue up to 220,000,000 shares of Series C Preferred (consisting of up to 70,000,000 shares of Series C-1 Preferred, 50,000,000 shares of Series C-2 Preferred and 100,000,000 shares of Series C-3 Preferred) having the rights and preferences provided in the Amended and Restated Certificate of Incorporation attached as Exhibit A to the Conversion Agreement.

2. Election of Director Nominees. Commencing upon the Company's next

upcoming meeting of shareholders, each Party and Care Capital, Essex and Galen (each of Care Capital, Essex and Galen being referred to herein as a "Designating Party") agree as follows:

(a) Each Party holding Common Stock, 1998 Debentures, 1999 Debentures, Series A Preferred, Series B Preferred and Series C Preferred (collectively, the "Securities") shall vote its Securities, and take or cause to be taken such other actions, as may be required from time to time to (i) ensure that the Board of Directors consists of no more than seven directors, and (ii) elect to the Board of Directors of the Company (A) one person designated by each Designating Party, (B) one person designated collectively by Care Capital, Essex and Galen by consent of at least two (2) of such three (3) entities (the "Group Designating Party") (C) one person who shall be the Chief Executive Officer of the Company, and (D) two persons who shall be independent directors (as defined in Rule 4200(a)(15) of the National Association of Securities' Dealers Listing Standards, as may be modified or supplemented) nominated and elected to the Board of Directors by the then current directors. Without limiting the generality of the foregoing, at each annual meeting of the shareholders of the Company, and at each special meeting of the shareholders and debentureholders of the Company called for the purpose of electing directors of the Company, and at any time at which the shareholders and debentureholders of the Company have the right to elect directors of the Company, in each such event, each Party shall vote all Securities owned by them (or shall consent in writing in lieu of a meeting of shareholders and debentureholders of the Company, as the case may be), or take such other actions as shall be necessary, to elect the Designating Party's designee and the Group Designating Party's designee as a director of the Company in accordance with the preceding provisions of this Section 2(a);

(b) Each Party shall take all actions necessary to remove forthwith the director designated by a Designating Party or the Group Designating Party when such removal is requested for any reason, with or without cause, by such Designating Party or the Group Designating Party. In the case of the death, resignation or removal as herein provided of a Designating Party's designee or the Group Designating Party's designee, each Party shall vote all Securities held by it to elect another person designated by such Designating Party or the Group Designating Party pursuant to Section 2(a);

(c) Each Party hereby agrees that it will not vote any of its Securities in favor of the removal of any director that shall have been designated by a Designating Party or the Group Designating Party, unless the Designating Party or the Group Designating Party that has designated such director shall have consented to such removal in writing.

In the event that any Party shall fail to vote the Securities held by it in accordance with Section 2(a) and (b), such Party shall, upon such failure

to so vote, be deemed immediately to have granted to each Designating Party or the Group Designating Party, as applicable, a proxy to vote its Securities solely for the election of the nominee of such Designating Party or the Group Designating Party, as applicable, or the removal of such Designating Party's or the Group Designating Party's designated director, as the case may be. Such Party acknowledges that each such proxy granted hereby, including any successive proxy, if necessary, is being given to secure the performance of an obligation hereunder, is coupled with an interest, and shall be irrevocable until such obligation is performed;

(d) No Party shall grant any proxy or enter into or agree to be bound by any voting trust with respect to the Securities held by such Party, or enter into any shareholder agreement or arrangement of any kind with any person with respect to the Securities held by such person that is, in either case, inconsistent with the terms of this Agreement (whether or not such agreement and arrangement was or is with other shareholders of the Company that are or are not parties to this Agreement);

(e) The Company shall take, or cause to be taken, such actions as may be required from time to time to establish and maintain executive, audit and compensation committees of the Board of Directors, as well as such other committees of the boards of directors of the Company as the Board of Directors shall determine, having such duties and responsibilities as are customary for such committees. The designees of each Designating Party and the Group Designating Party shall be, if so requested by such Designating Party or the Group Designating Party, in its sole discretion, a member of each such committee; and

(f) The rights and obligations provided in this Section 2 shall be applied separately for each Designating Party and for the Group Designating Party. The rights of a Designating Party shall terminate on the date such Designating Party ceases to be a holder of the Minimum Threshold (but only after the conversion of the 2004 Debentures). The right of a Designating Party to be a member of the Group Designating Party shall terminate on the date such Designating Party ceases to be a holder of the Minimum Threshold (but only after the conversion of the 2004 Debentures). For purposes hereof, "Minimum Threshold" shall mean at least 50% of the shares of Series A Preferred issued to such Designating Party upon conversion of its 2004 Debentures (or at least 50% of the shares of Common Stock issued upon conversion thereof).

3. Liability. No Party who shall vote or consent or withhold consent or make a request with respect to any Securities subject to this Agreement on, to or from any matter in compliance with the terms hereof that shall, as a result of any such vote or consent or withholding of consent or making of a request, have any obligation or liability to any other Party (whether such other Party shall also vote or consent or withhold consent or make a request with

respect to any Securities, then subject to this Agreement).

4. Certain Remedies. Without intending to limit the remedies available to any of the Parties, each Party agrees that damages at law will be an insufficient remedy in the event such Party violates the terms hereof or the powers granted hereunder and each of the Parties hereto further agrees that each of the other Parties hereto may apply for and have injunctive or other equitable relief in any court of competent jurisdiction to restrain the breach or threatened breach of, or otherwise specifically to enforce, any of such Party's agreements or the powers granted hereunder set forth herein.

5. Representations. Each Party represents and warrants to each other Party that this Agreement is its legal, valid and binding obligation, enforceable against such Party in accordance with its terms, and will not result in any (a) violation or breach of, or be in conflict with, each Party's respective organizational documents or material contracts, or (b) violation of any statutes, laws, rules, regulations, orders or judgments applicable to such Party.

6. Transfer of Securities. Except as otherwise set forth in the Transaction Documents (as defined in the Purchase Agreement), nothing shall prohibit or in any manner restrict any Party's ability to freely transfer, assign, convey, or otherwise dispose of or convert its Securities; provided, that upon the transfer, assignment, conveyance or disposition of any Securities by a Party, such transferring Party shall cause the transferee to which the Securities are transferred, assigned, conveyed or otherwise disposed to agree to be bound by the terms hereof (unless such transfer is made pursuant to an effective registration agreement under the Securities Act or through a broker pursuant to Rule 144).

7. Term. Except as provided in Sections 2(f) and 6 hereof, this Agreement and the Parties' obligations hereunder shall continue in effect for so long as any of Care Capital, Essex or Galen owns the Minimum Threshold.

8. Amendment. Any term of this Agreement or the powers granted hereunder may be amended and the observance of any such term or power may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of a majority of the Securities then subject to this Agreement, which majority must include each of Care Capital, Essex and Galen so long as it owns the Minimum Threshold.

9. Binding Effect. (a) This Agreement and the powers granted hereunder shall be binding upon, and shall inure to the benefit of, Care Capital, Essex and Galen and the Parties.

(b) Nothing in this Agreement or the powers granted hereunder shall obligate any Party hereto, in his or her capacity as an employee, officer or director of the Company or any of its subsidiaries, to take or refrain from taking any action in any such capacity or shall otherwise affect the rights or obligations of any such party in any such capacity.

10. Notices. All notices, demands or other communications given hereunder shall be in writing and shall be sufficiently given if transmitted by facsimile or delivered either personally or by a nationally recognized courier service marked for next business day delivery or sent in a sealed envelope by first class mail, postage prepaid and either registered or certified,

return receipt requested, to the address for each Party as provided on the signature pages hereto, or to such other address as any such Party shall designate in writing. Any such notice, demand or communication shall be deemed to have been given (a) on the date of delivery, if delivered personally, (b) on the date of facsimile transmission, receipt confirmed, (c) one business day after delivery to a nationally recognized overnight courier service, if marked for next day delivery or (d) five business days after the date of mailing, if mailed.

11. Miscellaneous. The section headings herein are inserted for convenience of reference only and shall not affect the meaning or interpretation hereof. This Agreement and the powers granted hereunder contain the entire agreement among the Parties hereto with respect to the matters contemplated herein. If for any reason any provision hereof shall be invalid, unenforceable or inoperative, the validity and effect of the other provisions hereof shall not be affected herein. This Agreement may be executed in one or more counterparts, and by the Parties hereto in separate counterparts, each of which, when so executed and delivered, shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. This Agreement shall become effective as to each signatory hereto upon the execution and delivery hereof by such signatory. This Agreement and the powers granted hereunder shall be governed in all respects by the laws of the State of New York wherein the terms of this Agreement were negotiated, excluding to the greatest extent permitted by law any rule of law that would cause the application of the laws of any jurisdiction other than the State of New York.

12. Board Observers. So long as Galen has the right to designate a director pursuant to Section 2(a) hereof, the Company will permit one observer selected by Galen to attend all meetings of the Board of Directors of the Company, and shall provide such observer with such notice and other information with respect to such meetings as are delivered to the directors of the Company; provided, that such observer shall not be permitted to attend any meeting or portion thereof or have access to such other information if, in the judgment of the Company under advice of counsel, such observer's presence or receipt of such information would adversely affect attorney-client privilege with respect to such meeting or information.

13. Termination of Original Agreement. The Parties acknowledge and agree that this Agreement is entered into in replacement of that certain Voting Agreement dated December 20, 2002 between the Company and the other Parties that are party thereto (the "Original Agreement"), and that upon effectiveness of this Agreement, the Original Agreement shall be terminated and no further legal force or effect.

[SIGNATURE PAGES FOLLOW]

IN WITNESS WHEREOF, each of the Parties hereto has executed this Agreement on the date first above written.

GALEN PARTNERS III, L.P.                   ORACLE STRATEGIC PARTNERS, L.P.
By: Claudius, L.L.C., General Partner      By: Oracle Strategic Capital L.L.C.,
610 Fifth Avenue, 5th Fl.                  General Partner
New York, New York  10019                  200 Greenwich Avenue
                                           3rd Floor
                                           Greenwich, Connecticut 06830

_______________________________________    _____________________________________
By: Srini Conjeevaram                      By: Joel Liffmann
Its: General Partner                       Its: Authorized Agent

GALEN PARTNERS INTERNATIONAL, III, L.P.    CARE CAPITAL INVESTMENTS II, LP
By: Claudius, L.L.C., General Partner      By: Care Capital II, LLC, as general
610 Fifth Avenue, 5th Floor                partner
New York, New York  10020                  47 Hulfish St., Suite 310
                                           Princeton, NJ 08542

_______________________________________    By:  ____________________________
By: Srini Conjeevaram                      Name:  David R. Ramsay
Its: General Partner                       Title: Authorized Signatory

GALEN EMPLOYEE FUND III, L.P.              ESSEX WOODLANDS HEALTH
By: Wesson Enterprises, Inc.               VENTURES V, L.P.
610 Fifth Avenue, 5th Floor                190 South LaSalle Street, Suite 2800
New York, New York 10020                   Chicago, IL 60603

_______________________________________    _____________________________________
By: Bruce F. Wesson                        By: Immanuel Thangaraj
Its: General Partner                       Its: Managing Director

                                       8

ALAN SMITH                                 PATRICK COYNE
21 Bedlow Avenue                           800 Merion Square Road
Newport, Rhode Island  02840               Gladwyne, Pennsylvania 19035

_______________________________________    _____________________________________

MICHAEL WEISBROT                           SUSAN WEISBROT
1136 Rock Creek Road                       1136 Rock Creek Road
Gladwyne, Pennsylvania  19035              Gladwyne, Pennsylvania  19035

_______________________________________    _____________________________________

GREG WOOD                                  DENNIS ADAMS
1263 East Calavera Street                  120 Kynlyn Road
Altadena, CA 91001                         Radnor, Pennsylvania 19312

_______________________________________    _____________________________________

STEFANIE HEITMEYER                         BERNARD SELZ
17759 Road, Route 66                       600 Fifth Avenue, 25th Floor
Fort Jennings, Ohio 45844                  New York, New York 10020

_______________________________________    _____________________________________

PETER CLEMENS                              ROGER GRIGGS
c/o Halsey Drug Co., Inc.                  c/o Tom Jennings
695 North Perryville Rd.                   7300 Turfway Road
Crimson Building #2                        Suite 300
Rockford, Illinois  61107                  Florence, KY 41042

_______________________________________    _____________________________________

VARSHA H. SHAH                             HEMANT K. SHAH
29 Chrissy Drive                           29 Chrissy Drive
Warren, New Jersey  07059                  Warren, New Jersey  07059

_______________________________________    _____________________________________

                                       9

VARSHA H. SHAH AS CUSTODIAN                VARSHA H. SHAH AS CUSTODIAN
FOR SACHIN H. SHAH                         FOR SUMEET H. SHAH
29 Chrissy Drive                           29 Chrissy Drive
Warren, New Jersey  07059                  Warren, New Jersey  07059

_______________________________________    _____________________________________
By: Varshah H. Shah                        By: Varshah H. Shah
Its: Custodian                             Its: Custodian

MICHAEL RAINISCH                           ILENE RAINISCH
c/o Alvin Rainisch                         c/o Alvin Rainisch
300 Flower Lane                            300 Flower Lane
Morganville, New Jersey  07751             Morganville, New Jersey  07751

_______________________________________    _____________________________________

KENNETH GIMBEL, IRA ACCOUNT                KENNETH GIMBEL
FBO KENNETH GIMBEL                         2455 Montgomery Avenue
2455 Montgomery Avenue                     Highland Park, Illinois  60035
Highland Park, Illinois  60035

_______________________________________    _____________________________________
By: __________________________
Its: Trustee

JESSICA K. CLEMENS                         JAKE P. CLEMENS
C/o Halsey Drug Co., Inc.                  c/o Halsey Drug Co., Inc.
695 North Perryville Rd.                   695 North Perryville Rd.
Crimson Building #2                        Crimson Building #2
Rockford, Illinois  61107                  Rockford, Illinois  61107

_______________________________________    _____________________________________

MICHAEL REICHER TRUST
c/o Halsey Drug Co., Inc.
695 North Perryville Rd.
Crimson Building #2
Rockford, Illinois  61107

_______________________________________
By: Michael K. Reicher
Its: Trustee

                                       10

PETER STIEGLITZ                            GEORGE E. BOUDREAU
RJ Palmer LLC                              222 Elbow Lane
156 West 56th Street, 5th Floor            Haverford, PA  19041
New York, New York 10019

_______________________________________    _____________________________________

JOHN E. HEPPE, JR.
237 W. Montgomery Avenue
Haverford, Pennsylvania 19041

_______________________________________

EXHIBIT 10.6

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of February 6, 2004, by and between HALSEY DRUG CO., INC., a New York corporation (the "Company") and the investors listed on Schedule 1 attached hereto (each an "Investor"; collectively, the "Investors").

WHEREAS, the Company and certain purchasers are parties to that certain Debenture and Warrant Purchase Agreement dated March 10, 1998 (as such agreement may be supplemented, amended, or otherwise modified from time to time, the "1998 Purchase Agreement"), whereby the Company issued to such parties the Company's 5% convertible secured debentures due March 15, 2003 (as such debentures may be supplemented, amended, or otherwise modified from time to time, the "1998 Debentures"; each such holder of 1998 Debentures, or any permitted successor, assign or transferee thereof, a "1998 Holder") and warrants to purchase Common Stock (the "1998 Warrants");

WHEREAS, in connection with the 1998 Purchase Agreement, the Company granted to the 1998 Holders registration rights as set forth in Article XI of the 1998 Purchase Agreement;

WHEREAS, the Company and certain purchasers are parties to that certain Debenture and Warrant Purchase Agreement dated May 26, 1999 (as such agreement may be supplemented, amended, or otherwise modified from time to time, the "1999 Purchase Agreement"), whereby the Company issued to such parties the Company's 5% convertible secured debentures due March 15, 2003 (as such debentures may be supplemented, amended, or otherwise modified from time to time, the "1999 Debentures"; each such holder of 1999 Debentures, or any permitted successor, assign or transferee thereof, a "1999 Holder") and warrants to purchase Common Stock (the "1999 Warrants");

WHEREAS, in connection with the 1999 Purchase Agreement, the Company granted to the 1999 Holders registration rights as set forth in Article XI of the 1999 Purchase Agreement;

WHEREAS, in connection with the Bridge Loan Agreements, Galen Partners III, L.P., Galen Partners International III, L.P. and Galen Employee Fund III, L.P. (collectively, "Galen") holds warrants to purchase an aggregate of 5,385,229 shares of the Company's common stock, $.01 par value per share (the "Common Stock") as more particularly described on Schedule 2 hereof (the "Bridge Loan Warrants");

WHEREAS, the Company and Watson Pharmaceuticals, Inc. ("Watson") are parties to that certain Loan Agreement, dated as of March 29, 2000, as amended by a certain

Amendment to Loan Agreement dated as of March 31, 2000 (as so amended, the "Loan Agreement");

WHEREAS, in consideration of further amending the Loan Agreement to, among other things, extend the maturity date of the loan by execution of a Second Amendment to the Loan Agreement dated as of December 20, 2002, the Company issued to Watson a warrant (the "Watson Warrant") to purchase 10,700,665 shares of the Common Stock;

WHEREAS, in connection with the 2002 Purchase Agreement (as defined below), all of the holders (except Galen) (the "Recap Shareholders") of the 1998 Warrants and the 1999 Warrants entered into an agreement (the "Recapitalization Agreement"), dated December 20, 2002, to recapitalize their interests in the Company by, inter alia, exchanging their respective warrants for shares of Common Stock (the "Recap Shares");

WHEREAS, the Company and certain purchasers are parties to that certain Debenture Purchase Agreement, dated December 20, 2002 (as such agreement may be supplemented, amended, or otherwise modified from time to time, the "2002 Purchase Agreement"), whereby the Company issued to such parties the Company's 5% convertible senior secured debentures due March 31, 2006 (as such debentures may be supplemented, amended, or otherwise modified from time to time, the "2002 Debentures"; each such holder of 2002 Debentures, or any permitted successor, assign or transferee thereof, a "2002 Holder");

WHEREAS, in connection with the closing of the 2002 Purchase Agreement, the Company, the 1998 Holders, the 1999 Holders, the holder of the 1998 Warrants, the holders of the 1999 Warrants, Galen, Watson, the holders of the Recap Shares, and the 2002 Holders entered into that certain Registration Rights Agreement dated December 20, 2002 (the "Original Registration Rights Agreement") (i) providing registration rights to the 2002 Holders, (ii) terminating the registration rights previously granted by the Company to the 1998 Holders, the 1999 Holders, the holders of the 1998 Warrants, the holders of the 1999 Warrants, and Galen, and (iii) granting registration rights to Watson, the 1998 Holders, the 1999 Holders, the 2002 Holders, the Recap Shareholders, and Galen for each of the 1998 Debentures, the 1999 Debentures, the 1998 Warrants, the 1999 Warrants, the Recap Shares, the Bridge Loan Warrants, and the 2002 Debentures; and

WHEREAS, the Company and certain purchasers are parties to that certain Debenture and Share Purchase Agreement, dated February 6, 2004 (as such agreement may be supplemented, amended or otherwise modified from time to time, the "2004 Purchase Agreement") whereby the Company issued to such parties the Company's convertible senior secured debentures (as such debentures may be supplemented, amended, or otherwise modified from time to time, the "2004 Debentures"; each such holder of 2004 Debentures, or any permitted successor, assign or transferee thereof, a "2004 Holder") which are convertible automatically into shares of the Company's Series A Convertible Preferred Stock (the "Series A Shares") immediately following the Company's receipt of shareholder approval to amend and restate its Certificate of Incorporation to authorize the Series A Shares (the "Charter

Amendment") and the filing of the Charter Amendment with the Office of the New York Department of State; and

WHEREAS, the Company and certain purchasers are parties to that certain Debenture Conversion Agreement, dated February 6, 2004 (as such agreement may be supplemented, amended or otherwise modified from time to time, the "Conversion Agreement"), whereby each holder of the Company's outstanding 5% convertible senior secured debentures due March 31, 2006 (collectively, the "Outstanding Debentures") shall convert such holder's Outstanding Debentures into shares of Series B Convertible Preferred Stock (the "Series B Shares") and/or Series C Convertible Preferred Stock (the "Series C Shares") immediately following the Company's receipt of shareholder approval of the Charter Amendment and the filing of the Charter Amendment with the Office of the New York Department of State;

WHEREAS, in connection with the 2004 Purchase Agreement, the Company has agreed to grant the holders of the 2004 Debentures registration rights relating to the Shares issuable upon conversion of the Series A Shares as set forth in this Agreement;

WHEREAS, in connection with the Conversion Agreement, the Company has agreed to grant the holders of each of the Series B Shares and the Series C Shares registration rights relating to the Shares issuable upon conversion of the Series B Shares and Series C Shares as set forth in this Agreement; and

WHEREAS, the Company and the Investors, each of whom is a party to the Original Registration Rights Agreement, desire to terminate the Original Registration Rights Agreement as of the date hereof, and provide the Investors with the registration rights as set forth in this Agreement.

WHEREAS, unless otherwise provided in this Agreement, capitalized terms used herein shall have the meanings set forth in Section 14 hereof.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and promises contained herein, the parties agree as follows:

1. Demand Registrations.

(a) Requests for Registration. The Holders may request registration under the Securities Act of all or any part of their Registrable Securities as provided for below in Section 1(b). Within ten days after receipt of any such request, the Company will give written notice of such requested registration to all other Holders of Registrable Securities. The Company will include in such registration all Registrable Securities with respect to which it has received written requests for inclusion therein within 30 days after receipt of the Company's notice. The Company shall cause its management to cooperate fully and to use its best efforts to support the registration of the Registrable Securities and the sale of the Registrable Securities pursuant to such registration as promptly as is practicable. Such cooperation shall include, but not be limited to, management's attendance and reasonable presentations in respect of the Company at road shows with respect to

the offering of Registrable Securities. The registration requested under this
Section 1 is referred to herein as a "Demand Registration".

(b) Number of Registrations. The Holders of Registrable Securities will be entitled to request the following number and types of registrations: (i) Watson shall be entitled to request one Demand Registration on Form S-1 (or any successor to such form), (ii) the Holders of at least 25% of the Registrable Securities then outstanding shall be entitled to request three Demand Registrations on Form S-1 (or any successor to such form), and (iii) the Holders of Registrable Securities will be entitled to unlimited Demand Registrations on Form S-3 (or any successor to such form), for which the Company will pay all Registration Expenses; provided, that the aggregate offering value of the Registrable Securities requested to be registered under Sections 1(b)(i), (ii) and (iii) must be reasonably expected (at the time of the request) to equal at least $2,500,000. A registration will not count as a Demand Registration (x) until it has become effective and the Holders have sold, in the aggregate, no less than 50% of the shares of Registrable Securities requested to be registered in the Demand Registration, or (y) if the offering of the Registrable Securities pursuant to such registration is interfered with for any reason by any stop order, injunction or other order or requirement of the Commission (other than any stop order, injunction or other requirement of the Commission prompted by acts or omissions of Holders of Registrable Securities); provided, however, that except as otherwise provided herein whether or not it becomes effective the Company will pay all Registration Expenses in connection with any registration so initiated.

(c) Priority on Demand Registrations. If a Demand Registration is with respect to an underwritten offering, and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities requested to be included exceeds the number which can be sold in such offering, the Company will include in such registration such number of Shares, which in the opinion of such underwriters, may be sold, allocated among the Holders electing to participate pro rata in accordance with the amounts of securities requested to be so included by the respective Holders. If the amount of such Registrable Securities does not exceed the maximum number which can be sold in such offering, the Company may include such number of securities which are not Registrable Securities in the Demand Registration which will not, together with the Holder's Registrable Securities, exceed the maximum number which can be sold in the Offering; provided, however, the Company will not include in any Demand Registration any securities which are not Registrable Securities without the written consent of the Holders of sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities participating in such registration. A registration shall not count as a Demand Registration if less than fifty percent (50%) of the Shares which any Holder desires to include therein are not included due to the determination of the managing underwriters referred to in the first sentence of this Section 1(c).

(d) Restrictions on Demand Registrations. The Company will not be obligated to effect any Demand Registration within six months after the effective date of a previous registration in which the Holders of Registrable Securities were given piggyback rights pursuant to Section 2 (in which registration the Holders were permitted to register at least 50% of the Registrable Securities that they requested for inclusion) other than a registration of Registrable Securities

intended to be offered on a continuous or delayed basis under Rule 415 or any successor rule under the Securities Act (a "Shelf Registration").

2. Piggyback Registrations.

(a) Right to Piggyback. Whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to a Demand Registration or pursuant to a registration on Forms S-4 or S-8 or any successors to such forms) and the registration form to be used may be used for the registration and contemplated disposition of Registrable Securities (a "Piggyback Registration"), the Company will give prompt written notice to all the Holders of Registrable Securities. The Company will include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 30 days after the receipt of the Company's notice, subject to any other priority cutback provisions below.

(b) Piggyback Expenses. The Registration Expenses of the Holders of Registrable Securities in such Piggyback Registration will be paid by the Company.

(c) Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering, the Company will include in such registration (i) first, the securities the Company proposes to sell, (ii) second, the Registrable Securities, pro rata in accordance with the amounts of Registrable Securities requested to be so included by each Requesting Stockholder, and (iii) third, any other securities requested to be included in such registration.

(d) Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company's securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering, the Company will include in such registration (i) first, the securities requested to be included therein by the holders requesting such registration, (ii) second, the Registrable Securities, pro rata in accordance with the amounts of Registrable Securities requested to be so included by each Requesting Stockholder, and (iii) third, other securities requested to be included in such registration.

(e) Other Restrictions. The Company hereby agrees that if it has previously filed a registration statement with respect to Registrable Securities pursuant to Section 1 or pursuant to this Section 2, and if such previous registration has not been withdrawn or abandoned, the Company will not file or cause to be effected any other registration of any of its equity securities or securities convertible or exchangeable into or exercisable for its equity securities under the Securities Act except on Form S-8 or any other similar form for employee benefit plans, whether on its own behalf or at the request of any holder or holders of such securities, until a period of at least six months has elapsed from the effective date of such previous registration or, if sooner, until all Registrable Securities included in such previous registration have been sold.

3. Holdback Agreements.

(a) Holders of Registrable Securities. The Investors and each other Holder of Registrable Securities who is or becomes a party to this Agreement, agrees not to effect any public sale or distribution of equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and the 90-day period beginning on the effective date of any underwritten Demand Registration or any underwritten Piggyback Registration except as part of such underwritten registration or, if sooner, until all Registrable Securities included within such registration have been sold.

(b) The Company. The Company agrees (i) not to effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and the 90-day period beginning on the effective date of any underwritten Demand Registration or any underwritten Piggyback Registration except as part of such underwritten registration or pursuant to registrations on Form S-8 or any other similar form for employee benefit plans or, if sooner, until all Registrable Securities included within such registration have been sold, and (ii) to use its reasonable best efforts to cause each holder of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, purchased from the Company at any time after the date of this Agreement (other than in a registered public offering) to agree not to effect any public sale or distribution of any such securities during such period except as part of such underwritten registration, if otherwise permitted or, if sooner, until all Registrable Securities included within such registration have been sold; provided, however, that the provisions of this Section 3(b) shall continue to apply with respect to a registration until the provisions of Section 3(a) no longer apply with respect to such registration.

(c) Registration Procedures. Whenever the Holders of Registrable Securities have requested that any Registrable Securities be registered pursuant to Section 1 or 2 of this Agreement, the Company shall use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto the Company shall as expeditiously as possible:

(i) prepare and file with the Commission a registration statement with respect to such Registrable Securities, which registration statement will state that the Holders of Registrable Securities covered thereby may sell such Registrable Securities either under such registration statement or, at any Holder's proper request, pursuant to Rule 144 (or any successor rule under the Securities Act), and use its best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company will furnish to the counsel selected by the Holders of sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities included in such registration copies of all such

documents proposed to be filed, which documents will be subject to the review of such counsel);

(ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period set forth in Section 4(i) hereof and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement;

(iii) furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller;

(iv) use its best efforts to register or qualify, if applicable, such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided that the Company will not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subsection, (B) subject itself to taxation in any such jurisdiction, or (C) consent to general service of process in any such jurisdiction);

(v) within one business day of its occurrence, notify each seller of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits to state any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Company will promptly prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading;

(vi) cause all such Registrable Securities to be listed on each securities exchange or market on which similar securities issued by the Company are then listed;

(vii) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement;

(viii) make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement, and

any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement;

(ix) cause the Registrable Securities to be registered on such appropriate registration form or forms of the Commission as shall permit a delayed or continuous offering of the Registrable Securities pursuant to Rule 415 under the Securities Act and permit the disposition of the Registrable Securities in accordance with the method or methods of disposition requested by the Holders of sixty-six and two-thirds percent (66-2/3%) of the Registrable Securities included in such registration, and keep such registration statement effective until the Holders of sixty-six and two-thirds percent (66-2/3%) of Registrable Securities included in such registration have completed the sale and distribution of the Registrable Securities;

(x) if such registration is an underwritten registration, cause the Company's officers, directors and holders of in excess of one percent of the Company's outstanding Common to execute lock-up agreements, containing customary terms and provisions, required by an underwriter in any such registered offering restricting such parties from selling shares of the Company's Common Stock for a period of up to 180 days; and

(xi) furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to Section 1 or 2, if the method of distribution is by means of an underwriting, on the date that the shares of Registrable Securities are delivered to the underwriters for sale pursuant to such registration, or if such Registrable Securities are not being sold through underwriters, on the date that the registration statement with respect to such shares of Registrable Securities becomes effective, (A) a signed opinion, dated such date, of the independent legal counsel representing the Company for the purpose of such registration, addressed to the underwriters, if any, and if such Registrable Securities are not being sold through underwriters, then to the Holders making such request, as to such matters as such underwriters or the Holders holding a majority of the Registrable Securities included in such registration, as the case may be, may reasonably request; and (B) letters dated such date and the date the offering is priced from the independent certified public accountants of the Company, addressed to the underwriters, if any, and if such Registrable Securities are not being sold through underwriters, then to the Holders making such request (x) stating that they are independent certified public accountants within the meaning of the Act and that, in the opinion of such accountants, the financial statements and other financial data of the Company included in the Registration Statement or the prospectus, or any amendment or supplement thereto, comply as to form in all material respects with the applicable accounting requirements of the Act and (y) covering such other financial matters (including information as to the period ending not more than five business days prior to the date of such letters) with respect to the registration in respect of which such letter is being given as such underwriters or the Holders holding a majority of the Registrable Securities included in

such registration, as the case may be, may reasonably request and as would be customary in such a transaction.

4. Registration Expenses. All Registration Expenses incurred in connection with a registration, qualification or compliance pursuant to this Agreement shall be borne by the Company, and all Selling Expenses shall be borne by the Holders, the Requesting Stockholders and any other holders of the securities so registered pro rata on the basis of the number of their shares so registered; provided, however, that the Company shall not be required to pay any Registration Expenses if, as a result of the withdrawal of a request for registration by a majority of Registrable Securities (other than as a result of any failure of the Company to comply with the terms of this Agreement, or the disclosure of any adverse development relating to the Company after the initial request for registration by any Holder), the registration statement does not become effective, in which case the Holders and Requesting Stockholders requesting registration shall bear such Registration Expenses pro rata on the basis of the number of their shares so included in the registration request, and, further, that such registration shall not be counted as a Demand Registration pursuant to Section 1.

5. Indemnification.

(a) The Company will indemnify each Holder, each Holder's officers, directors, employees, agents, members and partners, and each Person controlling, controlled by or under common control with such Holder, with respect to which registration, qualification or compliance of such Holder's securities has been effected pursuant to this Agreement, and each underwriter, if any, and each Person who controls any underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof), joint or several, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document (including any related registration statement notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each Holder's officers, directors, employees, agents, members and partners, and each Person controlling each such Holder, each such underwriter and each Person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable to a Holder in any such case to the extent that any such claim, loss, damage, liability or action arises out of or is based on any untrue statement or omission of material fact based upon written information furnished to the Company by such Holder or underwriter and stated to be specifically for use therein.

(b) Each Holder and Requesting Stockholder will severally not jointly, if Registrable Securities held by it are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of the Company's directors and officers and each underwriter, if any, of the Company's securities covered by such registration

statement, each Person who controls the Company or such underwriter within the meaning of the Securities Act and the rules and regulations thereunder, each other Holder, Requesting Stockholder or any other holder of securities included in the offering and each of their respective officers, directors, employees, agents, members and partners, and each Person controlling such other Holder, Requesting Stockholder and any other holders of securities included in the offering, against all claims, losses, damages and liabilities (or actions in respect thereof), joint or several, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, its officers and directors, each underwriter, each Person controlling the Company or such underwriter, each other Holder and Requesting Stockholders, their officers, directors, employees, agents, members, partners and control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder or Requesting Stockholder and stated to be specifically for use therein; provided, however, that the obligations of each such Holder and Requesting Stockholder hereunder shall be limited to an amount equal to the net proceeds (after deduction of underwriting discounts and selling commissions, if any) received by each such Holder or Requesting Stockholder of securities sold as contemplated herein.

(c) Each party entitled to indemnification under this Section 5 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld) and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement unless such failure has had a material adverse effect on such claim. The parties to this Agreement reserve any rights to claim under this Agreement for damages actually incurred by reason of any failure of the Indemnified Party to give prompt notice of a claim. To the extent counsel for the Indemnifying Party shall in such counsel's reasonable judgment, have a conflict in representing an Indemnified Party in conjunction with the Indemnifying Party or other Indemnified Parties, such Indemnified Party shall be entitled to separate counsel at the expense of the Indemnifying Party subject to the approval of such counsel by the Indemnified Party (whose approval shall not be unreasonably withheld). No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation. Each

Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with the defense of such claim and any litigation resulting therefrom.

6. Restrictive Legend. Each certificate representing (a) the Securities or (b) any Shares or other securities issued in respect thereof, upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event shall be stamped or otherwise imprinted with a legend in the following form (in addition to any legend required under applicable state securities laws and any other applicable agreement(s)):

"THIS [WARRANT/DEBENTURE/PREFERRED SHARE] [AND THE COMMON STOCK ISSUABLE UPON COVERSION HEREOF] HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), NOR ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNTIL (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR OTHER COUNSEL TO THE HOLDER OF SUCH [WARRANT/DEBENTURE/PREFERRED SHARE AND/OR COMMON STOCK] REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH [WARRANT/DEBENTURE/ PREFERRED SHARE AND/OR COMMON STOCK] MAY BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS."

7. Information by the Holders and Requesting Stockholders. Each Holder of Registrable Securities, and each Requesting Stockholder holding securities included in any registration, shall furnish to the Company such information regarding such Holder or Requesting Stockholder and the distribution proposed by such Holder or Requesting Stockholder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement.

8. Limitations on Registration of Issues of Securities. From and after the date of this Agreement, the Company shall not enter into any agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder the right to require the Company to register any securities of the Company that are more favorable to such holder or prospective holder than the rights granted under this Agreement.

9. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may permit the sale of the Restricted Securities to the public without registration, the Company agrees to:

(a) make and keep public information available as those terms are understood and defined and interpreted in and under Rule 144 under the Securities Act ("Rule 144"), at all times from and after the date hereof;

(b) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements; and

(c) so long as the Holders own any Restricted Securities, furnish to the Holders forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as any Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing any Holder to sell any such securities without registration.

10. Participation in Underwritten Registrations. Subject to the right of any Holder or Holders to withdraw any request for registration, no Person may participate in any underwritten registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all reasonable and customary questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements.

11. Selection of Underwriters. If any Demand Registration is an underwritten offering, the Holders of sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities included in such registration shall have the right to select the investment banking firm to be lead manager of the offering, subject to the approval of the Company (which approval will not be unreasonably withheld). If any registration other than a Demand Registration is an underwritten offering, the Company will have the right to select the investment banking firm to be lead manager of the offering, subject to the approval of the Holders of sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities included in such registration (which approval will not be unreasonably withheld).

12. Termination of Registration Rights. The rights of Holders to request a Demand Registration or participate in a Piggyback Registration shall expire on March 31, 2009.

13. Termination of Original Registration Rights Agreement. The Company and the Investors acknowledge and agree that this Amended and Restated Registration Rights Agreement is issued in replacement of that certain Original Registration Rights Agreement between the Company and the Investors listed as a Party thereto dated as of December 20, 2002 and upon execution of this Amended and Restated Registration Rights Agreement, the Original Registration Rights Agreement shall be terminated and no further legal force or effect.

14. Definitions. As used herein, the following terms have the following meanings:

"Act" means the Securities Act of 1933, as amended.

"Agreement" means this Amended and Restated Registration Rights Agreement.

"Bridge Loan Agreements" means any and all of the separate Bridge Loan Agreements between the Company, Galen Partners III, L.P. and the other parties listed on the signature pages thereto entered into between such parties commencing as of August 12, 1998 through and including December 20, 2002 pursuant to which the Bridge Loan Warrants were issued, including, without limitation, that certain Bridge Loan Agreement dated as of August 15, 2001 among the Company, Galen Partners III, L.P., Galen Partners International III L.P., Galen Employee Fund III, L.P., those individuals listed on the signature page thereto, and Galen Partners III, L.P., as agent for the lenders, as amended by the First Amendment to Bridge Loan Agreement dated as of January 8, 2002, the Second Amendment to Bridge Loan Agreement dated as of April 5, 2002, and the Third Amendment to Bridge Loan Agreement dated as of May 8, 2002, as such may be supplemented, amended or otherwise modified from time to time.

"Charter Amendment" has the meaning set forth in the recitals.

"Common Stock" has the meaning set forth in the recitals.

"Commission" means the Securities and Exchange Commission.

"Company" has the meaning set forth in the preamble.

"Conversion Agreement" has the meaning set forth in the recitals.

"Demand Registration" has the meaning set forth in Section 1(a) of this Agreement.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Holders" means the Investors or any Person to whom an Investor or transferee(s) of an Investor has assigned, transferred or otherwise conveyed the Securities or the Shares.

"Indemnified Party" has the meaning set forth in Section 5 hereof.

"Indemnifying Party" has the meaning set forth in Section 5 hereof.

"Investors" has the meaning set forth in the preamble.

"Loan Agreement" has the meaning set forth in the recitals.

"1998 Debentures" has the meaning set forth in the recitals.

"1998 Holder" has the meaning set forth in the recitals.

"1998 Purchase Agreement" has the meaning set forth in the recitals.

"1998 Warrants" has the meaning set forth in the recitals.

"1999 Debentures" has the meaning set forth in the recitals.

"1999 Holder" has the meaning set forth in the recitals.

"1999 Purchase Agreement" has the meaning set forth in the recitals.

"1999 Warrants" has the meaning set forth in the recitals.

"Outstanding Debentures" has the meaning set forth in the recitals.

"Person" means any individual, corporation, limited liability company, partnership, association, trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

"Piggyback Registration" has the meaning set forth in Section 2 of this Agreement.

"Registrable Securities" means any Shares issued or issuable upon the exercise or conversion of the Securities (including any Securities that may be issued as interest with respect to any Security) or in respect of the Shares issued or issuable upon the exercise or conversion of any Securities upon any stock split, stock dividend, recapitalization or similar event.

"Registration Expenses" means all expenses incurred by the Company in compliance with Sections 1 and 2 hereof, including, without limitation, all registration and filing fees, printing expenses, fees, and disbursements of counsel for the Company and blue sky fees and expenses, reasonable fees and disbursements for one counsel, as

such counsel is selected in accordance with Section 4(a), and the expense of any special audits incident to or required by any such registration, exclusive of the Selling Expenses.

"Restricted Securities" means the securities of the Company required to bear or bearing the legend set forth in Section 6 of this Agreement.

"Requesting Stockholders" means holders of securities of the Company entitled to have securities included in any registration pursuant to Section 2 and who shall request such inclusion.

"Rule 144" has the meaning set forth in Section 9 of this Agreement.

"Securities" means the Recap Shares, the Watson Warrant, the 1998 Debentures, 1999 Debentures, 1998 Warrants held by Galen, the 1999 Warrants held by Galen, the Bridge Loan Warrants, the 2002 Debentures, the 2004 Debentures, the Series A Shares, the Series B Shares, and the Series C Shares.

"Securities Act" means the Securities Act of 1933, as amended.

"Selling Expenses" means all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and, except as otherwise provided in "Registration Expenses", all fees and disbursements of counsel for any Holder.

"Series A Shares" has the meaning set forth in the recitals.

"Series B Shares" has the meaning set forth in the recitals.

"Series C Shares" has the meaning set forth in the recitals.

"Shares" means the shares of Common Stock which may be issued upon the exercise of all or a portion of the Securities. The term Shares does not include any other shares of Common Stock or other capital stock of the Company.

"Shelf Registration" has the meaning set forth in Section 1 of this Agreement.

"2002 Debentures" has the meaning set forth in the recitals.

"2004 Debentures" has the meaning set forth in the recitals.

"2002 Holder" has the meaning set forth in the recitals.

"2004 Holder" has the meaning set forth in the recitals.

"2002 Purchase Agreement" has the meaning set forth in the recitals.

"2004 Purchase Agreement" has the meaning set forth in the recitals.

"Watson Warrant" has the meaning set forth in the recitals.

15. Remedies. Any Person having rights under any provision of this Agreement shall be entitled to enforce such rights specifically to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or other security) for specific performance and for other injunctive relief in order to enforce or prevent violation of the provisions of this Agreement.

16. Amendments and Waivers. The provisions of this Agreement may be amended or waived only upon the prior written consent of the Company and the Holders of sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities, provided that the prior written consent of all of the Holders will be required to amend Section 1 or 2 hereof.

17 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any Investor or Holder upon any breach or default of the Company under this Agreement shall impair any such right, power or remedy of such Holder or Investor nor shall it be construed to be a waiver of any such breach or default, or an acquiescence, therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement, or any waiver on the part of any Investor or Holder of any provisions or conditions of this Agreement must be, made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative.

18. Successors and Assigns. All covenants and agreements in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. In addition, whether or not any express assignment has been made, the provisions of this Agreement which are for the benefit of the Holders of Registrable Securities are also for the benefit of, and enforceable by, any subsequent holder of Registrable Securities. The registration rights provided in this Agreement may be transferred without restriction and shall inure to and be enforceable by any and all Holders of Registrable Securities, including, without limitation, any successors, assigns, transferees, heirs, executors and administrators of the Investors.

19. Severability. Unless otherwise expressly provided herein, each Investor's or Holders rights and obligations hereunder are several rights and obligations, not rights and obligations jointly held with any other person. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

20. Counterparts; Facsimile Transmission. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. Each party to this Agreement agrees that it will be bound by its own facsimiled signature and that it accepts the facsimiled signature of each other party to this Agreement.

21. Descriptive Headings. The titles of the articles, sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

22. Governing Law. This Agreement and the rights of the parties hereunder shall be governed in all respects by the laws of the State of New York wherein the terms of this Agreement were negotiated, excluding to the greatest extent permitted by law any rule of law that would cause the application of the laws of any jurisdiction other than the State of New York.

23. Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the recipient, sent to the recipient by reputable overnight courier service (charges prepaid) or 48 hours after deposited in the United States mail, certified or registered to the recipient by postage prepaid or by facsimile. Such notices, demands and other communications shall be sent to the Investors and to any Holder at the addresses indicated on the Schedule of Investors attached hereto and to the Company at the address of its corporate headquarters or to such other address or to the attention of such other Person as the recipient party has specified by prior written notice to the sending party.

[THIS SPACE INTENTIONALLY LEFT BLANK]

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

COMPANY

HALSEY DRUG CO., INC.

By:____________________________________________
Name: Andrew D. Reddick
Title: President and Chief Executive Officer

GALEN PARTNERS III, L.P.                    ORACLE STRATEGIC PARTNERS, L.P.
By: Claudius, L.L.C., General Partner       By: Oracle Strategic Capital L.L.C.,
610 Fifth Avenue, 5th Fl.                   General Partner
New York, New York  10019                   200 Greenwich Avenue
                                            3rd Floor
                                            Greenwich, Connecticut 06830

_______________________________________     ____________________________________
By: Srini Conjeevaram                       By: Joel Liffmann
Its: General Partner                        Its: Authorized Agent

GALEN PARTNERS INTERNATIONAL, III, L.P.     CARE CAPITAL INVESTMENTS II, LP
By: Claudius, L.L.C., General Partner       By: Care Capital II, LLC, as general
610 Fifth Avenue, 5th Floor                 partner
New York, New York  10020                   47 Hulfish St., Suite 310
                                            Princeton, NJ 08542

_______________________________________     By: ________________________________
By: Srini Conjeevaram                       Name:  David R. Ramsay
Its: General Partner                        Title: Authorized Signatory

GALEN EMPLOYEE FUND III, L.P.               ESSEX WOODLANDS HEALTH
By: Wesson Enterprises, Inc.                VENTURES V, L.P.
610 Fifth Avenue, 5th Floor                 190 South LaSalle Street, Suite 2800
New York, New York 10020                    Chicago, IL 60603

_______________________________________     ____________________________________
By: Bruce F. Wesson                         By: Immanuel Thangaraj
Its: General Partner                        Its: Managing Director

                                       19

ALAN SMITH                                  PATRICK COYNE
21 Bedlow Avenue                            800 Merion Square Road
Newport, Rhode Island  02840                Gladwyne, Pennsylvania 19035

_______________________________________     ____________________________________

MICHAEL WEISBROT                            SUSAN WEISBROT
1136 Rock Creek Road                        1136 Rock Creek Road
Gladwyne, Pennsylvania  19035               Gladwyne, Pennsylvania  19035

_______________________________________     ____________________________________

GREG WOOD                                   DENNIS ADAMS
1263 East Calavera Street                   120 Kynlyn Road
Altadena, CA 91001                          Radnor, Pennsylvania  19312

_______________________________________     ____________________________________

STEFANIE HEITMEYER                          BERNARD SELZ
17759 Road, Route 66                        600 Fifth Avenue, 25th Floor
Fort Jennings, Ohio 45844                   New York, New York 10020

_______________________________________     ____________________________________

PETER CLEMENS                               ROGER GRIGGS
c/o Halsey Drug Co., Inc.                   c/o Tom Jennings
695 North Perryville Rd.                    7300 Turfway Road
Crimson Building #2                         Suite 300
Rockford, Illinois  61107                   Florence, KY 41042

_______________________________________     ____________________________________

VARSHA H. SHAH                              HEMANT K. SHAH
29 Chrissy Drive                            29 Chrissy Drive
Warren, New Jersey  07059                   Warren, New Jersey 07059

_______________________________________     ____________________________________

                                       20

VARSHA H. SHAH AS CUSTODIAN                 VARSHA H. SHAH AS CUSTODIAN
FOR SACHIN H. SHAH                          FOR SUMEET H. SHAH
29 Chrissy Drive                            29 Chrissy Drive
Warren, New Jersey  07059                   Warren, New Jersey  07059

_______________________________________     ____________________________________
By: Varsha H. Shah, Custodian               By: Varsha H. Shah, Custodian

MICHAEL RAINISCH                            ILENE RAINISCH
c/o Alvin Rainisch                          c/o Alvin Rainisch
300 Flower Lane                             300 Flower Lane
Morganville, New Jersey  07751              Morganville, New Jersey  07751

_______________________________________     ____________________________________

KENNETH GIMBEL, IRA ACCOUNT                 KENNETH GIMBEL
FBO KENNETH GIMBEL                          2455 Montgomery Avenue
2455 Montgomery Avenue                      Highland Park, Illinois  60035
Highland Park, Illinois  60035

_______________________________________     ____________________________________
By: __________________________
Its: Trustee

JESSICA K. CLEMENS                          JAKE P. CLEMENS
C/o Halsey Drug Co., Inc.                   c/o Halsey Drug Co., Inc.
695 North Perryville Rd.                    695 North Perryville Rd.
Crimson Building #2                         Crimson Building #2
Rockford, Illinois  61107                   Rockford, Illinois  61107

_______________________________________     ____________________________________

CONNIE REICHER TRUST                        MICHAEL REICHER TRUST
c/o Halsey Drug Co., Inc.                   c/o Halsey Drug Co., Inc.
695 North Perryville Rd.                    695 North Perryville Rd.
Crimson Building #2                         Crimson Building #2
Rockford, Ill.  61107                       Rockford, Ill.  61107

_______________________________________     ____________________________________
By: Connie Reicher, Trustee                 By: Michael Reicher, Trustee

ROBERT W. BAIRD & CO., INC., TTEE
FBO Michael K. Reicher IRA
c/o Halsey Drug Co., Inc.
695 North Perryville Rd.
Rockford, Ill.  61107

_______________________________________
By: Robert W. Baird, Trustee

GEORGE E. BOUDREAU                          JOHN E. HEPPE, JR.
222 Elbow Lane                              237 W. Montgomery Avenue
Haverford, PA  19041                        Haverford, Pennsylvania 19041

_______________________________________     ____________________________________

Watson:

Watson Pharmaceuticals, Inc.
311 Bonnie Circle
Corona, California 92880
Attention: Charles Slacik

Tel: 909-270-1400 ext. 4150
Fax: 909-270-1429

GALEN PARTNERS III, L.P.                 GALEN PARTNERS INTERNATIONAL, III, L.P.
By: Claudius, L.L.C., General Partner    By: Claudius, L.L.C., General Partner
610 Fifth Avenue, 5th Fl.                610 Fifth Avenue, 5th Floor
New York, New York  10019                New York, New York  10020


Tel: 212-218-4990                        Tel: 212-218-4990
Fax: 212-218-4999                        Fax: 212-218-4999

GALEN EMPLOYEE FUND III, L.P.            ESSEX WOODLANDS HEALTH VENTURES V, L.P.
By: Wesson Enterprises, Inc.             By: Essex Woodlands Health Ventures V,
610 Fifth Avenue, 5th Floor              L.L.C.,
New York, New York 10020                 Its General Partner
                                         190 South LaSalle Street, Suite 2800
                                         Chicago, IL 60603

Tel: 212-218-4990                        Tel: 312-444-6040
Fax: 212-218-4999                        Fax: 312-444-6034

CARE CAPITAL INVESTMENTS II, LP          ROGER GRIGGS
By: Care Capital II, LLC, as general     c/o Tom Griggs
partner                                  7300 Turfway Road
47 Hulfish St., Suite 310                Suite 300
Princeton, NJ 08542                      Florence, KY 41042

Tel: 609-520-1973                        Tel: 859-371-7581
Fax: 609-520-9299                        Fax: 859-371-7692

                                       23

ALAN SMITH                               PATRICK COYNE
21 Bedlow Avenue                         800 Merion Square Road
Newport, Rhode Island  02840             Gladwyne, PA 19035

Tel: 410-846-5418                        Tel: 215-255-1387
Fax: 410-846-5418                        Fax: 215-255-1296

MICHAEL WEISBROT                         SUSAN WEISBROT
1136 Rock Creek Road                     1136 Rock Creek Road
Gladwyne, Pennsylvania  19035            Gladwyne, Pennsylvania  19035

Tel: 610-941-0300                        Tel: 610-941-0300
Fax: 610-941-6655                        Fax: 610-941-6655

GREG WOOD                                DENNIS ADAMS
1263 East Calavera Street                120 Kynlyn Road
Atladena, CA  19001                      Radnor, Pennsylvania  19312

Tel: 323-254-4326                        Tel: 610-337-9230
Fax: 323-254-8756                        Fax: 610-293-1808

BERNARD SELZ                             ROBERT W. BAIRD & CO., INC., TTEE
600 Fifth Avenue, 25th floor             FBO Michael K. Reicher IRA
New York, NY 10020                       c/o Halsey Drug Co., Inc.
                                         695 North Perryville Rd.
Tel: 212-218-8270                        Crimson Building #2
Fax: 212-218-8250                        Rockford, Ill.  61107

MICHAEL REICHER TRUST                    Tel: 815-399-2060
c/o Halsey Drug Co., Inc.                Fax: 815-399-9710
695 North Perryville Rd.
Crimson Building #2                      PETER CLEMENS
Rockford, Ill.  61107                    c/o Halsey Drug Co., Inc.
                                         695 North Perryville Rd.
Tel: 815-399-2060                        Crimson Building #2
Fax: 815-399-9710                        Rockford, Ill.  61107

                                         Tel: 815-399-2060
                                         Fax: 815-399-9710

                                       24

CONNIE REICHER TRUST                     STEPHANIE HEITMEYER
c/o Halsey Drug Co., Inc.                17759 Road, Route 66
695 North Perryville Rd.                 Ft. Jennings, Ohio 45844
Crimson Building #2
Rockford, Ill.  61107

                                         Tel: 419-453-2144
Tel: 815-399-2060                        Fax: 419-453-3085
Fax: 815-399-9710

VARSHA H. SHAH                           HEMANT K. SHAH
29 Christy Drive                         29 Christy Drive
Warren, New Jersey  07059                Warren, New Jersey  07059

Tel: 732-469-6334                        Tel: 732-469-6334
Fax: 732-469-6434                        Fax: 732-469-6434

VARSHA H. SHAH AS CUSTODIAN              VARSHA H. SHAH AS CUSTODIAN
FOR SACHIN H. SHAH                       FOR SUMEET H. SHAH
29 Christy Drive                         29 Christy Drive
Warren, New Jersey  07059                Warren, New Jersey  07059

Tel: 732-469-6334                        Tel: 732-469-6334
Fax: 732-469-6434                        Fax: 732-469-6434

PETER STIEGLITZ                          GEORGE E. BOUDREAU
RJ Palmer LLC                            222 Elbow Lane
156 West 56th Street, 5th Floor          Haverford, PA  19041
New York, New York 10019

Tel: 917-344-5332                        Tel: 215-5456334
Fax:___________________________          Fax:___________________________

ORACLE STRATEGIC PARTNERS, L.P.          JOHN E. HEPPE, JR.
By: Oracle Strategic Capital L.L.C.,     237 W. Montgomery Avenue
General Partner                          Haverford, Pennsylvania 19041
200 Greenwich Avenue
3rd Floor
Greenwich, CT 06830

Tel: 203-862-7920                       Tel: 610-649-1554
Fax: 203-862-1601                        Fax:____________________________

                                                                                GALEN PARTNERS        GALEN
                             WARRANT EXERCISE        GALEN PARTNERS III,      INTERNATIONAL III,    EMPLOYEES
DATE OF WARRANT                  PRICE                       L.P.                    L.P.         FUND III, L.P.
August 12, 1998                 $  2.2100                    47,646                  4,611               209
September 17, 1998              $  1.8900                    23,824                  2,305               104
October 2, 1998                 $  1.7300                    23,824                  2,305               104
October 19, 1998                $  1.5000                     7,147                    692                31
October 19, 1998                $  1.4700                    35,735                  3,459               156
November 6, 1998                $  1.4700                    71,471                  6,917               311
December 2, 1998                $  1.3000                   654,098                 59,208             2,679
March 8, 1999                   $  1.1400                    64,120                  5,804               262
May 3, 1999                     $  1.1200                    11,863                  1,073                49
January 7, 2000                 $  1.4000                    23,965                  2,169                99
January 21, 2000                $  1.4300                    47,931                  4,339               196
February 19, 2000               $  1.1300                    23,965                  2,169                99
March 4, 2000                   $  1.5500                    23,965                  2,169                99
August 15, 2001                 $  3.0120                   140,459                 12,715               576
January 9, 2002                 $  1.8370                   146,157                 13,230               598
January 9, 2002                 $  1.8370                    66,805                  6,047               273
February 1, 2002                $  1.8700                    68,518                  6,202               280
March 1, 2002                   $  2.0870                    68,518                  6,202               280
April 1, 2002                   $  2.0100                    45,678                  4,135               187
May 8, 2002                     $  2.1600                 1,635,580                148,044             6,696
May 8, 2002                     $  2.1600                   548,142                 49,614             2,244
May 8, 2002                     $  2.1600                   241,586                 21,867               989
June 3, 2002                    $  1.9000                   215,194                 19,478               881
July 23, 2002                   $  1.7200                   186,772                 16,905               765
July 23, 2002                   $  1.4500                    82,220                  7,442               337
August 5, 2002                  $  1.4200                   151,245                 13,690               619
September 3, 2002               $  1.5100                   121,808                 11,025               499
October 1, 2002                 $  1.7545                    93,386                  8,453               382
November 4, 2002                $  1.7565                    11,775                  1,066                48
November 12, 2002               $  1.7730                    10,151                    919                42
November 21, 2002               $  1.5770                    24,971                  2,260               102
                                                          ---------                -------            ------
December 5, 2002                $  1.2770                    13,704                  1,240                56
                                                          ---------                -------            ------
                                                          4,932,223                447,754            20,252
                                                          =========                =======            ======

EXHIBIT 10.7

AMENDED AND RESTATED SUBORDINATION AGREEMENT, dated as of February 6, 2004, by and among (i) Halsey Drug Co., Inc., a New York corporation (the "Company"), (ii) the holders (the "Watson Holders") of the Watson Note,
(iii) the several purchasers (the "2004 Purchasers") of the 2004 Debentures,
(iv) the several holders (the "2003 Holders") of the 2003 Debentures, (v) the several holders (the "2002 Holders") of the 2002 Debentures, (vi) the several holders (the "1998 Holders") of the Galen Debentures, (vii) the several holders (the "1999 Holders") of the Oracle Debentures, (viii) Galen Partners III, L.P., a Delaware limited partnership ("Galen"), as agent for the 2004 Purchasers, the 2003 Holders and the 2002 Holders (in such capacity, the "2004 Agent"), (ix) Galen, Galen Partners International III, L.P., a Delaware limited partnership and Galen Employee Fund III, L.P., a Delaware limited partnership, (x) Oracle Strategic Partners, L.P. as agent for the 1999 Holders (in such capacity, the "Oracle Agent") and (viii) the Grantors listed on the signature pages hereof.

RECITALS

(A) Certain capitalized terms used in this Agreement without definition have the meaning ascribed to them in Section 1 below.

(B) WHEREAS, the 1998 Holders and the Company have entered into a Debenture and Warrant Purchase Agreement dated March 10, 1998 (such agreement, as amended, supplemented, or otherwise modified from time to time, the "1998 Purchase Agreement") pursuant to which the Company issued the Galen Debentures. The Galen Debentures are, or will be, secured by (i) a lien on and security interest in the Company Personal Property pursuant to the Company General Security Agreement dated March 10, 1999 between the Company and the Galen Partners III, L.P. (the "Galen Agent") (such agreement, as amended, supplemented, or otherwise modified from time to time, the "1998 Company General Security Agreement"), (ii) collateral assignments of the Company Assignable Property pursuant to the 1998 Company General Security Agreement and (iii) a lien on and security interest in the Company Investment Property pursuant to a Stock Pledge Agreement between the Company and the Galen Agent (such agreement, as amended, supplemented, or otherwise modified from time to time the "1998 Stock Pledge Agreement").

(C) WHEREAS, in connection with, and in order to support the obligations of the Company under, the 1998 Purchase Agreement, each of the Guarantors has guaranteed the Company's obligations under the Galen Debentures and has undertaken certain additional obligations pursuant to the Continuing Unconditional Secured Guaranty by each Guarantor dated March 10, 1998 (each such guaranty and all other obligations of each of the Guarantors under the Purchase Agreement, in each case, as they may be amended, supplemented or otherwise modified from time to time, a "Galen Guaranty"). The Galen Guaranties are, or will be, secured by (i) a lien on and security interest in the Guarantor Personal Property of each Guarantor granted pursuant to a Guarantors General Security Agreement dated March 10, 1998 between the Guarantors and the Galen Agent (such agreement, as amended, supplemented, or otherwise modified from time to time, the "1998 Guarantors General Security Agreement"), (ii) collateral assignments of the Guarantor Assignable Property of each Guarantor pursuant to the 1998 Guarantors General Security Agreement and (iii) a mortgage granted by Houba Inc. to the Galen

Agent on Houba Inc.'s Guarantor Mortgage Property (such mortgage, as amended, supplemented, or otherwise modified from time to time, the "1998 Mortgage").

(D) WHEREAS, the 1999 Holders and the Company have entered into a Debenture and Warrant Purchase Agreement dated May 26, 1999 (such agreement, as amended, supplemented, or otherwise modified from time to time, the "1999 Purchase Agreement") pursuant to which the Company issued the Oracle Debentures. The Oracle Debentures are, or will be, secured by (i) a lien on and security interest in the Company Personal Property granted pursuant to the Company General Security Agreement dated May 26, 1999 between the Company and the Oracle Agent (such agreement, as amended, supplemented, or otherwise modified from time to time, the "1999 Company General Security Agreement"), (ii) collateral assignments of the Company Assignable Property pursuant to the 1999 Company General Security Agreement and (iii) a lien on and security interest in the Company Investment Property pursuant to a Stock Pledge Agreement between the Company and the Oracle Agent (such agreement, as amended, supplemented, or otherwise modified from time to time, the "1999 Stock Pledge Agreement").

(E) WHEREAS, in connection with, and in order to support the obligations of the Company under, the 1999 Purchase Agreement, each of the Guarantors has guaranteed the Company's obligations under the Oracle Debentures and has undertaken certain additional obligations pursuant to the Continuing Unconditional Secured Guaranty by each Guarantor dated May 26, 1999 (each such guaranty and all other obligations of each of the Guarantors under the 1999 Purchase Agreement, in each case, as they may be amended, supplemented or otherwise modified from time to time, an "Oracle Guaranty"). The Oracle Guaranties are, or will be, secured by (i) a lien on and security interest in the Guarantor Personal Property of each Guarantor granted pursuant to a Guarantors General Security Agreement dated May 26, 1999 between the Guarantors and the Oracle Agent (such agreement, as amended, supplemented, or otherwise modified from time to time, the "1999 Guarantors General Security Agreement"),
(ii) collateral assignments of the Guarantor Assignable Property of each Guarantor pursuant to the 1999 Guarantors General Security Agreement and (iii) a mortgage granted by Houba Inc. to the Oracle Agent on Houba Inc.'s Guarantor Mortgage Property (such mortgage, as amended, supplemented or otherwise modified from time to time, the "1999 Mortgage").

(F) WHEREAS, Watson Pharmaceuticals, Inc., a Nevada corporation ("Watson") and the Company have entered into a Loan Agreement dated March 29, 2000 (such agreement, as supplemented, amended or otherwise modified from time to time, including, without limitation, as amended through the Third Amendment to Loan Agreement dated February 6, 2004, the "Watson Loan Agreement") pursuant to which Watson agreed to extend certain funds to the Company. The Company's obligation to pay the principal amount of, and interest on, the Watson Term Loan is now evidenced by a secured promissory note dated as of December 20, 2002 (the "Watson Note") which is, or will be, secured by (i) a lien on and security interest in the Company Personal Property granted pursuant to the Watson Security Agreement dated March 29, 2000 between the Company and Watson (such agreement, as amended, supplemented, or otherwise modified from time to time, the "Watson Security Agreement"), (ii) collateral assignments of the Company Assignable Property pursuant to the Watson Security Agreement and (iii) a lien on and security interest in the Company Investment Property pursuant to a Stock

Pledge Agreement between the Company and Watson (such agreement, as amended, supplemented, or otherwise modified from time to time, the "Watson Stock Pledge Agreement").

(G) WHEREAS, in connection with, and in order to support the obligations of the Company under, the Watson Loan Agreement, each of the Guarantors has guaranteed the Company's obligations under the 2000 Watson Term Loan and has undertaken certain additional obligations pursuant to the Continuing Unconditional Secured Guaranty by each Guarantor dated March 29, 2000 (each such guaranty and all other obligations of each of the Guarantors under the Watson Loan Agreement, in each case, as they may be amended, supplemented or otherwise modified from time to time, a "Watson Guaranty"). The Watson Guaranties are, or will be, secured by (i) a lien on and security interest in the Guarantor Personal Property of each Guarantor granted pursuant to a Guarantors General Security Agreement dated March 29, 2000 between the Guarantors and Watson (such agreement, as amended, supplemented, or otherwise modified from time to time, the "Watson Guarantors General Security Agreement"),
(ii) collateral assignments of the Guarantor Assignable Property of each Guarantor pursuant to the Watson Guarantors General Security Agreement and (iii) a mortgage granted by Houba Inc. to Watson Houba Inc.'s Guarantor Mortgage Property (such mortgage, as amended, supplemented, or otherwise modified from time to time, the "Watson Mortgage").

(H) WHEREAS, the 2002 Holders and the Company have entered into a Debenture Purchase Agreement dated as of December 20, 2002 (such agreement, as amended, supplemented, or otherwise modified from time to time, the "2002 Purchase Agreement") pursuant to which the Company issued the 2002 Debentures. The 2002 Debentures are, or will be, secured by (i) a lien on and security interest in granted pursuant to the Company General Security Agreement dated as of December 20, 2002 between the Company and the 2004 Agent (such agreement, as amended, supplemented, or otherwise modified from time to time, the "2002 Company General Security Agreement"), (ii) collateral assignments of the Company Assignable Property pursuant to the 2002 Company General Security Agreement and (iii) a lien on and security interest in the Company Investment Property pursuant to a Stock Pledge Agreement between the Company and Galen (such agreement, as amended, supplemented, or otherwise modified from time to time, the "2002 Stock Pledge Agreement").

(I) WHEREAS, in connection with, and in order to support the Obligations of the Company under, the 2002 Purchase Agreement, each of the Guarantors has guaranteed the Company's Obligations under the 2002 Debentures and has undertaken certain additional obligations pursuant to the Continuing Unconditional Secured Guaranty by each Guarantor dated as of December 20, 2002 (each such guaranty and all other obligations of each of the Guarantors under the 2002 Purchase Agreement, in each case, as they may be amended, supplemented or otherwise modified from time to time, a "2002 Guaranty"). The 2002 Guaranties are, or will be, secured by (i) a lien on and security interest in the Guarantor Personal Property of each Guarantor granted pursuant to a Guarantors General Security Agreement dated as of December 20, 2002 between the Guarantors and Galen (such agreement, as amended, supplemented, or otherwise modified from time to time, the "2002 Guarantors General Security Agreement"), (ii) collateral assignments of the Guarantor Assignable Property of each Guarantor pursuant to the 2002 Guarantors General Security Agreement and (iii) a mortgage granted by Houba Inc. to Galen on Houba Inc.'s Guarantor Mortgage Property (such mortgage, as it may be amended, supplemented or otherwise modified from time to time, the "2002 Mortgage").

(J) WHEREAS, in connection with the 2002 Purchase Agreement, each of Watson, the Company, the 1998 Holders, the 1999 Holders, the 2002 Holders, the 2003 Holders and the Grantors and Guarantors have entered into a Subordination Agreement dated as of December 20, 2002 (such agreement, as amended, supplemented or otherwise modified from time to time, the "Existing Subordination Agreement"), pursuant to which such parties made certain agreements regarding the priority of their respective security interests, priority as to certain payments and certain other matters set forth in the Existing Subordination Agreement.

(K) WHEREAS, the 2003 Holders and the Company have entered into the Joinder Agreements pursuant to which the Company issued the 2003 Debentures. The 2003 Debentures are, or will be, secured by (i) a lien on and security interest in granted pursuant to the 2002 Company General Security Agreement, (ii) collateral assignments of the Company Assignable Property pursuant to the 2002 Company General Security Agreement and (iii) a lien on and security interest in the Company Investment Property pursuant to the 2002 Stock Pledge Agreement.

(L) WHEREAS, in connection with, and in order to support the Obligations of the Company under, the Joinder Agreements, each of the Guarantors has guaranteed the Company's Obligations under the 2003 Debentures and has undertaken certain additional obligations pursuant to the 2002 Guaranties. The 2002 Guaranties are, or will be, secured by (i) a lien on and security interest in the Guarantor Personal Property of each Guarantor granted pursuant to the 2002 Guarantors General Security Agreement, (ii) collateral assignments of the Guarantor Assignable Property of each Guarantor pursuant to the 2002 Guarantors General Security Agreement and (iii) the 2002 Mortgage.

(M) WHEREAS, the 2004 Purchasers and the Company have entered into a Debenture Purchase Agreement dated as of the date hereof (such agreement, as amended, supplemented, or otherwise modified from time to time, the "2004 Purchase Agreement") pursuant to which the Company has agreed to issue the 2004 Debentures. The 2004 Debentures are, or will be, secured by (i) a lien on and security interest in granted pursuant to the Company General Security Agreement dated as of the date hereof between the Company and the 2004 Agent (such agreement, as amended, supplemented, or otherwise modified from time to time, the "2004 Company General Security Agreement"), (ii) collateral assignments of the Company Assignable Property pursuant to the 2004 Company General Security Agreement and (iii) a lien on and security interest in the Company Investment Property pursuant to a Stock Pledge Agreement between the Company and Galen (such agreement, as amended, supplemented, or otherwise modified from time to time, the "2004 Stock Pledge Agreement").

(N) WHEREAS, as a condition to the 2004 Purchasers' obligation to purchase the 2004 Debentures under the 2004 Purchase Agreement and in order to support the Obligations of the Company under the 2004 Purchase Agreement, each of the Guarantors has guaranteed the Company's Obligations under the 2004 Debentures and has undertaken certain additional obligations pursuant to the Continuing Unconditional Secured Guaranty by each Guarantor dated as of as of the date hereof (each such guaranty and all other obligations of each of the Guarantors under the 2004 Purchase Agreement, in each case, as they may be amended, supplemented or otherwise modified from time to time, a "2004 Guaranty"). The 2004 Guaranties are, or will be, secured by (i) a lien on and security interest in the Guarantor Personal Property of each

Guarantor granted pursuant to a Guarantors General Security Agreement dated as of the date hereof between the Guarantors and Galen (such agreement, as amended, supplemented, or otherwise modified from time to time, the "2004 Guarantors General Security Agreement") and (ii) collateral assignments of the Guarantor Assignable Property of each Guarantor pursuant to the 2004 Guarantors General Security Agreement.

(O) WHEREAS, it is a condition to closing under the 2004 Purchase Agreement that the parties hereto shall have entered into this Agreement to confirm, among other things, their relative rights with respect to the Company Collateral and the Guarantor Collateral.

NOW THEREFORE, in consideration of the foregoing and the mutual promises and agreements hereinafter contained, the parties hereto agree as follows:

SECTION 1. Definitions. (a) As used herein, the following terms have the following meanings:

this "Agreement" means this Amended and Restated Subordination Agreement, as it may be supplemented, amended or otherwise modified from time to time.

"Bankruptcy Proceeding" means, in the case of any Grantor, each of the following: (a) any distribution of all or any of the assets of such Grantor upon the dissolution, winding up, total or partial liquidation, arrangement, reorganization, adjustment, protection, relief or composition of such Grantor or its debts, whether in any bankruptcy, insolvency, arrangement, reorganization, receivership or relief proceeding or similar case or proceeding under any Federal or state bankruptcy or similar law and (b) any assignment for the benefit of creditors of any other marshalling of the assets and liabilities of such Grantor or otherwise.

"Cash Obligations" means, as at any time, the Obligations of the Company or any Guarantor, as applicable, to the extent then payable in cash.

"Collateral" means, collectively, the Company Collateral and the Guarantor Collateral of all Guarantors.

"Company" has the meaning specified in the introductory paragraph of this Agreement.

"Company Assignable Property" means, collectively, all of the Company's leases, contracts, patents, copyrights, trademarks and service marks, now owned or existing or hereafter acquired or arising.

"Company Collateral" means, collectively, the Company Personal Property, the Company Assignable Property and Company Investment Property.

"Company Investment Property" means all of the issued and outstanding shares of Houba, Inc. and Axiom Pharmaceutical Corporation.

"Company Personal Property" means all of the Company's properties and assets of whatever nature, tangible or intangible, now owned or existing or hereafter acquired or arising.

"Company Security Documents" means, collectively, the Galen Company Security Documents, the Oracle Company Security Documents, the Watson Company Security Documents, the 2002 Company Security Documents and the 2004 Company Security Documents.

"Existing Debentures" means, collectively, the Galen Debentures and the Oracle Debentures.

"Existing Holders" means the 1998 Holders and the 1999 Holders.

"Financing Documents" means any or all of (a) the Transaction Documents, (b) the Watson Loan Agreement, (c) the Joinder Agreements,
(d) the 1999 Purchase Agreement, (e) the 1998 Purchase Agreement, (f) the 2003 Debentures and (g) the Existing Debentures.

"Galen" has the meaning specified in the introductory paragraph of this Agreement.

"Galen Agent" has the meaning specified in the recitals.

"Galen Company Security Documents" means, collectively, the 1998 Company General Security Agreement and the 1998 Stock Pledge Agreement.

"Galen Debentures" means the Company's 5% Convertible Senior Secured Debentures due March 31, 2006 (as amended, supplemented or otherwise modified from time to time) in an aggregate principal amount of $20,800,000 issued under the 1998 Purchase Agreement.

"Galen Guarantor Security Documents" means, collectively, the 1998 Guarantors General Security Agreement and the 1998 Mortgage.

"Galen Guaranty" has the meaning specified in the recitals.

"Grantors" means the Company, Axiom Pharmaceutical Corporation, a Delaware corporation, and Houba Inc., an Indiana corporation, and each other subsidiary or affiliate of the Company that is or becomes a party to any Security Document or any Guaranty Security Document.

"Guarantors" means Axiom Pharmaceutical Corporation, a Delaware corporation, and Houba, Inc., an Indiana corporation, and each other subsidiary or affiliate of the Company that is or becomes a party to any Security Document.

"Guarantor Assignable Property" means, collectively, in respect of any Guarantor, all of such Guarantor's leases, contracts, patents, copyrights, trademarks and service marks, now owned or existing or hereafter acquired or arising.

"Guarantor Collateral" means, collectively, in respect of any Guarantor, (a) its Guarantor Personal Property, (b) its Guarantor Assignable Property and (c) if such Guarantor is Houba, Inc., its Guarantor Mortgage Property.

"Guarantor Mortgage Property" means Houba Inc.'s real property located at 16235 State Road 17, Culver, Indiana.

"Guarantor Personal Property" means, in respect of either Guarantor, all of such Guarantor's properties and assets of whatever nature, tangible or intangible, now owned or existing or hereafter acquired or arising.

"Guarantor Security Documents" means, collectively, the Galen Guarantor Security Documents, the Oracle Guarantor Security Documents, the Watson Guarantor Security Documents, the 2002 Guarantor Security Documents and the 2004 Guarantors General Security Agreement.

"Joinder Agreements" means, collectively, the Joinder Agreements dated June 16, 2003, July 1, 2003, July 15, 2003, August 5, 2003, August 19, 2003, September 5, 2003, and October 7, 2003 (each entered into under the 2002 Purchase Agreement), each as amended, supplemented, or otherwise modified from time to time.

"Junior Secured Party", as to any item of Collateral, and as to Secured Creditors purporting to have liens on and securities interests in such item under the Security Documents, means one such Secured Creditor whose lien on and security interest in such item (and to the extent such lien on and security interest in such item) is stated in Section 2 hereof to be junior in right to the liens and security interests of one or more such other Secured Creditors on and in such item.

"1998 Company General Security Agreement" has the meaning specified in the recitals.

"1998 Guarantors General Security Agreement" has the meaning specified in the recitals.

"1998 Holders" has the meaning specified in the introductory paragraph of this Agreement.

"1998 Mortgage" has the meaning specified in the recitals.

"1998 Purchase Agreement" has the meaning specified in the recitals.

"1998 Stock Pledge Agreement" has the meaning specified in the recitals.

"1999 Company General Security Agreement" has the meaning specified in the recitals.

"1999 Guarantors General Security Agreement" has the meaning specified in the recitals.

"1999 Holders" has the meaning specified in the introductory paragraph of this Agreement.

"1999 Mortgage" has the meaning specified in the recitals.

"1999 Purchase Agreement" has the meaning specified in the recitals.

"1999 Stock Pledge Agreement" has the meaning specified in the recitals.

"Obligations" of the Company or any Guarantor means, at any time, any loans, advances, debts, liabilities and obligations of the Company or such Guarantor, (a) in the case of the Company, under the Galen Debentures and the 1998 Purchase Agreement, the Oracle Debentures and the 1999 Purchase Agreement, the 2002 Debentures and the 2002 Purchase Agreement, the 2003 Debentures and the 2002 Purchase Agreement and the Joinder Agreements, the 2004 Debentures and the 2004 Purchase Agreement and the Watson Loan Agreement; and (b) in the case of any Guarantor, under its Galen Guaranty, its Oracle Guaranty, its Watson Guaranty, its 2002 Guaranty and its 2004 Guaranty, in each case, whether matured or unmatured, contingent or liquidated and whether for principal, accrued and unpaid interest (including, without limitation, interest accruing after the filing of a petition, or other act, initiating a Bankruptcy Proceeding), accrued and unpaid expenses, indemnities, fees (including attorneys fees and disbursements) or otherwise, whether or not such obligations are due and payable at such time.

"Oracle Company Security Documents" means, collectively, the 1999 Company General Security Agreement and the 1999 Stock Pledge Agreement.

"Oracle Debentures" of the Company's 5% Convertible Senior Secured Debentures due March 31, 2006 (as supplemented, amended or otherwise modified from time to time) in an aggregate principal amount of $22,863,000 issued under the 1999 Purchase Agreement.

"Oracle Guarantor Security Documents" means, collectively, the 1999 Guarantors General Security Agreement and the 1999 Mortgage.

"Oracle Guaranty" has the meaning specified in the recitals.

"Person" means any individual, corporation, limited liability company, partnership, association, trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

"Secured Creditors" means the Existing Holders, the 2002 Holders, the 2003 Holders, the Watson Holders and the 2004 Purchasers and their respective agents,

permitted successors, transferees and assigns, in their respective capacities as the beneficiaries under the Security Documents and the Guaranty Documents, respectively (whether named in such agreement or as an assignee thereof).

"Security Documents" means, collectively, the Company Security Documents and the Guarantor Security Documents.

"Senior Secured Party", as to any item of Collateral, and as to Secured Creditors purporting to have liens on and security interests in such item under the Security Documents, means one such Secured Creditor whose lien on and security interest in such item (and to the extent such lien on and security interest in such item) is stated in
Section 2 hereof to be senior and prior in right to the liens and security interests of one or more such other Secured Creditors on and in such item.

"2002 Company General Security Agreement" has the meaning specified in the recitals.

"2002 Company Security Documents" means, collectively, the 2002 Company General Security Agreement and the 2002 Stock Pledge Agreement.

"2002 Debentures" means, collectively, the 2002 Initial Debentures and the 2002 Interest Payment Debentures from time to time issued and outstanding.

"2002 Debentures Maximum Amount" means, at any time, an amount equal to the sum of (a) $35,000,000, (b) the aggregate principal amount of 2002 Interest Payment Debentures then outstanding, (c) without duplication, the aggregate amount of unpaid interest theretofore accrued on the 2002 Debentures, and (d) without duplication, the aggregate amount of all costs, expenses, fees, indemnities and other amounts payable in respect of the 2002 Debentures, the 2002 Purchase Agreement, the 2002 Guaranties, the 2002 Company Security Documents and the 2002 Guarantor Security Documents.

"2002 Initial Debentures" means the Company's 5% Convertible Senior Secured Debentures due March 31, 2006 (as amended, supplemented or otherwise modified from time to time) issued under the 2002 Purchase Agreement (except for 2003 Debentures and for Debentures issued in payment of interest on any one or more 2002 Debentures).

"2002 Interest Payment Debentures" means the Company's 5% Convertible Senior Secured Debentures due March 31, 2006 (as amended, supplemented or otherwise modified from time to time) issued under the 2002 Purchase Agreement in payment of interest on any one or more 2002 Debentures (whether consisting of 2002 Initial Debentures or other 2002 Interest Payment Debentures, or both).

"2002 Guarantor Security Documents" means, collectively, the 2002 Guarantors General Security Agreement and the 2002 Mortgage.

"2002 Guaranty" has the meaning specified in the recitals.

"2002 Guarantors General Security Agreement" has the meaning specified in the recitals.

"2002 Holders" has the meaning specified in the introductory paragraph of this Agreement.

"2002 Mortgage" has the meaning specified in the recitals.

"2002 Purchase Agreement" has the meaning specified in the recitals.

"2002 Stock Pledge Agreement" has the meaning specified in the recitals.

"2002 Transaction Documents" means, collectively, (a) the 2002 Purchase Agreement, (b) the 2002 Debentures, (c) the 2002 Company Security Documents, (d) the 2002 Guarantor Security Documents, (e) the Watson Term Loans Amendment (as such term is defined in the 2002 Purchase Agreement), (f) the Watson Consent (as such term is defined in the 2002 Purchase Agreement), (g) the Existing Debenture Amendments (as such term is defined in the 2002 Purchase Agreement) and (h) the Existing Debentureholder Consent (as such term is defined in the 2002 Purchase Agreement).

"2003 Debentures" means the Company's 5% Convertible Senior Secured Debentures due March 31, 2006 (as amended, supplemented or otherwise modified from time to time) issued pursuant to the Joinder Agreements under the 2002 Purchase Agreement, together with any Debentures issued in payment of interest on any one or more 2003 Debentures.

"2003 Debentures Maximum Amount" means, at any time, an amount equal to the sum of (a) $6,700,152, (b) without duplication, the aggregate amount of unpaid interest theretofore accrued on the 2003 Debentures, and (c) without duplication, the aggregate amount of all costs, expenses, fees, indemnities and other amounts payable in respect of the 2003 Debentures, the 2002 Purchase Agreement, the Joinder Agreements, the 2002 Guaranties, the 2002 Company Security Documents and the 2002 Guarantor Security Documents.

"2003 Holders" has the meaning specified in the introductory paragraph of this Agreement.

"2004 Agent" has the meaning specified in the introductory paragraph of this Agreement.

"2004 Company General Security Agreement" has the meaning specified in the recitals.

"2004 Company Security Documents" means, collectively, the 2004 Company General Security Agreement and the 2004 Stock Pledge Agreement.

"2004 Debentures" means the Company's Convertible Senior Secured Debentures (as amended, supplemented or otherwise modified from time to time) issued under the 2004 Purchase Agreement.

."2004 Debentures Maximum Amount" means, at any time, an amount equal to the sum of (a) the aggregate principal amount of all 2004 Debentures then outstanding, (b) without duplication, the aggregate amount of unpaid interest theretofore accrued on the 2004 Debentures, and (c) without duplication, the aggregate amount of all costs, expenses, fees, indemnities and other amounts payable in respect of the 2004 Debentures, the 2004 Purchase Agreement, the 2004 Guaranties, the 2004 Company Security Documents and the 2004 Guarantors General Security Agreement.

"2004 Guaranty" has the meaning specified in the recitals.

"2004 Guarantors General Security Agreement" has the meaning specified in the recitals.

"2004 Holders" has the meaning specified in the introductory paragraph of this Agreement.

"2004 Purchase Agreement" has the meaning specified in the recitals.

"2004 Stock Pledge Agreement" has the meaning specified in the recitals.

"Transaction Documents" means, collectively, (a) this Agreement, (b) the 2004 Purchase Agreement, (c) the 2004 Debentures,
(d) the 2004 Company Security Documents, (e) the 2004 Guarantors General Security Agreement and (f) the 2002 Transaction Documents.

"Watson" has the meaning specified in the recitals.

"Watson Agent" means Galen Partners III, L.P.

"Watson Holders" has the meaning specified in the introductory paragraph of this Agreement.

"Watson Company Security Documents" means, collectively, the Watson Security Agreement and the Watson Stock Pledge Agreement.

"Watson Guarantor Security Documents" means, collectively, the Watson Guarantors General Security Agreement and the Watson Mortgage.

"Watson Guaranty" has the meaning specified in the recitals.

"Watson Guarantors General Security Agreement" has the meaning specified in the recitals.

"Watson Loan Agreement" has the meaning specified in the recitals.

"Watson Maximum Amount" means, at any time, an amount equal to the sum of (a) $5,000,000, (b) without duplication, the aggregate amount of unpaid interest theretofore accrued on the Watson Term Loan and (c) without duplication, the aggregate amount of all costs, expenses, fees, indemnities and other amounts payable in respect of the Watson Loan Agreement.

"Watson Mortgage" has the meaning specified in the recitals.

"Watson Note" has the meaning specified in the recitals.

"Watson Security Agreement" has the meaning specified in the recitals.

"Watson Stock Pledge Agreement" has the meaning specified in the recitals.

"Watson Term Loan" means the term loan in the principal amount of $5,000,000 (as amended, supplemented, or otherwise modified from time to time) evidenced by the Watson Note.

(b) UCC Terms. Terms defined in Article 9 of the Uniform Commercial Code in effect in the State of New York (or in any other State, including, without limitation, the State of Indiana, to the extent that the Uniform Commercial Code in effect in such State is to be applied pursuant to the terms hereof) and not otherwise defined herein are used as therein defined.

SECTION 2. Priorities. (a) (i) The parties hereto hereby agree to the following priorities of interest in the Company Collateral:

The liens and security interests of the Watson Holders (under the Watson Company Security Documents) on and in the Company Collateral securing the Company's Obligations to the Watson Holders (up to an aggregate amount equal to the Watson Maximum Amount in effect from time to time) shall at all times be senior and prior in right to the liens thereon and security interests therein of the 2004 Purchasers, the 2003 Holders, the 2002 Holders, the 1998 Holders and the 1999 Holders under the 2004 Company Security Documents, the 2002 Company Security Documents, the Galen Company Security Documents and the Oracle Company Security Documents, respectively.

The liens and security interests of the 2004 Purchasers (under the 2004 Company Security Documents) on and in the Company Collateral, securing the Company's Obligations to the 2004 Purchasers (up to an aggregate amount equal to the 2004 Debentures Maximum Amount in effect from time to time) shall at all times be senior and prior in right to the liens thereon and security interests therein of the 2003 Holders, the 2002 Holders, the 1998 Holders and the 1999 Holders under the 2002 Company Security Documents, the Galen Company Security Documents and the Oracle Company Security Documents, respectively.

The liens and security interests of the 2003 Holders (under the 2002 Company Security Documents) on and in the Company Collateral, securing the Company's Obligations to the 2003 Holders (up to an aggregate amount equal to the 2003 Debentures Maximum Amount in effect from time to time) shall at all times be senior and prior in right to the liens thereon and security

interests therein of the 2002 Holders, the 1998 Holders and the 1999 Holders under the 2002 Company Security Documents, the Galen Company Security Documents and the Oracle Company Security Documents, respectively.

The liens and security interests of the 2002 Holders (under the 2002 Company Security Documents) on and in the Company Collateral, securing the Company's Obligations to the 2002 Holders (up to an aggregate amount equal to the 2002 Debentures Maximum Amount in effect from time to time) shall at all times be senior and prior in right to the liens thereon and security interests therein of the 1998 Holders and the 1999 Holders under the Galen Company Security Documents and the Oracle Company Security Documents, respectively.

The liens and security interests of the 1998 Holders and the 1999 Holders (under the Galen Company Security Documents and the Oracle Company Security Documents, respectively), on and in the Company Collateral shall at all times be equal and ratable according to their unpaid Obligations due to each such Secured Creditor from time to time under the Galen Debentures and the Oracle Debentures, respectively.

(ii) The parties hereto hereby agree to the following priorities of interest in the Guarantor Collateral of each Guarantor:

The liens and security interests of the Watson Holders (under the Watson Guarantor Security Documents) on and in the Guarantor Collateral of such Guarantor securing such Guarantor's Obligations under its Guaranty (in respect of the Company's Obligations to the Watson Holders up to an aggregate amount equal to the Watson Maximum Amount in effect from time to time) shall at all times be senior and prior in right to the liens thereon and security interests therein of the 2004 Purchasers, the 2003 Holders, the 2002 Holders, the 1998 Holders and the 1999 Holders under the 2004 Guarantors General Security Agreement, the 2002 Guarantor Security Documents, the Galen Guarantor Security Documents and the Oracle Guarantor Security Documents, respectively.

The liens and security interests of the 2004 Purchasers (under the 2004 Guarantors General Security Agreement) on and in the Guarantor Collateral of such Guarantor, securing such Guarantor's Obligations under its Guaranty (in respect of the Company's Obligations to the 2004 Purchasers up to an aggregate amount equal to the 2004 Debentures Maximum Amount in effect from time to time) shall at all times be senior and prior in right to the liens thereon and security interests therein of the 2003 Holders, the 2002 Holders, the 1998 Holders and the 1999 Holders (under the 2002 Guarantor Security Documents, the Galen Company Guaranty Documents and the Oracle Guaranty Documents, respectively).

The liens and security interests of the 2003 Holders (under the 2002 Guarantor Security Documents) on and in the Guarantor Collateral of such Guarantor, securing such Guarantor's Obligations under its Guaranty (in respect of the Company's Obligations to the 2003 Holders up to an aggregate amount equal to the 2003 Debentures Maximum Amount in effect from time to time) shall at all times be senior and prior in right to the liens thereon and security interests therein of the 2002 Holders, the 1998 Holders and the 1999 Holders (under the 2002 Guarantor Security Documents, the Galen Company Guaranty Documents and the Oracle Guaranty Documents, respectively).

The liens and security interests of the 2002 Holders (under the 2002 Guarantor Security Documents) on and in the Guarantor Collateral of such Guarantor, securing such Guarantor's Obligations under its Guaranty (in respect of the Company's Obligations to the 2002 Holders up to an aggregate amount equal to the 2002 Debentures Maximum Amount in effect from time to time) shall at all times be senior and prior in right to the liens thereon and security interests therein of the 1998 Holders and the 1999 Holders (under the Galen Company Guaranty Documents and the Oracle Guaranty Documents, respectively).

The liens and security interests of the 1998 Holders and the 1999 Holders (under the Galen Guarantor Security Documents and the Oracle Guarantor Security Documents, respectively) on and in the Guarantor Collateral of such Guarantor shall at all times be equal and ratable according to their unpaid Obligations due to each such Secured Creditor from time to time under the Galen Guaranty and the Oracle Guaranty.

(b) (i) The parties hereto hereby agree to the following priorities in right of payment of the Company's Cash Obligations:

(A) The Company's Cash Obligations under the Watson Loan Agreement (up to an aggregate amount equal to the Watson Maximum Amount in effect from time to time) shall at all time be senior and prior in right of payment to the Company's Cash Obligations under the 2004 Debentures and the 2004 Purchase Agreement, the 2003 Debentures and the 2002 Purchase Agreement and the Joinder Agreements, the 2002 Debentures and the 2002 Purchase Agreement, the Galen Debentures and the 1998 Purchase Agreement, and the Oracle Debentures and the 1999 Purchase Agreement.

The Company's Cash Obligations under the 2004 Debentures and the 2004 Purchase Agreement (up to an aggregate amount equal to the 2004 Debentures Maximum Amount in effect from time to time) shall at all times be senior and prior in right of payment to the Company's Cash Obligations under the 2003 Debentures and the 2002 Purchase Agreement and the Joinder Agreements, the 2002 Debentures and the 2002 Purchase Agreement, the Galen Debentures and the 1998 Purchase Agreement, and the Oracle Debentures and the 1999 Purchase Agreement.

The Company's Cash Obligations under the 2003 Debentures and the 2002 Purchase Agreement (up to an aggregate amount equal to the 2003 Debentures Maximum Amount in effect from time to time) shall at all times be senior and prior in right of payment to the Company's Cash Obligations under the 2002 Debentures and the 2002 Purchase Agreement, the Galen Debentures and the 1998 Purchase Agreement, and the Oracle Debentures and the 1999 Purchase Agreement.

The Company's Cash Obligations under the 2002 Debentures and the 2002 Purchase Agreement (up to an aggregate amount equal to the 2002 Debentures Maximum Amount in effect from time to time) shall at all times be senior and prior in right of payment to the Company's Cash Obligations under the Galen Debentures and the 1998 Purchase Agreement, and the Oracle Debentures and the 1999 Purchase Agreement.

The Company's Cash Obligations under the Galen Debentures and the 1998 Purchase Agreement shall at all times be equal and ratable in right of payment (in accordance with the Company's respective Cash Obligations to the 1998 Holders and the 1999 Holders) with the Company's Cash Obligations under the Oracle Debentures and the 1999 Purchase Agreement.

(ii) The parties hereto hereby agree to the following priorities in right of payment of each Guarantor's Cash Obligations:

(B) Such Guarantor's Cash Obligations under its Watson Guaranty in respect of the Company's Obligations to the Watson Holders (up to an aggregate amount equal to the Watson Maximum Amount in effect from time to time) shall at all times be senior and prior in right of payment to such Guarantor's Cash Obligations under its 2004 Guaranty, its 2002 Guaranty, its Galen Guaranty and its Oracle Guaranty.

Such Guarantor's Cash Obligations under its 2004 Guaranty in respect of the Company's Obligations to the 2004 Purchasers (up to an aggregate amount equal to the 2004 Debentures Maximum Amount in effect from time to time) shall at all times be senior and prior in right of payment to such Guarantor's Cash Obligations under its 2002 Guaranty, its Galen Guaranty and its Oracle Guaranty.

Such Guarantor's Cash Obligations under its 2002 Guaranty in respect of the Company's Obligations to the 2003 Holders (up to an aggregate amount equal to the 2003 Debentures Maximum Amount in effect from time to time) shall at all times be senior and prior in right of payment to such Guarantor's Cash Obligations under its 2002 Guaranty, its Galen Guaranty and its Oracle Guaranty.

Such Guarantor's Cash Obligations under its 2002 Guaranty in respect of the Company's Obligations to the 2002 Holders (up to an aggregate amount equal to the 2002 Debentures Maximum Amount in effect from time to time) shall at all times be senior and prior in right of payment to such Guarantor's Cash Obligations under its Galen Guaranty and its Oracle Guaranty.

Such Guarantor's Cash Obligations under its Galen Guaranty shall at all times be equal and ratable in right of payment with such Guarantor's Cash Obligations under its Oracle Guaranty.

For the avoidance of doubt, nothing in this Section 2(b) shall apply at any time to any Obligations of the Company or any Guarantor to the extent that they are not then Cash Obligations.

(c) Except as otherwise provided in Sections 2(a) and 2(b) hereof, no Secured Creditor shall have any lien or security interest which is prior to the lien and security interest of any other Secured Creditor in any item of Collateral covered by the Company Security Documents or the Guarantor Security Documents.

(d) So long as any Person is a Secured Creditor, the priorities set forth in this Agreement are applicable irrespective of the order of creation, attachment or perfection of any lien or security interest arising under the Security Documents (whether or not such security

interests have been perfected) or any priority that might otherwise be available to such Secured Creditor under applicable law and notwithstanding any representation or warranty of the Company or any of the Guarantors to the contrary in any Financing Document or any Security Document.

(e) Each Secured Creditor agrees not to contest, or to bring (or voluntarily join in) any action or proceeding for the purpose of contesting, the creation, attachment, validity, enforceability, perfection or priority (as herein provided) of, or seeking to avoid, the lien and security interest which any Security Document (as amended or otherwise modified hereby) purports to create in favor of any other Secured Creditor on or in any item of Collateral. Nothing herein shall be deemed or construed to prevent any Secured Creditor from commencing an action or proceeding against any other Secured Creditor to assert any right or claim it may have arising under or in connection with this Agreement.

SECTION 3. Enforcement of Security. (a) Each Secured Creditor may, from time to time, to the extent provided in the Financing Documents to which it is a party, (i) give notice that an "event of default" has occurred and is continuing under such Financing Documents, (ii) accelerate the Company's Obligations under such Financing Documents and (iii) whether or not it has given such notice or has effected such acceleration (but except as otherwise provided in this Agreement), take or authorize the taking of such action with regard to the protection, exercise, enforcement and collection of its rights in and to that portion of the Collateral, in which it may have an interest, as it may determine to be necessary or appropriate; provided, however, that each Secured Creditor which is, as to any item of Collateral, a Junior Secured Party in relation to one or more Senior Secured Parties, agrees that it (A) will not take any action to enforce, collect on or exercise any or its rights or remedies in respect of its liens on and security interests in such item or take or receive from the Company or any Guarantor, respectively, directly or indirectly, in cash or other property or by setoff or in any other manner, whether pursuant to any judicial or nonjudicial enforcement, collection, execution, levy or foreclosure proceedings or otherwise, including by deed in lieu of foreclosure, the Collateral, or any part thereof or interest therein, in each case unless and until each such Senior Secured Party has given written notice to such Junior Secured Party that those Obligations to such Senior Secured Party which are secured by such item and which are stated in Section 2 hereof to be senior to the Obligations to such Junior Secured Party have been indefeasibly paid in full (and each such Senior Secured Party hereby agrees promptly to give such notification following such payment to such Senior Secured Party), (B) will not interfere with any exercise by or on behalf of each such Senior Secured Party in respect of any liens and security interests of such Senior Secured Party on or in such item or any other rights or remedies of such Senior Secured Party in furtherance of the rights and remedies of such Senior Secured Party to the extent set forth in Section 2 hereof, and (C) will hold and promptly pay or deliver to each such Senior Secured Party, in order of and in accordance with the priorities set forth in Section 2 above (subject, however, to Section 3(c) hereof), any such item received by such Junior Secured Party (including, without limitation, any proceeds from the sale or other disposition of such item), in each case unless and until each such Senior Secured Party has given written notice to such Junior Secured Party that its Obligations (to the extent set forth in clause (A) above) have been indefeasibly paid in full.

(b) Notwithstanding anything to the contrary in Section 3(a) above, nothing in this Agreement shall prevent the conversion of the 2004 Debentures, the 2003 Debentures, the 2002 Debentures and the Existing Debentures in accordance with the terms of the Debenture Conversion Agreement of even date herewith among the Company and the parties hereto. In furtherance of Section
4(a)(i), the Watson Holders, the 2004 Purchasers, the 2003 Holders, the 2002 Holders and the Existing Holders hereby agree to give notice to each other of any "event of default" under their respective Financing Documents prior to enforcement of their respective remedies hereunder (which remedies are subject to Section 3(a)), it being understood, however, that nothing herein shall impair the Watson Holders' or the 2004 Purchasers' ability to act immediately as it may be entitled hereunder and pursuant to the Watson Note after transmitting such notice.

(c) (i) Except as otherwise provided in clause (ii) below, each Secured Creditor agrees to hold any item of Collateral, received by it, in or against which a security interest or lien may be perfected by possession, as possessory agent on behalf of all Secured Creditors that have a lien on or security interest in such item (including, if appropriate, on its own behalf), and, unless such Secured Creditor is a Senior Secured Party as to such item in relation to all other Secured Creditors, to give notice (indicating the nature and amount of such items) of such item and to turn over to the appropriate Secured Creditor thereto forthwith upon receipt thereof, provided that this clause (i) is intended solely to assure continuous perfection of the liens and security interests granted under the Security Documents and nothing in this clause (i) shall be deemed or construed as altering the priorities or obligations set forth elsewhere in this Agreement; and (ii) in the event any Secured Creditor receives any proceeds from the sale or any other disposition of any Collateral in contravention of this Agreement) or in excess of the portion of such proceeds to which such Secured Creditor is entitled hereunder, such Secured Creditor shall give notice (indicating the nature and amount of such proceeds and such excess, as applicable) and turn such proceeds or such excess, as applicable, over to the appropriate Secured Creditor entitled thereto.

(d) Except as otherwise expressly provided in this Agreement, each right, power and remedy of any of the Secured Creditors provided for in this Agreement or any of the Financing Documents, the Security Documents, or any other document relating thereto, whether such right, power or remedy is now existing or hereafter available at law or in equity or by statute or otherwise, shall be cumulative and concurrent (except to the extent otherwise provided in any such document) and shall be in addition to every other such right, power or remedy. Except as otherwise provided in Section 3(a), the Financing Documents, the Security Documents, or any other document relating thereto, the exercise or the beginning of the exercise by any Secured Creditor of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise of all such rights, powers or remedies, and no course of dealing or failure or delay on the part of any party hereto in exercising any such right, power or remedy shall operate as a waiver thereof or otherwise prejudice its rights, powers or remedies.

(e) Each Secured Creditor which is, as to any item of Collateral, a Junior Secured Party in relation to one or more Senior Secured Parties agrees that this Agreement shall be enforceable against it in all circumstances, including, without limitation, in any Bankruptcy Proceeding.

SECTION 4. Notices of Default; Collateral Disposition, etc.
(a) Each of the Secured Creditors agrees individually to give the others (as applicable):

(i) Copies of any written notice of an event of default (under any Financing Document or any Security Document) received from or sent to any Grantor, (A) within 10 business days of receipt of any such notice by such Secured Creditor from such Grantor (or, if earlier, prior to such Secured Creditor's exercising any right or remedy or taking any other action, in respect of such event of default, against the Company, any Guarantor, any Company Collateral or any Guarantor Collateral), or, as applicable, (B) simultaneously with any such notice sent by such Secured Creditor to any Grantor; and

(ii) 15 business days' prior written notice each time a Secured Creditor commences or intends to commence any action to liquidate, foreclose, sell, distribute or otherwise dispose of any part of the Collateral (which will be deemed to constitute reasonable notice), including the time and place of any public sale, private sale or other intended disposition of the Collateral, regardless of whether such Secured Creditor determines that any such asset is perishable, threatens to decline speedily in value, is of a type customarily sold on a recognized market or is consumer goods.

(b) This Agreement is intended, in part, to constitute a request for notice and a written notice of a claim by each Secured Creditor to the other of any interest in the Collateral, in accordance with the provisions of Section 9-611 and 9-621 of the Uniform Commercial Code.

(c) Anything herein to the contrary notwithstanding, nothing in this Section 4 shall permit any Secured Creditor to exercise any right or remedy, or to take any other action, against or in respect of the Company, any Guarantor, any Company Collateral or any Guarantor Collateral in contravention of Sections 2 or 3 hereof or of any other provision of this Agreement.

SECTION 5. Rights of Subrogation. Any Junior Secured Party in respect of one or more Senior Secured Parties agrees that, whether or not any such Senior Secured Party shall have received any payment or distribution to any one or more Senior Secured Parties from the Company or any Guarantor or on account of their Obligations, such Junior Secured Party shall not be entitled to exercise any rights of subrogation or reimbursement (or similar right or remedy of a surety) until the date on which all Obligations to all such Senior Secured Parties (to the extent such Obligations are stated in Section 2 hereof to be senior to the Obligations to such Junior Secured Party) shall have been indefeasibly paid in full.

SECTION 6. Further Assurances. Any Junior Secured Party in respect of one or more Senior Secured Parties will, at the expense of the Company, at any time and from time to time promptly execute and deliver all further instruments and documents and take all further action, that any Senior Secured Party may reasonably request, in order to protect any right or interest granted or purported to be granted hereby or to enable any Senior Secured Party to exercise and enforce its rights and remedies hereunder.

SECTION 7. Waiver of Marshalling and Similar Rights. Each of the parties hereto, to the fullest extent permitted by applicable law, waives any requirement regarding, and agrees not to demand, request, plead or otherwise claim the benefit of, any marshalling,

appraisement, valuation or other similar right that a creditor or any other Person may otherwise may have under applicable law.

SECTION 8. Obligations Hereunder Not Affected. Except as otherwise provided in this Agreement, all rights, interests, agreements and obligations of the Secured Creditors hereunder, in respect of each other or in respect of the other parties to this Agreement, and all agreements and obligations of the Junior Secured Parties in respect of the respective Senior Secured Parties under this Agreement shall remain in full force and effect irrespective of:

(a) Any lack of validity or enforceability of any Financing Document, any Security Document or any other agreement or instrument relating thereto;

(b) Any change in the time, manner or place of payment of, the security for, or in any other term of, all or any of the Obligations secured or guaranteed by the Security Documents, or any other extension, renewal, supplement, amendment or other modification, waiver, refinancing or restructuring of or any consent to departure from, or any act, omission or default under, this Agreement, the Security Documents, or any other Financing Document (including, without limitation, any increase in such Obligations resulting from the extension of additional credit to, or the issuance of additional debt or equity instruments by, the Company or any of its Subsidiaries or otherwise, but excluding, in any event, any such increase in the Company's Obligations to any one or more Secured Creditors to the extent that, after giving effect thereto and to any reductions associated or occurring substantially concurrently with such increase, the aggregate amount of the Company's Obligations to such Secured Creditors would exceed the aggregate amount of such Obligations to such Secured Creditors stated to be subject to the priorities of Section 2 hereof);

(c) Any taking, exchange, surrender, release or non-perfection of any lien or security interest in the Collateral, or any other collateral, or any taking, release, supplement, amendment or other modification or waiver of or consent to departure from any Guaranty, or any other guaranty, for all or any of the Obligations, or any settlement or compromise of any of such Obligations;

(d) Any manner of application of the Collateral, or any other collateral, or proceeds thereof, to all or any of the Obligations of the Company secured or guaranteed by the Security Documents, or any manner of sale or other disposition of any Collateral or such other collateral or any other assets of the Company;

(e) Any exercise or failure to exercise any rights by or against any Secured Creditor;

(f) Any change, restructuring or termination of the corporate structure of the Company or any of its Subsidiaries (including, without limitation, Houba, Inc. and Axiom Pharmaceutical Corporation); or

(g) Any other circumstance (including, without limitation, any statute of limitations) that might otherwise constitute a defense available to, or a discharge of, any Grantor, any Guarantor, any borrower, any Secured Creditor or any other secured creditor (irrespective of

such creditor being subordinated whether in priority of its liens on or security interest in collateral, in right of payment or otherwise).

This Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any Obligation is rescinded or must otherwise be returned by any Secured Creditor upon the initiation of any Bankruptcy Proceedings against any Grantor, or otherwise, all as though such payment had not been made.

SECTION 9. Appointment of Collateral Agents. In case of the pendency of any Bankruptcy Proceeding or other judicial proceeding relative to any Grantor or Guarantor, the Watson Agent and the 2004 Agent shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of the Obligations and other amounts due under the Financing Documents, the Security Documents or this Agreement and to file such other papers or documents as may be necessary or advisable in order to have such claims and amounts due allowed in such Bankruptcy Proceeding or judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims or other amounts due and to distribute the same in accordance with the provisions hereof. Nothing in this paragraph shall be deemed to authorize the 2004 Agent to authorize or consent to or accept or adopt on behalf of any 2004 Purchaser, 2003 Holder or 2002 Holder any plan or reorganization, arrangement, adjustment or composition affecting the Obligations or other amounts due under the Financing Documents, the Security Documents or this Agreement, or to authorize the 2004 Agent to vote in respect of the Obligations or other amounts due in any such Bankruptcy Proceeding or judicial proceeding.

SECTION 10. Representations and Warranties. Each of the Existing Holders, the 2002 Holders, the 2003 Holders, the Watson Holders and the 2004 Purchasers represents and warrants to the other parties hereto as follows:

(a) (i) This Agreement has been duly executed and delivered by its duly authorized officer and constitutes its legal, valid and binding obligation, enforceable against it in accordance with the terms hereof; and (ii) the execution, delivery and performance by it of this Agreement have been duly authorized by all necessary corporate or partnership action, as the case may be, and do not and will not (A) violate any provision of any law, rule or regulation having applicability to it or of its (x) charter or articles of association or by-laws or (y) limited partnership agreement, as the case may be, (B) result in a breach of or constitute a default or an event of default (or any event which, with the giving of notice, the lapse of time, or both, would constitute an event of default) under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which it is a party, or
(C) require the consent or approval of any governmental authority or arbitrator; and

(b) Each of the Existing Holders, 2002 Holders and 2003 Holders represents and warrants that it has not heretofore transferred or assigned its lien on and security interest in any Collateral under the 2002 Company Security Documents, the 2002 Guarantor Security Documents, the Galen Company Security Documents, the Galen Guarantor Security Documents, the Oracle Company Security Documents or the Oracle Guarantor Security Documents.

SECTION 11. Assignments. (a) No party hereto shall assign its rights hereunder or any interest herein or any of its rights or interests pursuant to the respective Security Documents made by it or in its favor, or any of its obligations hereunder or thereunder, to any other Person (i) without the prior written consent of the Senior Secured Parties holding a majority of the amount of the Obligations to such Senior Secured Parties and (ii) in compliance with Section 11(b) below.

(b) In the event of any assignment of any Security Document by any party hereto or by any successor or assignee of any party hereto or by any other party which may now or hereafter have any rights, title or interest in such Security Document, respectively, the terms of such assignment shall provide that, and the assigned Security Document shall bear a legend to the effect that (i) all provisions of such agreement, including provisions relating to the assignment thereof, shall be subject to the terms of this Agreement and that in the event of any conflict between such agreement and this Agreement, this Agreement shall prevail and (ii) the assignee of such Security Document shall be bound by all duties and obligations of the assignor of such Security Document under this Agreement.

(c) Notwithstanding anything to the contrary in this Agreement, each party hereto consents to the assignment on or before the date hereof by Watson to the Watson Holders (and/or the Watson Agent) of all of Watson's rights and interests under the Watson Company Security Documents, the Watson Guarantor Security Documents, the Watson Guaranty, the Watson Loan Agreement, the Watson Term Loan and the Watson Note.

SECTION 12. Continuing Agreement; Assignments of Obligations.
(a) This Agreement shall remain in full force and effect until the date on which all Obligations shall have been indefeasibly paid in full and no Obligations are outstanding.

(b) This Agreement shall be binding upon, and inure to the benefit of and be enforceable by, each party hereto and its successors, permitted transferees and assigns.

(c) Without limiting the generality of Section 12(b) above, except as otherwise provided in Section 11, nothing in this Agreement shall preclude any Secured Creditor from assigning or otherwise transferring all or any porting of its rights and obligations under any Financing Document or any Security Document to any other Person, and such other Person shall thereupon become vested with all the rights in respect thereof granted to such Secured Creditor herein or otherwise, in each case as provided in the respective Financing Documents or Security Documents.

SECTION 13. Amendment; Modification; Waiver of Documents. (a) Except as otherwise expressly provided herein, no provision of this Agreement may be supplemented, amended, or otherwise modified or waived other than by a writing signed by the parties hereto holding (i) a majority of the outstanding principal amount under the Existing Debentures, (ii) a majority of the outstanding principal amount under the 2002 Debentures, (iii) a majority of the outstanding principal amount under the 2003 Debentures, (iv) a majority of the outstanding principal amount under the 2004 Debentures and (v) a majority of the outstanding principal amount under the Watson Note. Furthermore, except as otherwise expressly provided herein, no rights of any Secured Creditor in any item of Collateral may be amended, supplemented, or

otherwise modified (whether by virtue of supplement or amendment to or other modification of this Agreement, any Financing Document or any Security Document or otherwise) without the prior written consent of such parties as would be sufficient to amend this Agreement pursuant to the first sentence of this
Section 13. Anything herein to the contrary notwithstanding (but except as otherwise specified in the following sentence), each Secured Creditor may make supplements or amendments to, or modifications or waivers of the provisions of its Financing Documents or Security Documents in accordance with the terms thereof without the prior written consent of or notice to any other Person, except for any changes in the definition of "Company Collateral" or "Guarantor Collateral" (or similar terms) set forth therein resulting in increase of the rights of such Secured Creditor in such item, which changes in such definitions shall require the prior written consent of such parties as would be sufficient to amend this Agreement pursuant to the first sentence of this Section 13.

(b) To the extent any provision of Section 13(a) or (b) hereof requires the consent of any Secured Creditor under one or more Security Documents to which such Secured Creditor is a party, the effectiveness of such consent shall be determined in accordance with such Security Documents.

(c) This Agreement supersedes in all respects the Existing Subordination Agreement.

SECTION 14. Intercreditor Agreement for Benefit of Parties Hereto. Nothing in this Agreement, express or implied, is intended or shall be construed to confer upon any person or entity other than the Secured Creditors any right, remedy or claim by reason of this Agreement or any covenant, condition or stipulation hereof; and the covenants, stipulations and agreements contained in this Agreement are and shall be for the sole and exclusive benefit of the parties hereto, and their respective successors and assigns.

SECTION 15. Notices. All notices, demands or other communications given hereunder shall be in writing and shall be sufficiently given if transmitted by facsimile or delivered either personally or by a nationally recognized courier service marked for next business day delivery or sent in a sealed envelope by first class mail, postage prepaid and either registered or certified, return receipt requested, addressed as follows:

if to any Watson Holder, 2004 Purchaser, 2003 Holder, 2002 Holder or Existing Holder, to it as set forth opposite its signature on the signature pages hereto;

if to the Company, to 695 No. Perryville Road, Rockford, Illinois 61107, fax no. (815) 399-9710, to the attention of Mr. Michael Reicher, Chief Executive Officer;

if to the Grantors and Guarantors, as applicable to: (i) Houba, Inc., 16235 State Road, #17, Culver, Indiana 46511, fax no:
(574) 842-2519, to the attention of Mr. Michael Reicher, Chief Executive Officer; or (ii) Axiom Pharmaceutical Corporation, 695 No. Perryville Road, Rockford, Illinois 61107, fax no. (815) 399-9710, to the attention of Mr. Michael Reicher, Chief Executive Officer;

if to any future Grantor or Guarantor, at such address given by such Grantor or Guarantor for notices to it; and

or to such other address with respect to any party hereto as such party may from time to time notify (as provided above) the other parties hereto.

Any such notice, demand or communication shall be deemed to have been given (i) on the date of delivery, if delivered personally, (ii) on the date of facsimile transmission, receipt confirmed, (iii) one business day after delivery to a nationally recognized overnight courier service, if marked for next day delivery or (iv) five business days after the date of mailing, if mailed.

SECTION 16. Individual Action. No Secured Creditor may require any other Secured Creditor to take or refrain from taking any action hereunder or with respect to any of the Collateral, except as and to the extent expressly set forth in this Agreement. Except as otherwise specified herein, no Secured Creditor shall be responsible to the other Secured Creditors for any recitals, statements, representations or warranties contained in this Agreement, any of the Financing Documents, Security Documents, or any other agreements or instruments executed and delivered by any Grantor pursuant to any of the Financing Documents, Security Documents or in any certificate of other document referred to or provided for in, or received by either of them under, any of the Financing Documents or Security Documents or for the authenticity, accuracy, completeness, value, validity, effectiveness, genuineness, enforceability or sufficiency of any of the Financing Documents, Security Documents, Guaranty Documents or any other document referred to or provided for therein or any lien under any Financing Document or Security Documents, or the perfection of any such lien or for any failure by any Grantor to perform any of its Obligations under any of the Financing Documents or Security Documents. Each Secured Creditor may employ agents and attorneys-in-fact and shall not be responsible, except as to money or securities received by it or its authorized agents, for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. No Secured Creditor, and none of its directors, officers, employees or agents shall be liable or responsible for any action taken or omitted to be taken by it or them hereunder or in connection herewith, except for its or their own gross negligence or willful misconduct.

SECTION 17. Reliance. In acting with respect to this Agreement, each of the Secured Creditors shall be entitled (a) to rely on any communication believed by it to be genuine and to have been made, sent or signed by the Person by whom it purports to have been made, sent or signed and (b) to rely on the advice or services or opinions and statements of any professional advisor whose advice or services to it seem necessary, expedient or desirable and are given or made in connection with this Agreement.

SECTION 18. No Waiver; Remedies. Except as otherwise specified herein, no failure on the part of any Secured Creditor to exercise and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right. The rights and remedies herein provided are cumulative and not exclusive of any remedies provided by law.

SECTION 19. Severability. If any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

SECTION 20. Governing Law. This Agreement and the rights of the parties hereunder shall be governed in all respects by the laws of the State of New York wherein the terms of this Agreement were negotiated, excluding to the greatest extent permitted by law any rule of law that would cause the application of the laws of any jurisdiction other than the State of New York.

SECTION 21. Jurisdiction. (a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or United States Federal court sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising our of or relating to this Agreement or any of the other Transaction Documents to which it is a party, or for recognition or enforcement of any judgment, and each of the parties hereto irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the fullest extent permitted by law, in such United States Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or any other manner provided by law. Nothing in this Agreement or any other Transaction Document shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or any of the other Transaction Documents in the courts of any jurisdiction.

(b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or in relation to this Agreement or any other Transaction Document to which it is a party in any such New York State or United States Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

SECTION 22. Waiver of Jury Trial. EACH OF THE PARTIES HERETO
HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY TRANSACTION DOCUMENT OR THE ACTIONS OF ANY PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.

SECTION 23. Titles and Subtitles. The titles of the articles, sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

SECTION 24. Counterparts. This Agreement may be executed in any number of counterparts, including by facsimile copy, each of which shall be deemed an original, but all of which together shall constitute one instrument.

SECTION 25. Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all

prior representations, negotiations, writings, memoranda and agreements. Each of the Secured Creditors and the Grantors and Guarantors hereby agrees that this Agreement supersedes and amends and restates in full the Existing Subordination Agreement.

[Signature pages follow]

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized as of the date first written above.

"GRANTORS"

HALSEY DRUG CO., INC.,
a New York corporation

Its:

AXIOM PHARMACEUTICAL
CORPORATION,
a Delaware corporation

Its:

GALEN PARTNERS III, L.P.                   ORACLE STRATEGIC PARTNERS, L.P.
By: Claudius, L.L.C., General Partner      By: Oracle Strategic Capital L.L.C.,
610 Fifth Avenue, 5th Fl.                  General Partner
New York, New York  10019                  200 Greenwich Avenue
                                           3rd Floor
                                           Greenwich, Connecticut 06830

_______________________________________    _____________________________________
By: Srini Conjeevaram                      By: Joel Liffmann
Its: General Partner                       Its: Authorized Agent

GALEN PARTNERS INTERNATIONAL, III, L.P.    CARE CAPITAL INVESTMENTS II, LP
By: Claudius, L.L.C., General Partner      By: Care Capital II, LLC, as general
610 Fifth Avenue, 5th Floor                partner
New York, New York  10020                  47 Hulfish St., Suite 310
                                           Princeton, NJ 08542

_______________________________________    By: ____________________________
By: Srini Conjeevaram                      Name: David R. Ramsay
Its: General Partner                       Title: Authorized Signatory

GALEN EMPLOYEE FUND III, L.P.              ESSEX WOODLANDS HEALTH
By: Wesson Enterprises, Inc.               VENTURES V, L.P.
610 Fifth Avenue, 5th Floor                190 South LaSalle Street, Suite 2800
New York, New York 10020                   Chicago, IL 60603

_______________________________________    _____________________________________
By: Bruce F. Wesson                        By: Immanuel Thangaraj
Its: General Partner                       Its: Managing Director

                                       27

ALAN SMITH                                 PATRICK COYNE
21 Bedlow Avenue                           800 Merion Square Road
Newport, Rhode Island  02840               Gladwyne, Pennsylvania 19035

_______________________________________    _____________________________________

MICHAEL WEISBROT                           SUSAN WEISBROT
1136 Rock Creek Road                       1136 Rock Creek Road
Gladwyne, Pennsylvania  19035              Gladwyne, Pennsylvania  19035

_______________________________________    _____________________________________

GREG WOOD                                  DENNIS ADAMS
1263 East Calavera Street                  120 Kynlyn Road
Altadena, CA 91001                         Radnor, Pennsylvania  19312

_______________________________________    _____________________________________


STEFANIE HEITMEYER                         BERNARD SELZ
17759 Road, Route 66                       600 Fifth Avenue, 25th Floor
Fort Jennings, Ohio 45844                  New York, New York 10020

_______________________________________    _____________________________________

PETER CLEMENS                              ROGER GRIGGS
c/o Halsey Drug Co., Inc.                  c/o Tom Jennings
695 North Perryville Rd.                   7300 Turfway Road
Crimson Building #2                        Suite 300
Rockford, Illinois  61107                  Florence, KY 41042

_______________________________________    _____________________________________


VARSHA H. SHAH                             HEMANT K. SHAH
29 Chrissy Drive                           29 Chrissy Drive
Warren, New Jersey  07059                  Warren, New Jersey  07059

_______________________________________    _____________________________________

                                       28

VARSHA H. SHAH AS CUSTODIAN                VARSHA H. SHAH AS CUSTODIAN
FOR SACHIN H. SHAH                         FOR SUMEET H. SHAH
29 Chrissy Drive                           29 Chrissy Drive
Warren, New Jersey  07059                  Warren, New Jersey  07059

_______________________________________    _____________________________________
By: Varshah H. Shah                        By: Varshah H. Shah
Its: Custodian                             Its: Custodian

MICHAEL RAINISCH                           ILENE RAINISCH
c/o Alvin Rainisch                         c/o Alvin Rainisch
300 Flower Lane                            300 Flower Lane
Morganville, New Jersey  07751             Morganville, New Jersey  07751

_______________________________________    _____________________________________

KENNETH GIMBEL, IRA ACCOUNT                KENNETH GIMBEL
FBO KENNETH GIMBEL                         2455 Montgomery Avenue
2455 Montgomery Avenue                     Highland Park, Illinois  60035
Highland Park, Illinois  60035

_______________________________________    _____________________________________
By: _______________________
Its: Trustee

JESSICA K. CLEMENS                         JAKE P. CLEMENS
C/o Halsey Drug Co., Inc.                  c/o Halsey Drug Co., Inc.
695 North Perryville Rd.                   695 North Perryville Rd.
Crimson Building #2                        Crimson Building #2
Rockford, Illinois  61107                  Rockford, Illinois  61107

_______________________________________    _____________________________________

MICHAEL REICHER TRUST
c/o Halsey Drug Co., Inc.
695 North Perryville Rd.
Crimson Building #2
Rockford, Illinois  61107

_______________________________________
By: Michael K. Reicher
Its: Trustee

                                       29

PETER STIEGLITZ                            GEORGE E. BOUDREAU
RJ Palmer LLC                              222 Elbow Lane
156 West 56th Street, 5th Floor            Haverford, PA  19041
New York, New York 10019

_______________________________________    _____________________________________

JOHN E. HEPPE, JR.
237 W. Montgomery Avenue
Haverford, Pennsylvania 19041

_______________________________________

EXHIBIT 10.8

COMPANY GENERAL SECURITY AGREEMENT

This Company General Security Agreement (the "Agreement") is dated as of February 6, 2004 by and among Halsey Drug Co., Inc., a New York corporation with its principal place of business at 695 North Perryville Road, Rockford, Illinois, 61107 ("Debtor"), and Galen Partners III, L.P., a Delaware limited partnership with its principal place of business at 610 Fifth Avenue, Fifth Floor, New York, New York, 10020, acting in its capacity as agent for the Purchasers, as defined below (the "Agent"), for the benefit of the Purchasers.

PRELIMINARY STATEMENTS

Debtor has entered into a Debenture and Share Purchase Agreement of even date herewith (as the same may be amended, modified, supplemented or restated from time to time, the "Purchase Agreement;" terms which are capitalized in this Agreement and not otherwise defined shall have the meanings ascribed to them in the Purchase Agreement) with the Purchasers listed on Exhibit B thereto (the "Purchasers"). The Purchasers have required, as a condition precedent to the effectiveness of the Purchase Agreement, that the Debtor (a) grant to the Agent, for the ratable benefit of the Purchasers, a security interest in and to the Collateral (as defined in Section 2.1 below) and
(b) execute and deliver this Agreement in order to secure the payment and performance by the Debtor of the obligations owing by the Debtor to the Purchasers under the Purchase Agreement, the Debentures, the other Transaction Documents (as defined in the Subordination Agreement) and each of the agreements, documents and instruments delivered by the Debtor pursuant thereto or in connection therewith (collectively, the "Obligations").

AGREEMENT

In consideration of the premises and in order to induce the Purchasers to enter into and perform the Purchase Agreement, the Debtor hereby agrees as follows:

ARTICLE 1

CREATION OF SECURITY INTEREST

1.1 SECURITY INTEREST

The Debtor hereby pledges, assigns and grants to the Agent a continuing perfected lien and security interest having priority over any and all other security interests (except as otherwise provided in the Subordination Agreement) in all of the Debtor's right, title and interest in and to the Collateral (as defined in Section 2.1 below) in order to secure the payment and performance of all Obligations owing by the Debtor.

1.2 DEBTOR REMAINS LIABLE

Anything herein to the contrary notwithstanding, (a) the Debtor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Agent of any of the rights hereunder shall not release the Debtor from any of its duties or obligations under the contracts and agreements included in the Collateral and (c) neither the Agent nor any Purchaser shall have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, the Purchase Agreement or any other Transaction Document (as defined in the Subordination Agreement), nor shall the Agent or any Purchaser be obligated to perform any of the obligations or duties of the Debtor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.

ARTICLE 2

COLLATERAL

2.1 COLLATERAL

For purposes of this Agreement, the term "Collateral" shall mean all of the kinds and types of property described in clauses (a) through (g) of this
Section 2.1, whether now owned or hereafter at any time arising, acquired or created by the Debtor and wherever located, and includes all replacements, additions, accessions, substitutions, repairs, proceeds and products relating thereto or therefrom, and all documents, ledger sheets and files of the Debtor relating thereto and all Proceeds (as defined in Section 2.2 below) of Collateral:

(a) all of the Debtor's accounts, whether now existing or existing in the future, including without limitation (i) all accounts receivable (whether or not specifically listed on schedules furnished to the Agent), including, without limitation, all accounts created by or arising from all of the Debtor's sales of goods or rendition of services made under any of the Debtor's trade names, or through any of its divisions, (ii) all unpaid seller's rights (including rescission, replevin, reclamation and stoppage in transit) relating to the foregoing or arising therefrom, (iii) all rights to any goods represented by any of the foregoing, including returned or repossessed goods, (iv) all reserves and credit balances held by the Debtor with respect to any such accounts receivable or account debtors, (v) all health-care-insurance receivables, (vi) all deposit accounts, (vii) all letter-of-credit rights,
(viii) all instruments (including, without limitation, promissory notes) and
(ix) all guarantees or collateral for any of the foregoing (all of the foregoing property and similar property being hereinafter referred to as "Accounts");

(b) all of the Debtor's inventory, including without limitation
(i) all raw materials, work in process, parts, components, assemblies, supplies and materials used or consumed in the Debtor's businesses, wherever located and whether in the possession of the Debtor or any other Person; (ii) all goods, wares and merchandise, finished or unfinished, held for sale or lease or leased or furnished or to be furnished under contracts of service, wherever located and whether in the possession of the Debtor or any other person or entity; and (iii) all goods returned to or repossessed by the Debtor (all of the foregoing property being hereinafter referred to as "Inventory");

(c) all of the equipment owned or leased by the Debtor, including, without limitation,

machinery, equipment, office equipment and supplies, computers and related equipment, furniture, furnishings, tools, tooling, jigs, dies, fixtures, manufacturing implements, fork lifts, trucks, trailers, motor vehicles, and other equipment (all of the foregoing property being hereinafter referred to as "Equipment");

(d) all of the Debtor's general intangibles (including, without limitation, payment intangibles), instruments, securities (including, without limitation, United States of America Treasury Bills), credits, claims, demands, documents, letters of credit and letter of credit proceeds, chattel paper, documents of title, certificates of title, certificates of deposit, warehouse receipts, bills of lading, leases which are permitted to be assigned or pledged, deposit accounts, money, tax refund claims, and contract rights which are permitted to be assigned or pledged (all of the foregoing property being hereinafter referred to as "Intangibles");

(e) all of the Debtor's intellectual property, including, without limitation, New Drug Applications, Investigatory New Drug Applications, Abbreviated New Drug Applications, Alternative New Drug Applications, registrations and quotas as issued by the DEA or the Attorney General of the United States pursuant to the CSA, certifications, permits and approvals of federal and state governmental agencies, patents, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names, domain names, technical knowledge and processes, formal or informal licensing arrangements which are permitted to be assigned or pledged, blueprints, technical specifications, computer software, programs, databases, copyrights, copyright applications and all confidential and proprietary information, including, without limitation, know-how, trade secrets, manufacturing and production processes and techniques, inventions, research and development information, databases and data, including, without limitation, technical data, financial and marketing and business data, pricing and cost information and business and marketing plans, and all embodiments thereof, and rights thereto, including, without limitation, all of the Debtor's rights to use the patents, trademarks, copyrights, service marks, or other property of the aforesaid nature of other Persons now or hereafter licensed to the Debtor, together with the goodwill of the business symbolized by or connected with the Debtor's trademarks, copyrights, service marks, licenses and the other rights included in this Section 2.1(e) (all of the foregoing property being hereinafter referred to as "Intellectual Property");

(f) all interest, dividends, distributions, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the then existing Collateral; and

(g) All of the shares of stock or other securities of Houba, Inc. and Axiom Pharmaceutical Corporation, and the certificates, if any, representing such shares or other securities, and all dividends, distributions, return of capital, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares or securities and all subscription warrants, rights or options issued thereon or with respect thereto, and all investment property, all, to the extent applicable, as further set forth in the Stock Pledge Agreement.

2.2 PROCEEDS

For purposes of this Agreement, the term "Proceeds" shall include (a) whatever is now or hereafter received by the Debtor upon the sale, exchange, collection or other disposition of any item

of Collateral, whether such proceeds constitute Inventory, Accounts, Intangibles, royalties, payment under insurance (whether or not the Agent is the loss payee thereof), or any indemnities, warranties or guaranties, payable by reason of loss or damage to or otherwise with respect to any or the foregoing Collateral, and (b) any such items which are now or hereafter acquired by the Debtor with any proceeds of Collateral hereunder.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES

The Debtor represents and warrants as follows:

3.1 ORGANIZATION AND EXISTENCE

The Debtor is a corporation duly organized, validly existing and in good standing under the laws of the State of New York and is qualified to do business in such other jurisdictions as the nature or conduct of its operations or the ownership of its properties require such qualification. The Debtor does not own or lease any property or engage in any activity in any jurisdiction that might require qualification to do business as a foreign corporation in such jurisdiction and where the failure to so qualify could reasonably be expected to have a Material Adverse Effect or subject the Debtor to a material liability.

3.2 AUTHORIZATION

(a) The Debtor has all requisite corporate power and authority (i) to execute and deliver, and to perform and observe its obligations under, the Transaction Documents (as defined in the Subordination Agreement) to which it is a party, and (ii) to consummate the transactions contemplated hereby and thereby, including, without limitation, the grant of any security interest, mortgage, payment trust, guaranty or other security arrangement by the Debtor in, on or in respect of the Collateral.

(b) All corporate action on the part of the Debtor and its directors and stockholders necessary for the authorization, execution, delivery and performance by the Debtor of this Agreement and the transactions contemplated herein or in any other Transaction Document (as defined in the Subordination Agreement) to which it is a party, has been taken.

3.3 PLACES OF BUSINESS

The Debtor has no places of business, or warehouses in which it leases space, other than those set forth on Section 3.3 of Schedule A, a copy of which is attached hereto and made a part hereof ("Schedule A").

3.4 LOCATION OF COLLATERAL

Except for the movement of Collateral from time to time from one place of business or warehouse listed on Section 3.3 of Schedule A to another place of business or warehouse listed on Section 3.3 of Schedule A, the Collateral is located at the Debtor's chief executive office or other places of business or warehouses listed on Section 3.3 of Schedule A, and not at any other location.

3.5 RESTRICTIONS ON COLLATERAL DISPOSITION

None of the Collateral is subject to contractual obligations that may restrict or inhibit the Agent's rights or ability to sell or dispose of the Collateral or any part thereof after the occurrence of an Event of Default, except (a) the rights of Watson under the Watson Term Loan and the documents executed in connection therewith, including, without limitation, the Watson Security Agreement dated as of March 29, 2000 (the "Watson Security Agreement"); and (b) the rights of the Existing Debentureholders.

3.6 STATUS OF ACCOUNTS

Each Account is based on an actual and bona fide rendition of services or sale of goods or products to customers, made by the Debtor in the ordinary course of its business. The Accounts created are the Debtor's exclusive property and are not and shall not be subject to any lien, consignment arrangement, encumbrance, security interest or financing statement whatsoever, except (a) the lien in favor of Watson under the Watson Term Loan and the documents executed in connection therewith, including, without limitation, the Watson Security Agreement, and (b) the liens in favor of the Existing Debentureholders. To the best knowledge of the Debtor, the Debtor's customers have accepted the goods, products and services and owe and are obligated to pay the full amounts stated in the invoices according to their terms, without any dispute, offset, defense or counterclaim.

3.7 COPYRIGHTS, TRADEMARKS AND PATENTS

(a) The Debtor owns outright all of the Intellectual Property Rights listed on Section 4.12 of the Schedule of Exceptions attached to the Purchase Agreement free and clear of all liens and encumbrances except for the Permitted Liens and pays no royalty to anyone under or with respect to any of them.

(b) The Debtor has not licensed to anyone the use of any of such Intellectual Property Rights and has no knowledge of the infringing use by the Debtor or any Guarantor of any Intellectual Property Rights of third parties.

(c) The Debtor has no knowledge, nor has it received any notice
(i) of any conflict with the asserted rights of others with respect to any Intellectual Property Rights used in, or useful to, the operation of the business conducted by the Debtor and the Guarantors or with respect to any license under which the Debtor or a Guarantor is licensor or licensee; or (ii) that the Intellectual Property Rights infringe upon the rights of any third party.

(d) The Debtor has made or performed all filings, recordings and other acts and has paid all required fees and taxes to maintain and protect its interest in each and every item of Intellectual Property in full force and effect throughout the world, and to protect and maintain its interest therein including, without limitation, recordations of any of its interests in patents and trademarks with the U.S. Patent and Trademark Office and in corresponding national and international patent offices, and recordation of any of its interests in any copyrights with the U.S. Copyright Office and in corresponding national and international copyright offices. The Debtor has used proper statutory notice in connection with its use of each patent, trademark and copyright.

3.8 INVENTORY

All Inventory of the Debtor consists of a quality and quantity usable and salable in the ordinary course of business, except for obsolete items and items of below-standard quality, all of which have been or will be written off or written down to net realizable value on the consolidated balance sheet of the Debtor and its Subsidiaries as of September 30, 2003. The quantities of each type of Inventory (whether raw materials, work-in-process, or finished goods) are not excessive, but are reasonable and warranted in the present circumstances of the Debtor.

3.9 OWNERSHIP

The Debtor is the legal and beneficial owner of its Collateral free and clear of any lien, claim, option or right of others, except for the security interest created under this Agreement, the Watson Security Agreement and the security agreements executed by the Debtor or the Guarantors in connection with the Existing Debentures. No effective financing statement or other instrument similar in effect covering all or any part of such Collateral or listing the Debtor or any trade name of the Debtor is on file in any recording office, except such as may have been filed relating to the Watson Term Loan and the Existing Debentures. The Agent has, for the benefit of the Purchasers, a valid and perfected security interest in the Collateral which security interest has priority over any and all other security interests (except as otherwise provided in the Subordination Agreement) in such Collateral.

ARTICLE 4

COVENANTS

The Debtor agrees as follows:

4.1 DEFEND AGAINST CLAIMS

The Debtor will defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein unless both the Agent and the Debtor determine that the claim or demand is not material and that, consequently, such defense would not be consistent with good business judgment. The Debtor will not permit any lien notices with respect to the Collateral or any portion thereof to exist or be on file in any public office except for those in favor of the Agent and those permitted under the terms of the Purchase Agreement.

4.2 CHANGE IN COLLATERAL LOCATION

The Debtor will not (a) change its corporate name, (b) change the location of its chief executive office or establish any place of business other than those specified in Section 3.3 of Schedule A, or (c) move or permit movement of the Collateral from the locations specified therein except from one such location to another such location, unless in each case the Debtor shall have given the Agent at least thirty (30) days prior written notice thereof, and shall have, in advance, executed and caused to be filed or delivered to the Agent any financing statements or other documents required by the Agent to perfect the security interest of the Agent in the Collateral in accordance with
Section 4.3 of this Agreement, all in form and substance satisfactory to the Agent.

4.3 ADDITIONAL FINANCING STATEMENTS

Promptly upon the reasonable request of the Agent, the Debtor will execute and deliver or use its best efforts to procure any document, give any notices, execute and file any financing statements, mortgages or other documents, all in form and substance satisfactory to the Agent, mark any chattel paper, deliver any chattel paper or instruments to the Agent and take any other actions that are necessary or, in the opinion of the Agent, desirable to perfect or continue the perfection of the Agent's security interest in the Collateral, to protect the Collateral against the rights, claims, or interests of third persons, or to effect the purposes of this Agreement. The Debtor will pay the costs incurred in connection with any of the foregoing.

4.4 ADDITIONAL LIENS; TRANSFERS

Without the prior written consent of the Agent, the Debtor will not, in any way, hypothecate or create or permit to exist any lien, security interest, charge or encumbrance on or other interest in the Collateral, other than those permitted under the terms of the Purchase Agreement and the liens in favor of Watson pursuant to the Watson Term Loan and documents relative thereto and the Existing Debentureholders, and the Debtor will not sell, transfer, assign, pledge, collaterally assign, exchange or otherwise dispose of the Collateral, other than the sale of Inventory in the ordinary course of business and the sale of obsolete or worn out Equipment. Notwithstanding the foregoing, if the proceeds of any such sale consist of notes, instruments, documents of title, letters of credit or chattel paper, such proceeds shall be promptly delivered to the Agent to be held as Collateral hereunder. If the Collateral, or any part thereof, is sold, transferred, assigned, exchanged, or otherwise disposed of in violation of these provisions, the security interest of the Agent shall continue in such Collateral or part thereof notwithstanding such sale, transfer, assignment, exchange or other disposition, and the Debtor will hold the proceeds thereof for the benefit of the Agent, and promptly transfer such proceeds to the Agent in kind.

4.5 CONTRACTUAL OBLIGATIONS

The Debtor will not enter into any contractual obligations which may restrict or inhibit the Agent's rights or ability to sell or otherwise dispose of the Collateral or any part thereof after the occurrence or during the continuance of an Event of Default.

4.6 AGENT'S RIGHT TO PROTECT COLLATERAL

Upon the occurrence or continuance of an Event of Default, the Agent shall have the right at any time to make any payments and do any other acts the Agent may deem necessary to protect the security interests of the Purchasers in the Collateral, including, without limitation, the rights to pay, purchase, contest or compromise any encumbrance, charge or lien which, in the reasonable judgment of the Agent, appears to be prior to or superior to the security interests granted hereunder, and appear in and defend any action or proceeding purporting to affect its security interests in, or the value of, the Collateral. The Debtor hereby agrees to reimburse the Agent for all payments made and expenses incurred under this Agreement including reasonable fees, expenses and disbursements of attorneys and paralegals acting for the Agent, including any of the foregoing payments under, or acts taken to protect its security interests in, the Collateral, which amounts shall be secured under this Agreement, and agrees it shall be bound by any payment made or act taken by the Agent hereunder

absent the Agent's gross negligence or willful misconduct. The Agent shall have no obligation to make any of the foregoing payments or perform any of the foregoing acts.

4.7 FURTHER OBLIGATIONS WITH RESPECT TO ACCOUNTS

In furtherance of the continuing assignment and security interest in the Accounts of the Debtor granted pursuant to this Agreement, upon the creation of Accounts, upon the Agent's request, the Debtor will execute and deliver to the Agent in such form and manner as the Agent may require, solely for its convenience in maintaining records of Collateral, such confirmatory schedules of Accounts, and other appropriate reports designating, identifying and describing the Accounts as the Agent may reasonably require. In addition, upon the Agent's request, the Debtor shall provide the Agent with copies of agreements with, or purchase orders from, the customers of the Debtor and copies of invoices to customers, proof of shipment or delivery and such other documentation and information relating to such Accounts and other Collateral as the Agent may reasonably require. Furthermore, upon the Agent's request, the Debtor shall deliver to the Agent any documents or certificates of title issued with respect to any property included in the Collateral, and any promissory notes, letters of credit or instruments related to or otherwise in connection with any property included in the Collateral, which in any such case came into the possession of the Debtor, or shall cause the issuer thereof to deliver any of the same directly to the Agent, in each case with any necessary endorsements in favor of the Agent. Failure to provide the Agent with any of the foregoing shall in no way affect, diminish, modify or otherwise limit the security interests granted herein. The Debtor hereby authorizes the Agent to regard the Debtor's printed name or rubber stamp signature on assignment schedules or invoices as the equivalent of a manual signature by the Debtor's authorized officers or agents.

4.8 INSURANCE

The Debtor agrees to maintain public liability insurance, third party property damage insurance and replacement value insurance on the Collateral under such policies of insurance, with such insurance companies, in such amounts and covering such risks as are at all times satisfactory to the Agent in its commercially reasonable judgment. All policies covering the Collateral are to name the Agent as an additional insured and the loss payee in case of loss, and are to contain such other provisions as the Agent may reasonably require to fully protect the Agent's interest in the Collateral and to any payments to be made under such policies. The Debtor will provide notice to Agent prior to any change in coverage.

4.9 TAXES

The Debtor agrees to pay, when due, all taxes lawfully levied or assessed against the Debtor or any of the Collateral before any penalty or interest accrues thereon; provided, however, that, unless such taxes have become a federal tax or ERISA lien on any of the assets of the Debtor, no such tax need be paid if the same is being contested, in good faith, by appropriate proceedings promptly instituted and diligently conducted and if an adequate reserve or other appropriate provision shall have been made therefor as required in order to be in conformity with GAAP.

4.10 COMPLIANCE WITH LAWS

The Debtor agrees to comply in all material respects with all Legal Requirements applicable to the Collateral or any part thereof, or to the operation of its business or its assets generally, unless

the Debtor contests in good faith, by appropriate legal, administrative or other proceedings promptly instituted and diligently conducted, any such Legal Requirements in a reasonable manner and in good faith. The Debtor agrees to maintain in full force and effect, its respective licenses and permits granted by any governmental authority as may be necessary or advisable for the Debtor to conduct its business in all material respects.

4.11 MAINTENANCE OF PROPERTY

The Debtor agrees to keep all property useful and necessary to its business in good working order and condition (ordinary wear and tear excepted) and not to commit or suffer any waste with respect to any of its properties.

4.12 ENVIRONMENTAL AND OTHER MATTERS

The Debtor will conduct its business so as to comply in all respects with all environmental, land use, occupational, safety or health Legal Requirements in all jurisdictions in which it is or may at any time be doing business, except to the extent that the Debtor is contesting, in good faith by appropriate legal, administrative or other proceedings, promptly instituted and diligently conducted, any such Legal Requirement; provided, further, that the Debtor shall comply with the order of any court or other governmental authority relating to such Legal Requirements unless the Debtor shall currently be prosecuting an appeal, proceedings for review or administrative proceedings and shall have secured a stay of enforcement or execution or other arrangement postponing enforcement or execution pending such appeal, proceedings for review or administrative proceedings.

4.13 INTELLECTUAL PROPERTY

With respect to each item of its Intellectual Property, the Debtor agrees to take, at its expense, all necessary steps, including, without limitation, in the U.S. Patent and Trademark Office, the U.S. Copyright Office and any other governmental authority, to (a) maintain the validity and enforceability of such Intellectual Property and maintain such Intellectual Property in full force and effect, and (b) pursue the registration and maintenance of each patent, trademark, or copyright registration or application, now or hereafter included in such Intellectual Property of the Debtor, including, without limitation, the payment of required fees and taxes, the filing of responses to office actions issued by the U.S. Patent and Trademark Office, the U.S. Copyright Office or other governmental authorities, the filing of applications for renewal or extension, the filing of affidavits under Sections 8 and 15 of the U.S. Trademark Act, the filing of divisional, continuation, continuation-in-part, reissue and renewal applications or extensions, the payment of maintenance fees and the participation in interference, reexamination, opposition, cancellation, infringement and misappropriation proceedings. The Debtor shall not, without the prior written consent of the Agent, discontinue use of or otherwise abandon any Intellectual Property, or abandon any right to file an application for any patent, trademark or copyright, unless the Debtor shall have previously determined that such use or the pursuit or maintenance of such Intellectual Property is no longer desirable in the conduct of the Debtor's business and that the loss thereof would not be reasonably likely to have a Material Adverse Effect, in which case, the Debtor will give prompt notice of any such abandonment to the Agent.

4.14 FURTHER ASSURANCES

The Debtor shall take all such further actions and execute all such further documents and instruments (including, but not limited to, collateral assignments of Intellectual Property and Intangibles or any portion thereof) as the Agent may at any time reasonably determine in its sole discretion to be necessary or desirable to further carry out and consummate the transactions contemplated by the Purchase Agreement and the documentation relating thereto, including this Agreement, and to perfect or protect the liens (and the priority status thereof) of the Agent in the Collateral.

ARTICLE 5

REMEDIES

5.1 OBTAINING COLLATERAL UPON DEFAULT

If any Event of Default shall have occurred and be continuing, then and in every such case, subject to any mandatory requirements of applicable law then in effect, the Agent, in addition to any rights now or hereafter existing under applicable law and subject to the Subordination Agreement, shall have all rights as a secured creditor under the Uniform Commercial Code in all relevant jurisdictions and may:

(a) personally, or by agents or attorneys, immediately retake possession of the Collateral or any part thereof, from the Debtor or any other Person who then has possession of any part thereof, with or without notice or process of law, and for that purpose may enter upon the Debtor's premises where any of the Collateral is located and remove the same and use in connection with such removal any and all services, supplies, aids and other facilities of the Debtor;

(b) instruct the obligor or obligors on any agreement, instrument or other obligation (including, without limitation, the Accounts) constituting the Collateral to make any payment required by the terms of such instrument or agreement directly to the Agent;

(c) withdraw all monies, securities and instruments held pursuant to any pledge arrangement for application to the Obligations;

(d) sell, assign or otherwise liquidate, or direct the Debtor to sell, assign or otherwise liquidate, any or all of the Collateral or any part thereof, and take possession of the proceeds of any such sale or liquidation;

(e) take possession of the Collateral or any part thereof, by directing the Debtor in writing to deliver the same to the Agent at any place or places designated by the Agent, in which event the Debtor shall at its own expense:

(1) forthwith cause the same to be moved to the place or places so designated by the Agent and there delivered to the Agent,

(2) store and keep any Collateral so delivered to the Agent at such place or places pending further action by the Agent as provided in Section 5.2, and

(3) while the Collateral shall be so stored and kept, provide such guards and maintenance services as shall be necessary to protect the same and to preserve and maintain

the Collateral in good condition;

it being understood that the Debtor's obligation to so deliver the Collateral is of the essence of this Agreement and that, accordingly, upon application to a court of equity having jurisdiction, the Agent shall be entitled to a decree requiring specific performance by the Debtor of said obligation.

5.2 DISPOSITION OF COLLATERAL

Subject to the Subordination Agreement, any Collateral repossessed by the Agent under or pursuant to Section 5.1 and any other Collateral whether or not so repossessed by the Agent may be sold, assigned, leased or otherwise disposed of under one or more contracts or as an entirety, and without the necessity of gathering at the place of sale the property to be sold, and in general in such manner, at such time or times, at such place or places and on such terms as the Agent may, in compliance with any mandatory requirements of applicable law, determine to be commercially reasonable. Any of the Collateral may be sold, leased or otherwise disposed of, in the condition in which the same existed when taken by the Agent or after any overhaul or repair which the Agent shall determine to be commercially reasonable. Any such disposition which shall be a private sale or other private proceedings permitted by such requirements shall be made upon not less than ten (10) days' written notice to the Debtor specifying the time at which such disposition is to be made and the intended sale price or other consideration therefor, and shall be subject, for the ten
(10) days after the giving of such notice, to the right of the Debtor or any nominee of the Debtor to acquire the Collateral involved at a price or for such other consideration at least equal to the intended sale price or other consideration so specified. Any such disposition which shall be a public sale permitted by such requirements shall be made upon not less than ten (10) days' written notice to the Debtor specifying the time and place of such sale and, in the absence of applicable requirements of law, shall be by public auction (which may, at the option of the Agent, be subject to reserve), after publication at least once in The New York Times not less than ten (10) days prior to the date of sale. If The New York Times is not then being published, publication may be made in lieu thereof in any newspaper then being circulated in the City of New York, New York, as the Agent may elect. All requirements of reasonable notice under this Section 5.2 shall be met if such notice is mailed, postage prepaid at least ten (10) days before the time of such sale or disposition, to the Debtor at its address set forth herein or such other address as the Debtor may have, in writing, provided to the Agent. The Agent may, if it deems it reasonable, postpone or adjourn any sale of any Collateral from time to time by an announcement at the time and place of the sale to be so postponed or adjourned without being required to give a new notice of sale. The proceeds realized from the sale of any Collateral shall be applied as follows: first, to the reasonable costs, expenses and attorneys' fees and expenses incurred by Agent for collection and for acquisition, completion, protection, removal, storage, sale and delivery of the Collateral; second, to interest due on any of the Obligations and any fees payable under this Agreement; and third, to the principal of the Obligations. If any deficiency shall arise, the Debtor shall remain liable to Agent and Purchasers therefor.

5.3 POWER OF ATTORNEY

The Debtor hereby irrevocably authorizes and appoints the Agent, or any Person or agent the Agent may designate, as the Debtor's attorney-in-fact, at the Debtor's cost and expense, to exercise all of the following powers upon and at any time after the occurrence and during the continuance of

an Event of Default, which powers, being coupled with an interest, shall be irrevocable until all of the Obligations owing by the Debtor shall have been paid and satisfied in full:

(a) accelerate or extend the time of payment, compromise, issue credits, bring suit or administer and otherwise collect Accounts or proceeds of any Collateral;

(b) receive, open and dispose of all mail addressed to the Debtor and notify postal authorities to change the address for delivery thereof to such address as the Agent may designate;

(c) give customers indebted on Accounts notice of the Agent's interest therein, or to instruct such customers to make payment directly to the Agent for the Debtor's account;

(d) convey any item of Collateral to any purchaser thereof;

(e) give any notices or record any liens under Section 4.3 hereof; and

(f) make any payments or take any acts under Section 4.6 hereof.

The Agent's authority under this 5.3 shall include, without limitation, the authority to execute and give receipt for any certificate of ownership or any document, transfer title to any item of Collateral, sign the Debtor's name on all financing statements or any other documents deemed necessary or appropriate to preserve, protect or perfect the security interest in the Collateral and to file the same, prepare, file and sign the Debtor's name on any notice of lien, assignment or satisfaction of lien or similar document in connection with any Account and prepare, file and sign the Debtor's name on a proof of claim in bankruptcy or similar document against any customer of the Debtor, and to take any other actions arising from or incident to the rights, powers and remedies granted to the Agent in this Agreement. This power of attorney is coupled with an interest and is irrevocable by the Debtor.

5.4 WAIVER OF CLAIMS

Except as otherwise provided in this Agreement, THE DEBTOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, NOTICE AND JUDICIAL HEARING IN CONNECTION WITH THE AGENT'S TAKING POSSESSION OF OR DISPOSING OF ANY OF THE COLLATERAL, INCLUDING, WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT WHICH THE DEBTOR WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE, and the Debtor hereby further waives, to the extent permitted by law:

(a) all damages occasioned by such taking of possession except any damages which are the direct result of the Agent's gross negligence or willful misconduct;

(b) all other requirements as to the time, place and terms of sale or other requirements with respect to the enforcement of the Agent's rights hereunder, except as expressly provided herein; and

(c) all rights of redemption, appraisement, valuation, stay, extension or moratorium now or hereafter in force under any applicable law in order to prevent or delay the enforcement of this

Agreement or the absolute sale of the Collateral or any portion thereof, and the Debtor, for itself and all who may claim under it, insofar as it or they now or hereafter lawfully may, hereby waives the benefit of all such laws.

Any sale of, or the grant of options to purchase, or any other realization upon any Collateral shall operate to divest all right, title, interest, claim and demand, either at law or in equity, of the Debtor therein and thereto, and shall be a perpetual bar both at law and in equity against the Debtor and against any and all persons claiming or attempting to claim the Collateral so sold, optioned or realized upon, or any part thereof, from, through and under the Debtor.

5.5 REMEDIES CUMULATIVE

Each and every right, power and remedy hereby specifically given to the Agent shall be in addition to every other right, power and remedy specifically given under this Agreement, under the Purchase Agreement or under other documentation relating thereto or now or hereafter existing at law or in equity, or by statute, and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time or simultaneously and as often and in such order as may be deemed expedient by the Agent. All such rights, powers and remedies shall be cumulative and the exercise or the beginning of exercise of one shall not be deemed a waiver of the right to exercise of any other or others. No delay or omission of the Agent in the exercise of any such right, power or remedy and no renewal or extension of any of the Obligations shall impair any such right, power or remedy or shall be construed to be a waiver of any default or Event of Default or any acquiescence therein.

ARTICLE 6

MISCELLANEOUS PROVISIONS

6.1 NOTICES

All notices, approvals, consents or other communications required or desired to be given hereunder shall be delivered in person, by facsimile transmission followed promptly by first class mail, by a nationally recognized courier service marked for next business day delivery or by overnight mail, and delivered if to the Agent, then to the attention of Bruce F. Wesson, c/o Galen Partners III, L.P., 610 Fifth Avenue, Fifth Floor, New York, New York, 10020, fax no. (212) 218-4990, with a copy to George N. Abrahams, Esq., c/o Wolf, Block, Schorr and Solis-Cohen, 250 Park Avenue, New York, New York, 10177, fax no. (212) 986-0604, and if to the Debtor, then to the attention of Mr. Andrew D. Reddick, 695 N. Perryville Road, Rockford, Illinois, 61107, with a copy to John P. Reilly, Esq., St. John & Wayne, L.L.C., 2 Penn Plaza East, Newark, New Jersey, 07105, fax no. (973) 491-3555.

6.2 HEADINGS

The headings in this Agreement are for purposes of reference only and shall not affect the meaning or construction of any provision of this Agreement.

6.3 SEVERABILITY

The provisions of this Agreement are severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect, in that jurisdiction only, such clause or provision, or part thereof, and shall not in any manner affect such clause or provision in any other jurisdiction or any other clause or provision of this Agreement in any jurisdiction.

6.4 AMENDMENTS, WAIVERS AND CONSENTS

Any amendment or waiver of any provision of this Agreement and any consent to any departure by the Debtor from any provision of this Agreement shall be effective only if made or given in writing signed by the Agent.

6.5 INTERPRETATION OF AGREEMENT

All terms not defined herein or in the Purchase Agreement shall have the meaning set forth in the applicable Uniform Commercial Code. Acceptance of or acquiescence in a course of performance rendered under this Agreement shall not be relevant in determining the meaning of this Agreement even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection.

6.6 CONTINUING SECURITY INTEREST

This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the Security Interest Termination Date, (b) be binding upon the Debtor, and its successors and assigns and (b) inure to the benefit of the Agent and its successors and assigns.

6.7 REINSTATEMENT

To the extent permitted by law, this Agreement shall continue to be effective or be reinstated if at any time any amount received by the Agent in respect of the Obligations owing by the Debtor is rescinded or must otherwise be restored or returned by the Agent upon the occurrence or during the pendency of any Event of Default, all as though such payments had not been made.

6.8 SURVIVAL OF PROVISIONS

All representations, warranties and covenants of the Debtor contained herein shall survive the execution and delivery of this Agreement, and shall terminate only upon the full and final indefeasible payment and performance by the Debtor of the Obligations secured hereby.

6.9 SETOFF

The Agent shall have all rights of setoff available at law or in equity.

6.10 POWER OF ATTORNEY

In addition to the powers granted to the Agent under Section 5.3, the Debtor hereby irrevocably authorizes and appoints the Agent, or any Person or agent the Agent may designate, as the Debtor's attorney-in-fact, at the Debtor's cost and expense, to exercise all of the following

powers, which being coupled with an interest, shall be irrevocable until all of the Obligations shall have been indefeasibly paid and satisfied in full:

(a) after the occurrence of an Event of Default, to receive, take, endorse, sign, assign and deliver, all in the name of the Agent or the Debtor, any and all checks, notes, drafts, and other documents or instruments relating to the Collateral; and

(b) to request, at any time from customers indebted on Accounts, verification of information concerning the Accounts and the amounts owing thereon.

6.11 INDEMNIFICATION; AUTHORITY OF AGENT

Neither the Agent nor any director, officer, employee, attorney or agent of the Agent shall be liable to the Debtor for any action taken or omitted to be taken by it or them hereunder, except for its or their own gross negligence or willful misconduct, nor shall the Agent be responsible for the validity, effectiveness or sufficiency of this Agreement or of any document or security furnished pursuant hereto. The Agent and its directors, officers, employees, attorneys and agents shall be entitled to rely on any communication, instrument or document reasonably believed by it or them to be genuine and correct and to have been signed or sent by the proper person or persons. The Debtor agrees to indemnify and hold harmless the Agent and any other person from and against any and all costs, expenses (including reasonable fees, expenses and disbursements of attorneys and paralegals (including, without duplication, reasonable charges of inside counsel)), claims or liability incurred by the Agent or such person hereunder, unless such claim or liability shall be due to willful misconduct or gross negligence on the part of the Agent or such person.

6.12 RELEASE; TERMINATION OF AGREEMENT

Subject to the provisions of Section 6.7 of this Agreement, this Agreement shall terminate upon full and final indefeasible payment and performance of all the Obligations owing by the Debtor. At such time, the Agent shall, at the request of the Debtor, reassign and redeliver to the Debtor all of the Collateral hereunder which has not been sold, disposed of, retained or applied by the Agent in accordance with the terms hereof. Such reassignment and redelivery shall be without warranty by or recourse to the Agent, except as to the absence of any prior assignments by the Agent of its interest in the Collateral, and shall be at the expense of the Debtor.

6.13 COUNTERPARTS

This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall together constitute one and the same agreement.

6.14 GOVERNING LAW

This Agreement and the rights of the parties hereunder shall be governed by, and construed in accordance with, the laws of the State of New York wherein the terms of this Agreement were negotiated, excluding to the greatest extent permitted by law any rule of law that would cause the application of the laws of any jurisdiction other than the State of New York.

6.15 SUBMISSION TO JURISDICTION

(a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or United States Federal court sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising our of or relating to this Agreement or any of the other Transaction Documents (as defined in the Purchase Agreement) to which it is a party, or for recognition or enforcement of any judgment, and each of the parties hereto irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the fullest extent permitted by law, in such United States Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the right that any party may otherwise have to bring any action or proceeding relating to this Agreement or any of the other Transaction Documents (as defined in the Purchase Agreement) in the courts of any other jurisdiction.

(b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or in relation to this Agreement or any other Transaction Document (as defined in the Purchase Agreement) to which it is a party in any such New York State or United States Federal court sitting in New York City. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

6.16 SERVICE OF PROCESS

THE DEBTOR HEREBY IRREVOCABLY AGREES THAT SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE DEBTOR AT ITS ADDRESS SET FORTH IN SECTION 6.1 HEREOF.

6.17 LIMITATION OF LIABILITY

THE AGENT SHALL NOT HAVE ANY LIABILITY TO THE DEBTOR (WHETHER SOUNDING IN TORT, CONTRACT, OR OTHERWISE) FOR LOSSES SUFFERED BY THE DEBTOR IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO THE TRANSACTIONS OR RELATIONSHIPS CONTEMPLATED BY THIS AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, UNLESS IT IS DETERMINED BY A FINAL AND NONAPPEALABLE JUDGMENT OR COURT ORDER BINDING ON THE AGENT, THAT THE LOSSES WERE THE RESULT OF ACTS OR OMISSIONS CONSTITUTING GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

6.18 DELAYS; PARTIAL EXERCISE OF REMEDIES

No delay or omission of the Agent to exercise any right or remedy hereunder, whether before or after the happening of any Event of Default, shall impair any such right or shall operate as a waiver thereof or as a waiver of any such Event of Default. No single or partial exercise by the

Agent of any right or remedy shall preclude any other or further exercise thereof, or preclude any other right or remedy.

6.19 JURY TRIAL

THE DEBTOR AND THE AGENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY TRANSACTION DOCUMENT OR THE ACTIONS OF ANY PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.

6.20 SUBJECT TO SUBORDINATION AGREEMENT

Notwithstanding anything to the contrary contained herein, the rights and remedies of the Agent and the Purchasers, and the obligations of the Debtor, under this Agreement are subject to the Subordination Agreement, as it may be amended, supplemented or otherwise modified from time to time.

[SIGNATURE PAGE TO FOLLOW]

IN WITNESS WHEREOF, the Debtor has caused this Company General Security Agreement to be duly executed and delivered as of the date first written above.

HALSEY DRUG CO., INC.

By:_______________________________
Name:
Title:

By its acceptance hereof, as of the day and year first above written, the Agent agrees to be bound by the provisions hereof applicable to it.

GALEN PARTNERS III, L.P.

By:______________________________
Name:
Title:

SCHEDULE A

SECTION 3.3 PLACES OF BUSINESS

1. 695 N. Perryville Road, Rockford, Illinois 61107

2. 77 Brenner Drive, Congers, New York

3. 125 Wells Avenue, Congers, New York

EXHIBIT 10.9

CONTINUING UNCONDITIONAL SECURED GUARANTY

This Continuing Unconditional Secured Guaranty ("Guaranty") is made as of February 6, 2004 by Houba, Inc., an Indiana corporation ("Guarantor") in favor of Galen Partners III, L.P., a Delaware limited partnership, acting in its capacity as agent for the Lenders, as defined below ("Agent"), for the benefit of the Lenders.

PRELIMINARY STATEMENTS

Halsey Drug Co., Inc., a New York corporation (the "Borrower"), entered into a Debenture and Share Purchase Agreement dated February 6, 2004 (the "Purchase Agreement;" terms used in this Guaranty and not otherwise defined shall have the meanings given to them in the Purchase Agreement) with the Purchasers listed on Exhibit B thereto (each a "Lender" and collectively, the "Lenders"). Pursuant to the Purchase Agreement, the Lenders have made financial accommodations to the Borrower in accordance with the terms of the Purchase Agreement. The Guarantor will continue to receive certain benefits from such accommodations and is therefore willing to guaranty the prompt payment and performance of the obligations of the Borrower, on the terms set forth in this Guaranty. The extension of credit by the Lenders to the Borrower is necessary and desirable to the conduct and operation of the business of the Borrower and will inure to the financial benefit of the Guarantor.

AGREEMENT

For value received and in consideration of any loan, advance, or financial accommodation of any kind whatsoever heretofore, now or hereafter made, given or granted to the Borrower by the Lenders (including, without limitation, the loans evidenced by the Debenture as made by the Lenders to the Borrower pursuant to, the Purchase Agreement) and other good and valuable consideration (the sufficiency and receipt of which are hereby acknowledged), the Grantor hereby agrees as follows:

ARTICLE 1

GUARANTY

1.1 GUARANTY

The Guarantor unconditionally guarantees to the Agent for the benefit of the Lenders (a) the full and prompt payment and performance when due, whether at maturity or earlier, by reason of acceleration or otherwise, and at all times thereafter, of all liabilities of the Borrower to the Lenders and (b) the prompt, full and faithful discharge by the Borrower of each and every term, condition, agreement, representation, warranty or covenant now or hereafter made by the Borrower to the Lenders, in each case, and the Agent under these clauses
(a) and (b), pursuant to the Purchase Agreement, the Debentures, the other Transaction Documents (as defined in the Subordination Agreement) or any document or instrument delivered by the Borrower to the Lenders in connection

therewith or pursuant thereto (which, together with the liabilities described in clause (a) of this Section 1.1, are collectively referred to in this Guaranty as the "Borrower's Liabilities"). The Guarantor further agrees to pay all reasonable out-of-pocket costs and expenses, including, without limitation, all court costs and reasonable attorneys' and paralegals' fees paid or incurred by the Lenders and the Agent (on behalf of the Lenders), in endeavoring to collect all or any part of the Borrower's Liabilities from, or in prosecuting any action against the Guarantor or any other guarantor of all or any part of the Borrower's Liabilities.

1.2 NO FRAUDULENT CONVEYANCE

Notwithstanding any provision of this Guaranty to the contrary, it is intended that this Guaranty, and any liens and security interests granted by the Guarantor to secure this Guaranty, will not constitute a Fraudulent Conveyance (as defined below). Consequently, the Guarantor agrees that if this Guaranty, or any liens or security interests securing this Guaranty, would, but for the application of this sentence, constitute a Fraudulent Conveyance, this Guaranty and each such lien and security interest shall be valid and enforceable only to the maximum extent that would not cause this Guaranty or such lien or security interest to constitute a Fraudulent Conveyance, and this Guaranty shall automatically be deemed to have been amended accordingly at all relevant times. For purposes hereof, "Fraudulent Conveyance" means a transfer of property or the incurrence of liability which would be avoidable under Section 548 or 544(b) of the Bankruptcy Code (as defined herein) or a fraudulent conveyance or fraudulent transfer under the provisions of any applicable fraudulent conveyance or fraudulent transfer law or similar law of any state, nation or other governmental unit, as in effect from time to time.

1.3 GUARANTY UNCONDITIONAL

The Guarantor hereby agrees that, except as hereinafter provided, and to the extent permitted by applicable law, its obligations under this Guaranty shall be unconditional, irrespective of (a) the validity or enforceability of the Borrower's Liabilities or any part thereof, or of any Debenture or other document evidencing all or any part of the Borrower's Liabilities, (b) the absence of any attempt to collect the Borrower's Liabilities from the Borrower or any other guarantor or other action to enforce the same, (c) the waiver or consent by the Agent, any Lender or Lenders with respect to any provision of any instrument evidencing the Borrower's Liabilities, or any part thereof, or any other agreement heretofore, now or hereafter executed by the Borrower and delivered to the Agent, the Lender or Lenders, (d) the failure by the Agent or any Lender to take any steps to perfect and maintain its security interest in, or to preserve its rights to, any security or collateral for the Borrower's Liabilities, (e) the institution of any proceeding under Chapter 11 of Title 11 of the United States Code (11 U.S.C. Section 101 et seq.), as amended (the "Bankruptcy Code"), or any similar proceeding, by or against the Borrower, or the Agent's or any Lender's election in any such proceeding of the application of Section 1111(b)(2) of the Bankruptcy Code, (f) any borrowing or grant of a security interest by the Borrower as debtor-in-possession, under Section 364 of the Bankruptcy Code, (g) the disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of the Lenders' claim(s) for repayment of the Borrower's Liabilities, or (h) any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor.

1.4 WAIVERS

(a) The Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of receivership or bankruptcy of the Borrower, protest or notice with respect to the Borrower's Liabilities and all demands whatsoever, and covenants that this Guaranty will not be discharged, except by complete performance of the obligations and liabilities contained herein. Upon the occurrence and during the continuance of an Event of Default under the Purchase Agreement, Lenders holding at least 60% of the then outstanding principal amount of the Debentures may, at their sole election, proceed directly and at once, without notice, against the Guarantor to collect and recover the full amount or any portion of the Borrower's Liabilities, without first proceeding against any other Person, or against any security or collateral for the Borrower's Liabilities.

(b) Until the Security Interest Termination Date, the Guarantor hereby waives any and all claims (including, without limitation, any claim for reimbursement, contribution or subrogation) of the Guarantor against the Borrower, any endorser or any other guarantor of all or any part of the Borrower's Liabilities, or against any of the Borrower's properties, arising by reason of any payment by the Guarantor to the Lenders pursuant to the provisions hereof.

1.5 NO SUBROGATION

The Guarantor hereby unconditionally and irrevocably agrees not to exercise any rights that it may now have or hereafter acquire against the Borrower or any other insider guarantor that arise from the existence, payment, performance or enforcement of the Borrower's Liabilities under or in respect of this Guaranty, the Purchase Agreement, the Debentures, the other Transaction Documents or any document or instrument delivered by the Borrower to the Lenders in connection therewith or pursuant thereto, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of the Agent or the Lenders against the Borrower or any other insider guarantor or any Collateral, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from the Borrower or any other insider guarantor, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or right, unless and until the Security Interest Termination Date. If any amount shall be paid to any Guarantor in violation of the immediately preceding sentence at any time prior to the indefeasible payment in full in cash of the Borrower's Liabilities and all other amounts payable under this Guaranty, such amount shall be received and held in trust for the benefit of the Lenders, shall be segregated from other property and funds of the Guarantor and shall forthwith be paid or delivered to the Agent in the same form as so received (with any necessary endorsement or assignment) to be credited and applied to the Borrower's Liabilities and all other amounts payable under this Guaranty, whether matured or unmatured, in accordance with the terms of the Debentures and the Purchase Agreement, or to be held as collateral for any Borrower's Liabilities or other amounts payable under this Guaranty thereafter arising. Upon the Security Interest Termination Date, except in the case of a Reinstatement Event (as defined below), the Agent and the Lenders will, at the Guarantor's request and expense, execute and deliver to the Guarantor appropriate documents, without recourse and without representation or warranty, necessary to

evidence the transfer by subrogation to the Guarantor of an interest in the Borrower's Liabilities resulting from such payment made by the Guarantor pursuant to this Guaranty.

1.6 LENDERS' RIGHTS WITH RESPECT TO BORROWER'S LIABILITIES

The Lenders are hereby authorized, without notice or demand and without affecting the liability of the Guarantor hereunder, at any time and from time to time to (a) renew, extend, accelerate or otherwise change the time for payment of, or other terms relating to the Borrower's Liabilities or otherwise modify, amend or change the terms of any debenture, note or other agreement, document or instrument now or hereafter executed by the Borrower and delivered to the Lenders; (b) accept partial payments on the Borrower's Liabilities; (c) take and hold security or collateral for the payment of the Borrower's Liabilities guaranteed hereby, or for the payment of this Guaranty, or for the payment of any other guaranties of the Borrower's Liabilities or other liabilities of the Borrower, and exchange, enforce, waive and release any such security or collateral; (iv) apply such security or collateral and direct the order or manner of sale thereof as in their sole discretion they may determine; and (v) settle, release, compromise, collect or otherwise liquidate the Borrower's Liabilities and any security or collateral therefor in any manner, without affecting or impairing the obligations of the Guarantor hereunder. The holders of 60% the then outstanding principal amount of the Debentures shall have the exclusive right to determine the time and manner of application of any payments or credits, whether received from the Borrower or any other source, and such determination shall be binding on the Guarantor. All such payments and credits may be applied, reversed and reapplied, in whole or in part, to any of the Borrower's Liabilities as the Lenders shall determine in their sole discretion without affecting the validity or enforceability of this Guaranty (unless otherwise required pursuant to the Purchase Agreement).

1.7 INFORMATION

The Guarantor hereby assumes responsibility for keeping itself informed of the financial condition of the Borrower, and any and all endorsers and/or other guarantors of any instrument or document evidencing all or any part of the Borrower's Liabilities and of all other circumstances bearing upon the risk of nonpayment of the Borrower's Liabilities or any part thereof that diligent inquiry would reveal, and the Guarantor hereby agrees that neither the Agent nor the Lenders shall have any duty to advise the Guarantor of information known to any of them regarding such condition or any such circumstances or to undertake any investigation not a part of their respective regular business routines. If the Agent or any Lender, in their respective sole discretions, undertake at any time or from time to time to provide any such information to the Guarantor, the Agent or such Lender, as the case may be, shall not be under any obligation to update any such information or to provide any such information to the Guarantor on any subsequent occasion.

1.8 REINSTATEMENT

The Guarantor consents and agrees that neither the Agent nor the Lenders shall be under any obligation to marshal any assets in favor of the Guarantor or against or in payment of any or all of the Borrower's Liabilities. The Guarantor further agrees that, to the extent that the Borrower makes a payment or payments to the Lenders or the Lenders receive any proceeds of collateral, which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or

preferential, set aside and/or required to be repaid to the Borrower, its estate, trustee, receiver or any other party, including, without limitation, the Guarantor, under any bankruptcy law or state or federal statutory or common law, then to the extent of such payment or repayment, the Borrower's Liabilities or the part thereof which has been paid, reduced or satisfied by such amount, and the Guarantor's obligations hereunder with respect to such portion of the Borrower's Liabilities, shall be reinstated and continued in full force and effect as of the date such initial payment, reduction or satisfaction occurred. Notwithstanding anything else to the contrary contained herein, the Guarantor consents and agrees that this Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Borrower's Liabilities is rescinded or must otherwise be returned by any Lender or any other Person upon the insolvency, bankruptcy or reorganization of the Borrower or the Guarantor or otherwise, all as though such payment had not been made (each such continuation or reinstatement, a "Reinstatement Event").

1.9 ASSIGNMENTS BY LENDERS

Each Lender may, to the extent and in the manner set forth in the Purchase Agreement, sell or assign the Borrower's Liabilities or any part thereof, or grant participations therein, and in any such event each and every permitted assignee or holder of, or participant in, all or any of the Borrower's Liabilities shall have the right to enforce this Guaranty, by suit or otherwise for the benefit of such assignee, holder, or participant, as fully as if herein by name specifically given such right.

ARTICLE 2

REPRESENTATIONS AND WARRANTIES

The Guarantor hereby represents and warrants that: (a) it is a corporation duly organized, validly existing and in good standing under the laws of the State of Indiana; (b) it is duly authorized and empowered to execute and deliver this Guaranty; (c) all corporate action on the part of the Guarantor requisite for the due execution and delivery of this Guaranty and the due granting and creation of the security interests referred to herein has been duly and effectively taken; (d) the Guarantor's chief executive office is located at 695 North Perryville Road, Rockford, Illinois 61107; and (e) the execution, delivery and performance of this Guaranty will not result in any violation of, conflict with, or result in a breach of, any of the terms of, or constitute a default under, any agreements, contracts, court orders or consent decrees, the Certificate of Incorporation or the By-laws, as amended, of the Guarantor.

ARTICLE 3

MISCELLANEOUS

3.1 SUCCESSORS AND ASSIGNS; ASSIGNMENT BY GUARANTOR

This Guaranty shall be binding upon the Guarantor and upon the successors (including without limitation, any receiver, trustee or debtor in possession of or for the Guarantor) of the Guarantor and shall inure to the benefit of the Lenders and their respective successors and permitted assigns. Notwithstanding anything contained herein to the contrary, this Guaranty may not be assigned by the Guarantor without the prior written consent of the Lenders.

3.2 TERM OF GUARANTY; SUBORDINATION AGREEMENT

(a) This Guaranty shall continue in full force and effect, and the Lenders shall be entitled to make loans and advances and extend financial accommodations to the Borrower on the faith hereof, until the Security Interest Termination Date and the Purchase Agreement has been terminated and the Debentures canceled. The Guarantor hereby unconditionally and irrevocably waives any right to revoke this Guaranty and acknowledges that this Guaranty is continuing in nature and applies to all Borrower's Liabilities, whether existing now or in the future.

(b) Notwithstanding anything to the contrary contained herein, the rights and remedies of the Agent and the Lenders, and the obligations of the Guarantor, under this Guaranty are subject to the Subordination Agreement, as it may be amended, supplemented or otherwise modified from time to time.

3.3 SEVERABILITY

Wherever possible each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Guaranty.

3.4 GOVERNING LAW

THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WHEREIN THE TERMS OF THIS GUARANTY WERE NEGOTIATED, EXCLUDING TO THE GREATEST EXTENT PERMITTED BY LAW ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.

3.5 CONSENT TO JURISDICTION

(a) The Guarantor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or United States Federal court sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising our of or relating to this Guaranty or any of the other Transaction Documents (as such term is defined in the Purchase Agreement) to which it is a party, or for recognition or enforcement of any judgment, and each of the parties hereto irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the fullest extent permitted by law, in such United States Federal court. The Guarantor agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the right that any party may otherwise have to bring any action or proceeding relating to this Guaranty or any of the other Transaction Documents (as such term is defined in the Purchase Agreement) in the courts of any other jurisdiction.

(b) The Guarantor irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or in relation to this Guaranty or any other Transaction

Document to which it is a party in any such New York State or United States Federal court sitting in New York City. The Guarantor hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

3.6 WAIVER OF JURY TRIAL

EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY TRANSACTION DOCUMENT OR THE ACTIONS OF ANY PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.

[SIGNATURE PAGE TO FOLLOW]

IN WITNESS WHEREOF, this Guaranty has been duly executed by the undersigned as of the date first written above.

HOUBA, INC.

By:____________________________
Name:
Title:

EXHIBIT 10.10

GUARANTORS GENERAL SECURITY AGREEMENT

This Guarantors General Security Agreement (the "Agreement") is dated as of February 6, 2004 by and among Houba, Inc., an Indiana corporation with its principal place of business at 16235 State Road 17, Culver, Indiana, 46511 ("Houba"), Axiom Pharmaceutical Corporation, a Delaware corporation with its principal place of business at 695 North Perryville Road, Rockford, Illinois, 61107 ("Axiom" and, together with Houba, the "Guarantors"), and Galen Partners III, L.P., a Delaware limited partnership with its principal place of business at 610 Fifth Avenue, Fifth Floor, New York, New York, 10020, acting in its capacity as agent for the Purchasers, as defined below (the "Agent"), for the benefit of the Purchasers.

PRELIMINARY STATEMENTS

A. Halsey Drug Co., Inc. (the "Company") has entered into a Debenture and Share Purchase Agreement of even date herewith (as the same may be amended, modified, supplemented or restated from time to time, the "Purchase Agreement;" terms which are capitalized in this Agreement and not otherwise defined shall have the meanings ascribed to them in the Purchase Agreement) with the Purchasers listed on Exhibit B thereto (the "Purchasers").

B. Each of the Guarantors has executed and delivered to Agent, for the benefit of the Purchasers, a Continuing Unconditional Secured Guaranty of even date herewith (each a "Guaranty") of the Company's obligations under the Purchase Agreement (collectively, the "Obligations").

C. The Purchasers have required, as a condition precedent to the effectiveness of the Purchase Agreement, that each Guarantor (a) grant to the Agent, for the ratable benefit of the Purchasers, a security interest in and to the Collateral (as defined in Section 2.1 below) and (b) execute and deliver this Agreement in order to secure the payment and performance by such Guarantor of the Guaranty.

AGREEMENT

In consideration of the premises and in order to induce the Purchasers to enter into and perform the Purchase Agreement, each Guarantor hereby agrees as follows:

ARTICLE 1

CREATION OF SECURITY INTEREST

1.1 SECURITY INTEREST

Each Guarantor hereby pledges, assigns and grants to the Agent a continuing perfected lien and security interest having priority over any and all other security interests (except as otherwise

provided in the Subordination Agreement) in all of such Guarantor's right, title and interest in and to the Collateral (as defined in Section 2.1 below) in order to secure the payment and performance of all Obligations owing by such Guarantor.

1.2 GUARANTORS REMAIN LIABLE

Anything herein to the contrary notwithstanding, (a) the Guarantors shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein to perform all of their duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Agent of any of the rights hereunder shall not release the Guarantors from any of their duties or obligations under the contracts and agreements included in the Collateral and (c) neither the Agent nor any Purchaser shall have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, the Purchase Agreement or any other Transaction Document (as defined in the Subordination Agreement), nor shall the Agent or any Purchaser be obligated to perform any of the obligations or duties of the Guarantors thereunder or to take any action to collect or enforce any claim for payment assigned hereunder.

ARTICLE 2

COLLATERAL

2.1 COLLATERAL

For purposes of this Agreement, the term "Collateral" shall mean, with respect to each Guarantor, all of the kinds and types of property described in clauses (a) through (f) of this Section 2.1, whether now owned or hereafter at any time arising, acquired or created by such Guarantor and wherever located, and includes all replacements, additions, accessions, substitutions, repairs, proceeds and products relating thereto or therefrom, and all documents, ledger sheets and files of such Guarantor relating thereto and all Proceeds (as defined in Section 2.2 below) of Collateral:

(a) all of such Guarantor's accounts, whether now existing or existing in the future, including without limitation (i) all accounts receivable (whether or not specifically listed on schedules furnished to the Agent), including, without limitation, all accounts created by or arising from all of such Guarantor's sales of goods or rendition of services made under any of such Guarantor's trade names, or through any of its divisions, (ii) all unpaid seller's rights (including rescission, replevin, reclamation and stoppage in transit) relating to the foregoing or arising therefrom, (iii) all rights to any goods represented by any of the foregoing, including returned or repossessed goods, (iv) all reserves and credit balances held by such Guarantor with respect to any such accounts receivable or account debtors, (v) all health-care-insurance receivables, (vi) all deposit accounts, (vii) all letter-of-credit rights, (viii) all instruments (including, without limitation, promissory notes) and (ix) all guarantees or collateral for any of the foregoing (all of the foregoing property and similar property being hereinafter referred to as "Accounts");

(b) all of such Guarantor's inventory, including without limitation (i) all raw materials, work in process, parts, components, assemblies, supplies and materials used or consumed in such Guarantor's businesses, wherever located and whether in the possession of such Guarantor or any

other Person; (ii) all goods, wares and merchandise, finished or unfinished, held for sale or lease or leased or furnished or to be furnished under contracts of service, wherever located and whether in the possession of such Guarantor or any other person or entity; and (iii) all goods returned to or repossessed by such Guarantor (all of the foregoing property being hereinafter referred to as "Inventory");

(c) all of the equipment owned or leased by such Guarantor, including, without limitation, machinery, equipment, office equipment and supplies, computers and related equipment, furniture, furnishings, tools, tooling, jigs, dies, fixtures, manufacturing implements, fork lifts, trucks, trailers, motor vehicles, and other equipment (all of the foregoing property being hereinafter referred to as "Equipment");

(d) all of such Guarantor's general intangibles (including, without limitation, payment intangibles), instruments, securities (including without limitation United States of America Treasury Bills), credits, claims, demands, documents, letters of credit and letter of credit proceeds, chattel paper, documents of title, certificates of title, certificates of deposit, warehouse receipts, bills of lading, leases which are permitted to be assigned or pledged, deposit accounts, money, tax refund claims, and contract rights which are permitted to be assigned or pledged (all of the foregoing property being hereinafter referred to as "Intangibles");

(e) all of each Guarantor's intellectual property, including, without limitation, New Drug Applications, Investigatory New Drug Applications, Abbreviated New Drug Applications, Alternative New Drug Applications, registrations and quotas as issued by the DEA or the Attorney General of the United States pursuant to the CSA, certifications, permits and approvals of federal and state governmental agencies, patents, patent applications, trademarks, trademark applications, service marks, service mark applications, trade names, domain names, technical knowledge and processes, formal or informal licensing arrangements which are permitted to be assigned or pledged, blueprints, technical specifications, computer software, programs, databases, copyrights, copyright applications and all confidential and proprietary information, including, without limitation, know-how, trade secrets, manufacturing and production processes and techniques, inventions, research and development information, databases and data, including, without limitation, technical data, financial and marketing and business data, pricing and cost information and business and marketing plans, and all embodiments thereof, and rights thereto, including, without limitation, all of such Guarantor's rights to use the patents, trademarks, copyrights, service marks, or other property of the aforesaid nature of other Persons now or hereafter licensed to such Guarantor, together with the goodwill of the business symbolized by or connected with such Guarantor's trademarks, copyrights, service marks, licenses and the other rights included in this Section 2.1(e) (all of the foregoing property being hereinafter referred to as "Intellectual Property"); and

(f) all interest, dividends, distributions, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the then existing Collateral.

2.2 PROCEEDS

For purposes of this Agreement, the term "Proceeds" shall include (a) whatever is now or hereafter received by such Guarantor upon the sale, exchange, collection or other disposition of any item of Collateral, whether such proceeds constitute Inventory, Accounts, Intangibles, royalties, payment under insurance (whether or not the Agent is the loss payee thereof), or any indemnities, warranties or guaranties, payable by reason of loss or damage to or otherwise with respect to any or the foregoing Collateral, and (b) any such items which are now or hereafter acquired by such Guarantor with any proceeds of Collateral hereunder.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES

Each Guarantor severally represents and warrants as follows:

3.1 ORGANIZATION AND EXISTENCE

Such Guarantor is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and is qualified to do business in such other jurisdictions as the nature or conduct of its operations or the ownership of its properties require such qualification. Such Guarantor does not own or lease any property or engage in any activity in any jurisdiction that might require qualification to do business as a foreign corporation in such jurisdiction and where the failure to so qualify could reasonably be expected to have a Material Adverse Effect or subject such Guarantor to a material liability.

3.2 AUTHORIZATION

(a) Such Guarantor has all requisite corporate power and authority
(i) to execute and deliver, and to perform and observe its obligations under, the Transaction Documents (as defined in the Subordination Agreement) to which it is a party, and (ii) to consummate the transactions contemplated hereby and thereby, including, without limitation, the grant of any security interest, mortgage, payment trust, guaranty or other security arrangement by such Guarantor in, on or in respect of the Collateral.

(b) All corporate action on the part of such Guarantor and its directors and stockholders necessary for the authorization, execution, delivery and performance by such Guarantor of this Agreement, the Guaranty by such Guarantor in favor of Agent, and, in the case of Houba, the Mortgage, and the transactions contemplated therein or in any other Transaction Document (as defined in the Subordination Agreement) to which it is a party, has been taken.

3.3 PLACES OF BUSINESS

Such Guarantor has no places of business, or warehouses in which it leases space, other than those set forth on Section 3.3 of Schedule A, a copy of which is attached hereto and made a part hereof ("Schedule A").

3.4 LOCATION OF COLLATERAL

Except for the movement of Collateral from time to time from one place of business or warehouse listed on Section 3.3 of Schedule A to another place of business or warehouse listed on Section 3.3 of Schedule A, the Collateral is located at such Guarantor's chief executive offices or other places of business or warehouses listed on Section 3.3 of Schedule A, and not at any other location.

3.5 RESTRICTIONS ON COLLATERAL DISPOSITION

None of the Collateral is subject to contractual obligations that may restrict or inhibit the Agent's rights or ability to sell or dispose of the Collateral or any part thereof after the occurrence of an Event of Default, except (a) the rights of Watson under the Watson Term Loan and the documents executed in connection therewith, including, without limitation, the Watson Security Agreement dated as of March 29, 2000 (the "Watson Security Agreement"), and (b) the rights of the Existing Debentureholders.

3.6 STATUS OF ACCOUNTS

Each Account is based on an actual and bona fide rendition of services or sale of goods or products to customers, made by such Guarantor in the ordinary course of its business. The Accounts created are such Guarantor's exclusive property and are not and shall not be subject to any lien, consignment arrangement, encumbrance, security interest or financing statement whatsoever, except (a) the lien in favor of Watson under the Watson Term Loan and the documents executed in connection therewith, including, without limitation, the Watson Security Agreement, and (b) the liens in favor of the Existing Debentureholders. To the best knowledge of such Guarantor, such Guarantor's customers have accepted the goods, products and services and owe and are obligated to pay the full amounts stated in the invoices according to their terms, without any dispute, offset, defense or counterclaim.

3.7 COPYRIGHTS, TRADEMARKS AND PATENTS

(a) Such Guarantor owns outright all of the Intellectual Property Rights listed on Section 4.12 of the Schedule of Exceptions attached to the Purchase Agreement free and clear of all liens and encumbrances except for the Permitted Liens and pays no royalty to anyone under or with respect to any of them.

(b) Such Guarantor has not licensed to anyone the use of any of such Intellectual Property Rights and has no knowledge of the infringing use by the Company or any Guarantor of any

Intellectual Property Rights of third parties.

(c) Such Guarantor has no knowledge, nor has it received any notice (i) of any conflict with the asserted rights of others with respect to any Intellectual Property Rights used in, or useful to, the operation of the business conducted by the Company and the Guarantors or with respect to any license under which the Company or a Guarantor is licensor or licensee; or (ii) that the Intellectual Property Rights infringe upon the rights of any third party.

(d) Such Guarantor has made or performed all filings, recordings and other acts and has paid all required fees and taxes to maintain and protect its interest in each and every item of Intellectual Property in full force and effect throughout the world, and to protect and maintain its interest therein including, without limitation, recordations of any of its interests in patents and trademarks with the U.S. Patent and Trademark Office and in corresponding national and international patent offices, and recordation of any of its interests in any copyrights with the U.S. Copyright Office and in corresponding national and international copyright offices. Such Guarantor has used proper statutory notice in connection with its use of each patent, trademark and copyright.

3.8 INVENTORY

All Inventory of such Guarantor consists of a quality and quantity usable and salable in the ordinary course of business, except for obsolete items and items of below-standard quality, all of which have been or will be written off or written down to net realizable value on the consolidated balance sheet of the Guarantors and its Subsidiaries as of September 30, 2003. The quantities of each type of Inventory (whether raw materials, work-in-process, or finished goods) are not excessive, but are reasonable and warranted in the present circumstances of such Guarantor.

3.9 OWNERSHIP

Such Guarantor is the legal and beneficial owner of its Collateral free and clear of any lien, claim, option or right of others, except for the security interest created under this Agreement, the Watson Security Agreement and the security agreements executed by the Company or the Guarantors in connection with the Existing Debentures. No effective financing statement or other instrument similar in effect covering all or any part of such Collateral or listing such Guarantor or any trade name of such Guarantor is on file in any recording office, except such as may have been filed relating to the Watson Term Loan and the Existing Debentures. The Agent has, for the benefit of the Purchasers, a valid and perfected security interest in the Collateral which security interest has priority over any and all other security interests (except as otherwise provided in the Subordination Agreement) in such Collateral.

ARTICLE 4

COVENANTS

Each Guarantor agrees (which agreements shall be several as to each Guarantor except as otherwise provided) as follows:

4.1 DEFEND AGAINST CLAIMS

Such Guarantor will defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein unless both the Agent and such Guarantor determine that the claim or demand is not material and that, consequently, such defense would not be consistent with good business judgment. Such Guarantor will not permit any lien notices with respect to the Collateral or any portion thereof to exist or be on file in any public office except for those in favor of the Agent and those permitted under the terms of the Purchase Agreement.

4.2 CHANGE IN COLLATERAL LOCATION

Such Guarantor will not (a) change its corporate name, (b) change the location of its chief executive office or establish any place of business other than those specified in Section 3.3 of Schedule A, or (c) move or permit movement of the Collateral from the locations specified therein except from one such location to another such location, unless in each case such Guarantor shall have given the Agent at least thirty (30) days prior written notice thereof, and shall have, in advance, executed and caused to be filed or delivered to the Agent any financing statements or other documents required by the Agent to perfect the security interest of the Agent in the Collateral in accordance with
Section 4.3 of this Agreement, all in form and substance satisfactory to the Agent.

4.3 ADDITIONAL FINANCING STATEMENTS

Promptly upon the reasonable request of the Agent, such Guarantor will execute and deliver or use its best efforts to procure any document, give any notices, execute and file any financing statements, mortgages or other documents, all in form and substance satisfactory to the Agent, mark any chattel paper, deliver any chattel paper or instruments to the Agent and take any other actions that are necessary or, in the opinion of the Agent, desirable to perfect or continue the perfection and the first priority of the Agent's security interest in the Collateral, to protect the Collateral against the rights, claims, or interests of third persons, or to effect the purposes of this Agreement. Such Guarantor will pay the costs incurred in connection with any of the foregoing.

4.4 ADDITIONAL LIENS; TRANSFERS

Without the prior written consent of the Agent, such Guarantor will not, in any way, hypothecate or create or permit to exist any lien, security interest, charge or encumbrance on or other interest in the Collateral, other than those permitted under the terms of the Purchase Agreement and the liens in favor of Watson pursuant to the Watson Term Loan and documents relative thereto and the Existing Debentureholders, and such Guarantor will not sell, transfer, assign, pledge, collaterally assign, exchange or otherwise dispose of the Collateral, other than the sale of Inventory in the ordinary course of business and the sale of obsolete or worn out Equipment. Notwithstanding the foregoing, if the proceeds of any such sale consist of notes, instruments, documents of title, letters of credit or chattel paper, such proceeds shall be promptly delivered to the Agent to be held as Collateral hereunder. If the Collateral, or any part thereof, is sold, transferred, assigned, exchanged, or otherwise disposed of in violation of these provisions, the security interest of the Agent shall continue in such Collateral or part thereof notwithstanding such sale, transfer, assignment, exchange

or other disposition, and such Guarantor will hold the proceeds thereof for the benefit of the Agent, and promptly transfer such proceeds to the Agent in kind.

4.5 CONTRACTUAL OBLIGATIONS

Such Guarantor will not enter into any contractual obligations which may restrict or inhibit the Agent's rights or ability to sell or otherwise dispose of the Collateral or any part thereof after the occurrence or during the continuance of an Event of Default.

4.6 AGENT'S RIGHT TO PROTECT COLLATERAL

Upon the occurrence or continuance of an Event of Default, the Agent shall have the right at any time to make any payments and do any other acts the Agent may deem necessary to protect the security interests of the Purchasers in the Collateral, including, without limitation, the rights to pay, purchase, contest or compromise any encumbrance, charge or lien which, in the reasonable judgment of the Agent, appears to be prior to or superior to the security interests granted hereunder, and appear in and defend any action or proceeding purporting to affect its security interests in, or the value of, the Collateral. The Guarantors hereby jointly and severally agree to reimburse the Agent for all payments made and expenses incurred under this Agreement including reasonable fees, expenses and disbursements of attorneys and paralegals acting for the Agent, including any of the foregoing payments under, or acts taken to protect its security interests in, the Collateral, which amounts shall be secured under this Agreement, and agree they shall be bound by any payment made or act taken by the Agent hereunder absent the Agent's gross negligence or willful misconduct. The Agent shall have no obligation to make any of the foregoing payments or perform any of the foregoing acts.

4.7 FURTHER OBLIGATIONS WITH RESPECT TO ACCOUNTS

In furtherance of the continuing assignment and security interest in the Accounts of such Guarantor granted pursuant to this Agreement, upon the creation of Accounts, upon the Agent's request, such Guarantor will execute and deliver to the Agent in such form and manner as the Agent may require, solely for its convenience in maintaining records of Collateral, such confirmatory schedules of Accounts, and other appropriate reports designating, identifying and describing the Accounts as the Agent may reasonably require. In addition, upon the Agent's request, such Guarantor shall provide the Agent with copies of agreements with, or purchase orders from, the customers of such Guarantor and copies of invoices to customers, proof of shipment or delivery and such other documentation and information relating to such Accounts and other Collateral as the Agent may reasonably require. Furthermore, upon the Agent's request, such Guarantor shall deliver to the Agent any documents or certificates of title issued with respect to any property included in the Collateral, and any promissory notes, letters of credit or instruments related to or otherwise in connection with any property included in the Collateral, which in any such case came into the possession of such Guarantor, or shall cause the issuer thereof to deliver any of the same directly to the Agent, in each case with any necessary endorsements in favor of the Agent. Failure to provide the Agent with any of the foregoing shall in no way affect, diminish, modify or otherwise limit the security interests granted herein. Each Guarantor hereby authorizes the Agent to regard such

Guarantor's printed name or rubber stamp signature on assignment schedules or invoices as the equivalent of a manual signature by such Guarantor's authorized officers or agents.

4.8 INSURANCE

Such Guarantor agrees to maintain public liability insurance, third party property damage insurance and replacement value insurance on the Collateral under such policies of insurance, with such insurance companies, in such amounts and covering such risks as are at all times satisfactory to the Agent in its commercially reasonable judgment. All policies covering the Collateral are to name the Agent as an additional insured and the loss payee in case of loss, and are to contain such other provisions as the Agent may reasonably require to fully protect the Agent's interest in the Collateral and to any payments to be made under such policies. Guarantor will provide notice to Agent prior to any change in coverage.

4.9 TAXES

Such Guarantor agrees to pay, when due, all taxes lawfully levied or assessed against such Guarantor or any of the Collateral before any penalty or interest accrues thereon; provided, however, that, unless such taxes have become a federal tax or ERISA lien on any of the assets of such Guarantor, no such tax need be paid if the same is being contested, in good faith, by appropriate proceedings promptly instituted and diligently conducted and if an adequate reserve or other appropriate provision shall have been made therefor as required in order to be in conformity with GAAP.

4.10 COMPLIANCE WITH LAWS

Such Guarantor agrees to comply in all material respects with all Legal Requirements applicable to the Collateral or any part thereof, or to the operation of its business or its assets generally, unless such Guarantor contests in good faith, by appropriate legal, administrative or other proceedings promptly instituted and diligently conducted, any such Legal Requirements in a reasonable manner and in good faith. Such Guarantor agrees to maintain in full force and effect, its respective licenses and permits granted by any governmental authority as may be necessary or advisable for such Guarantor to conduct its business in all material respects.

4.11 MAINTENANCE OF PROPERTY

Such Guarantor agrees to keep all property useful and necessary to its business in good working order and condition (ordinary wear and tear excepted) and not to commit or suffer any waste with respect to any of its properties.

4.12 ENVIRONMENTAL AND OTHER MATTERS

Such Guarantor will conduct its business so as to comply in all respects with all environmental, land use, occupational, safety or health Legal Requirements in all jurisdictions in which it is or may at any time be doing business, except to the extent that such Guarantor is contesting, in good faith by appropriate legal, administrative or other proceedings, promptly

instituted and diligently conducted, any such Legal Requirement; provided, further, that such Guarantor shall comply with the order of any court or other governmental authority relating to such Legal Requirements unless such Guarantor shall currently be prosecuting an appeal, proceedings for review or administrative proceedings and shall have secured a stay of enforcement or execution or other arrangement postponing enforcement or execution pending such appeal, proceedings for review or administrative proceedings.

4.13 INTELLECTUAL PROPERTY

With respect to each item of its Intellectual Property, each of the Guarantors agrees to take, at its expense, all necessary steps, including, without limitation, in the U.S. Patent and Trademark Office, the U.S. Copyright Office and any other governmental authority, to (a) maintain the validity and enforceability of such Intellectual Property and maintain such Intellectual Property in full force and effect, and (b) pursue the registration and maintenance of each patent, trademark, or copyright registration or application, now or hereafter included in such Intellectual Property of the Guarantors, including, without limitation, the payment of required fees and taxes, the filing of responses to office actions issued by the U.S. Patent and Trademark Office, the U.S. Copyright Office or other governmental authorities, the filing of applications for renewal or extension, the filing of affidavits under Sections 8 and 15 of the U.S. Trademark Act, the filing of divisional, continuation, continuation-in-part, reissue and renewal applications or extensions, the payment of maintenance fees and the participation in interference, reexamination, opposition, cancellation, infringement and misappropriation proceedings. Neither Guarantor shall, without the prior written consent of the Agent, discontinue use of or otherwise abandon any Intellectual Property, or abandon any right to file an application for any patent, trademark or copyright, unless such Guarantor shall have previously determined that such use or the pursuit or maintenance of such Intellectual Property is no longer desirable in the conduct of such Guarantor's business and that the loss thereof would not be reasonably likely to have a Material Adverse Effect, in which case, such Guarantor will give prompt notice of any such abandonment to the Agent.

4.14 FURTHER ASSURANCES

Such Guarantor shall take all such further actions and execute all such further documents and instruments (including, but not limited to, collateral assignments of Intellectual Property and Intangibles or any portion thereof) as the Agent may at any time reasonably determine in its sole discretion to be necessary or desirable to further carry out and consummate the transactions contemplated by the Purchase Agreement and the documentation relating thereto, including this Agreement, and to perfect or protect the liens (and the priority status thereof) of the Agent in the Collateral.

ARTICLE 5

REMEDIES

5.1 OBTAINING COLLATERAL UPON DEFAULT

If any Event of Default shall have occurred and be continuing, then and in every such case, subject to any mandatory requirements of applicable law then in effect, the Agent, in addition to any rights now or hereafter existing under applicable law and subject to the Subordination Agreement, shall have all rights as a secured creditor under the Uniform Commercial Code in all relevant jurisdictions and may:

(a) personally, or by agents or attorneys, immediately retake possession of the Collateral or any part thereof, from any Guarantor or any other Person who then has possession of any part thereof, with or without notice or process of law, and for that purpose may enter upon such Guarantor's premises where any of the Collateral is located and remove the same and use in connection with such removal any and all services, supplies, aids and other facilities of such Guarantor;

(b) instruct the obligor or obligors on any agreement, instrument or other obligation (including, without limitation, the Accounts) constituting the Collateral to make any payment required by the terms of such instrument or agreement directly to the Agent;

(c) withdraw all monies, securities and instruments held pursuant to any pledge arrangement for application to the Obligations;

(d) sell, assign or otherwise liquidate, or direct any Guarantor to sell, assign or otherwise liquidate, any or all of the Collateral or any part thereof, and take possession of the proceeds of any such sale or liquidation;

(e) take possession of the Collateral or any part thereof, by directing any Guarantor in writing to deliver the same to the Agent at any place or places designated by the Agent, in which event such Guarantor shall at its own expense:

(1) forthwith cause the same to be moved to the place or places so designated by the Agent and there delivered to the Agent,

(2) store and keep any Collateral so delivered to the Agent at such place or places pending further action by the Agent as provided in Section 5.2, and

(3) while the Collateral shall be so stored and kept, provide such guards and maintenance services as shall be necessary to protect the same and to preserve and maintain the Collateral in good condition;

it being understood that any Guarantor's obligation to so deliver the Collateral is of the essence of this Agreement and that, accordingly, upon application to a court of equity having jurisdiction, the Agent shall be entitled to a decree requiring specific performance by such Guarantor of said obligation.

5.2 DISPOSITION OF COLLATERAL

Subject to the Subordination Agreement, any Collateral repossessed by the Agent under or pursuant to Section 5.1 and any other Collateral whether or not so repossessed by the Agent may be sold, assigned, leased or otherwise disposed of under one or more contracts or as an entirety, and without the necessity of gathering at the place of sale the property to be sold, and in general in such manner, at such time or times, at such place or places and on such terms as the Agent may, in compliance with any mandatory requirements of applicable law, determine to be commercially reasonable. Any of the Collateral may be sold, leased or otherwise disposed of, in the condition in which the same existed when taken by the Agent or after any overhaul or repair which the Agent shall determine to be commercially reasonable. Any such disposition which shall be a private sale or other private proceedings permitted by such requirements shall be made upon not less than ten (10) days' written notice to such Guarantor specifying the time at which such disposition is to be made and the intended sale price or other consideration therefor, and shall be subject, for the ten
(10) days after the giving of such notice, to the right of such Guarantor or any nominee of such Guarantor to acquire the Collateral involved at a price or for such other consideration at least equal to the intended sale price or other consideration so specified. Any such disposition which shall be a public sale permitted by such requirements shall be made upon not less than ten (10) days' written notice to such Guarantor specifying the time and place of such sale and, in the absence of applicable requirements of law, shall be by public auction (which may, at the option of the Agent, be subject to reserve), after publication at least once in The New York Times not less than ten (10) days prior to the date of sale. If The New York Times is not then being published, publication may be made in lieu thereof in any newspaper then being circulated in the City of New York, New York, as the Agent may elect. All requirements of reasonable notice under this Section 5.2 shall be met if such notice is mailed, postage prepaid at least ten (10) days before the time of such sale or disposition, to the Guarantor at its address set forth herein or such other address as the Guarantor may have, in writing, provided to the Agent. The Agent may, if it deems it reasonable, postpone or adjourn any sale of any Collateral from time to time by an announcement at the time and place of the sale to be so postponed or adjourned without being required to give a new notice of sale. The proceeds realized from the sale of any Collateral shall be applied as follows:
first, to the reasonable costs, expenses and attorneys' fees and expenses incurred by Agent for collection and for acquisition, completion, protection, removal, storage, sale and delivery of the Collateral; second, to interest due on any of the Obligations and any fees payable under this Agreement; and third, to the principal of the Obligations. If any deficiency shall arise, Guarantors shall remain liable to Agent and Purchasers therefor.

5.3 POWER OF ATTORNEY

Each Guarantor hereby irrevocably authorizes and appoints the Agent, or any Person or agent the Agent may designate, as such Guarantor's attorney-in-fact, at such Guarantor's cost and expense, to exercise all of the following powers upon and at any time after the occurrence and during the

continuance of an Event of Default, which powers, being coupled with an interest, shall be irrevocable until all of the Obligations owing by such Guarantor shall have been paid and satisfied in full:

(a) accelerate or extend the time of payment, compromise, issue credits, bring suit or administer and otherwise collect Accounts or proceeds of any Collateral;

(b) receive, open and dispose of all mail addressed to such Guarantor and notify postal authorities to change the address for delivery thereof to such address as the Agent may designate;

(c) give customers indebted on Accounts notice of the Agent's interest therein, or to instruct such customers to make payment directly to the Agent for such Guarantor's account;

(d) convey any item of Collateral to any purchaser thereof;

(e) give any notices or record any liens under Section 4.3 hereof; and

(f) make any payments or take any acts under Section 4.6 hereof.

The Agent's authority under this 5.3 shall include, without limitation, the authority to execute and give receipt for any certificate of ownership or any document, transfer title to any item of Collateral, sign such Guarantor's name on all financing statements or any other documents deemed necessary or appropriate to preserve, protect or perfect the security interest in the Collateral and to file the same, prepare, file and sign such Guarantor's name on any notice of lien, assignment or satisfaction of lien or similar document in connection with any Account and prepare, file and sign such Guarantor's name on a proof of claim in bankruptcy or similar document against any customer of such Guarantor, and to take any other actions arising from or incident to the rights, powers and remedies granted to the Agent in this Agreement. This power of attorney is coupled with an interest and is irrevocable by such Guarantor.

5.4 WAIVER OF CLAIMS

Except as otherwise provided in this Agreement, EACH GUARANTOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, NOTICE AND JUDICIAL HEARING IN CONNECTION WITH THE AGENT'S TAKING POSSESSION OF OR DISPOSING OF ANY OF THE COLLATERAL, INCLUDING, WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT WHICH ANY GUARANTOR WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE, and each Guarantor hereby further waives, to the extent permitted by law:

(a) all damages occasioned by such taking of possession except any damages which are the direct result of the Agent's gross negligence or willful misconduct;

(b) all other requirements as to the time, place and terms of sale or other requirements with respect to the enforcement of the Agent's rights hereunder, except as expressly provided herein;

and

(c) all rights of redemption, appraisement, valuation, stay, extension or moratorium now or hereafter in force under any applicable law in order to prevent or delay the enforcement of this Agreement or the absolute sale of the Collateral or any portion thereof, and such Guarantor, for itself and all who may claim under it, insofar as it or they now or hereafter lawfully may, hereby waives the benefit of all such laws.

Any sale of, or the grant of options to purchase, or any other realization upon any Collateral shall operate to divest all right, title, interest, claim and demand, either at law or in equity, of such Guarantor therein and thereto, and shall be a perpetual bar both at law and in equity against such Guarantor and against any and all persons claiming or attempting to claim the Collateral so sold, optioned or realized upon, or any part thereof, from, through and under such Guarantor.

5.5 REMEDIES CUMULATIVE

Each and every right, power and remedy hereby specifically given to the Agent shall be in addition to every other right, power and remedy specifically given under this Agreement, under the Purchase Agreement or under other documentation relating thereto or now or hereafter existing at law or in equity, or by statute, and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time or simultaneously and as often and in such order as may be deemed expedient by the Agent. All such rights, powers and remedies shall be cumulative and the exercise or the beginning of exercise of one shall not be deemed a waiver of the right to exercise of any other or others. No delay or omission of the Agent in the exercise of any such right, power or remedy and no renewal or extension of any of the Obligations shall impair any such right, power or remedy or shall be construed to be a waiver of any default or Event of Default or any acquiescence therein.

ARTICLE 6

MISCELLANEOUS PROVISIONS

6.1 NOTICES

All notices, approvals, consents or other communications required or desired to be given hereunder shall be delivered in person, by facsimile transmission followed promptly by first class mail, by a nationally recognized courier service marked for next business day delivery or by overnight mail, and delivered if to the Agent, then to the attention of Bruce F. Wesson, c/o Galen Partners III, L.P., 610 Fifth Avenue, Fifth Floor, New York, New York, 10020, fax no. (212) 218-4990], with a copy to George N. Abrahams, Esq., c/o Wolf, Block, Schorr and Solis-Cohen, 250 Park Avenue, New York, New York, 10177, fax no. (212) 986-0604, and if to the Guarantors, then to c/o Halsey Drug Co., Inc., attention of Mr. Andrew D. Reddick, 695 N. Perryville Road, Rockford, Illinois, 61107, with a copy to John P. Reilly, Esq., St. John & Wayne, L.L.C., 2 Penn Plaza East, Newark, New Jersey, 07105, fax no. (973) 491-3555.

6.2 HEADINGS

The headings in this Agreement are for purposes of reference only and shall not affect the meaning or construction of any provision of this Agreement.

6.3 SEVERABILITY

The provisions of this Agreement are severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect, in that jurisdiction only, such clause or provision, or part thereof, and shall not in any manner affect such clause or provision in any other jurisdiction or any other clause or provision of this Agreement in any jurisdiction.

6.4 AMENDMENTS, WAIVERS AND CONSENTS

Any amendment or waiver of any provision of this Agreement and any consent to any departure by any Guarantor from any provision of this Agreement shall be effective only if made or given in writing signed by the Agent.

6.5 INTERPRETATION OF AGREEMENT

All terms not defined herein or in the Purchase Agreement shall have the meaning set forth in the applicable Uniform Commercial Code. Acceptance of or acquiescence in a course of performance rendered under this Agreement shall not be relevant in determining the meaning of this Agreement even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection.

6.6 CONTINUING SECURITY INTEREST

This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the Security Interest Termination Date, (b) be binding upon each Guarantor, and its successors and assigns and (b) inure to the benefit of the Agent and its successors and assigns.

6.7 REINSTATEMENT

To the extent permitted by law, this Agreement shall continue to be effective or be reinstated if at any time any amount received by the Agent in respect of the Obligations owing by the Guarantors is rescinded or must otherwise be restored or returned by the Agent upon the occurrence or during the pendency of any Event of Default, all as though such payments had not been made.

6.8 SURVIVAL OF PROVISIONS

All representations, warranties and covenants of the Guarantors contained herein shall survive the execution and delivery of this Agreement, and shall terminate only upon the full and final indefeasible payment and performance by the Guarantors of the Obligations secured hereby.

6.9 SETOFF

The Agent shall have all rights of setoff available at law or in equity.

6.10 POWER OF ATTORNEY

In addition to the powers granted to the Agent under Section 5.3, each Guarantor hereby irrevocably authorizes and appoints the Agent, or any Person or agent the Agent may designate, as such Guarantor's attorney-in-fact, at such Guarantor's cost and expense, to exercise all of the following powers, which being coupled with an interest, shall be irrevocable until all of the Obligations shall have been indefeasibly paid and satisfied in full:

(a) after the occurrence of an Event of Default, to receive, take, endorse, sign, assign and deliver, all in the name of the Agent or such Guarantor, any and all checks, notes, drafts, and other documents or instruments relating to the Collateral; and

(b) to request, at any time from customers indebted on Accounts, verification of information concerning the Accounts and the amounts owing thereon.

6.11 INDEMNIFICATION; AUTHORITY OF AGENT

Neither the Agent nor any director, officer, employee, attorney or agent of the Agent shall be liable to any Guarantor for any action taken or omitted to be taken by it or them hereunder, except for its or their own gross negligence or willful misconduct, nor shall the Agent be responsible for the validity, effectiveness or sufficiency of this Agreement or of any document or security furnished pursuant hereto. The Agent and its directors, officers, employees, attorneys and agents shall be entitled to rely on any communication, instrument or document reasonably believed by it or them to be genuine and correct and to have been signed or sent by the proper person or persons. Each Guarantor agrees to indemnify and hold harmless the Agent and any other person from and against any and all costs, expenses (including reasonable fees, expenses and disbursements of attorneys and paralegals (including, without duplication, reasonable charges of inside counsel)), claims or liability incurred by the Agent or such person hereunder, unless such claim or liability shall be due to willful misconduct or gross negligence on the part of the Agent or such person.

6.12 RELEASE; TERMINATION OF AGREEMENT

Subject to the provisions of Section 6.7 of this Agreement, this Agreement shall terminate upon full and final indefeasible payment and performance of all the Obligations owing by each Guarantor. At such time, the Agent shall, at the request of any Guarantor, reassign and redeliver to such Guarantor all of the Collateral hereunder which has not been sold, disposed of, retained or applied by the Agent in accordance with the terms hereof. Such reassignment and redelivery shall be without warranty by or recourse to the Agent, except as to the absence of any prior assignments by the Agent of its interest in the Collateral, and shall be at the expense of such Guarantor.

6.13 COUNTERPARTS

This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall together constitute one and the same agreement.

6.14 GOVERNING LAW

This Agreement and the rights of the parties hereunder shall be governed by, and construed in accordance with, the laws of the State of New York wherein the terms of this Agreement were negotiated, excluding to the greatest extent permitted by law any rule of law that would cause the application of the laws of any jurisdiction other than the State of New York.

6.15 SUBMISSION TO JURISDICTION

(a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or United States Federal court sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising our of or relating to this Agreement or any of the other Transaction Documents (as defined in the Purchase Agreement) to which it is a party, or for recognition or enforcement of any judgment, and each of the parties hereto irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the fullest extent permitted by law, in such United States Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the right that any party may otherwise have to bring any action or proceeding relating to this Agreement or any of the other Transaction Documents (as defined in the Purchase Agreement) in the courts of any other jurisdiction.

(b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or in relation to this Agreement or any other Transaction Document (as defined in the Purchase Agreement) to which it is a party in any such New York State or United States Federal court sitting in New York City. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

6.16 SERVICE OF PROCESS

EACH GUARANTOR HEREBY IRREVOCABLY AGREES THAT SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH GUARANTOR AT ITS ADDRESS SET FORTH IN SECTION 6.1 HEREOF.

6.17 LIMITATION OF LIABILITY

THE AGENT SHALL NOT HAVE ANY LIABILITY TO ANY GUARANTOR (WHETHER SOUNDING IN TORT, CONTRACT, OR OTHERWISE) FOR LOSSES SUFFERED BY ANY GUARANTOR IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO THE TRANSACTIONS OR RELATIONSHIPS CONTEMPLATED BY THIS AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, UNLESS IT IS DETERMINED BY A FINAL AND NONAPPEALABLE JUDGMENT OR COURT ORDER BINDING ON THE AGENT, THAT THE LOSSES WERE THE RESULT OF ACTS OR OMISSIONS CONSTITUTING GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.

6.18 DELAYS; PARTIAL EXERCISE OF REMEDIES

No delay or omission of the Agent to exercise any right or remedy hereunder, whether before or after the happening of any Event of Default, shall impair any such right or shall operate as a waiver thereof or as a waiver of any such Event of Default. No single or partial exercise by the Agent of any right or remedy shall preclude any other or further exercise thereof, or preclude any other right or remedy.

6.19 JURY TRIAL

EACH OF THE GUARANTORS AND THE AGENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY TRANSACTION DOCUMENT OR THE ACTIONS OF ANY PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.

6.20 SUBJECT TO SUBORDINATION AGREEMENT

Notwithstanding anything to the contrary contained herein, the rights and remedies of the Agent and the Purchasers, and the obligations of the Guarantors, under this Agreement are subject to the Subordination Agreement, as it may be amended, supplemented or otherwise modified from time to time.

[SIGNATURE PAGE TO FOLLOW]

IN WITNESS WHEREOF, each Guarantor has caused this Guarantors General Security Agreement to be duly executed and delivered as of the date first written above.

HOUBA, INC.

By:_________________________________
Name:
Title:

AXIOM PHARMACEUTICAL
CORPORATION

By:_________________________________
Name:
Title:

By its acceptance hereof, as of the day and year first above written, the Agent agrees to be bound by the provisions hereof applicable to it.

GALEN PARTNERS III, L.P.

By:________________________________
Name:
Title:

SCHEDULE A

SECTION 3.3

- Houba

16235 State Road 17, Culver, Indiana 46511.

- Axiom

695 N. Perryville Road, Rockford, Illinois 61107.

EXHIBIT 10.11

STOCK PLEDGE AGREEMENT

This Stock Pledge Agreement (this "Agreement") is dated as of February 6, 2004 by and between Halsey Drug Co., Inc., a New York corporation (the "Pledgor"), and Galen Partners III, L.P., a Delaware limited partnership, acting in its capacity as agent for the Purchasers, as hereinafter defined (the "Agent"), for the benefit of the Purchasers.

PRELIMINARY STATEMENTS

The Pledgor has entered into a Debenture and Share Purchase Agreement of even date herewith (as the same may be amended, modified, supplemented or restated from time to time, the "Purchase Agreement;" terms which are capitalized in this Agreement and not otherwise defined shall have the meanings ascribed to them in the Purchase Agreement) with the Purchasers listed on Exhibit B thereto (the "Purchasers"). It is a condition precedent to the effectiveness of the Purchase Agreement that the Pledgor shall have executed this Agreement and made the pledges referred to herein in favor of the Agent, for the ratable benefit of the Purchasers, as contemplated hereby.

AGREEMENT

In consideration of the premises and to induce the Purchasers to enter into the Purchase Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor hereby agrees with the Agent as follows:

ARTICLE 1

PLEDGE OF PLEDGED STOCK

1.1 DEFINITIONS; INTERPRETATION OF AGREEMENT

Unless the context otherwise requires, all terms not defined herein or in the Purchase Agreement shall have the meaning set forth in the New York Uniform Commercial Code (the "Code"). Acceptance of or acquiescence in a course of performance rendered under this Agreement shall not be relevant in determining the meaning of this Agreement even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection.

1.2 PLEDGE OF THE PLEDGED STOCK; POWER OF ATTORNEY

(a) As security for the prompt payment and performance when due of the obligations owing by the Pledgor to the Purchasers under the Purchase Agreement, the Debentures, the other Transaction Documents (as defined in the Subordination Agreement) and under the agreements, documents and instruments delivered by the Pledgor pursuant thereto or in connection therewith (collectively, the "Obligations"), the Pledgor hereby pledges to the Agent, for the ratable benefit of the Purchasers, and grants to the Agent, for the ratable benefit of the Purchasers, a lien on and

security interest having priority over any and all other security interests (except as otherwise provided in the Subordination Agreement), in the following (collectively the "Pledged Collateral"): (i) all of the issued and outstanding shares of common stock of Houba, Inc. ("Houba"), and Axiom Pharmaceutical Corporation ("Axiom" and, together with Houba, the "Subsidiaries"), which shares are more particularly described on Schedule A attached hereto (the "Pledged Stock"), (ii) all additional shares of common stock at any time issued to the Pledgor by Houba or Axiom, (iii) the certificates evidencing all Pledged Collateral, (iv) subject to Section 1.6 hereof, all dividends, cash, securities, investment property, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Stock and such shares and securities, and (v) all proceeds of any and all Pledged Collateral (including, without limitation, proceeds constituting any property of the types described above). The Pledgor shall deliver to the Agent original stock certificates for all of the Pledged Stock, each accompanied by an undated stock power executed in blank by the Pledgor.

(b) The Agent shall have no obligation with respect to the Pledged Collateral or any other property held or received by it hereunder except to use reasonable care in the custody thereof. The Agent may hold the Pledged Collateral in the form in which it is received by it.

(c) The Pledgor, to the fullest extent permitted by law, hereby constitutes and irrevocably appoints the Agent (and any officer or agent of the Agent, with full power of substitution and revocation) as the Pledgor's true and lawful attorney-in-fact, in the Pledgor's stead and in the name of the Pledgor or in the name of the Agent, to transfer, upon the occurrence and during the continuance of an Event of Default or at any time the Agent, based on all the facts and circumstances then existing, and in the exercise of its commercially reasonable credit judgment, believes, and has so notified the Pledgor in writing, that, in connection with the Purchase Agreement and the agreements, documents and instruments delivered by the Pledgor pursuant thereto or in connection therewith, fraud has occurred with respect to the Pledgor or any other Person controlling, controlled by, or under common control with the Pledgor which has a material adverse effect on the operations or condition (financial or otherwise) of the Pledgor and its subsidiaries, taken as a whole (a "Fraud"), the Pledged Collateral on the books of Houba and Axiom, as applicable, in whole or in part, to the name of the Agent or such other Person or Persons as the Agent may designate and, upon the occurrence and during the continuance of an Event of Default or at any time the Agent, based on all the facts and circumstances then existing, and in the exercise of its commercially reasonable credit judgment, believes, and has so notified the Pledgor in writing, that Fraud has occurred, to take all such other and further actions as the Pledgor could have taken with respect to the Pledged Collateral which the Agent in its reasonable judgment determines to be necessary or appropriate to accomplish the purposes of this Agreement.

(d) The powers of attorney granted pursuant to this Agreement and all authority hereby conferred are granted and conferred solely to protect the Agent's interests in the Pledged Collateral and shall not impose any duty upon the attorney-in-fact to exercise such powers. Such powers of attorney shall be irrevocable prior to the payment in full of the Obligations and shall not be terminated prior thereto or affected by any act of the Pledgor or other Persons or by operation of law. The foregoing power of attorney, being coupled with an interest, is irrevocable so long as any Obligation remains outstanding.

(e) Except to the extent that the Agent releases its pledge of any of the Pledged Collateral, each Person who shall be a transferee of the beneficial ownership of any of the Pledged Collateral shall be deemed to have irrevocably appointed the Agent, with full power of substitution and revocation, as such Person's true and lawful attorney-in-fact in such Person's name and otherwise to do any and all acts herein permitted and to exercise any and all powers herein conferred; provided, however, that no Person shall exercise any such power of attorney unless an Event of Default shall have occurred and be continuing or from and after such time as such Person has notified the Pledgor in writing that based on all the facts and circumstances then existing, and in the exercise of its commercially reasonable judgment, such Person believes that Fraud has occurred.

1.3 RIGHTS OF PLEDGOR; VOTING

(a) During the term of this Agreement and subject to the Subordination Agreement, and so long as the Pledgor has not received a Voting Notice (as defined below) from the Agent following (i) the occurrence and during the continuance of an Event of Default or (ii) from and after such time as the Agent determines that based on all the facts and circumstances then existing, and in the exercise of its commercially reasonable judgment, the Agent believes that Fraud has occurred, the Pledgor shall have the right to vote any of the Pledged Collateral in all corporate matters except those which would contravene this Agreement, the Purchase Agreement or any of the agreements, documents and instruments delivered by the Pledgor and each Subsidiary pursuant thereto unless the Agent consents in writing thereto.

(b) Subject to the Subordination Agreement, upon the occurrence and during the continuance of an Event of Default or from and after such time as the Agent has notified the Pledgor in writing that based on all the facts and circumstances then existing, and in the exercise of its commercially reasonable judgment, Agent believes that Fraud has occurred, the Pledgor shall give the Agent at least fifteen (15) days' prior notice of (i) any meeting of stockholders of any of the Subsidiaries or any meeting of directors of any of the Subsidiaries convened for any purpose and (ii) any written consent which the Pledgor proposes to execute as the stockholder of any of the Subsidiaries or which any of the representatives of the Pledgor proposes to execute as a director of any of the Subsidiaries. Subject to the Subordination Agreement, during the continuance of an Event of Default and from and after such time as the Agent determines that based on all the facts and circumstances then existing, and in the exercise of its commercially reasonable judgment, the Agent believes that Fraud has occurred, the Pledgor hereby authorizes the Agent to send its agents and representatives to any such meeting of stockholders or directors of any of the Subsidiaries that the Agent wishes to attend, and agrees to take such steps as may be necessary to confirm and effectuate such authority, including, without limitation, causing such Subsidiary to give reasonable prior written notice to the Agent of the time and place of any such meeting and the principal actions to be taken thereat.

(c) Notwithstanding the occurrence of an Event of Default or the determination by the Agent that based on all the facts and circumstances then existing, and in the exercise of its commercially reasonable judgment, the Agent believes that Fraud has occurred, and subject to the Subordination Agreement, the Pledgor may continue to exercise the voting rights of the Pledgor as herein described (and subject to the limitations herein) except to the extent that the Agent elects to exercise voting power (as determined by it in its sole discretion) by providing written notice to the

Pledgor at any time during the continuance of an Event of Default or from and after such time as the Agent has determined that based on all the facts and circumstances then existing, and in the exercise of its commercially reasonable judgment, the Agent believes that Fraud has occurred (a "Voting Notice"), whereupon the Agent shall have the exclusive right during the continuance of an Event of Default and after the Agent's determination of Fraud to exercise such rights to the extent specified in such Voting Notice, and the Pledgor shall take all such steps as may be necessary to effectuate such rights until the Agent notifies the Pledgor in writing of the release of such rights. Once any such Event of Default has been cured or waived and such cure or waiver is confirmed by the Agent to the Pledgor in writing, any relevant Voting Notice shall be deemed to be rescinded.

1.4 NO RESTRICTIONS ON TRANSFER

The Pledgor warrants and represents that, except as provided pursuant to (a) that certain Stock Pledge Agreement dated March 10, 1998 between the Pledgor and the 1998 Debentureholders, (b) that certain Stock Pledge Agreement dated May 26, 1999 between the Pledgor and the holders of the 1999 Debentures,
(c) that certain Stock Pledge Agreement dated March 29, 2000 between the Pledgor and Watson, and (d) that certain Stock Pledge Agreement dated December 20, 2002 between the Pledgor and the 2002 Debentureholders, there are no restrictions on the transfer of the Pledged Stock (except for such restrictions imposed by operation of law), that there are no options, warrants or rights pertaining thereto, and that the Pledgor has the right to transfer the Pledged Stock free of any encumbrances and without the consent of the creditors of the Pledgor or the consent of any of the Subsidiaries or any other Person or any governmental agency whatsoever.

1.5 NO TRANSFER OF LIENS; ADDITIONAL SECURITIES

The Pledgor agrees that it will not sell, transfer or convey any interest in, or suffer or permit any lien or encumbrance to be created upon or with respect to, any of the Pledged Collateral during the term of this Agreement, except to or in favor of the Agent, or as agreed to in writing in advance by the Agent in accordance with the terms of the Purchase Agreement and the Subordination Agreement. The Pledgor shall not cause, suffer or permit any Subsidiary to issue any common or preferred stock, or any other equity security or any other instruments convertible into equity securities, to any Person, unless the Agent otherwise consents in writing (which consent may be withheld in the Agent's reasonable credit judgment).

1.6 ADJUSTMENTS OF CAPITAL STOCK; PAYMENT AND APPLICATION OF DIVIDENDS

Subject to the Subordination Agreement and the Purchase Agreement, in the event that during the term of this Agreement any stock dividend, reclassification, readjustment or other change is declared or made in the capital structure of any Subsidiary or if any other or additional shares of stock of any Subsidiary are issued to the Pledgor, all new, substituted and additional shares or other securities issued by reason of any such change or acquisition shall immediately be delivered by the Pledgor to the Agent and shall be deemed to be part of the Pledged Collateral under the terms of this Agreement in the same manner as the shares of capital stock originally pledged hereunder. Subject to the Subordination Agreement and the Purchase Agreement, upon the occurrence and during the continuance of an Event of Default and from and after such time as the Agent determines that based

on all the facts and circumstances then existing, and in the exercise of its commercially reasonable judgment, the Agent believes that Fraud has occurred, all cash dividends received by or payable to the Pledgor in respect of the Pledged Collateral, including any additional shares of stock or investment property received by the Pledgor as a result of the Pledgor's record ownership of the Pledged Stock, shall immediately be delivered by the Pledgor to the Agent, to be held by the Agent as Pledged Collateral hereunder or to be applied by the Agent against the Obligations. Upon the occurrence and during the continuance of an Event of Default or from and after such time as the Agent determines that based on all the facts and circumstances then existing, and in the exercise of its commercially reasonable judgment, the Agent believes that Fraud has occurred, the Pledgor will not demand and will not be entitled to receive, any cash dividends or other income, interest or property in or with respect to the Pledged Collateral, and if the Pledgor receives any of the same, the Pledgor shall immediately deliver it to the Agent to be held by it and applied as provided in the preceding sentence.

1.7 WARRANTS AND OPTIONS

In the event that during the term of this Agreement subscription warrants or other rights or options shall be issued to the Pledgor in connection with the Pledged Collateral, all such stock warrants, rights and options shall forthwith be assigned to the Agent by the Pledgor, and such stock warrants, rights and options shall be, and, if exercised by the Pledgor, all new stock issued pursuant thereto shall be, pledged by the Pledgor to the Agent to be held as, and shall be deemed to be part of, the Pledged Collateral under the terms of this Agreement in the same manner as the shares of capital stock originally pledged hereunder.

1.8 RETURN OF PLEDGED COLLATERAL UPON TERMINATION

Upon the Security Interest Termination Date and the termination of the Purchase Agreement, the Agent shall cause to be transferred or returned to the Pledgor all of the stock pledged by the Pledgor herein and any money, property and rights received by the Agent pursuant hereto, to the extent the Agent has not taken, sold or otherwise realized upon the same as permitted hereunder, together with all other documents reasonably required by the Pledgor to evidence termination of the pledge contemplated hereby.

ARTICLE 2

EVENTS OF DEFAULT; REMEDIES

2.1 RIGHTS OF AGENT UPON DEFAULT

Upon the occurrence and during the continuance of any Event of Default and from and after such time as the Agent determines that based on all the facts and circumstances then existing, and in the exercise of its commercially reasonable judgment, the Agent believes that Fraud has occurred, subject to the Subordination Agreement, the Agent shall have and at any time may exercise with respect to the Pledged Collateral, the proceeds thereof, and any other property or money held by the Agent hereunder, all rights and remedies available to it under law, including, without limitation,

those given, allowed or permitted to a secured party by or under the Code, and all rights and remedies provided for herein and in the Purchase Agreement.

2.2 DISPOSITION OF PLEDGED STOCK

(a) Without limiting the foregoing, in the event that the Agent elects to sell the Pledged Stock (such term including, for purposes of this
Section 2.2, the Pledged Stock and all other shares of stock or securities at any time forming part of the Pledged Collateral), the Agent shall have the power and right in connection with any such sale, exercisable at its option and in its absolute discretion, to sell, assign, and deliver the whole or any part of the Pledged Stock or any additions thereto at a private or public sale for cash, on credit or for future delivery and at such price as the Agent deems to be satisfactory. Notice of any public sale shall be sufficient if it describes the Pledged Collateral to be sold in general terms, and is published at least once in The New York Times not less than ten (10) days prior to the date of sale. If The New York Times is not then being published, publication may be made in lieu thereof in any newspaper then being circulated in the City of New York, New York, as the Agent may elect. All requirements of reasonable notice under this
Section 2.2 shall be met if such notice is mailed, postage prepaid at least ten
(10) days before the time of such sale or disposition, to the Pledgor at its address set forth in Section 5.5 hereof or such other address as the Pledgor may have, in writing, provided to the Agent. The Agent may, if it deems it reasonable, postpone or adjourn any sale of any collateral from time to time by an announcement at the time and place of the sale to be so postponed or adjourned without being required to give a new notice of sale.

(b) Because federal and state securities laws may restrict the methods of disposition of the Pledged Stock which are readily available to the Agent, and specifically because a public sale thereof may be impossible or impracticable by reason of certain restrictions under the Securities Act or under applicable "blue sky" or other state securities laws as now or hereafter in effect, the Pledgor agrees that the Agent may from time to time attempt to sell the Pledged Stock by means of a private placement restricting the offering or sale to a limited number of prospective purchasers who meet suitability standards the Agent deems appropriate and who agree that they are purchasing for their own accounts for investment and not with a view to distribution, and the Agent's acceptance of the highest offer obtained therefrom shall be deemed to be a commercially reasonable disposition of the Pledged Stock. To the extent permitted by law, the Agent or its assigns may purchase all or any part of the Pledged Stock and any purchaser thereof shall thereafter hold the same absolutely free from any right or claim of any kind. To the fullest extent permitted by law, the Agent shall not be obligated to make any such sale pursuant to notice and may, without notice or publication, adjourn any public or private sale by announcement at the time and place fixed for the sale, and such sale may be held at any time or place to which the same may be adjourned. If any of the Pledged Stock is sold by the Agent upon credit or for future delivery, the Agent shall not be liable for the failure of the purchaser to pay for same and, in such event, the Agent may resell such Pledged Stock and the Pledgor shall continue to be liable to the Agent for the full amount of the Obligations to the extent the Agent does not receive full and final payment in cash therefor.

(c) Except as otherwise provided in the Purchase Agreement or by applicable law, the Agent shall have the sole right to determine the order in which Obligations shall be deemed discharged by the application of the proceeds of Pledged Stock or any other property or money held

hereunder or any amount realized thereon.

ARTICLE 3

REPRESENTATIONS AND WARRANTIES

The Pledgor represents and warrants to the Agent that:

3.1 CAPITALIZATION; GOOD TITLE

(a) All shares of Pledged Stock are fully paid, duly and properly issued, nonassessable and owned by the Pledgor free and clear of any lien or encumbrance of any kind whatsoever, excepting those herein granted to the Agent and those granted to the holders of the Existing Debentures and Watson. The Pledged Stock constitutes all of the outstanding securities of any class or kind of all of the Subsidiaries.

(b) Except in the case of the liens granted to the holders of the Existing Debentures and Watson, no effective financing statement or other instrument similar in effect covering all or any part of the Pledged Collateral is on file in any recording office.

3.2 VALID SECURITY INTEREST

The pledge of the Pledged Collateral pursuant to this Agreement creates a valid and perfected first-priority security interest, in accordance with and subject to the Subordination Agreement, securing the payment of the Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest having been duly made or taken.

3.3 CONSENTS

No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for (a) the pledge by the Pledgor of the Pledged Collateral pursuant to this Agreement, the grant by the Pledgor of the assignment or security interest granted hereby or the execution, delivery or performance of this Agreement by the Pledgor, (b) the perfection of or exercise by the Agent of its rights and remedies provided for in this Agreement, or (c) the exercise by the Agent of the voting or other rights provided for in this Agreement or the remedies in respect of the Pledged Collateral pursuant to this Agreement (except as may be required in connection with a judicial foreclosure, if applicable, or the disposition of the Pledged Stock by laws affecting the offering and sale of securities generally).

3.4 AUTHORIZATION; ENFORCEABILITY

The Pledgor has full right, power and authority to enter into this Agreement and to grant the security interest in the Pledged Collateral made hereby, and this Agreement constitutes the legal, valid and binding obligation of the Pledgor enforceable against the Pledgor in accordance with its terms, except as the enforceability thereof may be (a) limited by bankruptcy, insolvency,

reorganization, moratorium or similar laws affecting the enforceability of creditors' rights generally, and (b) subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

3.5 NO CONFLICT

The execution, delivery and performance by the Pledgor of this Agreement will not result in any violation, conflict with, or result in a breach of any of the terms of, or constitute a default under, any agreements, contracts, court orders or consent decrees, the Certificate of Incorporation or the By-laws, as amended, of the Pledgor.

ARTICLE 4

INDEMNITY AND EXPENSES

4.1 INDEMNITY

The Pledgor agrees to and hereby indemnifies the Agent and each of the Purchasers from and against any and all Losses arising out of, or in connection with, or resulting from this Agreement (including, without limitation, enforcement of this Agreement) unless resulting from or arising out of the gross negligence or willful misconduct of the Agent or such Purchaser.

4.2 EXPENSES

The Pledgor agrees promptly upon the Agent's or such Purchaser's demand to pay or reimburse the Agent or such Purchaser for all reasonable expenses
(including, without limitation, reasonable fees and disbursements of counsel)
incurred by the Agent or such Purchaser in connection with (a) any modification or amendment to or waiver of any provision of this Agreement requested by the Pledgor, (b) the custody or preservation of the Pledged Collateral, (c) any actual or attempted sale or exchange of, or any enforcement, collection, compromise or settlement respecting, the Pledged Collateral or any other property or money held hereunder or any other action taken by the Agent or such Purchaser hereunder reasonably necessary to enforce its rights, whether directly or as attorney-in-fact pursuant to the power of attorney herein conferred, or
(d) the failure by the Pledgor to perform or observe any of the provisions hereof. All such expenses shall be deemed a part of the Obligations for all purposes of this Agreement and the Agent may apply the Pledged Collateral or any other property or money held hereunder to payment of or reimbursement for such expenses after notice and demand to the Pledgor.

ARTICLE 5

MISCELLANEOUS

5.1 AGENT MAY PERFORM

If the Pledgor fails to perform any representation, warranty, covenant or agreement required to be performed by it contained herein, the Agent may, but shall not be obligated to, perform, or

cause performance of, such representation, warranty, covenant or agreement, and the out-of-pocket expenses of the Agent incurred in connection therewith shall be payable by the Pledgor.

5.2 WAIVERS AND AMENDMENT

The rights and remedies given hereby are in addition to all others however arising, but it is not intended that any right or remedy be exercised in any jurisdiction in which such exercise would be prohibited by law. No action, failure to act or knowledge of the Agent shall be deemed to constitute a waiver of any power, right or remedy hereunder, nor shall any single or partial exercise thereof preclude any further exercise thereof or the exercise of any other power, right or remedy. Any right or power of the Agent hereunder in respect of the Pledged Collateral and any other property or money held hereunder may at the option of the Agent be exercised as to all or any part of the same and the term the "Pledged Collateral" wherever used herein, unless the context clearly requires otherwise, shall be deemed to mean (and shall be read as) "the Pledged Collateral and any other property or money held hereunder or any part thereof." This Agreement shall not be amended nor shall any right hereunder be deemed waived except by a written agreement expressly setting forth the amendment or waiver and signed by the Agent.

5.3 CONTINUING SECURITY INTEREST; ASSIGNMENTS OF SECURED DEBT

This Agreement shall create a continuing security interest having priority over any and all security interests (except as otherwise provided in the Subordination Agreement) in the Pledged Collateral and shall (a) remain in full force and effect until the Security Interest Termination Date, (b) be binding upon the Pledgor, and the Pledgor's successors and assigns, and upon each of the Subsidiaries, and their successors and assigns, and (c) inure, together with the rights and remedies of the Agent and the Purchasers hereunder, to the benefit of the Agent, its successors and permitted assigns. Without limiting the generality of the foregoing clause (c), the Agent may assign or otherwise transfer all or any portion of its rights and obligations under this Agreement to any other Person, to the extent and in the manner provided in the Purchase Agreement and the Subordination Agreement and such other Person shall thereupon become vested with all the benefits in respect hereof granted to the Agent herein; the Agent shall, however, retain all of its rights and powers with respect to any part of the Pledged Collateral not transferred. Any agent or nominee of the Agent shall have the benefit of this Agreement as if named herein and may exercise all the rights and powers given to the Agent hereunder.

5.4 GOVERNING LAW; CONSENT TO JURISDICTION

(a) This Agreement and the rights of the parties hereunder shall be governed in all respects by the laws of the State of New York wherein the terms of this Agreement were negotiated, excluding to the greatest extent permitted by law any rule of law that would cause the application of the laws of any jurisdiction other than the State of New York.

(b) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or United States Federal court sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising our of or relating to this Agreement or any of the other Transaction Documents to

which it is a party, or for recognition or enforcement of any judgment, and each of the parties hereto irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the fullest extent permitted by law, in such United States Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the right that any party may otherwise have to bring any action or proceeding relating to this Agreement or any of the other Transaction Documents in the courts of any other jurisdiction.

(c) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or in relation to this Agreement or any other Transaction Document to which it is a party in any such New York State or United States Federal court sitting in New York City. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

5.5 NOTICES

All notices hereunder shall be in writing (except only as otherwise provided in Section 5.2) and shall be conclusively deemed to have been received and shall be effective (a) on the day on which delivered if delivered personally (including delivery by courier or overnight mail providing evidence of delivery), or transmitted by telex or telegram or telecopier with transmission confirmed, or (b) five (5) days after the date on which the same is deposited in the United States mail (certified or registered if required under Section 5.4), with postage prepaid and properly addressed, and any notice mailed shall be addressed:

(a) in the case of the Pledgor, to:

Halsey Drug Co., Inc.
695 N. Perryville Road Rockford, Illinois 61107 Telecopier No.: (815) 399-9710

with copies to:

St. John & Wayne
2 Penn Plaza East
Newark, New Jersey 07105 Attention: John P. Reilly, Esq.

Telephone No.: (973) 491-3600

Telecopier No.: (973) 491-3555

(b) in the case of the Agent, to:

Galen Partners III, L.P.

610 Fifth Avenue, Fifth Floor

New York, NY 10020
Telecopier No.: (212) 218-4999 Attention: Bruce F. Wesson with a copies to:

Wolf, Block, Schorr & Solis-Cohen 250 Park Avenue
New York, NY 10177
Attention: George N. Abrahams, Esq.

Telephone No.: (212) 986-1116

Telecopier No.: (212) 986-0604

or at such other address as the party giving such notice shall have been advised of in writing for such purpose by the party to whom or to which the same is directed.

5.6 SEVERABILITY; ENTIRE AGREEMENT

(a) If any provision of this Agreement shall be invalid, illegal, or unenforceable in any jurisdiction, the validity, legality or enforceability of any such provision in any other jurisdiction shall not be affected or impaired, and to the extent any provision is held invalid, illegal or unenforceable, then such provision shall be deemed severable from, and shall in no way affect the validity or enforceability of the remaining provisions of this Agreement.

(b) This Agreement, the Company General Security Agreement, and the Subordination Agreement constitute the entire agreement of the Pledgor and replaces any other or prior agreements or undertakings, with respect to the subject matter hereof, and there are no other agreements or undertakings, oral or written, respecting such subject matter which are intended to have any force or effect after the execution hereof.

(c) Notwithstanding anything to the contrary contained herein, the rights and remedies of the Agent, and the obligations of the Pledgor, under this Stock Pledge Agreement are subject to the Subordination Agreement, as it may be amended, supplemented or otherwise modified from time to time.

5.7 SUCCESSORS AND ASSIGNS; HEADINGS

This Agreement shall be binding upon and shall inure to the benefit of the Pledgor and the Agent and their respective successors and permitted assigns.
Section headings used herein are for convenience only and shall not affect the meaning or construction of any of the provisions hereof.

5.8 COUNTERPARTS

This Agreement may be executed in any number of counterparts, each executed counterpart constituting an original but all counterparts together constituting only one instrument.

5.9 FURTHER ASSURANCES

Pledgor and the Agent shall execute, in a proper and timely manner, at or after the date hereof, such additional documents and instruments as may be reasonably requested by the other parties in connection with the consummation or confirmation of the transactions contemplated by this Agreement.

5.10 NO ASSIGNMENT

This Agreement may not be assigned by the Pledgor without the prior express written consent of the Agent.

5.11 WAIVERS OF JURY TRIAL

THE PLEDGOR AND, BY ITS ACCEPTANCE HEREOF, THE AGENT HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY TRANSACTION DOCUMENT OR THE ACTIONS OF ANY PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.

5.12 WAIVERS OF CONSEQUENTIAL DAMAGES

NEITHER THE PLEDGOR OR THE AGENT, NOR ANY EMPLOYEE AGENT OR ATTORNEY OF EITHER OF THEM, SHALL BE LIABLE TO THE OTHER FOR CONSEQUENTIAL DAMAGES ARISING FROM ANY BREACH OF CONTRACT, TORT OR OTHER WRONG RELATING TO THIS AGREEMENT OR THE ESTABLISHMENT, ADMINISTRATION OR COLLECTION OF THE OBLIGATIONS, EXCEPT FOR BAD FAITH.

[SIGNATURE PAGE TO FOLLOW]

IN WITNESS WHEREOF, the Pledgor has caused this Stock Pledge Agreement to be executed by its duly authorized officer as of the date first written above.

HALSEY DRUG CO., INC.

By:________________________________
Name: Andrew D. Reddick
Title: President and Chief Executive
Officer

Accepted and Agreed to:

GALEN PARTNERS III, L.P.
on behalf of itself and as Agent
By: Claudius, L.L.C., General Partner

By:______________________
Name:
Title:

                           Certificate                                          Number of
       Issuer                  No.                   Designation                  Shares
-----------------------------------------------------------------------------------------
Houba, Inc.                     1            Common Stock, $.01 par value           100
Axiom Pharmaceutical            1            Common Stock, $.01 par value           100
Corporation

EXHIBIT 10.12

UMBRELLA AGREEMENT

This UMBRELLA AGREEMENT (this "Agreement") dated as of February 6, 2004, is among (a) WATSON PHARMACEUTICALS, INC., a Nevada corporation ("Watson"), (b) HALSEY DRUG CO., INC., a New York corporation, including its subsidiaries (collectively, "Halsey"), and (c) the other parties (each an "Investor" and collectively, the "Investor Group") listed on the signature page hereto.

PRELIMINARY STATEMENTS

1. Halsey and Watson have entered into a Loan Agreement dated as of March 29, 2000, as amended by an Amendment to Loan Agreement dated as of March 21, 2000 and as further amended by a Second Amendment to Loan Agreement dated as of December 20, 2002 (as so amended through such Second Amendment, the "Loan Agreement"), pursuant to which Watson made certain term loans to Halsey in the aggregate original principal amount of $21,401,331 (the "Loan").

2. Halsey is in default of certain payment and other obligations under the Loan Agreement and has requested that Watson agree to a restructuring of the Loan and certain related transactions in connection with an investment in Halsey by the Investors and certain other parties (the "Restructuring"). Watson is willing to consent to the Restructuring upon and subject to the terms and conditions set forth in this Agreement.

3. As part of the Restructuring, on the Effective Date (as defined below), the Investor Group has agreed to purchase the 2004 Debentures (as defined below) from Halsey for the sum of up to $14,000,000.00 and Halsey has agreed to issue the 2004 Debentures to the Investor Group pursuant to the 2004 Debenture Purchase Agreement (as defined below).

4. As a further part of the Restructuring, on the Effective Date, Watson has agreed to amend the Loan Agreement and the notes issued in connection thereunder by entering into the Third Amendment (as defined below) and in consideration for Watson entering into the Third Amendment, Halsey has agreed to pay $4,292,580 and to transfer the Purchased Assets to Watson.

5. As the final part of the Restructuring, on the Effective Date, Watson has agreed to sell the Assigned Rights (as defined below) to the Investor Group and, in consideration for the purchase of the Assigned Rights, the Investor Group has agreed to pay $1,000,000.00.

6. On the Effective Date, (i) Watson and Halsey have agreed to terminate all pre-existing agreements between them (including without limitation, the Supply Agreements (as defined below) and the Right of First Negotiation Agreement (as defined below)) and, (ii) Watson has agreed to amend the Warrant to Purchase Common Stock Agreement (as defined below).

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NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I

INTERPRETATION AND DEFINITIONS

Section 1.1 Certain Definitions. Terms defined in the Loan Agreement and used in this Agreement shall have the meanings given to them in the Loan Agreement, unless otherwise defined herein. The following terms shall have the following meanings:

"2004 Debentures" means the convertible senior secured debentures issued by Halsey pursuant to the 2004 Debenture Purchase Agreement.

"2004 Debenture Purchase Agreement" means the 2004 Debenture Purchase Agreement between Halsey and the Investor Group substantially in the form of Exhibit 1.1(a) hereto.

"Action" means any claim, action, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority.

"Ancillary Documents" means the Bill of Sale, the Assignment of Intellectual Property and the Hydrocodone Option Agreement.

"Assigned Agreements" means all right, title and interest of Watson in and to the Loan Agreement, the Notes, the Watson Security Documents, the Subordination Agreement dated as of December 20, 2002 among the Borrower, Watson and the parties thereto, the other Loan Documents and any and all instruments, agreements and other writings executed in connection with or pursuant thereto.

"Assigned Loan" means all right, title and interest of Watson in the Loan, together with all accrued and unpaid interest thereon and fees with respect thereto.

"Assigned Proceeds" means any and all present and future rights with respect to cash, securities, interest, dividends and other property which may be exchanged for or distributed or collected in respect of the Assigned Loan, the Assigned Agreements or the Assigned Security, and the proceeds thereof, including, without limitation, distributions in respect of principal, together with interest accrued but unpaid as of the Effective Date and fees with respect thereto, interest after the date hereof, fees, costs and expenses, and distributions obtained by or through redemption, consummation of a plan of reorganization or otherwise.

"Assigned Rights" means (i) the Assigned Loan; (ii) the Assigned Agreements; (iii) the Assigned Security; and (iv) the Assigned Proceeds.

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"Assigned Security" means all right, title and interest in and to any property, whether real or personal, tangible or intangible, of whatever kind and wherever located, whether now owned or hereafter acquired or created, in which a lien, encumbrance, security interest, mortgage, deed of trust, pledge, claim, set-off or charge of any kind (collectively, "Liens") has been granted or purported to have been granted pursuant to any of the Watson Security Documents and all right, title and interest in and to any and all instruments, agreements and other writings evidencing such a Lien.

"Assignment of Intellectual Property" means the assignment of Intellectual Property , substantially in the form of Exhibit 1.1(b).

"Bankruptcy Code" means the Bankruptcy Reform Act of 1978, 11 U.S.C. Sections 101 et seq., as amended.

"Bill of Sale" means the Bill of Sale and Assignment to be executed by Halsey, substantially in the form of Exhibit 1.1(c).

"Claimant" means each of Essex Woodlands Health Ventures V, L.P., Care Capital Investments, L.P., Galen Partners III, L.P., Galen Partners International, L.P., and Galen Employee Fund III, L.P.

"Claimant Recovery Amount" means, on any date, with respect to each Claimant, the amount equal to the aggregate value of all property received by such Claimant from the Loan Parties with respect to such Claimant's Debentures on or after the Effective Date. Notwithstanding anything to the contrary in this Agreement, equity or debt securities of the Company received by a Claimant with respect to the Debentures (including upon conversion or exchange thereof) shall be excluded from the calculation of the value of property deemed to have been received by such Claimant.

"Claimant Recovery Percentage" means, on any date, the amount determined by dividing the Claimant Recovery Amount for such Claimant by the face value of such Claimant's Debentures.

"Contingent Purchase Amount" shall have the meaning set forth in Section 2.3(b) hereto.

"Contingent Purchase Amount Payment Date" means any day that is five Business Days after any day on which a Claimant receives a payment or other property from the Loan Parties after which the Claimant Recovery Percentage exceeds the Watson Recovery Percentage.

"Contingent Purchase Termination Date" means the first to occur of (i) December 31, 2004, (ii) the date on which 100% of the Debentures shall have been exchanged for or

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converted into equity securities of the Company or (iii) the date on which the Watson Recovery Amount equals $21,401,331.

"Consents" means the Halsey and Guarantor Transfer Consent and the Secured Creditors' Transfer Consent.

"Debentures" means (i) the 2002 Debentures (as defined in the Subordination Agreement) that were issued prior to January 1, 2004 and (ii) the Existing Debentures (as defined in the Subordination Agreement).

"Encumbrance" means any security interest, pledge, hypothecation, mortgage, lien (including environmental and tax liens), violation, charge, lease, license, encumbrance, servient easement, adverse claim, reversion, reverter, preferential arrangement, restrictive covenant, condition or restriction of any kind, including any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership.

"Environmental Laws" means all Laws, now or hereafter in effect and as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety, natural resources or Hazardous Materials, including CERCLA; the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. Sections 6901 et seq.; the Clean Water Act, 33 U.S.C. Sections 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. Sections 2601 et seq.; the Clean Air Act, 42 U.S.C. Sections 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. Sections 300f et seq.; the Atomic Energy Act, 42 U.S.C. Sections 2011 et seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections 136 et seq.; and the Federal Food, Drug and Cosmetic Act, 21 U.S.C. Sections 301 et seq.

"Governmental Authority" means any federal, national, supranational, state, provincial, local, or similar government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body.

"Governmental Order" means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority.

"Halsey/Investor Group Transaction" means the transactions described in Section 2.1 of this Agreement.

"Halsey and Guarantor Transfer Consent" means the consent of Halsey and the Guarantors to the transfer of the Assigned Rights to the Investor in substantially the form of Exhibit 1.1(d).

"Hydrocodone Option Agreement" means the Hydrocodone Option Agreement to be executed by Halsey and Watson, substantially in the form of Exhibit 2.2(e).

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"Indemnified Party" means a Watson Indemnified Party, an Investor Group Indemnified Party or a Halsey Indemnified Party, as the case may be.

"Indemnifying Party" means Halsey pursuant to Section 5.1, an Investor or the Investor Group pursuant to Section 5.2 and Watson pursuant to
Section 5.3, as the case may be.

"Intellectual Property" means (i) patents, patent applications, and statutory invention registrations, (ii) trademarks, service marks, domain names, trade dress, logos, trade names, corporate names, and other identifiers of source or goodwill, including registrations and applications for registration thereof and including the goodwill of the business symbolized thereby or associated therewith, (iii) mask works and copyrights, including copyrights in computer software, and registrations and applications for registration thereof, and (iv) confidential and proprietary information, including trade secrets, know-how and invention rights.

"Investor Group Nominee" means Galen.

"Investor Group Purchase Price Bank Account" means the account of Halsey at LaSalle Bank, bearing account number 5800103177.

"Investor Group /Watson Transaction" means the transactions described in Section 2.3 of this Agreement.

"Law" means any federal, national, supranational, state, provincial, local or similar statute, law, ordinance, regulation, rule, code, order, requirement or rule of law (including common law).

"Liabilities" means any and all debts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or unmatured or determined or determinable, including those arising under any Law (including any Environmental Law), Action or Governmental Order and those arising under any contract, agreement, arrangement, commitment or undertaking.

"Loan Parties" means Halsey and the Guarantors.

"Parties" means collectively, Halsey, Watson and the Investor Group.

"Person" means an individual, partnership, corporation, statutory trust, joint stock company, trust, unincorporated association, limited liability company, joint venture, governmental authority or other entity of whatever nature.

"Pro Rata Portion" means, with respect to each Claimant, the percentage determined by dividing (i) the aggregate outstanding amount of the Debentures owned by such Claimant and its Affiliates as of January 1, 2004, by
(ii) the aggregate outstanding amount of the Debentures owned by all Claimants and their Affiliates as of January 1, 2004.

"Purchased Assets " means the assets specified in Schedule I hereto.

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"Right of First Negotiation Agreement" means that certain Right of First Negotiation Agreement between Halsey and Watson dated March 29, 2000.

"Secured Creditors" has the meaning given to such term in the Subordination Agreement.

"Secured Creditors' Transfer Consent" means the consent of the Secured Creditors to the transfer of the Assigned Rights to Investor Group in substantially the form of Exhibit 1.1(e).

"Subordination Agreement" means that certain Subordination Agreement dated December 20, 2002 among Watson, Halsey, the Investors and various other parties.

"Supply Agreements" means that certain Finished Goods Supply Agreement by and between Halsey and Watson dated March 29, 2000, as amended, that certain Active Ingredient Supply Agreement by and between Halsey and Watson dated March 29, 2000 and that certain Finished Goods Supply Agreement ("Core Products") by and between Halsey and Watson dated March 29, 2000, as amended.

"Third Amendment to Loan Agreement" means the Third Amendment to Loan Agreement between Halsey and Watson, substantially in the form of Exhibit 1.1(f) hereto.

"Transaction Documents" means this Agreement, the 2004 Debenture Purchase Agreement, the Third Amendment, the Consents and the Ancillary Documents.

"Warrant to Purchase Common Stock Agreement" means that certain Warrant to Purchase Common Stock, Par Value $.01 Per Share of Halsey Drug Co., Inc. dated December 20, 2002.

"Watson/Halsey Transaction" means the transactions described in Section 2.2 of this Agreement.

"Watson Loan Amendment Bank Account" means the account of Watson at Bank of America, bearing account number 1496301300.

"Watson Loan Purchase Price Bank Account" means the account of Watson at Bank of America, bearing account number 1496301300.

"Watson Recovery Amount" means, on any date, the amount equal to (i) $5,658,516 (ii) plus the value of all property received by Watson from the Claimants pursuant to Section 2.3(b)(ii) of this Agreement.

"Watson Recovery Percentage" means 26.44%

"Watson Security Documents" has the meaning specified in the Loan Agreement.

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Definition                                                   Location
----------                                                   --------
"Agreement".......................................    Preamble
"Closing".........................................    3.1
"Effective Date"..................................    3.8
"Halsey"..........................................    Preamble
"Halsey Indemnified Party"........................    5.2(a)
"Investor"........................................    Preamble
"Investor Group Indemnified Party"................    5.3(a)
"Investor Group Information"......................    4.4(d)
"Investor Group Purchase Price"...................    2.1(b)
"Loan"............................................    Preliminary Statements
"Loan Agreement"..................................    Preliminary Statements
"Loss"............................................    5.1
"Restructuring"...................................    Preliminary Statements
"Third Amendment"                                     2.2(a)
"Third Amendment Cash Amount"                         2.2(b)
"Third Party Claim"...............................    5.4(b)
"Watson"..........................................    Preamble
"Watson Indemnified Party"........................    5.2(b)
"Watson Information"..............................    4.3(f)
"Watson Loan Purchase Cash Amount"                    2.3 (b)(i)

Section 1.3 Interpretation and Rules of Construction. In this Agreement, except to the extent otherwise provided or that the context otherwise requires:

(a) when a reference is made in this Agreement to an Article, Section, Exhibit or Schedule, such reference is to an Article or
Section of, or a Schedule or Exhibit to, this Agreement unless otherwise indicated;

(b) the table of contents and headings for this Agreement are for reference purposes only and do not affect in any way the meaning or interpretation of this Agreement;

(c) whenever the words "include", "includes" or "including" are used in this Agreement, they are deemed to be followed by the words "without limitation";

(d) the words "hereof", "herein" and "hereunder" and words of similar import, when used in this Agreement, refer to this Agreement as a whole and not to any particular provision of this Agreement;

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(e) all terms defined in this Agreement have the defined meanings when used in any certificate or other document made or delivered pursuant hereto, unless otherwise defined therein;

(f) the definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms;

(g) any Law defined or referred to herein or in any agreement or instrument that is referred to herein means such Law or statute as from time to time amended, modified or supplemented, including by succession of comparable successor Laws;

(h) references to a Person are also to its successors and permitted assigns; and

(i) the use of "or" is not intended to be exclusive unless expressly indicated otherwise.

ARTICLE II

THE TRANSACTIONS

Section 2.1 The Halsey/Investor Group Transaction. Subject to the terms and conditions of this Agreement and in reliance on the agreements, representations and warranties contained herein and made pursuant hereto and the 2004 Debenture Purchase Agreement, on the Effective Date:

(a) Issuance of 2004 Debentures to Investor. Halsey and the Investor Group hereby agree to enter into the 2004 Debenture Purchase Agreement pursuant to which Halsey will issue convertible senior secured debentures in the principal amount of up to $14,000,000.00 (as such amount may be increased in accordance with the terms of such agreement) to the Investor Group and the other purchasers from time to time party thereto, all on the terms and conditions set forth in the 2004 Debenture Purchase Agreement.

(b) Investor Group Purchase Price. Each Investor severally and not jointly agrees to pay the purchase price for the 2004 Debentures in the amount specified for such Investor in such agreement (collectively, the "Investor Group Purchase Price").

Section 2.2 The Watson/Halsey Transaction. Subject to the terms and conditions of this Agreement and in reliance on the agreements, representations and warranties contained herein and made pursuant hereto, on the Effective Date:

(a) Third Amendment. Watson hereby agrees to enter into the Third Amendment to the Loan Agreement pursuant to which Watson will restructure certain of Halsey's obligations under the Loan Agreement in accordance with the terms set forth therein (the "Third Amendment").

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(b) Third Amendment Purchase Price. In consideration for Watson's agreement to enter into the Third Amendment, Halsey agrees, on the Effective Date, (i) to pay or cause to be paid to Watson the purchase price as follows: (i) payment in immediately available funds of an amount equal to $[4,279,850] (the "Third Amendment Cash Amount") and (ii) to sell, assign, transfer, convey and deliver, or cause to be sold, assigned, transferred, conveyed and delivered to Watson the Purchased Assets, in each case free and clear of any Encumbrances, and Watson hereby purchases from Halsey on such date, the Purchased Assets, in each case free and clear of any Encumbrances. Watson shall have full ownership of and title to the Purchased Assets, free and clear of any Encumbrances. With respect to any physical assets among the Purchased Assets, Halsey shall be responsible for any de-installation activities, costs and expenses and Watson shall be responsible for any packing and shipping activities, costs and expenses.

(c) Termination of Other Agreements. Halsey and Watson hereby agree to terminate all pre-existing agreements between Halsey and Watson (including without limitation, the Supply Agreements and the Right of First Negotiation Agreement).

(d) Waiver of Dilution. Halsey and Watson hereby agree that the Warrant to Purchase Common Stock Agreement is amended in accordance with the terms of Exhibit 2.2(d) hereto.

(e) Hydrocodone Option. Halsey shall grant to Watson a non-assignable, exclusive option (substantially in the form as set forth in Exhibit 2.2(e) hereto), to enter into a supply agreement with Halsey pursuant to which Halsey will supply, and Watson will purchase, on a non-exclusive, preferential basis, hydrocodone bitartrate active pharmaceutical ingredient manufactured using Halsey's proprietary hydrocodone bitartrate active pharmaceutical ingredient process.

Section 2.3 The Investor/Watson Transaction. Subject to the terms and conditions of this Agreement and in reliance on the agreements, representations and warranties contained herein and made pursuant hereto, on the Effective Date and immediately after the effectiveness of the Watson/Halsey Transaction:

(a) Transfer of Assigned Rights to Investor. Watson hereby sells, assigns, transfers, conveys and delivers to Investor Group all of Watson's right, title and interest in the Assigned Rights, and hereby delegates to Investor Group all of its obligations, duties and liabilities under the Assigned Agreements, and Investor Group hereby purchases, accepts and assumes from Watson from and after the Effective Date, all of Watson's right, title and interest in the Assigned Rights, provided, that, nothing contained herein is intended to, or shall be construed or deemed to constitute an assignment of any right of Watson to assert a claim under Section 502(h) of the Bankruptcy Code due to, or arising from, Watson's return of money or property to the estate of Halsey or any of its subsidiaries in connection with the assertion, by the estate or its representative of Halsey or any of its subsidiaries, of avoiding powers provided under Sections 544, 545, 547, 548, 549 and 550 of the Bankruptcy Code or analogous state law; it being understood and

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agreed by the Parties that the right to assert any such claim under
Section 502(h) of the Bankruptcy Code be and hereby is retained by Watson.

(b) Payment of Loan Purchase Price to Watson. As consideration for the sale, transfer and assignment of the Assigned Rights contemplated in Section 2.3(a): (i) on the Effective Date, the Investor Group agrees to pay Watson in immediately available funds an amount equal to $1,000,000.00 (the "Watson Loan Purchase Cash Amount"), and
(ii) and, until such time as the Watson Recovery Amount equals $21,401,331.00, on each Contingent Purchase Amount Payment Date that occurs prior to the Contingent Purchase Termination Date, each Claimant that has triggered such Contingent Purchase Amount Payment Date shall make a payment to Watson equal to that portion of the Claimant Recovery Amount for such Claimant that results in the Claimant Recovery Percentage exceeding the Watson Recovery Percentage (the "Contingent Purchase Amount"). To the extent the relevant Claimant Recovery Amount includes property other than immediately available funds, the Claimants may include in any resulting Contingent Purchase Amount paid hereunder a proportionate amount of such other property. Notwithstanding anything to the contrary in this Agreement, no Claimant shall have any obligation to make any payment under clause (ii) of this Section 2.3(b) on or after the Contingent Purchase Termination Date.

ARTICLE III

CLOSING

Section 3.1 Closing. Subject to the terms and conditions of this Agreement, the transactions contemplated by this Agreement shall take place at a closing (the "Closing") to be held at the offices of St. John & Wayne, L.L.C., Two Penn Plaza East, Newark, New Jersey 07105 at 10:00 A.M. New York time on February 6, 2004 or such other time or place as the parties hereto may agree.

Section 3.2 Closing Deliveries by Halsey to Investor Group. At the Closing, Halsey shall deliver or cause to be delivered to the Investor Group in connection with the Halsey/Investor Group Transaction:

(i) executed counterparts of this Agreement and the 2004 Debenture Purchase Agreement, in each case executed by Halsey, and such other instruments, in form and substance satisfactory to the Investors, as may be requested by the Investors to evidence the issuance of the 2004 Debentures;

(ii) notes evidencing the 2004 Debentures registered in such names as the Investors may request in writing at least one full Business Day before the Closing Date;

(iii) a receipt for the Investor Group Purchase Price;

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(iv) a true and complete copy, certified by the Secretary or an Assistant Secretary of Halsey, of the resolutions duly and validly adopted by the board of directors of Halsey evidencing its authorization of the execution and delivery of this Agreement and the 2004 Debenture Purchase Agreement and the consummation of the transactions contemplated hereby and thereby;

(v) a certificate of the Secretary or an Assistant Secretary of Halsey certifying the names and signatures of the officers of Halsey authorized to sign this Agreement, the 2004 Debenture Purchase Agreement and the other documents to be delivered hereunder and thereunder;

(vi) a certificate of a duly authorized officer of Halsey certifying that the representations and warranties of Halsey contained in this Agreement and the 2004 Debenture Purchase Agreement shall be true and correct in all material respects as of the Closing; and

(vii) any other documents as shall be required to be delivered pursuant to the terms of the 2004 Debenture Purchase Agreement.

Section 3.3 Closing Deliveries by Halsey to Watson. At the Closing, Halsey shall deliver or cause to be delivered to Watson in connection with the Watson/Halsey Transaction:

(i) the Third Amendment Cash Amount by wire transfer in immediately available funds to the Watson Loan Amendment Bank Account;

(ii) a secured promissory note in the aggregate principal amount of $5,000,000.00;

(iii) executed counterparts of this Agreement and the Third Amendment, in each case executed by Halsey;

(iv) executed counterparts of the Bill of Sale and the Assignment of Intellectual Property, in each case executed by Halsey, and such other instruments, in form and substance satisfactory to Watson, as may be requested by Watson to transfer the Purchased Assets to Watson or evidence such transfer on the public records;

(v) executed counterparts of each Ancillary Document to which Halsey is a party other than the Ancillary Documents delivered pursuant to clauses (iii) and (iv) above;

(vi) a true and complete copy, certified by the Secretary or an Assistant Secretary of Halsey, of the resolutions duly and validly adopted by the board of directors of Halsey evidencing its authorization of the execution and delivery of

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this Agreement, the Third Amendment and the Ancillary Documents and the consummation of the transactions contemplated hereby and thereby;

(vii) a certificate of the Secretary or an Assistant Secretary of Halsey certifying the names and signatures of the officers of Halsey authorized to sign this Agreement, the Third Amendment and the Ancillary Documents and the other documents to be delivered hereunder and thereunder;

(viii) a certificate of a duly authorized officer of Halsey certifying that the representations and warranties of Halsey contained in this Agreement shall be true and correct in all material respects as of the Closing;

(ix) a favorable opinion, dated the Effective Date and addressed to Watson , from St. John & Wayne, L.L.C., special New York counsel for Halsey, in form and substance satisfactory to Watson;

(x) such UCC termination statements and other documents as may be required by Watson to ensure that the Purchased Assets are conveyed free and clear of any Encumbrances; and

(xi) fully executed copies of the Halsey and Guarantor Transfer Consent, the Secured Creditors' Transfer Consent and any other consents required for an effective assignment of the Assigned Rights by Watson to Investor Group.

Section 3.4 Closing Deliveries by Investors to Halsey. At the Closing, each Investor shall deliver or cause to be delivered to Halsey in connection with the Halsey/Investor Group Transaction:

(i) such Investor's portion of the Investor Group Purchase Price by wire transfer in immediately available funds to the Investor Group Purchase Price Bank Account;

(ii) executed counterparts of this Agreement and the 2004 Debenture Purchase Agreement; and

(iii) all authorizations, consents, orders and approvals of all Governmental Authorities and officials and all third party consents and estoppel certificates, each in form and substance satisfactory to Halsey in its sole discretion, which Halsey in its sole discretion deems necessary or desirable for the consummation of the transactions contemplated by this Agreement and 2004 Debenture Purchase Agreement including all third party consents required under any contracts.

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Section 3.5 Closing Deliveries by the Investor Group to Watson. At the Closing, the Investors shall deliver or cause to be delivered to Watson in connection with the Investor Group/Watson Transaction:

(i) the Watson Loan Purchase Cash Amount by wire transfer in immediately available funds to the Watson Loan Purchase Price Bank Account; and

(ii) executed counterparts of this Agreement.

Section 3.6 Closing Deliveries by Watson to Halsey. At the Closing, Watson shall deliver or cause to be delivered to Halsey in connection with the transfer of the Purchased Assets:

(i) a receipt for the Third Amendment Cash Amount;

(ii) executed counterparts of this Agreement, the Third Amendment and the Ancillary Documents, in each case executed by Watson;

(iii) a true and complete copy, certified by the Secretary or an Assistant Secretary of Watson, of the resolutions duly and validly adopted by the Board of Directors of Watson evidencing its authorization of the execution and delivery of this Agreement, the Third Amendment, the Ancillary Documents and the consummation of the transactions contemplated hereby and thereby;

(iv) a certificate of a duly authorized officer of Watson certifying that the representations and warranties of Watson contained in this Agreement shall be true and correct in all material respects as of the Effective Date; and

(v) the promissory note dated December 20, 2002 in the principal amount of $17,500,000 issued by Halsey, as maker, to Watson, and the promissory note dated December 20, 2002 in the principal amount of $3,901,331 issued by Halsey, as maker, to Watson, each marked "cancelled".

Section 3.7 Closing Deliveries by Watson to the Investors. At the Closing, Watson shall deliver or cause to be delivered to the Investor Group Nominee in connection with the Investor Group/Watson Transaction:

(i) a receipt for the Watson Loan Purchase Cash Amount; and

(ii) executed counterparts of each Transaction Document to which Watson is a party;

(iii) the originally executed secured promissory note in the aggregate principal amount of $5,000,000.00, duly endorsed by Watson (without recourse

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or warranty to Watson except as set forth in this Agreement), endorsing Watson's interest in such note to the Investor Group Nominee; and

(iv) all Assigned Security in the possession of Watson.

Section 3.8 Effective Date. The effective date of the Halsey/Investor Group Transaction, Watson/Halsey Transaction and the Investor Group/Watson Transaction (the "Effective Date") shall be the date on which each of the Parties have signed this Agreement and each of the requirements set forth in Sections 3.2 to 3.7 of this Agreement shall have been satisfied. On the Effective Date, the Investor Group/Watson Transaction shall become effective immediately upon the effectiveness of the Watson/Halsey Transaction.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE PARTIES.

Section 4.1 Mutual Representations and Warranties. As an inducement to the other Parties to enter into this Agreement, each Party hereby severally and not jointly represents and warrants to the other Parties as follows:

(a) Organization, Authority and Qualification. Such Party is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation and has all necessary power and authority to enter into this Agreement and the Transaction Documents to which it is a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. Such Party is duly licensed or qualified to do business and is in good standing in each jurisdiction which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary. The execution and delivery of this Agreement and the Transaction Documents by such Party, the performance by such Party of its obligations hereunder and thereunder and the consummation by such Party of the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of such Party and its stockholders. This Agreement and the Transaction Documents, upon their execution shall have been duly executed and delivered by such Party, and (assuming due authorization, execution and delivery by the other Parties thereto) this Agreement and the Transaction Documents to which it is a party, upon their execution, shall constitute, legal, valid and binding obligations of such Party, enforceable against such Party in accordance with their respective terms, subject, as to enforceability, to bankruptcy, insolvency, moratorium, reorganization and other laws of general application relating to or affecting creditors' rights and to general equitable principles, provided, however, that Watson makes no representation with respect to the collectability of the Loan or any portion thereof.

(b) No Conflict. The execution, delivery and performance of this Agreement and the Transaction Documents to which it is a party do not and will not (a) violate, conflict

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with or result in the breach of any provision of the certificate of incorporation or by-laws (or similar organizational documents) of such Party, (b) conflict with or violate any Law or Governmental Order applicable to such Party, or any of its assets, properties or businesses, or (c) conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in the creation of any Encumbrance on any of the Purchased Assets or the Transaction Documents, as the case may be, pursuant to, any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which such Party is a party or by which any of its material assets is bound or affected.

(c) Litigation There are no pending or threatened actions, suits or proceedings against or affecting such Party or any of its properties by or before any court or administrative agency in respect of this Agreement, the Transaction Documents, the Purchased Assets or the 2004 Debentures, as the case may be, which are reasonably likely to materially adversely affect the ability of such Party to perform its obligations hereunder or call into question the validity of this Agreement or the Transaction Documents or the enforceability thereof in accordance with the respective terms thereof.

(d) Governmental Consents and Approval. Neither the execution and delivery by such Party of this Agreement or the Transaction Documents to which it is a party nor the consummation by such Party of any of the transactions contemplated hereby or thereby nor the performance by such Party of any of its obligations requires the consent or approval of, the giving of notice to, the filing or registration with, or the taking of any other action in respect of any Governmental Authority.

(e) Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement and the Transaction Documents based upon arrangements made by or on behalf of such Party.

(f) Arm's Length Transactions. The transactions entered into by and between the Parties hereto pursuant to this Agreement and the Transaction Documents are Arm's Length transactions. For purposes hereof, the term "Arm's Length" means a transaction or negotiation in which each party is completely independent of each other, seeks to obtain terms which are most favorable to it and has no economic or other interest in making concessions to the other party.

Section 4.2 Representations and Warranties of Halsey. As an inducement to the Investor Group and Watson to enter into this Agreement, Halsey hereby represents and warrants to the Investor Group and Watson as follows as of the Effective Date:

(a) Title. Halsey has good and marketable title to all the Purchased Assets, free and clear of all Encumbrances. Halsey has the complete and unrestricted power and

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unqualified right to sell, assign, transfer, convey and deliver the Purchased Assets to Watson without penalty or other adverse consequences. Following the consummation of the Watson/Halsey Transaction contemplated by this Agreement, the Third Amendment, and the Ancillary Documents and the execution of the instruments of transfer contemplated by this Agreement, the Third Amendment and the Ancillary Documents, Watson will own, with good, valid and marketable title, or lease, under valid and subsisting leases, or otherwise acquire the interests of Halsey in the Purchased Assets, free and clear of any Encumbrances, and without incurring any penalty or other adverse consequence, including any increase in rentals, royalties, or license or other fees imposed as a result of, or arising from, the consummation of the transactions contemplated by this Agreement.

(b) Closing Date Transactions. On the Effective Date, Watson will have had conveyed to it the Purchased Assets, free and clear of all Encumbrances.

(c) Insolvency. Halsey has not taken any action nor have any other steps been taken or legal proceedings commenced or threatened against Halsey for its dissolution, winding-up, bankruptcy, examination, administration, court protection, reorganization or appointment of a receiver, examiner, trustee or similar official with respect to Halsey or any of its assets or property or for the granting of suspension of payments to Halsey.

(d) Other Transactions. As of the Effective Date, except for this Agreement, there are no contracts or agreements to which Halsey is a party providing for any lease, sale, disposition of title or beneficial ownership of the Purchased Assets.

(e) Loan Documents. Halsey has provided to the Investor Group true, correct and complete copies of the Loan Agreement (including all waivers, supplements, forbearances and amendments thereto) and all schedules and exhibits to the Loan Agreement the other Loan Documents specified in Schedule II. Without in any way limiting the representations and warranties of Watson contained in this Agreement, Investor is assuming all risk with respect to the accuracy or sufficiency of such documents and information.

(f) Claimant Ownership. As of the Effective Date, the Claimants and their Affiliates collectively hold Debentures in an aggregate outstanding amount of $71,001,035 and such portion of Debentures held by the Claimants and their Affiliates collectively represents in excess of 79% of the aggregate outstanding amount of Debentures.

EXCEPT AS OTHERWISE PROVIDED HEREIN, HALSEY MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PURCHASED ASSETS, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE.

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Section 4.3 Representation and Warranties of the Investors. (A) As an inducement to Watson to enter into this Agreement, each Investor severally and not jointly hereby represents and warrants to Watson as follows as of the Effective Date:

(a) Insolvency. Such Investor has not taken any action nor, to its knowledge have any other steps been taken or legal proceedings commenced or threatened against the Investor for its dissolution, winding-up, bankruptcy, examination, administration, court protection, reorganization or appointment of a receiver, examiner, trustee or similar official with respect to the Investor or any of its assets or property or for the granting of suspension of payments to the Investor.

(b) Information. Investor is a sophisticated buyer with respect to the Assigned Rights, has adequate information concerning the business and financial condition of Halsey to make an informed decision regarding the Assigned Rights, and has independently, without reliance upon Watson and based on such information as it deemed appropriate, made its own analysis and decision to enter into this Agreement, except that Investor has relied upon the representations, warranties and covenants of Watson contained in this Agreement. Investor acknowledges that Watson may possess material information with respect to Halsey not known to the Investor which may be material to a decision to buy the Assigned Rights (the "Watson Information"), that Investor has determined to acquire the Assigned Rights notwithstanding its lack of knowledge of Watson Information and that Watson shall have no liability to Investor to the extent such liability arises from, is caused by or relates to the non-disclosure of Watson Information and Investor hereby releases Watson therefrom with respect to such nondisclosure; provided, however, that the foregoing limitation shall not in any way limit the liability of Watson for a breach of its representations and warranties contained in this Agreement.

(c) Acknowledgments. Investor acknowledges that Watson has not made and does not make any representation or warranty, whether express or implied, except as expressly set forth in this Agreement. Investor acknowledges that the sale of the Assigned Rights by Watson to Investor is irrevocable, and that Investor shall have no recourse to Watson, except with respect to breaches of representations, warranties and covenants expressly set forth in this Agreement, and pursuant to the indemnities contained herein. Investor acknowledges that the consideration paid pursuant hereto for the purchase of the Assigned Rights may differ both in kind and amount from any payments or distributions which may ultimately be received with respect thereto. Investor acknowledges that it is assuming the risk of full or partial loss which is inherent with the credit, and all collectability risks associated therewith.

(d) Securities Act. Investor is an "accredited investor" within the meaning of Section 2(15) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "Securities Act"). Without implying characterization of the Assigned Rights as a "security" within the meaning of any applicable securities laws,

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Investor is not purchasing the Assigned Rights with a view to resale or distribution in a manner that would violate applicable securities laws.

(e) No Reliance. Investor acknowledges that Watson has not given Investor any investment advice, credit information or opinion on whether the purchase of the Assigned Rights is prudent. Except as otherwise provided in this Agreement, Investor has not relied and will not rely on Watson to furnish or make available any documents or other information regarding the credit, affairs, financial condition or business of Halsey or any obligor, or any other matter concerning Halsey or any obligor. Investor is assuming all risk with respect to the accuracy or sufficiency of the Assigned Agreements, other than any representations, warranties or covenants made by Watson in this Agreement.

(f) Subordination Provisions. Investor expressly acknowledges that it has notice of Section 11 of the Subordination Agreement.

Section 4.4 Representation and Warranties of Watson. As an inducement to the Investors to enter into this Agreement, Watson hereby represents and warrants to the Investors as follows as of the Effective Date:

(a) Title. (A) Watson is the sole legal and beneficial owner and holder of the Assigned Rights and has good title to the Assigned Rights free and clear of any lien, security interest or other adverse claim; (B) the Assigned Agreements are the legal, valid and binding obligations of Watson, enforceable against Watson in accordance with their terms, subject, as to enforceability, to bankruptcy, insolvency, moratorium, reorganization and other laws of general application relating to or affecting creditors' rights and to general equitable principles, provided, however, that Watson makes no representation with respect to the collectability of the Loan or any portion thereof and
(C) Watson has not received any written notice that (i) any payment or other transfer made to or for the account of Watson from or on account of Halsey or any of its subsidiaries under the Assigned Rights is or may be void or avoidable as an actual or constructive fraudulent transfer or as a preferential transfer or (ii) the Assigned Rights, or any portion of them, are void, voidable, unenforceable or subject to any claim, counterclaim, setoff, defense, action, demand, litigation (including administrative proceedings or derivative actions), encumbrance, right (including expungement, avoidance, reduction, contractual or equitable subordination, or otherwise) or defect, other than those created pursuant to the Loan Documents, the effect of which is, or would be, materially and adversely to affect the Assigned Rights in whole or in part.

(b) Insolvency. Watson has not taken any action nor, to its knowledge have any other steps been taken or legal proceedings commenced or threatened against Watson for its dissolution, winding-up, bankruptcy, examination, administration, court protection, reorganization or appointment of a receiver, examiner, trustee or similar official with respect to Watson or any of its assets or property or for the granting of suspension of payments to Watson.

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(c) Acknowledgments. Watson acknowledges that no Investor has made and does not make any representation or warranty, whether express or implied, except as expressly set forth in this Agreement. Watson acknowledges that the sale of the Assigned Rights by Watson to the Investor Group is irrevocable, and that Watson shall have no recourse to the Investors, except with respect to breaches of representations, warranties and covenants expressly set forth in this Agreement, and pursuant to the indemnities contained herein. Watson acknowledges that the consideration paid pursuant hereto for the purchase of the Assigned Rights may differ both in kind and amount from any payments or distributions which may ultimately be received with respect thereto.

(d) No Reliance. Watson acknowledges that the Investors have not given Watson any investment advice, credit information or opinion on whether the sale of the Assigned Rights is prudent. Except as otherwise provided in this Agreement, Watson has not relied and will not rely on the Investors to furnish or make available any documents or other information regarding the credit, affairs, financial condition or business of Halsey or any obligor, or any other matter concerning Halsey or any obligor.

(e) Securities Act. Watson is an "accredited investor" within the meaning of Section 2(15) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. Without characterizing the Assigned Rights as a "security" within the meaning of applicable securities laws, Watson has not made any offers to sell, or solicitations of offers to buy, any portion of the Assigned Rights in violation of any applicable securities laws.

(f) Information. Watson is a sophisticated seller with respect to the Assigned Rights, has adequate information concerning the business and financial condition of Halsey to make an informed decision regarding the sale of the Assigned Rights and has independently, without reliance upon Investor and based on such information as Watson has deemed appropriate, made its own analysis and decision to enter into this Agreement, except that Watson has relied upon the representations, warranties and covenants of Investor contained in this Agreement. Watson acknowledges that the Investors currently may possess and hereafter may come into possession of certain information concerning the Assigned Rights, Halsey, or its affiliates which is not known to Watson and which may be material to a decision to sell the Assigned Rights (the "Investor Group Information"), that Watson has determined to sell the Assigned Rights notwithstanding its lack of knowledge of the Investor Group Information, and that Investors shall have no liability to Watson and Watson hereby waives and releases any claims which it might have against Investors or any Investor Indemnified Parties (as hereinafter defined), whether pursuant to applicable securities laws or otherwise, with respect to the non-disclosure of Investor Group Information; provided, however, that the foregoing limitation shall not in any way limit the liability of an Investor for a breach of its representations and warranties contained in this Agreement.

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ARTICLE V

INDEMNIFICATION

Section 5.1 Indemnification by Halsey. (a) Each Watson Indemnified Party and each Investor Group Indemnified Party shall be indemnified and held harmless by Halsey for and against any and all Liabilities, losses, diminution in value, damages, claims, costs and expenses, interest, awards, judgments and penalties (including attorneys' and consultants' fees and expenses) actually suffered or incurred by them (including any Action brought or otherwise initiated by any of them) (hereinafter a "Loss") (excluding indirect consequential or punitive damages), arising out of or resulting from:

(i) the breach of any representation, or warranty made by Halsey contained in this Agreement, the Third Amendment and the Ancillary Documents (it being understood that such representations and warranties shall be interpreted without giving effect to any limitations or qualifications as to "materiality" (including the word "material") set forth therein);

(ii) the breach of any covenant or agreement by Halsey contained in this Agreement, the Third Amendment and the Ancillary Documents; and

(iii) any and all Losses suffered or incurred by Watson by reason of or in connection with any claim or cause of action of any third party to the extent arising out Halsey's use, manufacture, sale or distribution of the Purchased Assets prior to the Effective Date.

(b) To the extent that Halsey's undertakings set forth in this
Section 5.1 may be unenforceable, Halsey shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all Watson/Investor Losses incurred by the Watson/Investor Group Indemnified Parties.

Section 5.2 Indemnification by the Investor. (a) Halsey and their Affiliates, officers, directors, employees, agents, successors and assigns (each an "Halsey Indemnified Party") shall be indemnified and held harmless by each Investor for and against any and all Losses (excluding indirect consequential or punitive damages), arising out of or resulting from the breach of any representation, warranty or covenant made by such Investor contained in this Agreement or the Transaction Documents. To the extent that an Investor's undertakings set forth in this Section 5.2 may be unenforceable, such Investor shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all Losses incurred by the Halsey Indemnified Parties.

(b) Watson and its Affiliates, officers, directors, employees, agents, successors and assigns (each a "Watson Indemnified Party") shall be indemnified and held harmless by each Investor for and against any and all Losses arising out of or resulting from:

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(i) the breach of any representation or warranty made by such Investor contained in this Agreement;

(ii) the non-performance by such Investor of any obligation of such Investor under this Agreement (to the extent such obligations are to be performed on or after the Effective Date);

(iii) the Assigned Rights, the Loan or the Assigned Agreements as a result or consequence of any act or omission by such Investor or any of its Investor Indemnified Parties occurring on or after the Effective Date; and

(iv) the non-performance by such Investor of any obligation assumed by Investor under this Agreement (to the extent such obligations are to be performed on or after the Effective Date).

(c) Each Watson Indemnified Party shall be indemnified and held harmless by the Claimants for and against any and all Losses arising out of or resulting from the return of the Third Amendment Cash Amount by Watson to the estate of Halsey or any of its subsidiaries or any other Losses suffered or incurred by Watson by reason of or in connection with the assertion, by the estate of Halsey or any of its subsidiaries or any trustee or other representative appointed for any such estate, of avoiding powers provided under Sections 544, 545, 547, 548, 549 and 550 of the Bankruptcy Code or analogous state law, but in each case only with respect to such assertions made regarding the Third Amendment Cash Amount. Notwithstanding anything to the contrary in this Agreement, (i) the aggregate liability of the Claimants under this Section 5.2(c) shall be limited to $5,000,000.00 (it being agreed by the Claimants, for the purposes of this Section 5.2(c), that reasonable attorneys' and consultants' fees and expenses shall be separately indemnified by the Claimants and shall not be included in the computation of aggregate liability under this clause (i)),
(ii) no Claimant shall have any liability under this Section 5.2(c) in excess of its Pro Rata Portion of the aggregate liability of the Claimants hereunder and
(iii) the Claimants liability hereunder shall survive until the expiration of applicable statute of limitations (with extensions) with respect to the matters addressed in this Section 5.2(c).

(d) To the extent that such Investor's undertakings set forth in this Section 5.2(b) or Section 5.2(c) may be unenforceable, such Investor shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all Losses incurred by the Watson Indemnified Parties.

Section 5.3 Indemnification by Watson. (a) Each Investor and its respective Affiliates, officers, directors, employees, agents, successors and assigns (each an "Investor Indemnified Party") shall be indemnified and held harmless by Watson for and against any and all Losses (excluding indirect consequential or punitive damages), arising out of or resulting from:

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(i) the breach of any of Watson's representations, warranties, covenants or agreements in this Agreement; and

(ii) the non-performance by Watson of any obligation of Watson under this Agreement (to the extent such obligations are to be performed on or after the Effective Date).

(b) Each Halsey Indemnified Party shall be indemnified and held harmless by Watson for and against any and all Losses suffered or incurred by Halsey by reason of or in connection with any claim or cause of action by any third party to the extent arising out of Watson's use, manufacture, sale or distribution of the Purchased Assets on or after the Effective Date.

(c) Notwithstanding anything to the contrary in this Agreement, the liability of Watson under (i) this Section 5.3(a) shall be limited to $1,000,000.00 and (ii) this Section 5.3(b) shall be limited to $4,658,516. To the extent that Watson's undertakings set forth in this Section 5.3 may be unenforceable, Watson shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all Losses incurred by the Investor Indemnified Parties or Halsey Indemnified Parties as the case may be.

Section 5.4 Notice of Loss; Third Party Claims. (a) An Indemnified Party shall give the Indemnifying Party notice of any matter which an Indemnified Party has determined has given or could give rise to a right of indemnification under this Agreement, within 60 days of such determination, stating the amount of the Loss, if known, and method of computation thereof, and containing a reference to the provisions of this Agreement in respect of which such right of indemnification is claimed or arises.

(b) If an Indemnified Party shall receive notice of any Action, audit, demand or assessment (each, a "Third Party Claim") against it or which may give rise to a claim for the Loss under this Article V, within 30 days of the receipt of such notice, the Indemnified Party shall give the Indemnifying Party notice of such Third Party Claim; provided, however, that the failure to provide such notice shall not release the Indemnifying Party from any of its obligations under this Article V except to the extent that the Indemnifying Party is materially prejudiced by such failure and shall not relieve the Indemnifying Party from any other obligation or Liability that it may have to any Indemnified Party otherwise than under this Article V. If the Indemnifying Party acknowledges in writing its obligation to indemnify the Indemnified Party hereunder against any Losses that may result from such Third Party Claim, then the Indemnifying Party shall be entitled to assume and control the defense of such Third Party Claim at its expense and through counsel of its choice if it gives notice of its intention to do so to the Indemnified Party within ten days of the receipt of such notice from the Indemnified Party; provided, however, that if there exists or is reasonably likely to exist a conflict of interest that would make it inappropriate in the reasonable judgment of the Indemnified

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Party for the same counsel to represent both the Indemnified Party and the Indemnifying Party, then the Indemnified Party shall be entitled to retain its own counsel in each jurisdiction for which the Indemnified Party determines counsel is required, at the expense of the Indemnifying Party. In the event that the Indemnifying Party exercises the right to undertake any such defense against any such Third Party Claim as provided above, the Indemnified Party shall cooperate with the Indemnifying Party in such defense and make available to the Indemnifying Party, at the Indemnifying Party's expense, all witnesses, pertinent records, materials and information in the Indemnified Party's possession or under the Indemnified Party's control relating thereto as is reasonably required by the Indemnifying Party. Similarly, in the event the Indemnified Party is, directly or indirectly, conducting the defense against any such Third Party Claim, the Indemnifying Party shall cooperate with the Indemnified Party in such defense and make available to the Indemnified Party, at the Indemnifying Party's expense, all such witnesses, records, materials and information in the Indemnifying Party's possession or under the Indemnifying Party's control relating thereto as is reasonably required by the Indemnified Party. No such Third Party Claim may be settled by the Indemnifying Party without the prior written consent of the Indemnified Party, which consent shall not be unreasonably withheld.

Section 5.5 Fees and Expenses. (a) Watson shall pay and be liable for the payment of all costs and expenses of Watson in respect of the Assigned Rights incurred or chargeable prior to the Effective Date.

(b) Investor Group shall pay and be liable for the payment of all costs and expenses of Investors in respect of the Assigned Rights incurred or chargeable to any period on and after the Effective Date.

(c) If Investor Group receives any reimbursement in cash paid by Halsey for the fees and/or expenses which previously were paid by Watson, Investor Group shall promptly deliver to Watson the portion of the fees and/or expenses received by Investor which previously had been paid by Watson.

ARTICLE VI

ADDITIONAL AGREEMENTS

Section 6.1 Further Assurances. (a) Each of the Parties hereby agree to execute and deliver, or cause to be executed and delivered, such other documents, instruments and agreements, and take such other actions, as another Party may reasonably request in connection with the transactions contemplated by this Agreement, including, without limitation, compliance with Section 11(b) of the Subordination Agreement, and the delivery of any notices or other documents or instruments which may be required in connection with the transfer of the Purchased Assets, the 2004 Debentures and the Assigned Rights.

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Section 6.2 UCC Financing Statements. (a) Watson hereby authorizes Investors to file one or more amendments to financing or continuation statements, including, without limitation, one or more amendments to financing statements indicating that Watson has assigned of record all of its power to authorize an amendment to financing statements covering the assets or personal property of Halsey or any of its subsidiaries, in each case without the signature of Watson. Watson ratifies its authorization for the Investor Group acting through the Investor Group Nominee to have filed such amendments to financing statements or continuation statements filed prior to the date hereof.

(b) Halsey hereby authorizes Watson to file one or more amendments to financing or continuation statements, including, without limitation, one or more amendments to financing statements indicating that Halsey has assigned of record all of their power to authorize an amendment to financing statements covering the Purchased Assets, in each case without the signature of Halsey. Halsey ratifies its authorization for Watson to have filed such amendments to financing statements or continuation statements filed prior to the date hereof.

(c) The Investor Group hereby releases any and all Encumbrances against the Purchased Assets and hereby authorizes each of Halsey and Watson to file one or more termination statements to any financing or continuation statements to terminate any and all Encumbrances covering the Purchased Assets (but only with respect to such Purchased Assets and not with respect to any other property covered by such financing or continuation statements), in each case without the signature of the Investor Group.

Section 6.3 Further Notices. Each Claimant hereby agrees to provide Watson written notice of the following events within three Business Days of their occurrence: (i) the receipt by a Claimant of any payment or other property (other than equity or debt securities of the Company) on account of such Claimant's Debentures, (ii) the commencement by or against any of the Loan Parties of any bankruptcy, insolvency, arrangement, reorganization, receivership or relief proceeding or similar case or proceeding under any federal or state bankruptcy or similar law and (iii) any distribution of all or any of the assets of the Loan Parties upon the dissolution, winding up, total or partial liquidation, arrangement, reorganization, adjustment, protection, relief or composition of such Loan Party or its debts, whether in any bankruptcy, insolvency, arrangement, reorganization, receivership or relief proceeding or similar case or proceeding under any federal or state bankruptcy or similar law and (iv) any assignment for the benefit of creditors or any other marshalling of the assets and liabilities of such Loan Parties or otherwise. The Claimants' obligations under clause (i) of this Section 6.3 shall terminate upon the Contingent Purchase Termination Date. The Claimants' obligations under clauses
(ii)-(iv) of this Section 6.3 shall terminate when the Claimants' obligation under Section 5.2(c) expire.

Section 6.4 Subrogation. To the extent that any Party enforces any claim for indemnification or other right, claim or remedy against another Party under this Agreement and receives payment or another remedy from such Party in respect of such right, claim or remedy, the Parties agree that to the extent permitted by law and the Assigned Agreements, without the need for further action on the part of any Party, the indemnifying Party shall be subrogated to all

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rights of the indemnified Party against any other entity with respect to such right, claim or remedy to the extent that the indemnified Party receives such payment or other remedy from the indemnifying Party (including, without limitation, with respect to the rights reserved by Watson under Section 2.3(a) in the event the Claimants make any payments under Section 5.2(c)).

Section 6.5 Public Announcements. Each Party agrees not to make, or cause to be made, any press release or public announcement in respect of this Agreement or the transactions contemplated hereby or otherwise communicate with any news media without the prior written consent of Watson, the Company and the Claimants, which consents shall not be unreasonably withheld, and the Parties shall cooperate as to the timing and contents of any such press release, public announcement or communication.

ARTICLE VII

GENERAL PROVISIONS

Section 7.1 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by an internationally recognized overnight courier service, by facsimile or registered or certified mail (postage prepaid, return receipt requested) to the respective parties hereto at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 7.1):

If to Halsey, at:

Halsey Drug Co., Inc.
695 No. Perryville Road
Rockford, Illinois 61107
Attention: Chief Executive Officer
Fax: (815) 399-9710

If to Watson, at:

Watson Pharmaceuticals, Inc.,
311 Bonnie Circle
Corona, California 92880
Attention: Chief Financial Officer

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Fax: (909) 279-8094 cc: General Counsel

If to the Investor Group, to the Investor Group Nominee at:

Galen Partners III, L.P.

610 Fifth Avenue, 5th Fl.
New York, New York 10020
Attention: Chief Financial Officer
Fax: (212) 218-4999

Section 7.2 Expenses. Except as otherwise specified in this Agreement or any other Transaction Document, all costs and expenses, including fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such costs and expenses, whether or not the Closing shall have occurred.

Section 7.3 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any Law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect for so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either party hereto. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible.

Section 7.4 Entire Agreement. This Agreement and the Transaction Documents constitute the entire agreement of the Parties with respect to the subject matter hereof and thereof and supersede all prior agreements and undertakings, both written and oral, between the Parties with respect to the subject matter hereof and thereof.

Section 7.5 Assignment. This Agreement may not be assigned by operation of law or otherwise without the express written consent of each of the Parties (which consent may be granted or withheld in the sole discretion of each of the Parties); provided, however, that Watson may assign this Agreement or any of its rights and obligations hereunder to one or more Affiliates of Watson without the consent of the other Parties, provided further however that Watson shall remain, upon such assignment, liable in respect of its obligations under
Section 5.3, 5.4, 6.1, 6.4 and 6.5.

Section 7.6 Amendment. This Agreement may not be amended or modified except (a) by an instrument in writing signed by, or on behalf of, each of the Parties or (b) by a waiver in accordance with Section 7.7.

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Section 7.7 Waiver. Any party to this Agreement may (a) extend the time for the performance of any of the obligations or other acts of the other Parties, (b) waive any inaccuracies in the representations and warranties of the other Parties contained herein or in any document delivered by the other Parties pursuant hereto or (c) waive compliance with any of the agreements of the other Parties or conditions to such Party's obligations contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the Party to be bound thereby. Any waiver of any term or condition shall not be construed as a waiver of any subsequent breach or a subsequent waiver of the same term or condition, or a waiver of any other term or condition of this Agreement. The failure of any Party hereto to assert any of its rights hereunder shall not constitute a waiver of any of such rights. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.

Section 7.8 No Third Party Beneficiaries. Except for the provisions of Article V relating to indemnified parties, this Agreement shall be binding upon and inure solely to the benefit of the Parties and their respective successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person.

Section 7.9 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts executed in and to be performed in that State. All Actions arising out of or relating to this Agreement shall be heard and determined exclusively in any New York federal court sitting in the Borough of Manhattan of The City of New York, provided, however, that if such federal court does not have jurisdiction over such Action, such Action shall be heard and determined exclusively in any New York state court sitting in the Borough of Manhattan of The City of New York. Consistent with the preceding sentence, the Parties hereto hereby (a) submit to the exclusive jurisdiction of any federal or state court sitting in the Borough of Manhattan of The City of New York for the purpose of any Action arising out of or relating to this Agreement brought by any party hereto and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any such Action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the Action is brought in an inconvenient forum, that the venue of the Action is improper, or that this Agreement or the transactions contemplated by this Agreement may not be enforced in or by any of the above-named courts.

Section 7.10 Waiver of Jury Trial. Each of the Parties hereby waives to the fullest extent permitted by applicable law any right it may have to a trial by jury with respect to any litigation directly or indirectly arising out of, under or in connection with this Agreement or the transactions contemplated by this Agreement. Each of the Parties hereby (a) certifies that no representative, agent or attorney of the other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver and (b) acknowledges that it has been induced to enter into this Agreement and the transactions contemplated by this Agreement, as applicable, by, among other things, the mutual waivers and certifications in this Section 7.10.

Umbrella Agreement

Section 7.11 Currency. Unless otherwise specified in this Agreement, all references to currency, monetary values and dollars set forth herein shall mean United States (U.S.) dollars and all payments hereunder shall be made in United States dollars.

Section 7.12 Counterparts. This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement.

Umbrella Agreement

IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized.

HALSEY DRUG CO., INC.

By:________________________________
Name:
Title:

WATSON PHARMACEUTICALS, INC.

By:________________________________
Name:
Title:

Umbrella Agreement

By: Claudius, L.L.C., General Partner
610 Fifth Avenue, 5th Fl.
New York, New York  10019

___________________________
By: Srini Conjeevaram
Its: General Partner

GALEN PARTNERS INTERNATIONAL, III, L.P.     CARE CAPITAL INVESTMENTS II, LP
By: Claudius, L.L.C., General Partner       By: Care Capital II, LLC, as general
610 Fifth Avenue, 5th Floor                 partner
New York, New York  10020                   47 Hulfish St., Suite 310
                                            Princeton, NJ 08542

                                            By:_______________________________
___________________________                 Name:  David R. Ramsay
By: Srini Conjeevaram                       Title: Authorized Signatory
Its: General Partner
                                            ESSEX WOODLANDS HEALTH
GALEN EMPLOYEE FUND III, L.P.               VENTURES V, L.P.
By: Wesson Enterprises, Inc.                190 South LaSalle Street, Suite 2800
610 Fifth Avenue, 5th Floor                 Chicago, IL 60603
New York, New York 10020

___________________________                 __________________________________
By: Bruce F. Wesson                         By:  Immanuel Thangaraj
Its: General Partner                        Its: Managing Director

MICHAEL WEISBROT                            SUSAN WEISBROT
1136 Rock Creek Road                        1136 Rock Creek Road
Gladwyne, Pennsylvania 19035                Gladwyne, Pennsylvania  19035

___________________________                 __________________________________

DENNIS ADAMS
120 Kynlyn Road
Radnor, Pennsylvania  19312

___________________________

PETER STIEGLITZ                             GEORGE E. BOUDREAU
RJ Palmer LLC                               222 Elbow Lane
156 West 56th Street, 5th Floor             Haverford, PA  19041
New York, New York 10019

___________________________                 _________________________________

JOHN E. HEPPE, JR.
237 W. Montgomery Avenue
Haverford, Pennsylvania 19041

___________________________

Umbrella Agreement

SCHEDULE I

PURCHASED ASSETS

1. Halsey's Drug Master File for manufacturing doxycycline monohydrate active pharmaceutical ingredient ("API") and any equivalent filings with the governing health authorities of any other country.

2. Any and all registrations, permits, licenses, authorizations, approvals, presentations, notifications of filings, in Halsey's possession, which are filed with or granted by the governing health authority of any country, and which are required to develop, make, use, sell, import or export doxycycline monohydrate, other than the doxycycline monohydrate API Drug Master File.

3. Halsey's Drug Master File for manufacturing doxycycline hyclate API and any equivalent filings with the governing health authorities of any other country.

4. Any and all registrations, permits, licenses, authorizations, approvals, presentations, notifications of filings, in Halsey's possession, which are filed with or granted by the governing health authority of any country, and which are required to develop, make, use, sell, import or export doxycycline hyclate, other than the doxycycline hyclate API Drug Master File.

5. Abbreviated New Drug Application No. 061717 for 50mg and 100mg doxycylcine hyclate filed with the FDA by Halsey or its Affiliate, and any supplements thereto.

6. Abbreviated New Drug Application No. 089536 for 40mg, 50mg and 325mg acetaminophen; butalbital; caffeine filed with the FDA by Halsey or its Affiliate, and any supplements thereto.

7. All doxycycline monohydrate API and doxycycline hyclate API related equipment owned by Halsey, as described on Schedule IA attached hereto.

8. The products set forth on the invoices set forth on Schedule IB hereto. It being understood among the parties hereto that no additional consideration shall be paid for such products, notwithstanding the prices set forth on such invoices.

Umbrella Agreement

SCHEDULE IA

DOXYCYCLINE MONOHYDRATE API AND
DOXYCYCLINE HYCLATE API EQUIPMENT

GENERALIZED EQUIPMENT LIST FOR DOXYCYCLINE HYCLATE AND DOXYCYCLINE MONOHYDRATE

PRODUCTION
1/19/04

PLANT A- USED FOR THE MANUFACTURE OF DOXYCYCLINE HYCLATE

1. 600-gallon Hydrogenator (Methacycline HCl and Wilkinson's Catalyst)

2. 500-gallon Crystallizer (Precipitation)

3. 32 sq. ft Filter Box (Filtration)

4. Atmospheric Tray Dryer*

5. 500-gallon Reactor (Neutralization)

6. 100-gallon Reactor (HCl /Ethanol absorption)

7. Sparkle Filter (Filtration)

8. 250-gallon Clarity Tank (Clarification)

9. Polishing Filter

10. 350-gallon Reactor (Holding Tank for clarified solution)

11. 10 sq ft PP Filter Box (used to obtain Doxy Hyclate wet cake)

12. Atmospheric Tray Dryer* (Drying of final product)

13. 600-gallon Reactor (Waste Tank used for neutralization prior to transfer into tanker)

14. Fitz-Mill (Shared between both Doxy Hyclate and Doxy Mono)

15. V-blender (Shared between both Doxy Hyclate and Doxy Mono)

* The atmospheric tray dryers are powered by steam and cannot be easy relocated

PLANT B- USED FOR THE MANUFACTURE OF DOXYCYCLINE MONOHYDRATE

1. 100-gallon Dissolution Tank (Doxy Hyclate, Acetone, Water)

2. Inline Filter assembly (Clarification)

3. 300-gallon Precipitation Tank

4. 9 sq ft Filter Box (Doxy mono wet cake)

5. 2-vacuum dryers

6. 500-gallon Reactor (waste)

SCHEDULE IB

[Invoices to be attached]

SCHEDULE II

LOAN DOCUMENTS

1. Loan Agreement dated March 29, 2000

2. Amendment to Loan Agreement dated March 31, 2000

3. Second Amendment to Loan Agreement dated December 20, 2002

4. Third Amendment to Loan Agreement dated February 6, 2004

5. Secured Promissory Note for $17,500,000.00 dated March 31, 2000

6. Secured Promissory Note for $17,500,000.00 dated December 20, 2002

7. Secured Promissory Note for $3,901,331.00 dated December 20, 2002

8. Secured Promissory Note for $5,000,000.00 dated as of December 20, 2002

9. Watson Stock Pledge Agreement dated March 29, 2000

10. Watson Security Agreement dated March 29, 2000

11. Watson Guaranty dated March 29, 2000

12. Watson Guarantors Security Agreement Dated March 29, 2000

13. Real Estate Mortgage by Houba Inc., dated March 29, 2000

14. Subordination Agreement (Mortgage) dated March 29, 2000

15. Subordination Agreement dated March 29, 2000

16. Subordination Agreement dated December 20, 2002

Umbrella Agreement

EXHIBIT 1.1(a)

FORM OF 2004 DEBENTURE PURCHASE AGREEMENT

EXHIBIT 1.1(b)

FORM OF ASSIGNMENT OF INTELLECTUAL PROPERTY

This ASSIGNMENT OF INTELLECTUAL PROPERTY (this "Assignment"), effective the 6th day of February, 2004, is made and entered into by and between Halsey Drug Co., Inc. a New York corporation ("Assignor"), and Watson Pharmaceuticals, Inc., Inc. a Nevada corporation ("Assignee") (each a "Party," and collectively, the "Parties"). Capitalized terms used herein but not otherwise defined herein shall have the meanings set forth in the Watson Umbrella Agreement (defined below).

WHEREAS, Assignor is the owner of each of (i) the patents and patent applications set forth on Schedule A hereto (the "Patents"); (ii) the copyrights, copyright registrations and copyright applications set forth on Schedule B hereto (the "Copyrights"); and (iii) the trademarks, trademark registrations and trademark applications (including any and all goodwill symbolized thereby) set forth on Schedule C hereto (the "Trademarks")
((i)-(iii), collectively, the "Purchased Intellectual Property");

WHEREAS, Assignor and Assignee entered into that certain Watson Umbrella Agreement dated [____________] (the "Watson Umbrella Agreement"), pursuant to which Assignee agreed to purchase the Purchased Assets from Assignor, including all of Assignor's right, title and interest in and to the Purchased Intellectual Property; and

WHEREAS, the execution and delivery of this Assignment is a condition to Closing.

NOW THEREFORE, for the consideration set forth in the Watson Umbrella Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Assignment. Effective upon Closing, Assignor hereby assigns to Assignee all of Assignor's right, title and interest in and to the Purchased Intellectual Property, including all rights therein provided by international conventions and treaties, and the right to sue for past, present and future infringement thereof.

2. Additional Representations and Warranties. In addition to the representations and warranties expressly provided in the Watson Umbrella Agreement, Assignor hereby makes the following representations and warranties with respect to the Purchased Intellectual Property:

1. Assignor is the exclusive owner of the entire and unencumbered right, title and interest in and to the Purchased Intellectual Property and has a valid right to use the Purchased Intellectual Property.

2. To the knowledge of Assignor after due inquiry, the Purchased Intellectual Property is not subject to any outstanding decree, order, injunction, judgment or ruling restricting the use of such

Purchased Intellectual Property or that would impair the validity or enforceability of such Purchased Intellectual Property.

3. No Actions or Claims have been asserted or are pending or, to the knowledge of Assignor after due inquiry, threatened against the Assignor or any subsidiary (i) based upon or challenging or seeking to deny or restrict the use by the Assignor or any its subsidiary of any of the Purchased Intellectual Property, (ii) alleging that any services provided by, processes used by, or products manufactured or sold by the Assignor or any of its subsidiary infringe or misappropriate any intellectual property right of any third party or (iii) alleging that the Purchased Intellectual Property is being licensed or sublicensed in conflict with the terms of any license or other agreement.

4. No person is engaging in any activity that infringes the Purchased Intellectual Property, to the knowledge of Assignor after due inquiry. None of the Assignor or its subsidiary has granted any license or other right to any third party in respect to the Purchased Intellectual Property. The consummation of the transactions contemplated by this Agreement and the Watson Umbrella Agreement will not result in the termination or impairment of any of the Purchased Intellectual Property.

3. Further Assurances. Assignor shall, at the cost and expense of Assignee, timely execute and deliver any additional documents and perform such additional acts necessary or desirable to record and perfect the interest of Assignee in and to the Purchased Intellectual Property, and shall not enter into any agreement in conflict with this Assignment.

4. Governing Law. This Assignment shall be governed by and construed in accordance with the laws of New York, without regard to the conflicts of law rules of such state.

5. Counterparts. This Assignment may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same agreement.

IN WITNESS WHEREOF, each Party has caused this Assignment to be executed by its duly authorized representative.

HALSEY DRUG CO., INC.

By: _______________________________
Name: Andrew D. Reddick
Title: President

HOUBA, INC.

By: _______________________________
Name: Peter A. Clemens
Title: Vice President

WATSON PHARMACEUTICALS, INC.

By: _______________________________
Name:
Title:

Country           Application No.           Patent No.           Filing Date           Issue Date
-------           ---------------           ---------            -----------           ----------

Country           Title           App. No.           Reg. No.           Filing Date           Issue Date
-------           -----           --------           -------            -----------           ----------

Country           Mark           App. No.           Reg. No.           Filing Date           Issue Date
-------           ----           --------           --------           -----------           ----------

Umbrella Agreement

EXHIBIT 1.1(c)

FORM OF BILL OF SALE AND ASSIGNMENT

BILL OF SALE AND ASSIGNMENT, dated as of February 6, 2004 (this "Bill of Sale and Assignment"), from Halsey Drug Co., Inc. a New York corporation (the "Seller"), to Watson Pharmaceuticals, Inc., Inc. a Nevada corporation (the "Purchaser").

WHEREAS, the Seller and the Purchaser have entered into the Umbrella Agreement, dated as of February 6, 2004 (the "Umbrella Agreement"; unless otherwise defined herein, capitalized terms shall be used herein as defined in the Umbrella Agreement); and

WHEREAS, the execution and delivery of this Bill of Sale and Assignment by the Seller is a condition to the obligations of the Purchaser to consummate the transactions contemplated by the Umbrella Agreement;

NOW, THEREFORE, in consideration of the promises and mutual agreements set forth in the Umbrella Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Seller does hereby agree as follows:

1. Sale and Assignment of Purchased Assets and Properties. The Seller hereby sells, assigns, transfers, conveys, grants, bargains, sets over, releases, delivers, vests and confirms unto the Purchaser and its successors and assigns, forever, the entire right, title and interest of the Seller free and clear of all Encumbrances in and to any and all of the Purchased Assets.

2. Obligations and Liabilities Not Assumed. Nothing expressed or implied in this Bill of Sale and Assignment shall be deemed to be an assumption by the Purchaser or its subsidiaries of any Liabilities of the Seller. Neither the Purchaser nor its subsidiaries by this Bill of Sale and Assignment, agree to assume or agree to pay, perform or discharge any liabilities of the Seller of any nature, kind or description whatsoever.

3. Further Assurances. The Seller hereby covenants and agrees that, at any time and from time to time after the date of this Bill of Sale and Assignment, at the Purchaser's request, the Seller will do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, any and all further acts, conveyances, transfers, assignments, and assurances as necessary to grant, sell, convey, assign, transfer, set over to or vest in the Purchaser any of the Purchased Assets.

4. Power of Attorney. The Seller hereby constitutes and appoints the Purchaser, its successors and assigns, the true and lawful attorney and attorneys of the Seller, with full power of substitution, in the name of the Purchaser or in the name and stead of the Seller, but on behalf of and for the benefit of the Purchaser, its successors and assigns (and at the expense of the Seller):

(a) to collect, demand and receive any and all Purchased Assets transferred hereunder and to give receipts and releases for and in respect of the same;

(b) to institute and prosecute in the Seller's name, or otherwise, at the expense and for the benefit of the Purchaser any and all actions, suits or proceedings, at law, in equity or otherwise, which the Purchaser may deem proper in order to collect, assert or enforce any claim, right or title of any kind in or to the Purchased Assets hereby sold and assigned to the Purchaser or intended so to be, to defend or compromise any and all such actions, suits or proceedings in respect of any of such Purchaser Purchased Assets, and to do all such acts and things in relation thereto as the Purchaser shall deem advisable for the collection or reduction to possession of any of such Purchased Assets;

(c) to take any and all other reasonable action designed to vest more fully in the Purchaser the Purchased Assets hereby sold and assigned to the Purchaser or intended so to be and in order to provide for the Purchaser the benefit, use, enjoyment and possession of such Purchased Assets; and

(d) to do all reasonable acts and things in relation to the Purchased Assets sold and assigned hereunder.

The Seller acknowledges that the foregoing powers are coupled with an interest and shall be irrevocable by it or upon its subsequent dissolution or in any manner or for any reason. The Purchaser shall be entitled to retain for its own account any amounts collected pursuant to the foregoing powers, including any amounts payable as interest with respect thereto. The Seller shall from time to time pay to the Purchaser, when received, any amounts that shall be received directly or indirectly by the Seller (including amounts received as interest) in respect of any Purchased Assets sold, assigned or transferred to the Purchaser pursuant hereto.

5. No Third Party Beneficiaries. This Bill of Sale and Assignment shall be binding upon and inure solely to the benefit of the Purchaser and its permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person, any legal or equitable right, benefit or remedy of any nature whatsoever, under or by reason of this Agreement.

6. Severability. If any term or other provision of this Bill of Sale and Assignment is invalid, illegal or incapable of being enforced by any Law or public policy, all other terms and provisions of this Bill of Sale and Assignment shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to either the Seller or the Purchaser

7. Governing Law. This Bill of Sale and Assignment shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts executed in and to be performed in that State (without regard to conflicts of law provisions thereof).

IN WITNESS WHEREOF, this Bill of Sale and Assignment has been executed by the Seller as of the date first above written.

HALSEY DRUG CO., INC

By: _______________________________
Name:
Title:

EXHIBIT 1.1(d)

HALSEY AND GUARANTOR TRANSFER CONSENT

To: The Members of the
Investor Group a
Party to the Umbrella Agreement by and among Halsey Drug Co., Inc., Watson Pharmaceuticals, Inc. and the Investor Group listed as signatories thereto

We refer to that certain Loan Agreement, dated as of March 29, 2000, as amended by a certain Amendment to Loan Agreement dated March 21, 2000, as further amended by a certain Second Amendment to Loan Agreement dated December 20, 2002, as further amended by a certain Third Amendment to Loan Agreement dated February 6, 2004 (as so amended, the "Loan Agreement"), between Halsey Drug Co. Inc., a New York corporation (the "Halsey") and Watson Pharmaceuticals, Inc., a Nevada corporation (the "Lender"), the Watson Security Documents and the Subordination Agreement. Capitalized terms used herein and not otherwise defined shall have the meanings attributed to them in the Loan Agreement.

The undersigned hereby waives any objection it may have or any violation of the Loan Documents, in order to permit Watson to assign all of its right, title and interest in and to the Loan and the Loan Documents to Care Capital Investments II, LP, Essex Woodlands Health Ventures, L.P., Galen Partners III, L.P. and the other purchasers of the Loan listed as signatories to the Umbrella Agreement dated February 6, 2004 by and among Watson, Halsey and the other signatories thereto (the "Investor Group") and to permit Investor Group to assume the obligations of Watson in respect of the Loan and under the Loan Documents. The undersigned also hereby agrees to cooperate with Investor in modifying the Loan Documents in accordance with any reasonable request by Investor Group in furtherance of the assignment and assumption contemplated hereby.

HALSEY DRUG CO., INC.

By:_________________________________________
Name: Andrew D. Reddick
Title: President and Chief Executive Officer

AXIOM PHARMACEUTICAL CORPORATION

By:_________________________________________
Name: Peter A. Clemens
Title: Vice President

HOUBA INC.

By:_________________________________________
Name: Peter A. Clemens

Date: February 6, 2004 Title: Vice President

EXHIBIT 1.1(e)

SECURED CREDITORS' TRANSFER CONSENT

To: The Members of the Investor
Group a Party to the Umbrella Agreement by and among Halsey Drug Co., Inc., Watson Pharmaceuticals, Inc. and the Investor Group listed as signatories thereto

We refer to that certain Subordination Agreement, dated as of December 20, 2002 (the "Subordination Agreement"), between Halsey Drug Co. Inc., a New York corporation (the "Halsey"), Watson Pharmaceuticals, Inc., a Nevada corporation (the "Lender") and the parties listed therein. Capitalized terms used herein and not otherwise defined shall have the meanings attributed to them in the Subordination Agreement.

Pursuant to Section 11(a) of the Subordination Agreement, the undersigned hereby consents to the assignment by Watson of all of its right, title and interest in and to the Watson Term Loans, the Watson Loan Agreement, the Watson Company Security Documents, the Watson Guaranty and the Watson Guarantor Security Documents to Care Capital Investments II, LP, Essex Woodlands Health Ventures V, L.P., Galen Partners III, L.P. and the other purchaser of the Watson Term Loans listed as signatories to the Umbrella Agreement dated February 6, 2004 by and among Watson, Halsey and the other signatories thereto (the "Investor Group"), and the assumption by the Investor Group of the obligations of Watson in respect of the Watson Term Loans, the Watson Loan Agreement, the Watson Company Security Documents, the Watson Guaranty and the Watson Guarantor Security Documents. The undersigned also hereby agrees to cooperate with Investor Group in modifying the Watson Company Security Documents and the Watson Guarantor Security Documents to comply with the terms of Section 11(b) hereto and in accordance with any reasonable request by Investor Group in furtherance of the assignment and assumption contemplated hereby.

[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]

GALEN PARTNERS III, L.P.                     ORACLE STRATEGIC PARTNERS, L.P.
By: Claudius, L.L.C., General Partner        By: Oracle Strategic Capital,
610 Fifth Avenue, 5th Fl.                    L.L.C., General Partner
New York, New York 10019                     200 Greenwich Avenue, 3rd Floor
                                             Greenwich, Connecticut 06830

___________________________                  ___________________________
By: Srini Conjeevaram                        By: Joel Liffman
Its: General Partner                         Its: Authorized Agent

GALEN PARTNERS INTERNATIONAL, III, L.P.      CARE CAPITAL INVESTMENTS II, LP
By: Claudius, L.L.C., General Partner        By: Care Capital II, LLC, as
610 Fifth Avenue, 5th Floor                  general partner
New York, New York 10020                     47 Hulfish St., Suite 310
                                             Princeton, NJ 08542

___________________________
By: Srini Conjeevaram                        By: _______________________
Its: General Partner                         Name: David R. Ramsay
                                             Title: Authorized Signatory

GALEN EMPLOYEE FUND III, L.P.                ESSEX WOODLANDS HEALTH
By: Wesson Enterprises, Inc.                 VENTURES V, L.P.
610 Fifth Avenue, 5th Floor                  190 South LaSalle Street, Suite
New York, New York 10020                     2800
                                             Chicago, IL 60603

___________________________                  ___________________________
By: Bruce F. Wesson                          By: Immanuel Thangaraj
Its: General Partner                         Its: Managing Director

ALAN SMITH                                   PATRICK COYNE
21 Bedlow Avenue                             800 Merion Square Road
Newport, Rhode Island 02840                  Gladwyne, Pennsylvania 19035

___________________________                  ___________________________

MICHAEL WEISBROT                             SUSAN WEISBROT
1136 Rock Creek Road                         1136 Rock Creek Road
Gladwyne, Pennsylvania 19035                 Gladwyne, Pennsylvania 19035

___________________________                  ___________________________

GREG WOOD                                    DENNIS ADAMS
1263 East Calavera Street                    120 Kynlyn Road
Altadena, CA 91001                           Radnor, Pennsylvania 19312

___________________________                  ___________________________

STEFANIE HEITMEYER                           BERNARD SELZ
17759 Road, Route 66                         600 Fifth Avenue, 25th Floor
Fort Jennings, Ohio 45844                    New York, New York 10020

___________________________                  ___________________________

PETER CLEMENS                                ROGER GRIGGS
c/o Halsey Drug Co., Inc.                    c/o Tom Jennings
695 North Perryville Rd.                     7300 Turfway Road
Crimson Building #2                          Suite 300
Rockford, Illinois 61107                     Florence, KY 41042

___________________________                  ___________________________

VARSHA H. SHAH                               HEMANT K. SHAH
29 Chrissy Drive                             29 Chrissy Drive
Warren, New Jersey 07059                     Warren, New Jersey 07059

___________________________                  ___________________________

VARSHA H. SHAH AS CUSTODIAN                  VARSHA H. SHAH AS CUSTODIAN
FOR SACHIN H. SHAH                           FOR SUMEET H. SHAH
29 Chrissy Drive                             29 Chrissy Drive
Warren, New Jersey 07059                     Warren, New Jersey 07059

___________________________                  ___________________________
By: Varshah H. Shah                          By: Varshah H. Shah
Its: Custodian                               Its: Custodian

MICHAEL RAINISCH                             ILENE RAINISCH
c/o Alvin Rainisch                           c/o Alvin Rainisch
300 Flower Lane                              300 Flower Lane
Morganville, New Jersey 07751                Morganville, New Jersey 07751

___________________________                  ___________________________

KENNETH GIMBEL, IRA ACCOUNT                  KENNETH GIMBEL
FBO KENNETH GIMBEL                           2455 Montgomery Avenue
2455 Montgomery Avenue                       Highland Park, Illinois 60035
Highland Park, Illinois 60035

___________________________                  ___________________________
By: __________________________
Its: Trustee

JESSICA K. CLEMENS                           JAKE P. CLEMENS
C/o Halsey Drug Co., Inc.                    c/o Halsey Drug Co., Inc.
695 North Perryville Rd.                     695 North Perryville Rd.
Crimson Building #2                          Crimson Building #2
Rockford, Illinois 61107                     Rockford, Illinois 61107

___________________________                  ___________________________

MICHAEL REICHER TRUST
c/o Halsey Drug Co., Inc.
695 North Perryville Rd.
Crimson Building #2
Rockford, Illinois 61107

___________________________
By: Michael K. Reicher
Its: Trustee

EXHIBIT 1.1(f)

FORM OF THIRD AMENDMENT TO LOAN AGREEMENT

EXHIBIT 2.2(d)

AMENDMENT TO WARRANT TO PURCHASE COMMON STOCK AGREEMENT

1. Section 3(d)(v) of the Warrant to Purchase Common Stock Agreement is amended to delete the word "or" at the end of the paragraph.

2. Section 3(d)(vi) of the Warrant to Purchase Common Stock Agreement is amended to delete the period at the end of the paragraph and to substitute in its place, a semi-colon.

3. A new Section 3(d)(vii) is added to the Warrant to Purchase Common Stock Agreement to read as follows :

"(vii) the issuance of the Company's convertible senior secured debentures pursuant to that certain 2004 Debenture Purchase Agreement dated February 6, 2004 between the Company and the signatories to such agreement; or"

4. A new Section 3(d)(viii) is added to the Warrant to Purchase Common Stock to read as follows:

"(viii) the issuance of Series A Preferred Stock, Series B Preferred Stock, Series C-1 Preferred Stock, Series C-2 Preferred Stock or Series C-3 Preferred Stock pursuant to that certain Debenture Conversion Agreement dated February 6, 2004 between the Company and the signatories to such Agreement."

EXHIBIT 2.2(e)

HYDROCODONE OPTION AGREEMENT

EXHIBIT 10.13

THIRD AMENDMENT, WAIVER AND CONSENT

TO

LOAN AGREEMENT

THIS THIRD AMENDMENT, WAIVER AND CONSENT TO LOAN AGREEMENT, dated as of February 6, 2004 (the "Third Amendment"), is made and entered into by and between Halsey Drug Co., Inc., a New York corporation ("Borrower"), and Watson Pharmaceuticals, Inc., a Nevada corporation ("Lender"). Capitalized terms used herein and not otherwise defined shall have the meaning provided in the Loan Agreement (as defined below).

RECITALS

WHEREAS, Borrower and Lender are parties to that certain Loan Agreement, dated as of March 29, 2000, as amended by a certain Amendment to Loan Agreement dated as of March 31, 2000, and as further amended by a certain Second Amendment to Loan Agreement dated as of December 20, 2002 (as so amended, the "Loan Agreement"); and

WHEREAS, in accordance with the terms of the Loan Agreement, Borrower has issued to Lender two Promissory Notes, the first dated December 20, 2002 in the principal amount of $17,500,000 (the "Replacement Note"), and the second dated December 20, 2002 in the principal amount of $3,901,331 (the "New Note", and together with the Replacement Note, collectively, the "Old Notes"); and

WHEREAS, in order to allow the Borrower to complete each of the transactions contemplated pursuant to that certain Term Sheet dated December 19, 2003 between the Borrower and the other signatories thereto (the "Term Sheet Transactions"), Borrower has requested Lender, and Lender has agreed, to consent to the Term Sheet Transactions and to waive certain restrictions contained in the Loan Agreement, as provided herein; and

WHEREAS, pursuant to a certain Umbrella Agreement dated of even date herewith (the "Umbrella Agreement") by and among Borrower, Lender, Care Capital Investment II, L.P., Essex Woodlands Health Ventures V, LP, Galen Partners III, L.P. and the other signatories

thereto (collectively, but excluding the Borrower and Lender, the "Investor Group"), in consideration of Borrower's payment to Lender of $4,000,000, Lender has agreed to (i) cancel and discharge in full New Note in the principal amount of $3,901,331, (ii) forgive $12,500,000 in principal amount of Replacement Note and amend and restate Replacement Note as provided herein, and (iii) amend the Loan Agreement as provided herein (collectively, the "Note and Loan Agreement Amendments"); and

WHEREAS, pursuant to the terms of the Umbrella Agreement, Lender will transfer and convey to the Investor Group all of its right, title and interest in and to the Loan Agreement and Replacement Note after giving effect to the Note and Loan Agreement Amendments; and

WHEREAS, it is a condition to the completion of the Term Sheet Transactions and the Umbrella Agreement that the Note and Loan Agreement Amendments be completed in accordance with the terms of this Third Amendment.

NOW, THEREFORE, the parties hereto agree as follows:

AGREEMENT

1. Loan Agreement Waivers. Lender hereby consents to the Term Sheet Transactions and, on the date this Third Amendment becomes effective, waives the following, which waivers are limited solely to the Term Sheet Transactions:

(a) The requirements to give notice of adverse changes and to comply with material agreements contained in Sections 7.3 and 7.4 of the Loan Agreement;

(b) The lien restrictions contained in Section 8.3 of the Loan Agreement;

(c) The indebtedness restrictions contained in Section 8.4 of the Loan Agreement;

(d) The restrictions against the amendment to the Certificate of Incorporation and/or By-Laws of the Borrower or the Guarantors, contained in Section 8.6 of the Loan Agreement;

(e) The restrictions against the Guarantors' guaranteeing any obligation of any person, firm or entity contained in Section 8.7 of the Loan Agreement;

(f) The restrictions against engaging in any business other than such business conducted by the Borrower contained in Section 8.10 of the Loan Agreement; and

(g) any and all Events of Default under the Loan Agreement and the Loan Documents that have occurred and are continuing as of the date hereof.

2. The fifth Recital to the Loan Agreement is hereby amended in its entirety to read as follows:

"WHEREAS, pursuant to that certain Debenture and Warrant Purchase Agreement, dated May 26, 1999 (the "1999 Debenture Agreement"), executed by Borrower in favor of the purchasers named therein, Borrower issued its 5% Convertible Senior Secured Debentures due March 15, 2003 (such debentures, the "Oracle Debentures").

3. Article One of the Loan Agreement is hereby amended in its entirety to read as follows:

"1. AMOUNT AND TERMS OF LOANS.

"1.1 Term Loans. Subject to the terms herein, Lender has previously loaned to Borrower the aggregate principal amount of Twenty One Million Four Hundred One Thousand Three Hundred Thirty One Dollars ($21,401,331) (the "Original Loan"). Effective the date of the Third Amendment to the Loan Agreement, (i) Lender forever forgives, discharges, cancels and renders null and void Borrower's obligation to repay Sixteen Million Four Hundred One Thousand Three Hundred Thirty One Dollars ($16,401,331) in principal amount, plus accrued and unpaid interest on such principal amount, of the Original Loan, resulting in a remaining principal balance of the Original Loan of Five Million Dollars ($5,000,000) (the "Loan"), and (ii) Lender forever forgives and discharges Borrower's obligation to pay interest under the Original Loan, as evidenced by the Old Notes, to the extent accrued and unpaid through and including the date of the Third Amendment to the Loan Agreement. The Old Notes previously issued by Borrower to Lender hereunder shall be amended or cancelled, as appropriate, in accordance with Section 1.2 below. Notwithstanding any prepayment of the Loan by Borrower, sums repaid may not be re-borrowed.

"1.2 Promissory Notes. Borrower's obligation to pay the principal of, and interest on, the Loan shall be evidenced by a promissory note dated as of December 20,

2002 duly executed and delivered by Borrower in the form attached as Exhibit A to the Third Amendment to the Loan Agreement and representing the $5,000,000 principal balance of the Loan (the "Note"), which Note shall be an amendment and restatement of the Replacement Note. Upon execution and delivery of the Note, each of the Old Notes shall be null and void and of no further legal force or effect. Watson agrees to return to Borrower each of the original Old Notes on the date of execution of the Third Amendment to the Loan Agreement."

4. Section 7.2(b) of the Loan Agreement is hereby amended in its entirety to read as follows:

"(b) Within ninety (90) days after the end of each fiscal year, consolidated statements of income and retained earnings and cash flows of the Borrower and its Subsidiaries for the period from the beginning of each fiscal year to the end of such fiscal year, and consolidated balance sheets as at the end of such fiscal year, setting forth in each case in comparative form corresponding figures for the preceding fiscal year, which statements will be prepared in accordance with GAAP, consistently applied (except as approved by the accounting firm examining such statements and disclosed by the Borrower) and will be accompanied by the report of the Borrower's independent certified public accountant firm;"

5. Section 7.8 of the Loan Agreement is hereby deleted in its entirety.

6. Section 8.12 of the Loan Agreement is hereby deleted in its entirety.

7. Section 8.13 of the Loan Agreement is hereby deleted in its entirety.

8. Section 9.1(e) of the Loan Agreement is hereby amended in its entirety to read as follows:

"(e) If any default shall occur under any indenture, mortgage, agreement, instrument or commitment evidencing or under which there is outstanding indebtedness of the Borrower or a Subsidiary aggregating in excess of $1

million, and which default results in such indebtedness becoming due and payable prior to its due date and, if such indenture or instrument so requires, the holder or holders thereof shall have declared such indebtedness due and payable;"

9. Section 9.1(i) of the Loan Agreement is hereby amended in its entirety to read as follows:

"(i) if any default shall occur and be continuing under the terms of the Existing Debentures and such indebtedness has become due and payable; or"

10. A new Section 9.1(j) is hereby added to the Loan Agreement as follows:

"(j) if the Conversion Event (and the conversion of the Existing Debentures into Preferred Stock in connection therewith), shall not have occurred by November 1, 2004."

11. Sections 9.2 and 9.3 of the Loan Agreement are hereby amended in their entirety to read as follows:

"9.2 Remedies.

(a) Subject to Section 9.4, upon the occurrence of an Event of Default, Lender may, at any time, unless all defaults shall theretofore have been remedied, at its option, by written notice or notices to Borrower (i) declare the Loan to be due and payable, whereupon the same shall forthwith mature and become due and payable, together with interest accrued thereon, without presentment, demand, protest or notice, all of which are hereby waived; and (ii) declare any other amounts payable to Lender under the Loan Documents or as contemplated hereby due and payable.

(b) Subject to Section 9.4, upon the occurrence of any of the Events of Default described in Section 9.1(h) above, then, automatically and whether or not notice is given, (i) the Loan shall become immediately due and payable, together with interest

accrued thereon, without presentment, demand, protest or notice, all of which are hereby waived; and (ii) any other amounts payable to Lender under the Loan Documents or as contemplated hereby shall become immediately due and payable.

(c) Notwithstanding anything contained in Section 9.2(a), in the event that any time after the principal of the Loan shall so become due and payable and prior to the date of maturity stated in the Note, and all arrears of principal of and interest on the Loan (with interest at the rate specified in the Note) shall be paid by or for the account of Borrower, then Lender, by written notice or notices to Borrower, may (but shall not be obligated to) waive such Event of Default and its consequences and rescind or annul such declaration, but no such waiver shall extend to or affect any subsequent Event of Default or impair any right resulting therefrom.

9.3 Enforcement. Subject to Section 9.4, in case any one or more Events of Default shall occur and be continuing, Lender may proceed to protect and enforce its rights by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in the Note or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law. In case of a default in the payment of any principal of or interest on the Loan, Borrower will pay to Lender such further amount as shall be sufficient to cover the cost and the expenses of collection, including, without limitation, reasonable attorneys' fees, expenses and disbursements. No course of dealing and no delay on the part of Lender in exercising any rights shall operate as a waiver thereof or otherwise prejudice Lender's rights. No right conferred hereby or by the Note upon Lender shall be exclusive of any other right referred to herein or therein or now available at law in equity, by statute or otherwise."

12. A new Section 9.4 is hereby added to the Loan Agreement as follows:

"9.4 Waiver of Events of Default; Forbearance from Exercise of Remedies.

(a) Borrower and Lender acknowledge and agree that as of the date of the Third Amendment to the Loan Agreement, certain Events of Default have occurred and are continuing, including without limitation, the Borrower's default in the payment of interest due under the Old Notes. Upon the date of the Third Amendment to the Loan

Agreement, Lender will be deemed to have waived any and all Events of Default under the Loan Agreement, the Old Notes, and the Loan Documents that have occurred and are continuing as of the date hereof.

(b) Notwithstanding anything to the contrary contained in the Loan Agreement, the Note or the Loan Documents, including, without limitation, Sections 9.1, 9.2 and 9.3 of the Loan Agreement, commencing with the occurrence and continuance of any Event of Default on or after the date of the Third Amendment to Loan Agreement and for a period of two (2) years thereafter, Lender shall forbear from the exercise and enforcement (and shall be prohibited from any exercise or enforcement) of any rights and remedies under the Loan Agreement, the Note, and the Loan Documents, including, without limitation, the right to declare the Loan due and payable, the acceleration of the maturity of the Loan, or the exercise or enforcement of any rights or remedies provided under the Watson Security Documents; provided, however, that Lender's forbearance obligations contained in this Section 9.4(b) shall not (i) impair, alter or otherwise diminish the exercise and enforcement of Lender's rights and remedies provided in the Loan Agreement, the Note and the Loan Documents solely upon the occurrence and continuance of an Event of Default under Sections 9.1(a), 9.1(c) (but limited solely to any default that affects the priority of the liens granted by Borrower and the Guarantors to Lender pursuant to the Loan Documents), 9.1(e), 9.1.(h), 9.1(i) or 9.1(j) of the Loan Agreement, or (ii) in any circumstance extend beyond June 30, 2007 (regardless of whether the applicable Event of Default occurred less than two (2) years prior to such date)."

13. The definition of "Existing Debentures" set forth in Section 12.1 of the Loan Agreement is hereby amended in its entirety to read as follows:

""Existing Debentures" shall mean, collectively, (i) the Galen Debentures, (ii) the Oracle Debentures, (iii) the convertible secured debentures due March 31, 2006 issued pursuant to that certain Debenture Purchase Agreement dated December 20, 2002 between the Borrower and the purchasers listed on the signature page thereto, and (iv) the convertible secured debentures due July 31, 2004 issued pursuant to that certain Debenture and Share Purchase Agreement dated February 6, 2004 between the Borrower

and the purchasers listed on the signature page thereto, as each of such debentures may be supplemented, amended, or otherwise modified from time to time."

14. The definition of "Existing Holders" set forth in Section 12.1 of the Loan Agreement is hereby amended in its entirety to read as follows:

""Existing Holders" shall mean the holders of the Existing Debentures."

15. The definition of "Obligations" set forth in Section 12.1 of the Loan Agreement is hereby amended in its entirety to read as follows:

"Obligations" shall mean all obligations, liabilities and indebtedness of every kind, nature and description of the Borrower and the Guarantors from time to time owing to the Lender or any Indemnitee under or in connection with the Loan Documents, whether direct or indirect, primary or secondary, joint or several, absolute or contingent, due or to become due, now existing or hereafter arising and however acquired and shall include, without limitation, all principal and interest on the Loan and, to the extent chargeable under any Loan Document, all charges, expenses, fees and reasonable attorney's fees."

16. Section 12.1 of the Loan Agreement is further amended by adding the following definition in alphabetical order in its entirety:

""Conversion Agreement" shall mean that certain Debenture Conversion Agreement dated February 6, 2004 by and among the Borrower and the holders of the Existing Debentures, as such agreement may be supplemented, amended or otherwise modified from time to time in accordance with its terms."

17. Section 12.1 of the Loan Agreement is further amended by adding the following definition in alphabetical order in its entirety:

""Conversion Event" shall mean the conversion of the Existing Debentures into Preferred Stock immediately upon the filing by the Borrower of the documents necessary to create the Preferred Stock."

18. Section 12.1 of the Loan Agreement is further amended by adding the following definition in alphabetical order in its entirety:

""Old Notes" shall mean, collectively, (i) the secured promissory note dated December 20, 2002 issued by Borrower to Lender in the principal amount of $17,500,000, and (ii) the secured promissory note dated December 20, 2002 issued by Borrower to Lender in the principal amount of $3,901,331."

19. Section 12.1 of the Loan Agreement is further amended by adding the following definition in alphabetical order in its entirety:

""Preferred Stock" shall mean, collectively, (i) the Series A Convertible Preferred Stock, $.01 par value, of the Borrower (now or hereafter issued), (ii) the Series B Convertible Preferred Stock, $.01 par value, of the Borrower (now or hereafter issued), (iii) the Series C-1 Convertible Preferred Stock, $.01 par value, of the Borrower (now or hereafter issued), (iv) the Series C-2 Convertible Preferred Stock, $.01 par value, of the Borrower (now or hereafter issued), and (v) the Series C-3 Convertible Preferred Stock, $.01 par value, of the Borrower (now or hereafter issued)."

20. Section 12.3 of the Loan Agreement is hereby amended in its entirety to read as follows:

"12.3 Governing Law. This Agreement and the rights of the Parties hereunder shall be governed in all respects by the laws of the State of New York wherein the terms of this Loan Agreement were negotiated."

21. Section 12.11 of the Loan Agreement is hereby amended in its entirety to read as follows:

"12.11 Litigation. The Parties each hereby waive trial by jury in any action or proceeding of any kind or nature in any court in which an action may be commenced arising out of this Loan Agreement or the Loan Documents. The Parties hereto agree that the state and federal court which set in the City and State of New York shall have exclusive jurisdiction to hear and determine any claims or disputes between Borrower

and Lender, pertaining directly or indirectly to this Loan Agreement or to any matter arising therefrom. The parties each expressly submit and consent in advance to such jurisdiction in any action or proceeding commenced in such courts provided that such consent shall not be deemed to be a waiver of personal service of the summons and complaint, or other process or papers issued therein. The choice of forum set forth in this Section 12.11 shall not be deemed to preclude the enforcement of any judgment obtained in such forum or the taking of any action under this Loan Agreement to enforce same in any appropriate jurisdiction. The Parties waive any objections based upon forum non-conveniens and any objection to venue of any action instituted hereunder."

22. Schedule I to the Loan Agreement is hereby amended in its entirety as set forth in Schedule I to the Third Amendment to the Loan Agreement.

23. Limitation of Amendment. Except as amended above, the terms of the Loan Agreement shall remain in full force and effect.

24. Governing Law. This Third Amendment and the rights of the parties hereunder shall be governed in all respects by the laws of the State of New York wherein the terms of this Third Amendment were negotiated.

25. Counterparts. This Third Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.

IN WITNESS WHEREOF, Borrower and Lender have caused this Third Amendment to be duly executed by their duly authorized officers all as of the day and year first above written.

"BORROWER"                                      "LENDER"

HALSEY DRUG CO., INC.                           WATSON PHARMACEUTICALS, INC.

By:____________________________                 By:_____________________________
Name:  Andrew D. Reddick                        Name:  _________________________
Title: President and Chief Executive Officer    Title: _________________________

EXHIBIT A

Note

SCHEDULE I

Debentureholders Receiving In-Kind Interest Payments

All Existing Holders

EXHIBIT 10.14

SECURED PROMISSORY NOTE

$5,000,000 As of December 20, 2002 Corona, California

1. Promise to Pay. For good and valuable consideration, the receipt of which is hereby acknowledged, HALSEY DRUG CO., INC., a New York corporation ("Maker"), promises to pay to WATSON PHARMACEUTICALS, INC., a Nevada corporation ("Watson"), or order (either, the "Holder"), on the Maturity Date (as defined below), unless sooner paid as provided in Section 5 hereof, the principal sum of Five Million Dollars ($5,000,000), plus accrued unpaid interest thereon. The outstanding principal balance of this Note shall bear interest at a variable rate equal to the prime rate announced from time to time by Bank of America (the "Prime Rate") plus four and one half percent (4.5%) per annum (the "Interest Rate") from January __, 2004 to the date the principal sum is paid in full. Interest payments shall be made as provided in Section 2 below. All payments under this Note shall be made to the order of the Holder at the address Holder may designate in writing to Maker. All payments of principal under this Note shall be made in U.S. dollars.

2. Payment of Interest. Interest shall be paid on each March 31, June 30, September 30 and December 31 during the term of this Note, commencing March 31, 2004 (each such date being an "Interest Payment Date"). The payment of accrued interest on this Note shall be made in the form of Maker's common stock, par value $.01 per share (the "Common Stock") with the number of shares of Maker's Common Stock equal to the quotient of (x) the interest payment amount, divided by (y) the average of the closing bid and asked prices for Maker's Common Stock as reported in the Over-The-Counter Bulletin Board ("OTC Bulletin Board") (or such other over-the-counter market or exchange on which the Maker's Common Stock may then be traded or admitted for trading) for the twenty (20) trading days immediately preceding such Interest Payment Date, rounded up to the nearest whole share of Maker's Common Stock. No cash interest payments shall be made on this Note.

3. Maturity Date. The date that this Note shall mature, and the principal amount outstanding hereunder, plus accrued unpaid interest thereon and any charges pertaining thereto, shall become due and payable (the "Maturity Date") shall be June 30, 2007.

4. Loan and Security Agreements. Maker and Watson are party to that certain Loan Agreement, dated as of March 29, 2000, as amended by that certain Amendment to Loan Agreement dated as of March 31, 2000, as further amended by that certain Second Amendment to Loan Agreement dated as of December 20, 2002 and as further amended by that certain Third Amendment, Waiver and Consent to Loan Agreement dated as of January __, 2004 (as so amended, the "Loan Agreement"). The full and punctual payment and performance of this Note by Maker are secured and guaranteed by the Company General Security Agreement, the Company Collateral Assignments, the Stock

Pledge Agreement, the Guaranties, the Guarantors Security Agreement, the Guarantor Collateral Assignments and the Mortgage, as those terms are defined in the Loan Agreement (the "Security Agreements"). The security interest granted to Holder under the Security Agreements extends to the proceeds of any sale or other transfer or disposition of such assets, whether by Maker, its affiliates, the Holder or any other person, that occurs prior to the payment in full of this Note. Copies of the Loan Agreement and the Security Agreements may be obtained from Maker without charge.

5. Prepayments. Maker may voluntarily prepay this Note either in whole or in part without penalty or premium.

6. Waivers. Maker hereby waives diligence, presentment for payment, demand, protest, notice of non-payment, notice of dishonor, notice of protest, and any and all other notices and demands whatsoever. Maker shall remain bound under this Note until all principal and interest and any other amounts that are payable hereunder or under the Loan Agreement or the Security Agreements have been paid in full, notwithstanding any extensions or renewals granted with respect to this Note or the release of any party liable hereunder or any security for the payment of this Note. Maker, and any and all endorsers hereof, also waive the right to plead any and all statutes of limitations as a defense to any demand on this Note or any and all obligations or liabilities arising out of or in connection with this Note, the Loan Agreement or the Security Agreements, to the fullest extent permitted by law.

7. Events of Default. Any of the following events shall constitute an event of default by Maker under this Note (an "Event of Default"):

(a) the failure of Maker to pay to Holder, on the Maturity Date, any and all principal amounts due and owing under this Note;

(b) the failure of Maker to pay to Holder interest payments when due; or

(c) there occurs any other event or circumstance that constitutes an "Event of Default" as defined in Section 9.1 of the Loan Agreement.

Subject to the forbearance provisions contained in Section 9.4 of the Loan Agreement, upon the occurrence of any Event of Default, as defined herein above, at Holder's option, Holder may declare immediately due and payable, and on any such declaration there shall become immediately due and payable, the entire unpaid principal balance of this Note, together with all accrued and unpaid interest under this Note and any other sums owing at the time of such declaration pursuant to this Note, the Loan Agreement or the Security Agreements, and Holder shall be entitled to exercise all rights and remedies available to Holder under this Note, under the Loan Agreement and the Security Agreements and under applicable law, all of which rights and remedies shall be cumulative. Without limiting the generality of the foregoing, upon the occurrence of an Event of Default, the interest rate at which interest shall accrue on the principal sum and any other amounts that are due under this Note shall increase to the lower of (i) the Prime Rate plus six and

one-half percent (6.5%) per annum or (ii) the maximum interest rate permitted under applicable law (the "Default Rate"), until all such amounts have been paid in full.

8. No Waiver by Holder. Subject to the forbearance provisions contained in
Section 9.4 of the Loan Agreement, any delay or omission on the part of Holder to exercise any of Holder's rights or remedies hereunder, under the Loan Agreement or the Security Agreements or under applicable law, including, without limitation, the right to accelerate amounts owing under this Note, shall not be deemed a waiver of that right or remedy or of any other right or remedy of Holder in respect thereof. The acceptance by Holder of any payment pursuant to the terms of this Note which is less than payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of the Holder's rights or remedies under this Note, the Loan Agreement, the Security Agreements or under applicable law at that time or at any subsequent time or nullify any prior exercise of any such rights or remedies without the express written consent of Holder, except as and to the extent provided to the contrary by applicable law.

9. Governing Law. This Note shall be governed by and construed according to and enforced under the internal laws of the State of New York without giving effect to its choice of laws rules.

10. Enforcement of the Note. Maker agrees that the Superior Court in and for the County of New York, New York shall have exclusive jurisdiction over any disputes, between the Maker and Holder and any action, suit or other proceeding brought by Maker or Holder relating to the interpretation or enforcement of this Note, and Maker agrees as follows: (a) Maker shall accept and not contest the personal or subject matter jurisdiction of such Court; (b) Maker shall accept and not object to or challenge the venue of such Court or assert the doctrine of forum non conveniens with respect to such Court; (c) Maker shall accept and not contest the validity or effectiveness of service of process in any such action, suit or other proceeding by registered or certified first class mail; and (d) TO THE MAXIMUM EXTENT PERMITTED BY LAW, MAKER WAIVES AND SHALL WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR OTHER PROCEEDING BROUGHT WITH RESPECT TO THIS NOTE OR ITS ENFORCEMENT OR INTERPRETATION. If Maker fails to pay any amounts due hereunder when due, then Maker shall pay all costs of enforcement and collection, including, without limitation, reasonable attorneys' fees and costs incurred by Holder, whether or not enforcement and collection includes the filing of a lawsuit, and whether or not that lawsuit is prosecuted to judgment. The costs of enforcement and collection shall be added to the principal amount of the Note and shall accrue interest at the Default Rate from the Date incurred until the date paid by Maker.

11. Binding Nature. The provisions of this Note shall be binding on Maker and shall inure to the benefit of Holder.

12. Usury Savings Provisions. In the event Holder receives any sums under this Note which constitute interest in an amount in excess of that permitted by any applicable law,

then, all such sums constituting interest in excess of that permitted to be paid under applicable law shall, at Holder's option, either be credited to the payment of principal owing hereunder or returned to Maker. The provisions of this Section 12 control the other provisions of this Note and any other agreement between Maker and Holder.

13. Severability. If, but only to the extent that, any provision of this Note shall be invalid or unenforceable, then, such offending provision shall be deleted from this Note, but only to the extent necessary to preserve the validity and effectiveness of this Note to the fullest extent permitted by applicable law.

14. Interpretation. No provision of this Note shall be interpreted for or against Maker or Holder because that person or that person's legal representative drafted such provision. Unless otherwise indicated elsewhere in this Note, (a) the term "or" shall not be exclusive, (b) the term "including" shall mean "including, but not limited to," and (c) the terms "below," "above," "herein," "hereof," "hereto," "hereunder" and other terms similar to such terms shall refer to this Note as a whole and not merely to the specific section, subsection, paragraph or clause where such terms may appear. The section and sub-section headings in this Note are included for convenience of reference only and shall be ignored in the construction or interpretation of this Note.

15. Amended and Restated Note. This Note is issued in accordance with that certain Third Amendment to Loan Agreement dated as of January __, 2004, between Maker and Watson (the "Third Amendment"), and is issued by Maker as an amendment and restatement of that certain Secured Promissory Note issued by Maker to Watson in the principal amount of $17,500,000 dated December 20, 2002 (the "Original Note"). Upon execution and delivery of this Note to Watson, the Original Note shall be null and void and of no further legal force or effect.

[SIGNATURE PAGE TO FOLLOW]

"MAKER"

HALSEY DRUG CO., INC.

EXHIBIT 10.15

HYDROCODONE API SUPPLY OPTION AGREEMENT

HYDROCODONE API SUPPLY OPTION AGREEMENT (this "Agreement") dated as of February 6, 2004 between HALSEY DRUG CO, INC., a New York corporation ("HDC"), HOUBA, INC., an Indiana corporation ("Houba" and together with HDC, collectively, "Halsey") and WATSON PHARMACEUTICALS INC., a Nevada corporation ("Watson", and together with Halsey, the "Parties").

PRELIMINARY STATEMENT

Halsey desires to provide Watson with an exclusive option to enter into a supply agreement with Halsey for hydrocodone bitartrate active pharmaceutical ingredient on the terms and subject to the conditions set forth herein.

NOW, THEREFORE, the parties hereto agree as follows:

1. DEFINED TERMS; RULES OF CONSTRUCTION; CALCULATIONS.

1.1 Rules of Construction. This Agreement shall be subject to the Rules of Construction set forth herein.

1.2 Definitions. As used in this Agreement, capitalized terms defined in the preamble and other Sections of this Agreement shall have the meanings set forth therein, and terms defined in Exhibit A shall have the meanings set forth therein and capitalized terms used herein but not otherwise defined herein shall have the meanings set forth as follows:

"Action" means any claim, action, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority.

"Business Day" means any day other than a Saturday, Sunday or day which banks are generally closed in the State of California.

"Encumbrance" means any security interest, pledge, hypothecation, mortgage, lien (including environmental and tax liens), violation, charge, lease, license, encumbrance, servient easement, adverse claim, reversion, reverter, preferential arrangement, restrictive covenant, condition or restriction of any kind, including any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership.

"Environmental Laws" means all Laws, now or hereafter in effect and as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety, natural resources or Hazardous Materials, including CERCLA; the Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901 et seq.; the Hazardous Materials

Transportation Act, 49 U.S.C. Sections 6901 et seq.; the Clean Water Act, 33 U.S.C. Sections 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. Sections 2601 et seq.; the Clean Air Act, 42 U.S.C. Sections 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. Sections 300f et seq.; the Atomic Energy Act, 42 U.S.C. Sections 2011 et seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections 136 et seq.; and the Federal Food, Drug and Cosmetic Act, 21 U.S.C. Sections 301 et seq.

"Governmental Authority" means any federal, national, supranational, state, provincial, local, or similar government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body.

"Governmental Order" means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority.

"Halsey Indemnified Party" has the meaning given such term in
Section 7(b).

"Indemnified Party" means a Watson Indemnified Party or a Halsey Indemnified Party, as the case may be.

"Indemnifying Party" means Halsey pursuant to Section 7(a) and Watson pursuant to Section 7(b), as the case may be.

"Law" means any federal, national, supranational, state, provincial, local or similar statute, law, ordinance, regulation, rule, code, order, requirement or rule of law (including common law).

"Liabilities" means any and all debts, liabilities and obligations, whether accrued or fixed, absolute or contingent, matured or unmatured or determined or determinable, including those arising under any Law (including any Environmental Law), Action or Governmental Order and those arising under any contract, agreement, arrangement, commitment or undertaking.

"Option Exercise Date" means the date that the Option Exercise Notice shall have been given to Halsey, as provided in Section 3(a) of the Agreement.

"Option Period" means the period commencing on the date of this Agreement and expiring on the 180th day following the date of this Agreement.

"Third Party Claim" has the meaning given such term in Section 7(d)(ii).

"Watson Indemnified Party" has the meaning given such term in
Section 7(a).

2. GRANT OF OPTION. Subject to the conditions set forth herein, Halsey hereby grants to Watson or its designee a non-assignable exclusive option (the "Option") to enter into a supply agreement with Halsey (the "Supply Agreement") pursuant to which Halsey will

supply, and Watson will purchase, on a non-exclusive, preferential basis, hydrocodone bitartrate active pharmaceutical ingredient ("Hydrocodone API") manufactured using Halsey's proprietary hydrocodone bitartrate API process (the "Hydrocodone Process") which Option is exercisable at any time during the Option Period by delivery of an Election Notice in accordance with Section 3.

3. EXERCISE OF OPTION.

(a) Exercise Notice. Watson may only exercise the Option by giving a written notice (the "Election Notice") with respect to such exercise during the Option Period. Such notice shall be given in accordance with Section 6 to Halsey on a Business Day.

(b) Option Exercise Conditions. Watson may exercise the Option if the following conditions shall have been satisfied or waived by Halsey in its sole discretion:

(i) the Option Exercise Date occurs during the Option Period;

(ii) the Election Notice contains a commitment by Watson to fund (A) fifty percent (50%), up to an aggregate maximum of $3,500,000, of the Development and Scale-Up Expenses (as defined in Exhibit A) to develop the Hydrocodone Process through commercial scale-up and final regulatory approvals for commercial distribution in the United States. Such funding by Watson shall be paid on a monthly basis within thirty (30) days after the end of each month in which Halsey actually incurs such Development and Scale-Up Expenses;

(iii) Watson commits to negotiate in good faith with Halsey the terms of the Supply Agreement for a period of 75 days following Halsey's receipt of the Election Notice, which shall include, without limitation, the terms specified in Exhibit A hereto.

(c) Promptly following Halsey's receipt of the Election Notice, (i) Halsey shall use commercially reasonable efforts to obtain financing dedicated to its portion of the Development and Scale-Up Expenses, and (ii) the Parties shall negotiate in good faith the terms of the Supply Agreement and shall use reasonable best efforts to execute the Supply Agreement within sixty
(60) days following Halsey's receipt of the Election Notice; provided, however, that if during the sixty (60) day period following Halsey's receipt of the Election Notice Halsey is unable, despite using commercially reasonable efforts, to obtain financing dedicated to the cost of its portion of the Development and Scale-Up Expenses, the Parties shall discuss and negotiate in good faith alternatives relating to Halsey's development and scale-up of the Hydrocodone Process.

4. EXPENSES. Except as otherwise specified in this Agreement, all costs and expenses, including fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the party incurring such costs and expenses, whether or not the Closing shall have occurred.

5. REPRESENTATIONS AND WARRANTIES. (a) Halsey hereby represents and warrants as follows:

(i) Halsey is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all necessary power and authority to enter into this Agreement and the related documents to which it is a party, to carry out its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. Halsey is duly licensed or qualified to do business and is in good standing in each jurisdiction which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary, except where the failure to be so qualified will not have a material adverse effect on its operations or financial condition. The execution and delivery of this Agreement and the related documents (upon execution and delivery) by Halsey, the performance by Halsey of its obligations hereunder and thereunder and the consummation by Halsey of the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of Halsey and its stockholders. This Agreement and the related documents, upon their execution shall have been duly executed and delivered by Halsey, and (assuming due authorization, execution and delivery by the other Parties thereto) this Agreement and the related documents to which it is a party, upon their execution, shall constitute, legal, valid and binding obligations of Halsey, enforceable against Halsey in accordance with their respective terms, subject, as to enforceability, to bankruptcy, insolvency, moratorium, reorganization and other laws of general application relating to or affecting creditors' rights and to general equitable principles.

(ii) The execution, delivery and performance of this Agreement and the related documents (upon execution and delivery) to which it is a party do not and will not (a) violate, conflict with or result in the breach of any provision of the certificate of incorporation or by-laws (or similar organizational documents) of Halsey, (b) conflict with or violate any Law or Governmental Order applicable to Halsey, or any of its assets, properties or businesses, or (c) conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of any note, bond, mortgage or indenture, contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which Halsey is a party or by which the Hydrocodone Process, as the case may be, is bound or affected.

(iii) There are no pending or threatened actions, suits or proceedings against or affecting Halsey or any of its properties by or before any court or administrative agency in respect of this Agreement, the Hydrocodone Process, as the case may be, which are reasonably likely to materially adversely affect the ability of Halsey to perform its obligations hereunder or call into question the validity of this Agreement and the related documents (upon execution and delivery) or the enforceability thereof in accordance with the respective terms thereof.

(iv) Neither the execution and delivery by Halsey of this Agreement and the related documents (upon execution and delivery) to which it is a party nor the

consummation by Halsey of any of the transactions contemplated hereby or thereby nor the performance by Halsey of any of its obligations requires the consent or approval of, the giving of notice to, the filing or registration with, or the taking of any other action in respect of any Governmental Authority.

(v) Halsey has not taken any action nor have any other steps been taken or legal proceedings commenced or threatened against Halsey for its dissolution, winding-up, bankruptcy, examination, administration, court protection, reorganization or appointment of a receiver, examiner, trustee or similar official with respect to Halsey or any of its assets or property or for the granting of suspension of payments to Halsey.

(vi) There are no contracts or agreements to which Halsey is a party providing for any lease, sale, disposition of title or beneficial ownership of Halsey's rights in or to the Hydrocodone Process.

(b) Watson hereby represents and warrants as follows:

(i) The execution and delivery of this Agreement by Watson, the performance by Watson of its obligations hereunder and the consummation by Watson of the transactions contemplated hereby have been duly authorized by all requisite action on the part of Watson. This Agreement constitutes the legal, valid and binding obligation of Watson and is enforceable against Watson in accordance with its terms, except as the enforceability thereof may be limited by the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and by general principles of equity.

(ii) The execution, delivery and performance by Watson of this Agreement does not contravene its constituent documents or any Law or material contractual restriction binding on or affecting it.

6. NOTICES. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by an internationally recognized overnight courier service, by facsimile or registered or certified mail (postage prepaid, return receipt requested) to the respective parties hereto at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 7):

If to Halsey, at:

Halsey Drug Co., Inc.
695 No. Perryville Road
Rockford, Illinois 61107
Attention: Chief Executive Officer
Fax: (815) 399-9710

If to Watson, at:

Watson Pharmaceuticals, Inc.,
311 Bonnie Circle
Corona, California 92880
Attention: Chief Financial Officer
Fax: (909) 279-8094
cc: General Counsel

7. INDEMNIFICATION. (a) Indemnification by Halsey. Watson and its Affiliates, officers, directors, employees, agents, successors and assigns (each a "Watson Indemnified Party") shall be indemnified and held harmless by Halsey for and against any and all Liabilities, losses, diminution in value, damages, claims, costs and expenses, interest, awards, judgments and penalties (including attorneys' and consultants' fees and expenses) actually suffered or incurred by them (including any Action brought or otherwise initiated by any of them) (hereinafter a "Loss"), arising out of or resulting from the breach of any representation, warranty or covenant made by Halsey contained in this Agreement.

To the extent that Halsey's undertakings set forth in this Section 7(a) may be unenforceable, Halsey shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all Losses incurred by Halsey Indemnified Parties.

(b) Indemnification by Watson. Halsey and its Affiliates, officers, directors, employees, agents, successors and assigns (each a "Halsey Indemnified Party") shall be indemnified and held harmless by Watson for and against any and all Losses, arising out of or resulting from the breach of any representation or warranty made by the Watson contained in this Agreement. To the extent that Watson's undertakings set forth in this Section 7(b) may be unenforceable, Watson shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all Losses incurred by the Halsey Indemnified Parties.

(c) Notice of Loss; Third Party Claims. (i) An Indemnified Party shall give the Indemnifying Party notice of any matter which a Indemnified Party has determined has given or could give rise to a right of indemnification under this Agreement, within 60 days of such determination, stating the amount of the Loss, if known, and method of computation thereof, and containing a reference to the provisions of this Agreement in respect of which such right of indemnification is claimed or arises.

(ii) If an Indemnified Party shall receive notice of any Action, audit, demand or assessment (each, a "Third Party Claim") against it or which may give rise to a claim for the Loss under this Section 7, within 30 days of the receipt of such notice, the Indemnified Party shall give the Indemnifying Party notice of such Third Party Claim; provided, however, that the failure to provide such notice shall not release the Indemnifying Party from any of its obligations under this Section 7 except to the extent that the Indemnifying Party is materially prejudiced by such failure and shall not relieve the Indemnifying Party from any other obligation or Liability

that it may have to any Indemnified Party otherwise than under this Section 7. If the Indemnifying Party acknowledges in writing its obligation to indemnify the Indemnified Party hereunder against any Losses that may result from such Third Party Claim, then the Indemnifying Party shall be entitled to assume and control the defense of such Third Party Claim at its expense and through counsel of its choice if it gives notice of its intention to do so to the Indemnified Party within ten days of the receipt of such notice from the Indemnified Party; provided, however, that if there exists or is reasonably likely to exist a conflict of interest that would make it inappropriate in the judgment of the Indemnified Party in its sole and absolute discretion for the same counsel to represent both the Indemnified Party and the Indemnifying Party, then the Indemnified Party shall be entitled to retain its own counsel in each jurisdiction for which the Indemnified Party determines counsel is required, at the expense of the Indemnifying Party. In the event that the Indemnifying Party exercises the right to undertake any such defense against any such Third Party Claim as provided above, the Indemnified Party shall cooperate with the Indemnifying Party in such defense and make available to the Indemnifying Party, at the Indemnifying Party's expense, all witnesses, pertinent records, materials and information in the Indemnified Party's possession or under the Indemnified Party's control relating thereto as is reasonably required by the Indemnifying Party. Similarly, in the event the Indemnified Party is, directly or indirectly, conducting the defense against any such Third Party Claim, the Indemnifying Party shall cooperate with the Indemnified Party in such defense and make available to the Indemnified Party, at the Indemnifying Party's expense, all such witnesses, records, materials and information in the Indemnifying Party's possession or under the Indemnifying Party's control relating thereto as is reasonably required by the Indemnified Party. No such Third Party Claim may be settled by the Indemnifying Party without the prior written consent of the Indemnified Party, which consent shall not be unreasonably withheld or delayed.

8. AMENDMENTS. No change or modification of this Agreement shall be valid unless the same shall be in writing and signed by the Parties.

9. ASSIGNMENTS. This Agreement shall not be assignable by any of the Parties hereto.

10. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts executed in and to be performed in that State. All Actions arising out of or relating to this Agreement shall be heard and determined exclusively in any New York federal court sitting in the Borough of Manhattan of The City of New York, provided, however, that if such federal court does not have jurisdiction over such Action, such Action shall be heard and determined exclusively in any New York state court sitting in the Borough of Manhattan of The City of New York. Consistent with the preceding sentence, the Parties hereto hereby (a) submit to the exclusive jurisdiction of any federal or state court sitting in the Borough of Manhattan of The City of New York for the purpose of any Action arising out of or relating to this Agreement brought by any party hereto and (b) irrevocably waive, and agree not to assert by way of motion, defense, or otherwise, in any such Action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the Action is brought in an inconvenient forum, that the venue of the Action is improper, or that this Agreement or the transactions contemplated by this Agreement may not be enforced in or by any of the above-named courts.

11. BENEFIT AND BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors, heirs and assigns; provided that the Parties hereby consent to the appointment by Watson of any of its affiliate as its designee for purposes of exercising the Option.

12. SEVERABILITY OF PROVISIONS. Except as otherwise provided in the succeeding sentence, every provision of this Agreement is intended to be severable, and, if any term or provision of this Agreement is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity or legality of the remainder of this Agreement. The preceding sentence of this Section shall be of no force or effect if the consequence of enforcing the remainder of this Agreement without such illegal or invalid term or provision would be to cause any Party to lose the benefit of its economic bargain.

13. HEADINGS. Section headings in this Agreement are included herein for the convenience of reference only and shall not constitute a part of this Agreement for any other purpose.

14. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the different Parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

15. WAIVER OF JURY TRIAL. Each of the Parties hereby waives to the fullest extent permitted by applicable law any right it may have to a trial by jury with respect to any litigation directly or indirectly arising out of, under or in connection with this Agreement or the transactions contemplated by this Agreement. Each of the Parties hereby (a) certifies that no representative, agent or attorney of the other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver and (b) acknowledges that it has been induced to enter into this Agreement and the transactions contemplated by this Agreement, as applicable, by, among other things, the mutual waivers and certifications in this Section 15.

IN WITNESS WHEREOF, the Parties hereto have signed this Agreement as of the day and year first above written.

HALSEY DRUG CO., INC.

By: _______________________________
Name: Andrew D. Reddick
Title: President and Chief Executive
Officer

HOUBA, INC.

By: _______________________________
Name: Peter A. Clemens
Title: Vice President

WATSON PHARMACEUTICALS INC.

By: _______________________________
Name:
Title:

EXHIBIT A

TERMS TO BE INCLUDED IN HYDROCODONE API SUPPLY AGREEMENT

A. Watson will fund fifty percent (50%), subject to an aggregate maximum of $3,500,000, of the cost to develop and commercialize the Hydrocodone Process, including, without limitation, the capital improvements required at Halsey's Culver, Indiana facility, the purchase, installation and validation of associated manufacturing equipment, the preparation and filing of the Drug Master File for the Hydrocodone API and the related direct labor expenses (the "Development and Scale Up Expenses"). Such funding by Watson shall be paid on a monthly basis within thirty (30) days after the end of each month in which Halsey actually incurs such Development and Scale-Up Expenses;

B. Halsey will supply to Watson and Watson shall purchase on a preferential basis up to a maximum annual quantity of 4,600 kg of Hydrocodone API;

C. The transfer price to Watson for the Hydrocodone API shall be Halsey's fully absorbed manufacturing cost as determined based on US GAAP plus 50% of the difference between such manufacturing cost and the lowest price available to Watson from an alternative supplier for comparable quantities of Hydrocodone API; provided, however, that the transfer price shall not be less than Halsey's fully absorbed manufacturing costs plus 35%.

D. The Supply Agreement shall have a term of five (5) years.

EXHIBIT 10.16

NOTEHOLDERS AGREEMENT

This Noteholders Agreement ("Agreement") is dated as of February 6, 2004 by and among Essex Woodlands Health Ventures V, L.P., a Delaware limited partnership ("Essex"), Galen Partners III, L.P., a Delaware limited partnership ("Galen"), acting in its capacity as a Holder (as defined herein) and as agent for the Holders ("Agent") and Care Capital Investments, L.P., a Delaware limited partnership ("Care Capital" and, together with Essex, Galen and the other participants in the Senior Note (as defined herein), the "Holders").

PRELIMINARY STATEMENTS

Pursuant to Section 2.3 of that certain Umbrella Agreement (the "Umbrella Agreement") as of the date hereof by and among the Holders, Watson Pharmaceuticals, Inc. ("Watson") and Halsey Drug Co., Inc. ("Company"), Watson agreed to sell, transfer and assign to the Holders the Assigned Rights, including Watson's right, title and interest in that certain Amended and Restated Note in the principal amount of $5,000,000 issued as of the date hereof by the Company pursuant to the Loan Agreement, and any other promissory notes issued by the Company pursuant to the Loan Agreement from time to time (the "Senior Note"). The Holders hereby agree to (1) appoint Agent to act as agent for the Holders with respect to the Assigned Rights and (2) acquire a participation in the Senior Note, all on the terms and subject to the conditions set forth in this Agreement.

AGREEMENT

In consideration of the mutual covenants contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

ARTICLE 1

CERTAIN DEFINED TERMS

Capitalized terms appearing in this Agreement without definition will have the meanings ascribed to such terms in the Umbrella Agreement. For the purposes of this Agreement, the following terms have the meanings indicated:

"Participation Percentage" shall mean the percentage interest of each Holder in the principal amount of the Senior Note at any time outstanding, which on the date of this Agreement is equal to percentage set forth opposite such Holder's name on Schedule I.

"Requisite Holders" means the holders of sixty percent (60%) of the aggregate Participation Percentage.

ARTICLE 2

APPOINTMENT OF AGENT; DUTIES OF AGENT

2.1 APPOINTMENT OF AGENT

(a) Each Holder hereby designates Galen as its agent and authorizes the Agent to take action on its behalf under the Assigned Agreements, to exercise the powers and perform the duties described therein, and to exercise such other powers reasonably incidental thereto. The Agent may perform any of its duties through its agents or employees. Each Holder acknowledges that Galen has undertaken the agency herein set forth as an accommodation to the Holders and at no charge. Without limiting the generality of the foregoing, the Agent is hereby expressly authorized to (i) waive breaches or events of default, (ii) release security interests or other liens, in each case arising under or in connection with the Assigned Agreements, with the written consent of the Requisite Holders, and (iii) make claims against Watson with respect to Watson's obligations to the Holders under the Umbrella Agreement, in each case without written consent of the Holders.

(b) The Requisite Holders may from time to time instruct the Agent in writing to take any action on behalf of the Holders under the Assigned Agreements, or refrain from taking any such action, as applicable (in each case to the extent the Agent would be authorized to do so pursuant to Section 2.1(a) above), and in each such case the Agent shall promptly comply with such instructions. Each Holder agrees to hold Agent harmless and covenants not to sue Agent with respect to any action taken by Agent pursuant to this Section 2.1(b).

(c) This Section 2.1 is for the benefit of the Agent and the Holders only. The Agent acts only for the Holders and assumes no obligation to or agency or trust relationship with the Company or any of its affiliates or subsidiaries, except for the ratable disbursement to the Holders of any payments received by the Agent for the account of the Holders, if any.

(d) SUBJECT TO THE TERMS OF SECTION 2.1(b) AND 2.1(e), THE AGENT'S AUTHORITY WITH RESPECT TO THE ASSIGNED AGREEMENTS SHALL BE EXCLUSIVE, AND NO HOLDER SHALL TAKE ANY ACTION OR EXERCISE ANY RIGHT UNDER ANY ASSIGNED AGREEMENT WITHOUT THE CONSENT OF THE AGENT.

(e) The holders of a majority of the aggregate Participation Percentage held by Holders other than Galen and its Affiliates may revoke the authority of the Agent to act on the Holders' behalf at any time, by written notice to the Agent (which revocation shall be effective upon receipt by the Agent unless the revocation states a later effective date). Upon such effectiveness, Galen shall be deemed to have resigned and the Holders may appoint a successor Agent pursuant to Section 2.7.

2.2 NATURE AND DUTIES OF AGENT

The Agent has no duties or responsibilities, except those expressly set forth in this Agreement and the Assigned Agreements. Neither the Agent nor any of its officers, directors, employees or agents shall be liable for any action taken or omitted in compliance with this Agreement. The duties of the Agent shall be mechanical and administrative in nature. The Agent shall not have a fiduciary relationship to the Holders or any participant of the Holders.

2.3 LACK OF RELIANCE ON AGENT

Independently and without reliance upon the Agent, each Holder has made and shall continue to make its own independent investigation and analysis of the content and validity of this Agreement and the Assigned Agreements or of the performance and creditworthiness of the Company thereunder. The Agent assumes no responsibility and undertakes no obligation to make inquiry with respect to such matters.

2.4 RELIANCE BY AGENT

The Agent may rely upon written or telephonic communication it believes to be genuine and to have been signed, sent or made by the proper person. The Agent may obtain the advice of legal counsel (including, for matters concerning the Company, counsel for the Company), independent public accountants and other experts selected by it and shall have no liability for action or inaction taken or not taken, in good faith, based upon such advice.

2.5 INDEMNIFICATION OF AGENT

Each Holder agrees to hold the Agent harmless against, and reimburse and indemnify the Agent for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including reasonable attorneys fees and disbursements) or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent in performing its duties hereunder, unless resulting from the Agent's fraud, gross negligence or willful misconduct. The liability of the Holders hereunder shall be several and not joint and each Holder shall be liable only for the percentage of such amounts equal to its Participation Percentage.

2.6 AGENT IN ITS INDIVIDUAL CAPACITY

In its capacity as a Holder, Galen shall have the same rights and powers hereunder as the other Holders and may exercise them to the same extent as the other Holders (as if it was not acting as the Agent herein). To the extent permitted by the Assigned Agreements, Galen shall have the right to lend money to, make investments in and generally engage in any kind of business with, the Company to the same extent as if it were not the Agent (and shall have no duty hereunder to account for the same to the other Holders).

2.7 SUCCESSOR AGENT

(a) The Agent may, upon 30 days' notice to each Holder and the Company, resign by giving written notice thereof to each Holder and the Company. The Agent's resignation shall be effective upon the expiration of such 30-day period or the earlier appointment of a successor agent.

(b) Upon receipt of the Agent's resignation, the Requisite Holders may appoint a successor Agent. If a successor Agent has not been selected and accepted its appointment within 15 business days, then the retiring Agent may, on behalf of the Holders, appoint a successor Agent.

(c) Upon its acceptance of the agency hereunder, a successor agent shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring agent, and the retiring agent shall be discharged from its duties and obligations under this Agreement and deemed released by the Holders from all claims of any description or sort. The retiring agent shall continue to have the benefit of this Agreement for any action or inaction while it was Agent.

(d) Notwithstanding anything contained herein to the contrary, Agent shall retain any and all rights as a Holder under the Assigned Agreements.

2.8 COLLATERAL MATTERS

The Agent shall have no obligation to assure that the Collateral exists or is owned by the Company or any of its affiliates or subsidiaries, or that such Collateral is cared for, protected or insured, or that the liens on the Collateral have been created, perfected, or have any particular priority. Subject to Section 2.1, with respect to the Collateral the Agent may act in any manner it may deem appropriate, in its sole discretion, given Agent's own interest in the Collateral as a Holder, and it shall have no duty or liability whatsoever to any of the Holders, except for its fraud, willful misconduct or gross negligence.

2.9 ACTIONS WITH RESPECT TO DEFAULTS

Without limiting the generality of Section 2.1 above, (a) the Agent shall only take action with respect to a "default" or "event of default" under the Assigned Agreements as shall be directed by the Requisite Holders, and (b) no Holder shall take any action with respect to a "default" or "event of default" under the Assigned Agreements without the consent of the Agent.

ARTICLE 3

PARTICIPATION IN SENIOR NOTE

3.1 PARTICIPATION

Each Holder hereby acquires an undivided interest in the Senior Note in a percentage equal to its Participation Percentage. The interest of each Holder under this Agreement shall include participation in the principal of and interest on the Senior Note and in all amounts payable by the Company under the Senior Note and participation in any security therefore, all for the pro rata account and risk of each Holder in accordance with its Participation Percentage.

3.2 RECORD HOLDER OF SENIOR NOTE

The Agent and each Holder hereby acknowledges that Watson is assigning the Senior Note to Agent for the benefit of the Holders, and that Agent holds the Senior Note solely as a nominee of the Holders. The Agent shall have no beneficial interest in the Senior Note (other than in its Participation Percentage thereof owned in its role as a Holder).

3.3 APPLICATION OF PAYMENTS

(a) Promptly upon receipt by the Agent of any payment of principal of or interest on the Senior Note (including the net cash proceeds received from any realization upon security therefore) or of any fees or costs payable by the Company under the Senior Note or other Assigned Agreement, the Agent shall remit to each Holder its pro rata share thereof in accordance with its Participation Percentage.

(b) All amounts payable by Agent to the Holders hereunder shall be paid in lawful currency of the United States and in immediately available funds at the address set forth opposite the name of each of the Holders on the signature page of this Agreement. Any Holder may change the address to which payments are to be sent by notice of such change to the Agent given as provided herein.

ARTICLE 4

VARIOUS UMBRELLA AGREEMENT MATTERS

4.1 UMBRELLA AGREEMENT

Essex, Care Capital, Galen, Galen Partners International III, L.P. and Galen Employee Fund III, L.P. (each a "Claimant" and collectively, the "Claimants") are parties to the Umbrella Agreement and have undertaken certain obligations as "Claimants" under such agreement. Each Claimant agrees to the provisions of this Article 4 as a material inducement to the other Claimants to enter into the Umbrella Agreement and to be a "Claimant" thereunder.

4.2 CONTRIBUTION

In order to provide for just and equitable contribution as between the Claimants with respect to certain specific liabilities of the Claimants under the Umbrella Agreement, the Claimants agree as follows:

(a) Each Claimant agrees to comply with its obligations under the Umbrella Agreement and that (i) on each Contingent Purchase Amount Payment Date such Claimant will pay to Watson any amounts, if any, that it is obligated to pay pursuant to Section 2.3(b)(ii) of the Umbrella Agreement, and (ii) it will promptly deliver to Watson any amounts it receives from Halsey that are required to be handed over to Watson pursuant to Section 5.5(c) of the Umbrella Agreement.

(b) Each Claimant (the "Indemnifying Claimant") shall indemnify and hold each other Claimant and its officers, employees, agents, successors and assigns (each an "Indemnified Party") harmless against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including reasonable attorneys fees and disbursements) or disbursements of any kind or nature whatsoever ("Losses") which may be imposed on, incurred by or asserted against the Indemnified Party as a result of the failure of the Indemnifying Claimant or its Affiliate to comply with Section 4.2(a) above.

(c) In the event that an Indemnified Party believes it is entitled to indemnification pursuant to Section 4.2(b), such Indemnified Party may make demand upon the applicable Indemnifying Claimant(s) and such Indemnifying Claimant(s) shall, within seven business days after receipt thereof, either (i) pay its indemnification obligation in full, or (ii) request an accounting of the Losses from such Indemnified Party. Upon receipt of such accounting setting forth in reasonable detail the computation of the amount of the Losses and reasonable evidence thereof, the Indemnifying Claimant(s) shall promptly pay the amount thereof.

(d) To the extent that an Indemnifying Claimant's undertakings set forth in Section 4.2(b) may be unenforceable, such Indemnifying Claimant shall contribute the maximum amount that it is permitted to contribute under applicable Law to the payment and satisfaction of all applicable Losses incurred by the Indemnified Party.

4.3 COOPERATION

In connection with any dispute with Watson with respect to or other claim relating to the Umbrella Agreement, each Claimant shall cooperate with the other Claimants and the Agent with respect to such dispute or claim and shall make available to the other Claimants and the Agent all such witnesses, records, materials and information in the Claimant's possession or under the Claimant's control relating thereto as is reasonably required by such other Claimant(s) or the Agent.

ARTICLE 5

MISCELLANEOUS

5.1 WAIVER

No failure on the part of the Agent, a Holder or the Holders to exercise, and no delay in exercising, any right, power, or remedy hereunder shall operate as a waiver thereof.

5.2 GOVERNING LAW

This Agreement and the rights of the parties hereunder shall be governed in all respects by the laws of the State of New York wherein the terms of this Agreement were negotiated, excluding to the greatest extent permitted by law any rule of law that would cause the application of the laws of any jurisdiction other than the State of New York.

5.3 SEVERABILITY

If any provision or portion of any provision of this Agreement is held to be unenforceable or invalid by any court of competent jurisdiction, the remaining portions of any such provision and the remaining provisions hereof shall remain in effect.

5.4 FURTHER ASSURANCES

The Holders and the Agent shall execute, in a proper and timely manner, at or after the date hereof, such additional documents and instruments as may be reasonably requested by the other parties in connection with the consummation or confirmation of the transactions contemplated by this Agreement.

5.5 COUNTERPARTS

This Agreement may be executed simultaneously in one or more counterparts, including by facsimile copy, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

5.6 AMENDMENT

No modification or amendment to this Agreement may be made except by a written instrument signed by the Agent and the Requisite Holders; provided, that any amendment to Article 4 shall require the written consent of each Claimant.

5.7 NOTICES

All notices, approvals, consents or other communications required or desired to be given hereunder shall be delivered in person, by facsimile transmission followed promptly by first class mail or by overnight mail, and delivered, if to the Holders, then to the address set forth opposite the name of each of the Holders on the signature page

hereof and if to Agent, then to the attention of Bruce F. Wesson, c/o Galen Partners III, L.P., 610 Fifth Avenue, Fifth Floor, New York, New York, 10020.

5.8 ARBITRATION

Any controversy or claim arising out of or related to this contract, or the breach thereof, shall be settled by arbitration before three arbitrators in New York City to be administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof.

5.9 TERMINATION

This Agreement shall terminate and be of no further force or effect upon the written consent to such termination by the Requisite Holders.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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

GALEN PARTNERS III, L.P.                     CARE CAPITAL INVESTMENTS II, LP
By: Claudius, L.L.C., General Partner        By: Care Capital II, LLC, as
610 Fifth Avenue, 5th Fl.                    general partner
New York, New York 10019                     47 Hulfish St., Suite 310
                                             Princeton, NJ 08542

                                             By: _____________________________
___________________________                  Name:  David R. Ramsay
By: Srini Conjeevaram                        Title: Authorized Signatory
Its: General Partner

GALEN PARTNERS INTERNATIONAL, III, L.P.      ESSEX WOODLANDS HEALTH
By: Claudius, L.L.C., General Partner        VENTURES V, L.P.
610 Fifth Avenue, 5th Floor                  190 South LaSalle Street, Suite
New York, New York 10020                     2800
                                             Chicago, IL 60603

___________________________                  ___________________________
By: Srini Conjeevaram                        By: Immanuel Thangaraj
Its: General Partner                         Its: Managing Director

GALEN EMPLOYEE FUND III, L.P.                DENNIS ADAMS
By: Wesson Enterprises, Inc.                 120 Kynlyn Road
610 Fifth Avenue, 5th Floor                  Radnor, Pennsylvania  19312
New York, New York 10020

___________________________                  ___________________________
By: Bruce F. Wesson
Its: General Partner

MICHAEL WEISBROT                             SUSAN WEISBROT
1136 Rock Creek Road                         1136 Rock Creek Road
Gladwyne, Pennsylvania 19035                 Gladwyne, Pennsylvania 19035

___________________________                  ___________________________

PETER STIEGLITZ                              GEORGE E. BOUDREAU
RJ Palmer LLC                                222 Elbow Lane
156 West 56th Street, 5th Floor              Haverford, PA 19041
New York, New York 10019

___________________________                  ___________________________

JOHN E. HEPPE, JR.
237 W. Montgomery Avenue
Haverford, Pennsylvania 19041

___________________________

             NAME OF HOLDER                    PARTICIPATION PERCENTAGE
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Essex Woodlands Health Ventures V, L.P.               [37.75%*]
     Care Capital Investments, L.P.                   [21.82%*]
        Galen Partners III, L.P.                      [34.49%*]
 Galen Partners International III, L.P.                [3.12%*]
     Galen Employee Fund III, L.P.                     [0.14%*]
  Michael Weisbrot and Susan Weisbrot                  [1.13%*]
              Dennis Adams                             [0.91%*]
           George E. Boudreau                          [0.36%*]
            Peter Stieglitz                            [0.15%*]
           John E. Heppe, Jr.                          [0.15%*]
                                                       -----
                 TOTAL                                   100%
                                                       -----

* These percentages are subject to being finalized.