<PAGE>   1
                                                                   Exhibit 10.72

                                                                    May 26, 1999

To the Purchaser(s) Set Forth on Exhibit A hereto:


                  HALSEY DRUG CO., INC., a New York corporation (the "Company"),
agrees with you as follows:

                                    ARTICLE I

            AUTHORIZATION OF THE SECURITIES; ADJUSTMENT OF CONVERSION
                            PRICE AND WARRANT PRICES

                  I.1. Authorization of Securities. The Company represents that
it has taken all corporate action necessary to authorize the issuance and sale
of (a) its 5% Convertible Senior Secured Debentures due March 15, 2003 in the
aggregate principal amount of $22,862,603.04 (the "Debentures"), (b) warrants
to purchase an aggregate of 2,309,351 shares of Common Stock, par value $.01 per
share ("Common Stock"), of the Company initially at a price of $1.404 per share
(the "$1.404 Warrants") and (c) warrants to purchase an aggregate of 2,309,351
shares of Common Stock initially at a price of $2.285 per share (the "$1.404
Warrants" and together with the $2.285 Warrants, the "Warrants"). The Debentures
and the Warrants (collectively, the "Securities") are to be sold pursuant to
this Agreement to you (each of you is sometimes referred to herein as a
"Purchaser"). Interest on the Debentures is payable at the rate of 5% per annum,
as more particularly specified in the form of Debenture attached hereto as
Exhibit B. Each Debenture is convertible in whole or in part from time to time
into a number of shares of Common Stock initially at the rate of one share of
Common Stock for each $1.404 in principal amount of the Debenture to be
converted. For purposes of this Agreement, the term "Shares" shall mean the
shares of Common Stock which may be issued upon conversion of all or a portion
of the principal amount of the Debentures and the shares of Common Stock that
may be issued from time to time pursuant to the exercise of the Warrants. The
term "Shares" does not include any other shares of Common Stock or other capital
stock of the Company.

                  I.2. Adjustment of Conversion Price and Warrant Prices. The
prices at which Shares may be acquired upon conversion of the Debentures and
exercise of the Warrants (the "Conversion Price" and the "Warrant Prices",
respectively) are subject to adjustment as set forth therein.
<PAGE>   2
                                   ARTICLE II

             SALE AND PURCHASE OF THE SECURITIES; SECURITY DOCUMENTS

                  II.1. Sale and Purchase of the Securities. Subject to the
terms and conditions hereof and in reliance on the representations and
warranties contained herein, or made pursuant hereto, the Company will issue and
sell to each Purchaser and/or such Purchaser's designees, and each Purchaser,
severally and not jointly, will purchase from the Company, on the Closing Date
specified in Article 3, the Securities for the purchase prices set forth
opposite such Purchaser's name on Exhibit A.

                  The Company and Oracle Strategic Partners, L.P. ("Oracle")
acknowledge and agree that the funding of the remaining aggregate of $10,000,000
in principal amount of the Debentures as set forth in Exhibit A hereto will be
funded in two (2) equal installments (each an Installment"). The first
Installment of $5,000,000 will be made within three (3) business days after the
later to occur of (i) written notice by the Company to Oracle of the Company's
receipt of approval from the U.S. Food and Drug Administration ("FDA") relating
to its Abbreviated New Drug Application ("ANDA") for Prednisolone Syrup, and
(ii) written notice by the Company to Oracle indicating that the Charter
Amendment (as defined and provided in Section 9.12(B) hereof) has been filed
with, and accepted for filing by, the Office of the Department of State of the
State of New York (such notice shall include a copy of the Charter Amendment
stamped "filed" by the Office of the Department of State of the of New York).
The second and final Installment of $5,000,000 will be funded within three (3)
business days after the later of: (i) written notice by the Company to Oracle of
the Company's receipt of FDA approval for the ANDA relating to Doxycycline
Monohydrate; (ii) receipt of shareholder approval of the proposals as described
in Section 9.12(B) hereof, provided, however that in the event that FDA approval
of the ANDA relating to Doxycycline Monohydrate shall not have been received on
or prior to March 31, 2000, Oracle shall have no obligation to fund the final
$5,000,000 Installment as provided herein and in Exhibit A hereto. The Company
shall provide Oracle with written evidence of the FDA's approval of the ANDA for
each of Prednisolone Syrup and Doxycycline Monohydrate promptly upon receipt of
same from the FDA.

                  II.2. Company Security Documents. All of the obligations of
the Company under the Debentures shall be secured by the following:

                  (a) A lien on all the personal property and assets of the
Company now existing or hereinafter acquired granted pursuant to a Company
General Security Agreement dated of even date herewith between the Company and
Oracle, as agent for the Purchasers (the "Company General Security Agreement"),
which, except for Permitted Liens (as hereinafter defined in Section 10.4),
shall be a first lien ranking pari passu with the lien granted to the investors
in the Company's 5% convertible senior secured debentures due March 15, 2003
issued pursuant to a certain Debenture and Warrant Purchase Agreement dated
March 10, 1998 between the Company and the Purchasers listed on the signature
page thereto (the "March 1998
<PAGE>   3
Debentures").

                  (b) Collateral assignments of all leases, contracts, patents,
copyrights, trademarks and service marks of the Company (collectively, the
"Company Collateral Assignments").

                  II.3. Guaranties. All of the obligations of the Company under
the Debentures shall be guaranteed pursuant to Continuing Unconditional Secured
Guaranties (each, a "Guaranty" and collectively, the "Guaranties") by each of
the following subsidiaries of the Company (each, a "Guarantor"):

                    (a) Houba, Inc. ("Houba"); and
                    (b) Halsey Pharmaceuticals, Inc.

                  II.4. Guarantor Security Documents. All of the obligations of
the Guarantors under the Guaranties shall be secured by the following:

                    (a) A lien on all of the personal property and assets of the
respective Guarantors now existing or hereinafter acquired, granted pursuant to
a Guarantors General Security Agreement dated of even date herewith between the
Guarantors and Oracle, as agent for the Purchasers (the "Guarantors Security
Agreement"), which, except for Permitted Liens (as hereinafter defined in
Section 10.4), shall be a first lien ranking pari passu with the lien granted to
the investors in the March 1998 Debentures.

                    (b) Collateral assignments of all leases, contracts,
patents, copyrights, trademarks and service marks of the Guarantors
(collectively, "Guarantor Collateral Assignments").

                    (c) A first mortgage granted by Houba on real property owned
by Houba located at 16235 State Road 17, Culver, Indiana (the "Mortgage").

                                   ARTICLE III

                                     CLOSING

                  The closing of the purchase and sale of the Securities (the
"Closing") will take place at the offices of St. John & Wayne, 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. Such time and date is herein called the "Closing
Date."





                                       3
<PAGE>   4
                  On the Closing Date there will be delivered to each Purchaser:
(a) a Debenture dated the Closing Date, in the principal amount set forth
opposite the name of such Purchaser in Exhibit A, (b) a warrant certificate or
certificates substantially in the form of Exhibit C registered in such
Purchaser's name representing the right to purchase for $1.404 per Share the
number of Shares set forth opposite the name of such Purchaser on Exhibit A and
(c) a warrant certificate or certificates substantially in the form of Exhibit D
representing the right to purchase for $2.285 per Share the number of Shares set
forth opposite the name of such Purchaser on Exhibit A. The number of Shares
which may be purchased upon exercise of the Warrants is subject to adjustment as
provided therein. The foregoing Securities shall be delivered by the Company,
against delivery by each Purchaser to the Company of 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 (or wire transfer) for
the amount set forth opposite the name of such Purchaser on Exhibit A.

                                   ARTICLE IV

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

                  The Company represents and warrants to you as follows:

                  IV.1. Organization and Existence, etc. Except as set forth in
Section 4.1 of the Schedule of Exceptions attached hereto as Exhibit E (the
"Schedule of Exceptions") or in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 (the "Annual Report"), the Company is a
corporation duly organized and validly existing and in good standing under the
laws of its jurisdiction of incorporation and is qualified to do business in
such other jurisdictions as the nature of its operations or the ownership of its
properties require such qualification, except where the failure to be so
qualified could not reasonably be expected to have a material adverse effect on
the Company's business, operations, assets or condition (financial or
otherwise), or on its ability to perform its obligations under this Agreement
and the transactions contemplated hereby (a "Material Adverse Effect") and has
all requisite corporate power and authority to carry on its business as now
conducted and proposed to be conducted; the Company has all requisite corporate
power and authority to enter into this Agreement, to issue the Securities as
contemplated herein and to carry out and perform its obligations under the terms
and conditions of this Agreement. The Company does not own or lease any property
or engage in any activity in any jurisdiction which 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
Purchasers with true, correct and complete copies of its Certificate of
Incorporation, By-Laws and all amendments thereto, as of the date hereof.





                                       4
<PAGE>   5
                  IV.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 entity in which the Company owns
securities having a majority of the voting power in the election of directors or
persons serving equivalent functions (each, a "Subsidiary"). 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 set forth in Section 4.2 of the
Schedule of Exceptions or in the Annual Report, each Subsidiary is a corporation
duly organized and 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 on the Company
and its Subsidiaries, taken as a whole, or subject such Subsidiary to a material
liability.

                  IV.3.    Capitalization.

                  (a) As of the date hereof, the Company's authorized capital
stock consists of 40,000,000 shares of Common Stock, par value $.01 per share,
of which 14,286,440 shares are outstanding and 25,713,560 are reserved for
issuance for the purposes set forth in Section 4.3 of the Schedule of
Exceptions. As of the date hereof, the Company holds 439,603 shares of Common
Stock in its treasury which shares may be reissued.

                  (b) All the issued and outstanding shares of capital stock of
the Company shall, as of the Closing, (i) have been duly authorized and validly
issued, (ii) be 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(a), Section
4.3 of the Schedule of Exceptions or the Annual Report, there are no outstanding
preemptive, conversion or other rights, options, warrants, calls, agreements or
commitments granted or issued by or binding upon the Company, for the purchase
or acquisition of any shares of its capital stock or securities convertible into
or exercisable or exchangeable for capital stock.

                  IV.4. Authorization. All corporate action on the part of the
Company and the directors and, except as otherwise provided in Section 9.12
hereof, stockholders of the Company necessary for the authorization, execution,
delivery and performance by the Company of this Agreement and the transactions
contemplated herein, and for the authorization, issuance and delivery of the
Securities, has been taken or will have been taken prior to the Closing.





                                       5
<PAGE>   6
                  IV.5. Binding Obligations; No Material Adverse Contracts, etc.
This Agreement is a valid and binding obligation of the Company enforceable in
accordance with its terms. Except as set forth in Section 4.5 of the Schedule of
Exceptions and as provided in Sections 9.12 and 9.14 hereof, the execution,
delivery and performance by the Company of this Agreement and compliance
herewith 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 under, any
provision of state or Federal law to which the Company is subject, the
Certificate of Incorporation, as amended, or the By-Laws, as amended, 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, which violation or conflict could reasonably be
expected to have a Material Adverse Effect, or except for liens on the assets of
the Company created in favor of the Purchasers and the investors in the March
1998 Debentures, result in the creation of any mortgage, pledge, lien,
encumbrance or charge upon any of the properties or assets of the Company
pursuant to any such term. Except as set forth in Section 4.5 of the Schedule of
Exceptions or the Annual Report, no stockholder of the Company has or will have
any preemptive rights or rights of first refusal by reason of the issuance of
the Securities or Shares issuable upon conversion or exercise of the Securities.

                  IV.6. Compliance with Instruments, etc. Except as set forth in
Section 4.6 of the Schedule of Exceptions or the Annual Report, neither the
Company nor any Subsidiary is (a) in default past any grace, notice or cure
period under any indenture, agreement or instrument to which it is a party or by
which it is bound, (b) in violation of its Certificate of Incorporation, By-Laws
or of any applicable law, (c) in default with respect to any order, writ,
injunction or decree of any court, administrative agency or arbitrator, or (d)
in default under any order, license, regulation or demand of any government
agency, which default or violation could reasonably be expected to have a
Material Adverse Effect on the Company and its Subsidiaries taken as a whole.

                  IV.7. Litigation. Except as set forth in Section 4.7 of the
Schedule of Exceptions or the Annual Report, there is no action, suit or
proceeding pending, or, to the knowledge of the Company, threatened, against the
Company or any Subsidiary before any court, administrative agency or arbitrator
or any action, suit or proceeding pending, or, to the knowledge of the Company,
threatened, which challenges the validity of any action taken or to be taken
pursuant to or in connection with this Agreement or the issuance of the
Securities.

                  IV.8.    Financial Information; SEC Documents.

                    (a) The Company has furnished to the Purchasers the
consolidated financial statements of the Company and its Subsidiaries, including
consolidated balance sheets as of December 31, 1998 and 1997 and consolidated
statements of operations, changes in cash flows and stockholders' equity,
covering the three years ended December 31, 1998, all of






                                       6
<PAGE>   7
which statements have been certified by Grant Thornton LLP, certified public
accountants, and all of which statements are included or incorporated by
reference in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 filed with the Securities and Exchange Commission (the
"Commission") under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Such financial statements fairly present the condition of the
Company and its Subsidiaries as of the dates thereof and the results of the
operations of the Company and its Subsidiaries for such periods.

                    (b) The Company has also furnished to the Purchasers the
unaudited consolidated balance sheet of the Company and its subsidiaries as of
March 31, 1999, and the related unaudited consolidated statements of operations,
consolidated statements of cash flow and consolidated statements of
stockholders' equity for the three months ended March 31, 1999 and March 31,
1998. Such financial statements fairly present, in conformity with generally
accepted accounting principles ("GAAP") applied on a basis consistent with the
financial statements referred to in paragraph (a) of this Section, 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
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 is no fact known to
the Company which the Company has not disclosed to the Purchasers prior to or as
of the date of this Agreement which materially and adversely affects, or in the
future is likely to materially and adversely affect, the business, properties,
condition (financial or otherwise) or business prospects of the Company and its
Subsidiaries, taken as a whole.

                  IV.9. Offering. Subject in part to the truth and accuracy of
the Purchasers' representations and the compliance by each Purchaser with its
covenants set forth in this Agreement and any subscription agreement executed
and delivered by the Purchasers, the offer, sale and issuance of the Securities
as contemplated by this Agreement are not subject to the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
and the Company, or anyone acting on its behalf, will not take any action
hereafter that would cause such registration requirements to be applicable.

                  IV.10. Permits; Governmental and Other Approvals.

                    (a) Other than as set forth in Section 4.10 of the Schedule
of Exceptions or the Annual Report, each of the Company and its Subsidiaries
possesses such franchises, licenses, permits and other authority as are
necessary for the conduct of its business






                                       7
<PAGE>   8
as now being conducted and proposed to be conducted (except where the failure to
possess such franchises, licenses, permits or other authority could not
reasonably be expected to have a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole) and the Company and its Subsidiaries are not in
default under any of such franchises, licenses, permits or other authority.
Other than as set forth in Section 4.10 of the Schedule of Exceptions, the
Annual Report or as otherwise contemplated in Article 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 or entity is required in connection with the Company's valid
execution, delivery and performance of this Agreement or the offer, issuance and
sale of the Securities 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 in all material
respects with all applicable provisions of the Federal Food, Drug, and Cosmetic
Act (the "FDC Act"), (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 in compliance with the following specific requirements: the
Company and the Guarantors have registered all facilities with the United States
Food and Drug Administration (the "FDA"); the Company and the Guarantors have
listed all drug products with the FDA; each drug product marketed by the Company
or any Guarantor is the subject of an application approved by the FDA; all
marketed drug products comply with any conditions of approval and the terms of
the application submitted to the FDA; all drug products are manufactured in
compliance with the FDA's good manufacturing practice regulations; all products
are labeled and promoted in accordance with the terms of the marketing
application and the provisions of the FDC Act; all adverse events that were
required to be reported to the FDA have been reported to the FDA in a timely
manner; each of the Company and the Guarantors is in compliance in all material
respects 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; to the Company's knowledge, neither the
Company nor any Guarantor is employing or utilizing the services of any
individual who has been debarred under the FDC Act; 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; any products exported by the Company or a Guarantor have been
exported in compliance with the FDC Act; and each of the Company and the
Guarantors is in compliance in all material respects with the provisions of the
Prescription Drug Marketing Act, to the extent applicable.

                  (c) Without limiting the general liability 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 in all
material respects with all applicable provisions of the






                                       8
<PAGE>   9
Controlled Substances Act (the "CSA") and that the Company and the Guarantors
are in compliance with the following specific requirements: the Company and the
Guarantors are registered with the Drug Enforcement Administration (the "DEA")
at each facility where controlled substances are exported, imported,
manufactured or distributed; all controlled substances are stored and handled
pursuant to DEA security requirements; all records and inventories of receipt
and distributions of controlled substances are maintained in the manner and form
as required by DEA regulations; all reports, including, but not limited to,
ARCOS, manufacturing quotas, production quotas, and disposals, have been
submitted to DEA in a timely manner; all adverse events, including thefts or
significant losses of controlled substances, have been reported to DEA in a
timely manner; to the Company's 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 any
imports or exports of controlled substances have been conducted in compliance
with the CSA and DEA regulations.

                  IV.11. Sales Representatives, Customers and Key Employees.
Other than as set forth in Section 4.11 of the Schedule of Exceptions or the
Annual Report, to the knowledge of the Company, no independent sales
representatives, customers 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 Subsidiary on or after the Closing or in
the case of employees, leave, as of the Closing, the employ of the Company on
and after the Closing. Other than as set forth in Section 4.11 of the Schedule
of Exceptions or the Selected Reports or as contemplated by this Agreement, all
personnel are employed on an "at will" basis and may be terminated upon notice
of not more than 30 days.

                  IV.12. Copyrights, Trademarks and Patents. (a) Section 4.12 of
the Schedule of Exceptions sets forth a list of all of the Company's and any
Guarantor's patents, patent applications, trademarks, copyrights, trademark
registrations and applications therefor, patent, trademark or trade name
licenses, 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 (referred to
collectively as "Intellectual Property Rights"). The Intellectual Property
Rights are, to the best of the Company's knowledge and belief, 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 Encumbrances and pays no royalty to anyone under or with
respect to any of them.

                           (c) Neither the Company nor any Guarantor has
licensed anyone to




                                       9
<PAGE>   10
use 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.

                           (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.

                  IV.13. Inventory. All inventory of the Company 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 Company and its Subsidiaries as of December
31, 1998. 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.

                  IV.14. Registration Rights. Except as provided for in this
Agreement or as set forth in Section 4.14 of the Schedule of Exceptions or in
the Annual Report, 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.

                  IV.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. The Company
is in material compliance with all applicable laws respecting employment
practices, terms and conditions of employment and wages and hours and is not and
has not engaged in any unfair labor practice. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any other governmental agency arising out of the Company's
activities and the Company has no knowledge of any facts or information that
would give rise thereto; there is no labor strike or labor disturbance pending
or threatened against the Company nor is any grievance currently being asserted.

                  IV.16.   Environmental Matters.

                           (a) Each of the Company and the Guarantors has
obtained all environmental, health and safety permits 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 on the Company or the






                                       10
<PAGE>   11
Guarantors), and all such permits are in full force and effect and each of the
Company and the Guarantors is in compliance in all material respects with all
terms and conditions of such permits.

                           (b) Except as set forth in Section 4.16 of the
Schedule of Exceptions or the Annual Report, 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 heath or safety permits necessary for the operation of the business of the
Company and the Guarantors.

                           (c) Except as set forth in Section 4.16 of the
Schedule of Exceptions or the Annual Report, during the occupancy by the Company
or any Guarantor of any real property owned or leased by the Company or such
Guarantor, neither the Company nor any Guarantor, and to the best knowledge of
the Company, no other person or entity, 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 clean up,
removal or other remedial or responsive action under any environmental laws. To
the best knowledge of the Company, there are no underground storage tanks and no
polychlorinated biphenyls ("PCB's"), PCB contaminated oil or asbestos on any
property leased by the Company or any Guarantor.

                           (d) Except as set forth in Section 4.16 of the
Schedule of Exceptions or the Annual Report, neither the Company nor any
Guarantor is subject to any judgment, decree, order or citation related to or
arising out of environmental laws, or has received notice that it has been named
or listed as a potentially responsible party by any person or governmental body
or agency in any matter arising under environmental laws.

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

                  IV.17. Taxes. Except as set forth in Section 4.17 of the
Schedule of Exceptions or the Annual Report, the Company and each of the
Guarantors have filed all necessary income, franchise and other material tax
returns, domestic and foreign and have paid all taxes shown as due thereunder,
and the Company has no knowledge 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 on the Company or the Guarantors.

                  IV.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






                                       11
<PAGE>   12
arrangements in effect to which the Company, the Guarantors, and any of its
ERISA Affiliates are a party or by which the Company, the Guarantors, and any of
its ERISA Affiliates are bound, legally or otherwise, including, without
limitation, any profit-sharing, deferred compensation, bonus, stock option,
stock purchase, pension, retainer, consulting, retirement, severance, welfare or
incentive plan, agreement or arrangement; 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; any employment agreement; or
any other "employee benefit plan" (within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended through the date of
this Agreement ("ERISA")) (herein referred to individually as "Plan" and
collectively as "Plans"). For purposes of this Agreement, "ERISA Affiliate"
means (i) 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 Internal Revenue Code of 1986, as amended (the "Code")) as
the Company, its Subsidiaries, or any ERISA Affiliate; (ii) 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 (iii) 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 (i) or any partnership, trade or business
described in clause (ii) of this paragraph.

                  (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 delivered to Oracle, as agent: (i) the most recent Plan
document and trust agreement (including any amendments thereto and prior plan
documents, if amended with the last two years), (ii) the last two Form 5500
filings and schedules thereto, (iii) the most recent Internal Revenue Service
("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 Pension Benefit Guaranty Corporation
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 in all
material respects with applicable law, including but not limited to ERISA, and
the Code and with any applicable collective bargaining agreements or other
contractual obligations.

                  (d) Except as shown on Section 4.18 of the Schedule of
Exceptions, with






                                       12
<PAGE>   13
respect to any Plan that is subject to Section 412 of the Code ("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 and ERISA Affiliates are not
now, nor will they after the passage of time be, subject to any lien imposed
under Code Section 412(n) by reason of a failure of the Company, any Subsidiary,
or any ERISA Affiliate to make timely installments or other payments required
under Code Section 412.

                  (e) Except as shown on Section 4.18 of the Schedule of
Exceptions or in the Annual Report, no Plan subject to Title IV of ERISA has any
"Unfunded Pension Liability." For purpose of this Agreement, 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.

                  (f) Except as shown on Section 4.18 of the Schedule of
Exceptions, to the best knowledge of the Company, its Subsidiaries, and ERISA
Affiliates, there are no pending or 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) Neither the Company, any Subsidiary, nor any ERISA
Affiliate has incurred and or reasonably expects to incur (i) any withdrawal
liabilities as defined in Section 4201 of ERISA ("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, neither the Company, any Subsidiary, nor
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) Neither the Company, any Subsidiary, nor 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.

                  4.19. Personal Property. The Company and the Guarantors have
good and marketable title to each item of equipment, machinery, furniture,
fixtures, vehicles, structures






                                       13
<PAGE>   14
and other personal property, tangible and intangible, included as an asset in
the Financial Statements filed as part of the Company's Annual Report and as
part of its Form 10-Q for the period ended March 31, 1999 free and clear of any
security interests, options, liens, claims, charges or encumbrances whatsoever,
except as set forth in Schedule 4.7 hereto and as disclosed in the Company
General Security Agreement and the Guarantors General Security Agreement
executed in connection herewith. The tangible personal property owned by the
Company or used by the Company on the date hereof in the operation of its
business is adequate for the business conducted and proposed to be conducted by
the Company.

                  4.20. Real Property. The Company and the Guarantors do not own
any fee simple interest in real property other than as set forth on Schedule
4.20 (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 delivered to Purchaser a true and
complete copy of all of the lease and sublease agreements, as amended to date
(the "Leases") relating to the Owned Property and the Leased Property. The
Company enjoys a peaceful and undisturbed possession of the Owned Property and
Leased Property. No person other than the Company has any right to use or occupy
any part of the Owned Property and the Leased Property. 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 or 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 sub-leases, 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. All of the Premises are used in the conduct of the Company's or the
Guarantors' business.

                  All material permits, licenses, franchises, approvals and
authorizations (collectively, the "Real Property Permits") of all governmental
authorities having jurisdiction over each Leased Property and from all insurance
companies and fire rating and other similar boards and organizations
(collectively, the "Insurance Organizations"), required have been issued to the
Company and the Guarantors to enable each Leased 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, as of the date hereof, in full force
and effect.

                  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 any part thereof.

                  4.21. Disclosure. The information heretofore provided and to
be provided pursuant to this Agreement, including the Schedules of Exceptions
and the Exhibits hereto, and each of the agreements, documents, certificates and
writings previously delivered to the





                                       14
<PAGE>   15
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 required to be stated herein or therein or 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 is no fact
which could reasonably be expected to have a Material Adverse Effect on the
Company or the Guarantors or the prospects of the Company or the Guarantors
which has not been set forth herein.

                                    ARTICLE V

                REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS

                  Each of the Purchasers severally represents and warrants to
the Company that it is acquiring the Securities for investment for its own
account and is not acquiring any of the Securities with the view to, or for
resale in connection with, any distribution thereof. Each Purchaser understands
that none of the Securities have been registered under the Securities Act. If
the Purchaser should in the future decide to dispose of any Securities it is
understood that the Purchaser may do so only in compliance with the Securities
Act. Each Purchaser will be required to complete and execute the form of
Subscription Agreement attached as Exhibit J hereto. Purchaser acknowledges that
the Company will rely upon the representations made by such Purchaser in the
Subscription Agreement in connection with the issuance of the Securities to be
sold hereunder.

                                   ARTICLE VI

                     CONDITIONS TO CLOSING OF THE PURCHASERS

                  The obligation of each Purchaser to purchase the Securities 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, any of which may
be waived by such Purchaser:

                  VI.1. Representations and Warranties Correct. The
representations and warranties in Article 4 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.

                  VI.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 in all material respects.

                  VI.3. Compliance Certificate. The Company shall have delivered
to the Purchaser a certificate of 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





                                       15
<PAGE>   16
matters as the Purchaser shall reasonably request.

                  VI.4. No Impediments. Neither the Company nor any Purchaser
shall be subject to any order, decree or injunction of a court or administrative
agency of competent jurisdiction which would impose any material limitation on
the ability of such Purchaser to exercise full rights of ownership of the
Securities.

                  VI.5. Waivers/Elections of Rights of First Refusal. The
Company shall have obtained from each person other than a Purchaser who has any
current effective right of first refusal with respect to the Securities, a
written waiver or election of such right in form and substance reasonably
satisfactory to the Purchasers.

                  VI.6. Other Agreements and Documents. The Company shall have
issued to such Purchaser all of the Securities (including the Debenture, the
$1.404 Warrants and the $2.285 Warrants) and the Company or each of the
Guarantors shall have executed and delivered the following agreements and
documents:

                  (a) The Company Security Agreement in the form of Exhibit F
attached hereto;

                  (b) The Guaranties in the form of Exhibit G attached hereto;

                  (c) The Guarantors Security Agreement in the form of Exhibit H
attached hereto;

                  (d) Financing Statements on Form UCC-1 with respect to all
personal property and assets of the Company and each Guarantor;

                  (e) A certified copy of the Certificate of Incorporation of
the Company and each Guarantor and all amendments thereto;

                  (f) A copy of the By-Laws of the Company and each Guarantor as
amended to date, certified as being true by a principal officer of the Company;

                  (g) 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;

                  (h) The Mortgage; and

                  (i) Intercreditor Agreement in the form of Exhibit I attached
hereto.

                  VI.7. Consents. The Company shall have obtained all necessary
consents or






                                       16
<PAGE>   17
waivers, if any, from all parties 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 hereby may be consummated and the
business of the Company may be conducted by the Company after the Closing
without adversely affecting the Company.

                  VI.8. Legal Investment. At the time of the Closing, the
purchase of the Securities to be purchased by each Purchaser hereunder shall be
legally permitted by all laws and regulations to which the Purchasers and the
Company are subject.

                  VI.9. Proceedings and Other Documents. All corporate and other
proceedings in connection with the transactions contemplated by this Agreement
shall have been taken 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 transaction contemplated
hereby as the Purchasers may reasonably request.

                  VI.10. 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 J attached hereto.

                  VI.11. Nomination of Director. One designee of the Purchasers
shall have been nominated for election as a director of the Company for
consideration at the Company's 1999 Annual Meeting of Shareholders.

                                   ARTICLE VII

                      CONDITIONS TO CLOSING OF THE COMPANY

                  The Company's obligation to sell the Securities at the Closing
is subject to the fulfillment to its satisfaction on or prior to the Closing
Date of each of the following conditions:

                  VII.1. Representations. The representations made by each
Purchaser pursuant to Article 5 hereof and in the Subscription Agreement shall
be true and correct when made and shall be true and correct on the Closing Date.

                  VII.2. Legal Investment. At the time of the Closing, the
purchase of the Securities shall be legally permitted by all laws and
regulations to which the Purchasers and the Company are subject.

                  VII.3. Payment of Purchase Price. The Company shall have
received payment in full of the purchase price for the Securities.


                                  ARTICLE VIII



                                       17
<PAGE>   18
                                   PREPAYMENT

                  VIII.1. No Optional Prepayments. The Company may not at any
time, without the prior written consent of the holders of all outstanding
Debentures, prepay any Debenture, in whole or in part.

                                   ARTICLE IX

                              AFFIRMATIVE COVENANTS

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

                  IX.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 material terms of licenses and other rights to use licenses,
trademarks, trade names, service marks, copyrights, patents or processes owned
or possessed by it and necessary to the conduct of its business.

                  (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 material provision of all leases to which it is a
party or under which it occupies property.

                  (c) The Company shall and shall cause each of the Guarantors
to, except as otherwise described in the Annual Report, 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, and 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 the validity thereof shall be
contested timely and in good faith by appropriate proceedings, if the Company or
the Guarantors shall have set aside on its books adequate reserves with respect
thereto, and the failure to pay shall not be prejudicial in any material respect
to the holders of the Securities, 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 therefor. The Company shall and shall cause
the Guarantors to pay or cause to be paid all other indebtedness incident to the
operations







                                       18
<PAGE>   19
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.

                  IX.2. Basic Financial Information. The Company shall furnish
the following reports to each Purchaser (or any transferee of any Securities),
so long as the Purchaser is a holder of any Securities:

                  (a) within thirty (30) days after the end of each of the
twelve (12) monthly accounting periods in each fiscal year (or when furnished to
the Company's Board of Directors, if earlier), unaudited consolidated statements
of income and retained earnings and cash flows of the Company and its
Subsidiaries for each monthly period and for the period from the beginning of
such fiscal year to the end of such monthly period, together with consolidated
balance sheets of the Company and its Subsidiaries as at the end of each monthly
period, setting forth in each case comparisons to budget and to corresponding
periods in the preceding fiscal year, which statements will be prepared in
accordance with generally accepted accounting principles, consistently applied;

                  (b) within ninety (90) days after the end of each fiscal year,
consolidated statements of income and retained earnings and cash flows of the
Company 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 generally accepted accounting principles,
consistently applied (except as approved by the accounting firm examining such
statements and disclosed by the Company), and will be accompanied by:

                  (i) an unqualified report of the Company's independent
certified public accounting firm;

                  (ii) a report from such accounting firm addressed to the
Purchasers, stating that in making the audit necessary to express their opinion
on the financial statements, nothing has come to their attention which would
lead them to believe that the Company is not in





                                       19


<PAGE>   20
compliance with the financial covenants contained in, or that an Event of
Default has occurred with respect to, this Agreement or the Debentures (an
"Event of Non-Compliance") or, if such accountants have reason to believe that
any Event of Non-Compliance has occurred, a letter specifying the nature
thereof; and

         (iii) the management letter of such accounting firm;

                  (c) within forty-five (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/or 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
ninety (90) days after the end of the fiscal year;

                  (d) promptly upon receipt thereof, any additional reports or
other detailed information concerning significant aspects of the operations and
condition, financial or otherwise, of the Company and its Subsidiaries, given to
the Company by its independent accountants;

                  (e) at least thirty (30) days prior to the end of each fiscal
year, a detailed annual operating budget and business plan for the Company and
its Subsidiaries for the succeeding twelve-month period. Such budgets shall be
prepared on a monthly basis, displaying consolidated statements of anticipated
income and retained earnings, consolidated statements of anticipated cash flow
and projected consolidated balance sheets, setting forth in each case the
assumptions (which assumptions and projections shall represent and be based upon
the good faith judgment in respect thereof of the chief executive officer of the
Company) behind the projections contained in such financial statements, and
which budgets shall have been approved by the Board of Directors of the Company
prior to the beginning of each twelve-month period for which such budget shall
have been prepared and, promptly upon preparation thereof, any other budgets
that the Company may prepare and any revisions of such annual or other budgets;

                  (f) within ten (10) days after transmission or receipt
thereof, copies of all financial statements, proxy statements and reports which
the Company sends to its stockholders or directors, and copies of all
registration statements and all regular, special or periodic reports which it or
any of its officers or directors files with the Commission, the American Stock
Exchange (the "AMEX") or with any other securities exchange on which any of the
securities of the Company are then listed or proposed to be listed, copies of
all press releases and other statements made generally available by the Company
to the public concerning material developments in the business of the Company
and its Subsidiaries and copies of material


                                       20
<PAGE>   21
communications sent to or received from stockholders, directors or committees of
the Board of Directors of the Company or any of its Subsidiaries and copies of
all material communications sent to and received from any lender to the Company;
and

                  (g) 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.

                  IX.3. Notice of Adverse Change. The Company shall promptly
give notice to all holders of any Securities (but in any event within seven (7)
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;

                  (b) the institution or threatening of institution of an
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 materially adversely affect the business, prospects, properties, financial
condition or results of operations of the Company and its Subsidiaries, taken as
a whole whether or not arising in the ordinary course of business; or

                  (c) any information relating to the Company or any Subsidiary
which could reasonably be expected to materially and adversely affect the
assets, property, business or condition (financial or otherwise) of the Company
or its ability to perform the terms of this Agreement. Any notice given under
this Section 9 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 has taken and/or proposes to take
with respect thereto.

                  IX.4. Compliance With Agreements; Compliance With Laws. The
Company shall comply and 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
in all material respects with any material laws, ordinances, rules and
regulations of any foreign, Federal, state or local government or any agency
thereof, or any writ, order or decree, and conform to all valid requirements of
governmental authorities 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, the Employee Retirement
Income Security Act of 1978, the Environmental Protection Act, the Occupational
Safety and Health Act, the Foreign Corrupt Practices Act and the rules and
regulations of each of the agencies administering such acts.

                  IX.5. Protection of Licenses, etc. The Company shall and shall
cause its


                                       21
<PAGE>   22
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 therefor and other proprietary information 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.

                  IX.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 generally accepted accounting principles applied
on a consistent basis.

                  (b) The Company shall permit each holder of any Securities 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 (i) to make extracts or copies of the
books, accounts and records of the Company or its Subsidiaries, and (ii) 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 which a holder of any Securities (a "Holder") 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.

                  IX.7.  Board Members and Meetings.

                  The Company agrees to hold meetings of its Board of Directors
at least four (4) times a year, at no more than three-month intervals. So long
as the Purchasers own any Debentures, the Purchasers (by action of the holders
of a majority of the outstanding principal amount of the Debentures) shall have
the right to designate for nomination one person to be a member of the Company's
Board of Directors and the Company shall cause such designee to be nominated on
the Closing Date, subject to the approval of the Company's shareholders for (i)
the election of such designee and (ii) an amendment to the Company's
certification of incorporation to increase the size of the Board of Directors.
So long as the Purchasers own any Debentures, at each annual meeting of
Stockholders held thereafter, the Purchasers (by action of the holders of a
majority of the outstanding principal amount of the Debentures) shall have the
right to nominate one designee to be a member of the Board of Directors.

                  IX.8. Maintenance of Office. The Company will maintain its
principal office at


                                       22
<PAGE>   23
the address of the Company set forth in Section 16.5 of this Agreement where
notices, presentments and demands in respect of this Agreement and any of the
Securities may be made upon the Company, until such time as the Company shall
notify the holders of the Securities in writing, at least thirty (30) days prior
thereto, of any change of location of such office.

                  IX.9. Use of Proceeds. The Company shall use all the proceeds
received from the sale of the Securities pursuant to this Agreement for the
purposes set forth in Section 9.9 of the Schedule of Exceptions.

                  IX.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 therein.

                  IX.11. Reporting Requirements. The Company shall comply with
its reporting and filing obligations pursuant to Section 13 or 15(d) of the
Exchange Act. The Company shall provide copies of such reports, including,
without limitation, reports on Form 10-K, 10-Q, 8-K and Schedule 14A promulgated
under the Exchange Act, or substantially the same information required to be
contained in any successor form, to each holder of Securities promptly upon
filing with the Commission.

                  IX.12. Amendments to the Company's Certificate of
Incorporation.

                  (A) The Company will present to its shareholders for
consideration at the 1999 Annual Meeting of Shareholders (i) a proposal to amend
the Company's Certificate of Incorporation to increase the number of authorized
shares of the Company's common stock available for issuance from 40,000,000 to
75,000,000 shares in order to provide for a sufficient number of authorized
shares to be available and reserved for issuance upon conversion of the
Debentures and exercise of the Warrants, (ii) a proposal to amend the Company's
Certificate of Incorporation to provide that holders of Debentures shall have
the right to vote as part of a single class with all holders of Common Stock of
the Company on all matters to be voted on by such stockholders with such Holder
having such number of votes as shall equal the number of votes they would have
had such Holders converted the entire outstanding principal amount of the
Debentures into Shares immediately prior to the record date relating to such
vote, (iii) a proposal to obtain shareholder approval to permit the issuance of
the Company's Common Stock in an amount exceeding twenty percent (20%) of the
Company's outstanding Common Stock on the date of this Agreement pursuant to the
conversion of the Debentures and exercise of the Warrants, (iv) a proposal to
amend the Company's Certificate of Incorporation to increase the size of the
Board of Directors from a maximum of eight (8) to a maximum of eleven (11)
directors, and (v) the nomination for director of a designee of the Purchasers
(as designated by the holders of a majority of the outstanding principal amount
of the Debentures). Upon receipt of approval from the Company's shareholders to
increase the Company's authorized shares from 40,000,000 to 75,000,000 shares,
the Company will file an amendment to the Certificate of Incorporation to
reflect such increase in the Company's authorized shares to 75,000,000 shares of
Common Stock and at all times cause there to be reserved for issuance a
sufficient number of Shares upon conversion of the Debentures and exercise of
the Warrants.

                                       23
<PAGE>   24
                  (B) Upon execution of this Purchase Agreement, the Company
shall use its best efforts to promptly file with the Federal Trade Commission
and the Department of Justice, but in no event later than sixty (60) days from
the date of this Purchase Agreement, all required Pre-Merger Notifications and
Reports ("Notifications") pursuant to the Hart-Scott-Rodino Anti-Trust
Improvements Act of 1976, as amended ("HSR Act") in conjunction with a
corresponding filing by Galen Partners III, L.P. and Galen Partners
International III, L.P. (collectively, "Galen"), in order to permit the Company
to file the amendment to its Certificate of Incorporation approved at the
Company's Annual Shareholder's Meeting held on June 30, 1998 providing the
holders of the Company's 5% Convertible Senior Secured Debentures due March 15,
2003 ("March 1998 Debentures") with the right to vote as part of a single class
with all holders of the Company's Common Stock on all matters to be voted on by
such stockholders on a "as converted" basis (the "Charter Amendment"). Promptly
upon the satisfaction of the waiting period required under the HSR Act, the
Company shall file with the Secretary of State of the State of New York the
Charter Amendment and convene a special meeting of the Company shareholders (the
"Special Meeting") to reconsider the proposals described in Section 9.12(A)(i),
(ii) and (iii) in the event such proposals were not approved at the Company's
Annual Shareholders Meeting. By execution of this Agreement by counterpart
solely as to the provisions of this Section 9.12(B), Galen agrees to file its
required Notifications under the HSR Act and to exercise its voting rights
provided under the Charter Amendment at the Special Meeting and cast all such
votes in favor of the proposals described above at the Special Meeting.

                  IX.13. Listing of Common Stock. As promptly as practicable
following receipt of shareholder approval of the amendment to the Company's
Certificate of Incorporation contemplated in Section 9.12 hereof, the Company
shall file the appropriate applications for listing with the AMEX the shares
underlying the Debentures and Warrants. The Company shall use its best efforts
and work diligently to accomplish such listings as promptly as practicable after
the 1999 Annual Meeting of Shareholders.

                  IX.14. HSR Act Filing. The Purchasers acknowledge and agree
that until the filing, if required, of all Pre-Merger Notifications and reports
("Notifications") pursuant to the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), with respect to the issuance of the
Securities and the expiration or termination of all applicable waiting periods
thereunder, a Certificate of Amendment to the Certificate of Incorporation of
the Company providing for voting rights for the Holders will not be filed. The
Company agrees to file all Notifications, if any, required to be filed by it
under the HSR within sixty (60) days after the date hereof.

                  IX.15. 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 any of the Securities.

                                       24

<PAGE>   25

                                    ARTICLE X

                               NEGATIVE COVENANTS

                  The Company hereby covenants and agrees, so long as any
Purchaser owns any Debentures, it will not (and not allow any of the Guarantors
to), directly or indirectly, without the prior written consent of the holders of
at least a majority in aggregate principal amount of the Debentures then
outstanding, as follows:

                  X.1. Payment of Dividends; Stock Purchase. Declare or pay any
cash dividends on, or make any distribution to the holders of, any shares of
capital stock of the Company, other than dividends or distributions payable in
such capital stock, or purchase, redeem or otherwise acquire or retire for value
any shares of capital stock of the Company or warrants or rights to acquire such
capital stock.

                  X.2. 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 but will suffer and permit the execution
of every such power as though no such law had been enacted.

                  X.3. Reclassification. Effect any reclassification,
combination or reverse stock split of the common stock of the Company.

                  X.4. Liens. Except as otherwise provided in this Agreement,
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 generally accepted accounting
principles consistently applied shall have been made therefor;

                  (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 being contested in good
faith, if an adverse decision in which contest would not materially affect the
business of the Company;

                  (c) liens securing indebtedness of the Company or any
Subsidiaries which (i) is permitted under Section 10.5(h) or (ii) is in an
aggregate principal amount not exceeding

                                       26

<PAGE>   26
$500,000 and which liens are subordinate to liens on the same assets held by the
Holders;

                  (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 such reserves or other appropriate provisions, if any,
as shall be required by generally accepted accounting principles 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 constituting 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 in any material respect with the ordinary conduct of the
business of the Company or any of its Subsidiaries;

                  (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 debt 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 liens listed in Section 10.4 of the Schedule of
Exceptions ("Permitted Liens"); and

                  (m) the replacement, extension or renewal of any lien
permitted by this Section 10.4 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

                                       27

<PAGE>   27
indebtedness secured thereby.

                  X.5. Indebtedness. Create, incur, assume, suffer, permit to
exist, or guarantee, directly or indirectly, any indebtedness, excluding,
however, from the operation of the covenant:

                           (a) any indebtedness or the incurring, creating or
assumption of any indebtedness secured by liens permitted by the provisions of
Section 10.4 (c) above;

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

                           (c) 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;

                           (d) indebtedness existing on the date hereof and
described in Section 10.5 of the Schedule of Exceptions;

                           (e) 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;

                           (f) indebtedness relating to loans from the Company
to its Subsidiaries;

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

                           (h) indebtedness relating to a working capital line
of credit in an amount not to exceed $10,000,000;

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

                           (j) indebtedness (if any) expressly permitted by, and
in accordance with, the terms and conditions of this Agreement.

                  For purposes hereof, the term "indebtedness" shall mean and
include (A) all items which would be included on the liability side of a balance
sheet 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 by such corporation),
deferred credits of
                                       28

<PAGE>   28
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 Subsidiary) for which the Company (or Subsidiary)
is obligated, contingently or otherwise, to purchase or otherwise acquire, or
for the payment or purchase of which the Company (or Subsidiary) has agreed,
contingently or otherwise, to advance or supply funds, or with respect to which
the Company (or Subsidiary) is contingently liable, including, without
limitation, indebtedness for borrowed money and indebtedness guaranteed or
supported indirectly by the Company (or Subsidiary) through an agreement,
contingent or otherwise (1) to purchase the indebtedness, or (2) 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
(3) 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; provided,
however, that such term shall not mean and include any indebtedness (x) 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 (y) as to which the Company (or Subsidiary) is in good faith
contesting, provided that an adequate reserve therefor has been set up on the
books of the Company (or Subsidiary).

                  X.6. Merger, Consolidation, etc. Merge or consolidate with any
person pursuant to a transaction in which the outstanding voting stock of the
Company is converted into or exchanged for cash, securities or other property,
other than any such transaction where the outstanding voting stock of the
Company 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 66_% of the voting stock of the surviving or transferee corporation
immediately after such transaction; or sell, transfer, lease or otherwise
dispose of all or substantially all of its consolidated assets (as shown on the
most recent financial statements of the Company or the Subsidiary, as the case
may be) in any single transaction or series of related transactions; or
liquidate, dissolve, recapitalize or reorganize in any form of transaction.

                  X.7. Arm's Length Transactions. Enter into any transaction,
contract or commitment or take any action other than at Arm's Length. For
purposes hereof the term "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.

                                   ARTICLE XI

                               REGISTRATION RIGHTS

                  XI.1. Restrictive Legend. Each certificate representing (i)
any Debenture, (ii) the Warrants or (iii) any Shares or other securities issued
in respect of the Debentures, Warrants or

                                       29

<PAGE>   29
Shares, upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event or upon the exercise of the Warrants or
conversion of the Debentures, shall be stamped or otherwise imprinted with a
legend in the following form (in addition to any legend required under
applicable state securities laws):

         "THIS [NAME OF SECURITY] [AND THE COMMON STOCK ISSUABLE UPON
         [CONVERSION] [EXERCISE] HEREOF] HAVE NOT BEEN REGISTERED UNDER THE
         SECURITIES ACT OF 1933, AS AMENDED, 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 LAW OR (2)
         THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR OTHER
         COUNSEL TO THE HOLDER OF SUCH [NAME OF SECURITY] REASONABLY
         SATISFACTORY TO THE COMPANY THAT SUCH [NAME OF SECURITY] [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.

                           XI.2. Certain Definitions. As used in this Article
11, the following terms shall have the following respective meanings:

         "Holders" shall mean the Purchasers or any person to whom a Purchaser
or transferee of a Purchaser has assigned any Debenture, Warrants or Shares.

         "Initiating Holders" shall mean any persons who in the aggregate are
Holders of at least a majority of the Shares.

         "Registrable Securities" shall mean any Shares issued upon exercise of
the Warrants, conversion of any Debenture or in respect of the Shares issued
upon exercise of the Warrants or conversion of any Debenture upon any stock
split, stock dividend, recapitalization or similar event. "Requesting
Stockholders" shall mean holders of securities of the Company entitled to have
securities included in any registration pursuant to Section 11.3 and who shall
request such inclusion.

         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.

                  "Registration Expenses" shall mean all expenses incurred by
the Company in

                                       30

<PAGE>   30
compliance with Sections 11.3 and 11.4 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 for the Initiating Holders,
and the expense of any special audits incident to or required by any such
registration, exclusive of Selling Expenses.

                  "Restricted Securities" shall mean the securities of the
Company required to bear or bearing the legend set forth in Section 11.1 hereof.

                  "Selling Expenses" shall mean 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.

                  XI.3.  Requested Registration.

                  (a) Requests for Registration. The Initiating Holders may
request registration under the Securities Act of all or part of their
Registrable Securities. Within ten (10) days after receipt of any such request,
the Company will give written notice of such requested registration to all other
Holders of Registrable Securities and any other stockholder having registration
rights which entitle it to participate in such registration. The Company will
include in such registration all Registrable Securities with respect to which it
has received written requests for inclusion therein within fifteen (15) 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 11.3(a) is referred to
herein as a "Demand Registration."

                  (b) Number of Registrations. The Holders of Registrable
Securities will be entitled to request one (1) Demand Registration for which the
Company will pay all Registration Expenses. A registration will not count as a
Demand Registration until it has become effective; provided, however, that
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 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. The Company will not include in any
Demand Registration any securities which are not Registrable Securities without
the written consent of the Holders of

                                       31

<PAGE>   31
a majority of the Registrable Securities requesting such registration. Any
persons other than Holders of Registrable Securities who participate in a Demand
Registration which is not at the Company's expense must pay their share of the
Registration Expenses. A registration shall not count as a Demand Registration
if some or all 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 11.3(c).

                  (d) Restrictions on Demand Registrations. The Company will not
be obligated to effect any Demand Registration within six (6) months after the
effective date of a previous registration in which the Holders of Registrable
Securities were given piggyback rights pursuant to Section 11.4 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").

                  XI.4.  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
Holders of Registrable Securities of its intention to effect such a
registration. The Company will include in such registration all Registrable
Securities with respect to which the Company has received written requests for
inclusion therein within thirty (30) days after the receipt of the Company's
notice.

                  (b Piggyback Expenses. The Registration Expenses of the
Holders of Registrable Securities 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 and securities of the Company with
respect to which similar registration rights have heretofore been granted and
requested to be included in such registration, pro rata in accordance with the
amounts of Registrable Securities and such securities requested to be so
included by the respective Holders and holders of such securities of the
Company; 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

                                       32

<PAGE>   32
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
and securities of the Company with respect to which similar registration rights
have heretofore been granted and requested to be included in such registration,
pro rata in accordance with the amounts of Registrable Securities and such
securities requested to be so included by the respective Holders and holders of
such securities of the Company, 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 11.3 or pursuant to this Section 11.4, 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 (6) 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.

                  XI.5.  Holdback Agreements.

                  (a Each Holder of Registrable Securities which is 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 (7) 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 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 (7) 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.

                                       33

<PAGE>   33
                  XI.6. Registration Procedures. Whenever the Holders of
Registrable Securities have requested that any Registrable Securities be
registered pursuant to this Article 11, the Company will use its reasonable 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 will as expeditiously as possible:

                  (a 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 similar rule
then in effect), 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 a majority of the Registrable Securities
covered by such registration statement copies of all such documents proposed to
be filed, which documents will be subject to the review of such counsel);

                  (b 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 11.6(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;

                  (c 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;

                  (d use its best efforts to register or qualify 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 (i) qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subsection, (ii) subject itself to
taxation in any such jurisdiction, or (iii) consent to general service of
process in any such jurisdiction);

                  (e 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

                                       34
<PAGE>   34
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;

                  (f cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed;

                  (g provide a transfer agent and registrar for all such
Registrable Securities not later than the effective date of such registration
statement;

                  (h 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; and

                  (i 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 Initiating Holders and keep such registration statement effective until the
Holders have completed the sale and distribution of the Registrable Securities.

                  XI.7. Expenses of Registration. All Registration Expenses
incurred in connection with a registration, qualification or compliance pursuant
to this Article 11 shall be borne by the Company, and all Selling Expenses shall
be borne by the Holders and the Requesting Stockholders 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 Initiating Holders, 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 11.3.

                  XI.8.  Indemnification.

                  (a The Company will indemnify each Holder, each Holder's
officers, directors, employees, agents and partners, and each person controlling
such Holder, with respect to which registration, qualification or compliance of
such Holder's securities has been effected pursuant to this Article 11, and each
underwriter, if any, and each person who controls any underwriter, against all
claims, losses, damages and liabilities (or actions in respect thereof)

                                       35
<PAGE>   35
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 and partners, and each
person controlling 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 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, 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 and
Requesting Stockholder and each of their officers, directors, employees, agents
and partners, and each person controlling such Holder or Requesting Stockholder,
against all claims, losses, damages and liabilities (or actions in respect
thereof) 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, 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 Holder and
Requesting Stockholders hereunder shall be limited to an amount equal to the
proceeds (after deduction of underwriting discounts, if any) to each such Holder
or Requesting Stockholder of securities sold as contemplated herein.

                                       36
<PAGE>   36
                  (c Each party entitled to indemnification under this Section
11.8 (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 Article
11 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.

                  XI.9. Information by Holders. 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 Article 11.

                  XI.10. 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 more favorable than the rights granted
under this Article 11.

                  XI.11. 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, at all times from and

                                       37
<PAGE>   37
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
Securities Exchange Act at any time after it has become subject to such
reporting requirements; and

                  (c so long as the Purchaser owns any Restricted Securities,
furnish to the Purchaser forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of Rule 144 (at any
time from and after ninety (90) days following the effective date of the first
registration statement filed by the Company for an offering of its securities to
anyone other than its employees), 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 the Purchaser may reasonably request in
availing itself of any rule or regulation of the Commission allowing the
Purchaser to sell any such securities without registration.

                  XI.12. Participation in Underwritten Registrations. No person
may participate in any underwritten registration hereunder unless such person
(i) 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 (ii) completes and executes all reasonable questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
required under the terms of such underwriting arrangements.

                  XI.13. Selection of Underwriters. If any Demand Registration
is an underwritten offering, the Holders of a majority of the Registrable
Securities included in such registration have the right to select the investment
banker(s) and manager(s) to administer 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 banker(s) and manager(s) to
administer the offering, subject to the approval of the Holders of a majority of
the Registrable Securities included in such registration (which approval will
not be unreasonably withheld).

                  XI.14. Termination of Registration Rights. The rights of
Holders to request a Demand Registration or participate in a Piggyback
Registration shall expire on March 15, 2007.

                                   ARTICLE XII

                               EVENTS OF DEFAULTS

                  XII.1. Events of Default. If any of the following events shall
occur and be continuing 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

                                       38
<PAGE>   38
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 each case such default shall have continued without cure for ten (10)
days from the scheduled date of payment of such principal and/or interest;

                  (b If the Company shall default in the performance of any of
the covenants contained in Articles 9 or 10 and in the case of a default under
Sections 9.1 through and including 9.8, 9.13, 9.14 or 10.4 (exclusive of Section
10.4(c)), such default shall have continued without cure for thirty days (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 (the Company
to give forthwith to all other Holders of the Debentures at the time outstanding
written notice of the receipt of such Default Notice, specifying the default
referred to therein);

                  (c If the Company shall default in the performance of any
other material agreement or covenant contained in this Agreement or in any other
agreement executed in connection with this Agreement and such default shall not
have been remedied to the satisfaction of the Holder or Holders of at least a
majority in aggregate principal amount of the Debentures then outstanding,
within forty five (45) days after a Default Notice shall have been given to the
Company (the Company to give forthwith to all other Holders of Debentures at the
time outstanding written notice of the receipt of such Default Notice,
specifying the default referred to therein);

                  (d If any representation or warranty made in this Agreement or
in or any certificate delivered pursuant hereto shall prove to have been
incorrect when made;

                  (e If 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
$250,000, or which results in such indebtedness, in an aggregate amount (with
other defaulted indebtedness) in excess of $750,000 becoming due and payable
prior to its due date and if such indenture or instrument so requires, the
holder or holders thereof (or a trustee on their behalf) shall have declared
such indebtedness due and payable;

                  (f 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 on the Company and its Subsidiaries, taken as
a whole, and such default is not waived or cured within the applicable grace
period;

                  (g 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
sixty (60) days after entry thereof;

                                       39
<PAGE>   39
                  (h If the Company or any Subsidiary shall make an assignment
for the benefit of creditors, or shall admit in writing its inability to pay its
debts; or if the Company or any Subsidiary shall suffer a receiver or trustee
for it or substantially all of its assets to be appointed, and, if appointed
without its consent, not to be discharged or stayed within ninety (90) days; or
if the Company or any Subsidiary shall suffer proceedings under any law relating
to bankruptcy, insolvency or the reorganization or relief of debtors to be
instituted by or against it, and, if contested by it, not to be dismissed or
stayed within ninety (90) days; or if the Company or any Subsidiary shall suffer
any writ of attachment or execution or any similar process to be issued or
levied against it or any significant part of its property which is not released,
stayed, bonded or vacated within ninety (90) days after its issue or levy; or if
the Company or any Subsidiary takes corporate action in furtherance of any of
the aforesaid purposes or conditions; or

                   (i (A) Prior to November 30, 1999, the directors and the
shareholders of the Company do not (i) approve an amendment to the Certificate
of Incorporation of the Company to (a) increase the number of authorized shares
of Common Stock from 40,000,000 to 75,000,000 and (b) give the holders of
Debentures voting rights as set forth in Section 9.12(A) of this Agreement, and
(ii) authorize the issuance by the Company of shares of its Common Stock in
excess of twenty percent (20%) of the Company's outstanding shares of the date
hereof upon conversion of the Debentures and exercise of the Warrants as set
forth in Section 9.12(A) of this Agreement.

                  XII.2.  Remedies.

                  (a Except as provided in Section 12.2(c) hereof, upon the
occurrence of an Event of Default, any Holder or Holders of a majority in
aggregate principal amount of the Debentures at the time outstanding 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; and (ii)
declare any other amounts payable to the Purchasers under this Agreement or as
contemplated hereby due and payable.

                  (b Notwithstanding anything 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 at least a majority in
aggregate principal amount of the Debentures then outstanding, 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 a 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
then outstanding, describing such notice or other action and the nature of the
claimed default.

                                       40
<PAGE>   40
                  (c) Notwithstanding anything to the contrary contained herein,
upon the occurrence of an Event of Default under Section 12.1(i)(concerning the
failure to obtain shareholder approval of the matters described in such Section)
the Purchasers' shall have the right to require the Company to redeem the
Debentures at par, together with outstanding interest, plus a default interest
payment computed at the annual rate of five percent (5%) accruing from the date
of issuance of the Debentures until redeemed by the Company. Upon the occurrence
of an Event of Default pursuant to Section 12.1(i), the Purchasers may provide
written notice to the Company, in accordance with Section 16.5 hereof, demanding
that the Company redeem all or any portion of the Debentures. Not later than
fifteen (15) days following the receipt of such notice, the Company shall remit
to the Purchasers, against the surrender of the Debentures and the Warrants
issued to the Purchaser pursuant to this Agreement, the sum of the principal
amount of the Debentures, plus accrued and unpaid interest through the date of
redemption computed at the annual rate of five percent (5%), plus a default
interest payment computed at the annual rate of five percent (5%) from the date
of issuance of the Debentures through and including the date of redemption. The
Company's redemption obligations under this Section 12.2(c) are conditioned upon
the Purchaser's surrender of the Debentures and Warrants issued pursuant to this
Agreement. In the event a Purchaser demands the redemption by the Company of
less than the entire principal amount of a Debenture, the Company will issue a
new Debenture of like tenor to the Purchaser in a principal amount equal to the
unredeemed principal amount of such Debenture.

                  XII.3. Enforcement. In case any one or more Events of Default
shall occur and be continuing, the Holder of a Debenture then outstanding 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 contained herein 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. Each Holder
agrees that it will give written notice to the other Holders 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 any Debenture 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 in equity, by
statute or otherwise.


                                  ARTICLE XIII

                              AMENDMENT AND WAIVER

                  This Agreement may not be amended, discharged or terminated
(or any provision hereof waived) without the written consent of the Company and
the Purchasers. Provided that such written consent of the Company and the
Purchasers is given:

                  (a Holders of at least a majority in aggregate principal
amount of the Debentures then outstanding may by written instrument amend or
waive any term or condition of

                                       41
<PAGE>   41
this Agreement relating to the rights or obligations of Holders of Debentures,
which amendment or waiver operates for the benefit of such Holders, except that
no such amendment or waiver shall (i) change the fixed maturity of any
Debentures, the rate or the time of mandatory prepayment of principal thereof or
payment of interest thereon, the principal amount thereof, without the consent
of the holder of the Debentures so affected, (ii) change the aforesaid
percentage of Debentures, the Holders of which are required to consent to any
such amendment or waiver, without the consent of the holders of all the
Debentures then outstanding or (iii) change the percentage of the amount of the
Debentures, the Holders of which may declare the Debentures to be due and
payable under Article 12.

                  The Company and each Holder of a Debenture then or thereafter
outstanding shall be bound by any amendment or waiver effected in accordance
with the provisions of this Article 13, whether or not such Debenture shall have
been marked to indicate such modification, but any Debenture issued thereafter
shall bear a notation as to any such modification. Promptly after obtaining the
written consent of the holders herein provided, the Company shall transmit a
copy of such modification to all of the holders of the Debentures then
outstanding.

                  (b Holders of at least a majority of the Shares then
outstanding may by written instrument amend or waive any term or condition of
this Agreement relating to the rights or obligations of holders of Shares, which
amendment or waiver operates for the benefit of such holders but in no event
shall the obligation of any holder of Shares hereunder be increased, except upon
the written consent of such holder of Shares.

                  The Company and each holder of a Share then or thereafter
outstanding shall be bound by any amendment or waiver effected in accordance
with the provisions of this Article 13, whether or not such Share shall have
been marked to indicate such modification, but any Share issued thereafter shall
bear a notation as to any such modification. Promptly after obtaining the
written consent of the holders herein provided, the Company shall transmit a
copy of such modification to all of the holders of the Shares then outstanding.

                                   ARTICLE XIV

                     EXCHANGE AND REPLACEMENT OF DEBENTURES

                  XIV.1. Subject to Section 15.2, at any time at the request of
any Holder of one or more of the Debentures to the Company at its office
provided under Section 16.5, the Company at its expense (except for any transfer
tax or any other tax arising out of the exchange) will issue in exchange
therefor 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.

                  XIV.2. Upon receipt of evidence satisfactory to the Company of
the loss, theft,

                                       42
<PAGE>   42
destruction or mutilation of any Debenture and, in the case of any such loss,
theft, or destruction, upon delivery of a bond of indemnity satisfactory to the
Company (provided that if the holder is a Purchaser or a financial institution,
its own agreement will be satisfactory), or in the case of any such mutilation,
upon surrender and cancellation of such Debenture, the Company will issue a new
Debenture of like tenor as if the lost, stolen, destroyed or mutilated Debenture
were then surrendered for exchange in lieu of such lost, stolen, destroyed or
mutilated Debenture.

                                   ARTICLE XV

                      TRANSFER OF AND PAYMENT OF DEBENTURES

                      XV.1.  Notification of Proposed Sale.


                  (a Subject to Section 15.1(b), each holder of a Debenture by
acceptance thereof agrees that it will give the Company ten (10) 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 Commission.

                  (b If the Holder of a Debenture 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 Section 15.1(a).

                  XV.2. Payment. So long as a Purchaser shall be the holder of
any Debenture, the Company will make payments of principal and interest to such
Purchaser no later than 11 a.m. Eastern Time on the date when such payment is
due. Payments shall be made by delivery to such Purchaser at such Purchaser's
address furnished to the Company in accordance with this Agreement of a
certified or official bank check drawn upon or issued by a bank which is a
member of the New York Clearinghouse for banks or by wire transfer to such
Purchaser's (or such Purchaser's nominee's) account at any bank or trust company
in the United States of America.

                                   ARTICLE XVI

                                  MISCELLANEOUS

                  XVI.1. 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, without giving
effect to its conflict of laws rules.

                                       43
<PAGE>   43
                  XVI.2. Survival. Except as specifically provided herein, the
representations, warranties, covenants and agreements made herein shall survive
(a) any investigation made by the Purchasers and (b) the Closing.

                  XVI.3. 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 successors, assigns, heirs,
executors and administrators of the parties hereto.

                  XVI.4. Entire Agreement. This Agreement (including the
Exhibits and Schedules hereto) and the 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.

                  XVI.5. Notices, etc. 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
              Attention: Mr. Michael Reicher
              Chief Executive Officer
              Facsimile: (815) 399-9710

         (b   if to a Purchaser, to the address set forth on Exhibit A 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. Copies of any
notice, demand or communication given to (x) the Company, shall 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 and (y)
any Purchaser, shall be delivered to Kane Kessler, P.C., 1350 Avenue of the
Americas, New York, New York 10019, Attention: Robert L. Lawrence, Esq.,
Facsimile: (212) 245-3009, or such other address as may be directed.

                  XVI.6. Delays or Omissions. No delay or omission to exercise
any right, power or remedy accruing to any holder of any Securities 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


                                       44
<PAGE>   44
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 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.

                  XVI.7. 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.

                  XVI.8.  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, person or firm, 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; provided, however,
that the Company will have the right to defend against such liability by
representative(s) of its own choosing, which representative(s) shall be approved
by the Holders of a majority in aggregate principal amount of the Debentures and
the Holders of a majority of the Shares (which approval shall not be
unreasonably withheld or delayed). In the event that the Company shall fail to
undertake the defense within thirty (30) days of any notice of such claim, the
Purchasers shall have the right to undertake the defense, compromise or
settlement of such claim upon written notice to the Company by holders of a
majority in principal amount of the Debentures and the holders of a majority of
the Shares and the Company will be responsible for and shall pay all reasonable
costs and expenses of defending such liability or asserted liability and any
amounts paid in settlement.

                  (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 or firm (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.

                  XVI.9. Expenses. 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 the Company
will reimburse the Purchasers


                                       45
<PAGE>   45
for all of the reasonable expenses incurred by 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 and due diligence conducted in connection therewith, including the fees
and disbursements of counsel and auditors for the Purchasers; provided, however,
that the amount of such reimbursement shall not exceed $25,000. Such
reimbursement shall be paid on the Closing Date.

                  XVI.10. 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 Agreement or by reason of any other
cause or dispute whatsoever between them. The parties hereto agree that the
State and Federal Courts which sit in the State of New York and the County of
New York shall have exclusive jurisdiction to hear and determine any claims or
disputes between the Company and such holders, pertaining directly or indirectly
to this 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 16.10 shall
not be deemed to preclude the enforcement of any judgment obtained in such forum
or the taking of any action under this Agreement to enforce same in any
appropriate jurisdiction. The parties each waive any objection based upon forum
non conveniens and any objection to venue of any action instituted hereunder.

                  XVI.11. 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.

                  XVI.12. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.


                                       46
<PAGE>   46
                  If the Purchaser is in agreement with the foregoing the
Purchaser shall sign where indicated below and thereupon this letter shall
become a binding agreement between such Purchaser and the Company.

                                                     HALSEY DRUG CO., INC.


                                                     By: /s/ Michael Reicher
                                                         -----------------------
                                                     Michael Reicher
                                                     Chief Executive Officer
Solely as to the Provisions
of Section 9.12(B) hereof

GALEN PARTNERS III, L.P.
By:  Claudius, L.L.C., General Partner

By: /s/ Bruce F. Wesson
    --------------------
        Bruce F. Wesson
        Managing Member



GALEN PARTNERS INTERNATIONAL III, L.P.
By:  Claudius, L.L.C., General Manager

By: /s/ Bruce F. Wesson
    --------------------
        Bruce F. Wesson
        Managing Member



                                       47
<PAGE>   47
PURCHASERS

ORACLE STRATEGIC PARTNERS, L.P.


By: /s/ Larry Feinberg
    --------------------


GALEN PARTNERS III, L.P.
By:  Claudius, L.L.C., General Partner

By: /s/ Bruce F. Wesson
    --------------------
        Bruce F. Wesson
        Managing Member


GALEN PARTNERS INTERNATIONAL III, L.P.
By:  Claudius, L.L.C., General Partner

By: /s/ Bruce F. Wesson
    --------------------
        Bruce F. Wesson
        Managing Member


GALEN EMPLOYEE FUND III, L.P.
By:  Wesson Enterprises, Inc.

By: /s/ Bruce F. Wesson
    --------------------
        Bruce F. Wesson
        President

/s/ Patrick Coyne
--------------------
PATRICK COYNE


/s/ Alan Smith
--------------------
ALAN SMITH


/s/ Michael Weisbrot
--------------------
MICHAEL WEISBROT


                                       48
<PAGE>   48

/s/ Susan Weisbrot
--------------------
SUSAN WEISBROT

/s/ Greg Wood
--------------------
GREG WOOD


/s/ Dennis Adams
--------------------
DENNIS ADAMS

/s/ Bernard Selz
--------------------
BERNARD SELZ


                                       49
<PAGE>   49
                                    EXHIBIT A

<TABLE>
<CAPTION>
                                               Principal Amount of         $1.404           $2.285
      Name and Address of Purchaser            Debenture Purchased        Warrants         Warrants        Purchase Price
      -----------------------------            -------------------        --------         --------        --------------

<S>                                              <C>                       <C>               <C>             <C>
1.   Oracle Strategic Partners, L.P.             $  5,000,000.00           505,050           505,050         $5,000,000.00

2.   Oracle Strategic Partners, L.P.             $10,000,000.00(1)       1,010,100         1,010,100        $10,000,000.00

3.   Galen Partners III, L.P.                    $ 5,964,583.09(2)         602,483           602,483         $5,964,583.09

4.   Galen Partners International III, L.P.      $   539,900.40(3)          54,535           54,535            $539,900.40

5.   Galen Employee Fund III, L.P.               $    24,424.10(4)           2,467             2,467            $24,424.10

6.   Patrick Coyne                               $    51,178.08(5)           5,169             5,169            $51,178.08

7.   Alan Smith                                  $    13,358.08(6)           1,349             1,349            $13,358.08

8.   Michael and Susan Weisbrot                  $   564,446.96(7)          57,015           57,015            $564,446.96

9.   Greg Wood                                   $   204,712.33(8)          20,678           20,678            $204,712.33

10.  Dennis Adams                                $    300,000.00            30,303           30,303            $300,000.00

11.  Bernard Selz                                $    200,000.00            20,202           20,202            $200,000.00
                                                 ---------------      ------------     ------------         --------------
                  Total                          $ 22,862,603.04      2,309,351.00     2,309,351.00         $22,862,603.04

</TABLE>
<PAGE>   50

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

1        To be funded by Oracle Strategic Partners, L.P. in accordance with the
         terms of Section 2.1 hereof.

2        Consists of the surrender of convertible bridge notes in the principal
         amount of $5,590,917 plus accrued and unpaid interest of $373,666.09.

3        Consists of the surrender of convertible bridge notes in the principal
         amount of $506,077 plus accrued and unpaid interest of $33,823.40.

4        Consists of the surrender of convertible bridge notes in the principal
         amount of $22,894 plus accrued and unpaid interest of $1,530.10.

5        Consists of (i) the surrender of convertible bridge notes in the
         principal amount of $25,000 plus accrued and unpaid interest of
         $1,178.08 and (ii) an additional investment of $25,000.

6        Consists of the surrender of convertible bridge notes in the principal
         amount of $13,000 plus accrued and unpaid interest of $358.08.

7        Consists of (i) the surrender of convertible bridge notes in the
         principal amount of $351,222 plus accrued and unpaid interest of
         $13,224.96 and (ii) an additional investment of $200,000.

8        Consists of (i) the surrender of convertible bridge notes in the
         principal amount of $100,000 plus accrued and unpaid interest of
         $4,712.33 and (ii) an additional investment of $100,000.