Document:

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                                                                   EXHIBIT 10.12

                               UMBRELLA AGREEMENT

                  This UMBRELLA AGREEMENT (this "Agreement") dated as of
February 6, 2004, is among (a) WATSON PHARMACEUTICALS, INC., a Nevada
corporation ("Watson"), (b) HALSEY DRUG CO., INC., a New York corporation,
including its subsidiaries (collectively, "Halsey"), and (c) the other parties
(each an "Investor" and collectively, the "Investor Group") listed on the
signature page hereto.

                             PRELIMINARY STATEMENTS

                  1.       Halsey and Watson have entered into a Loan Agreement
dated as of March 29, 2000, as amended by an Amendment to Loan Agreement dated
as of March 21, 2000 and as further amended by a Second Amendment to Loan
Agreement dated as of December 20, 2002 (as so amended through such Second
Amendment, the "Loan Agreement"), pursuant to which Watson made certain term
loans to Halsey in the aggregate original principal amount of $21,401,331 (the
"Loan").

                  2.       Halsey is in default of certain payment and other
obligations under the Loan Agreement and has requested that Watson agree to a
restructuring of the Loan and certain related transactions in connection with an
investment in Halsey by the Investors and certain other parties (the
"Restructuring"). Watson is willing to consent to the Restructuring upon and
subject to the terms and conditions set forth in this Agreement.

                  3.       As part of the Restructuring, on the Effective Date
(as defined below), the Investor Group has agreed to purchase the 2004
Debentures (as defined below) from Halsey for the sum of up to $14,000,000.00
and Halsey has agreed to issue the 2004 Debentures to the Investor Group
pursuant to the 2004 Debenture Purchase Agreement (as defined below).

                  4.       As a further part of the Restructuring, on the
Effective Date, Watson has agreed to amend the Loan Agreement and the notes
issued in connection thereunder by entering into the Third Amendment (as defined
below) and in consideration for Watson entering into the Third Amendment, Halsey
has agreed to pay $4,292,580 and to transfer the Purchased Assets to Watson.

                  5.       As the final part of the Restructuring, on the
Effective Date, Watson has agreed to sell the Assigned Rights (as defined below)
to the Investor Group and, in consideration for the purchase of the Assigned
Rights, the Investor Group has agreed to pay $1,000,000.00.

                  6.       On the Effective Date, (i) Watson and Halsey have
agreed to terminate all pre-existing agreements between them (including without
limitation, the Supply Agreements (as defined below) and the Right of First
Negotiation Agreement (as defined below)) and, (ii) Watson has agreed to amend
the Warrant to Purchase Common Stock Agreement (as defined below).

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                  NOW, THEREFORE, in consideration of the premises and the
mutual agreements contained herein, and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

                                   ARTICLE I

                         INTERPRETATION AND DEFINITIONS

                  Section 1.1 Certain Definitions. Terms defined in the Loan
Agreement and used in this Agreement shall have the meanings given to them in
the Loan Agreement, unless otherwise defined herein. The following terms shall
have the following meanings:

                  "2004 Debentures" means the convertible senior secured
debentures issued by Halsey pursuant to the 2004 Debenture Purchase Agreement.

                  "2004 Debenture Purchase Agreement" means the 2004 Debenture
Purchase Agreement between Halsey and the Investor Group substantially in the
form of Exhibit 1.1(a) hereto.

                  "Action" means any claim, action, suit, arbitration, inquiry,
proceeding or investigation by or before any Governmental Authority.

                  "Ancillary Documents" means the Bill of Sale, the Assignment
of Intellectual Property and the Hydrocodone Option Agreement.

                  "Assigned Agreements" means all right, title and interest of
Watson in and to the Loan Agreement, the Notes, the Watson Security Documents,
the Subordination Agreement dated as of December 20, 2002 among the Borrower,
Watson and the parties thereto, the other Loan Documents and any and all
instruments, agreements and other writings executed in connection with or
pursuant thereto.

                  "Assigned Loan" means all right, title and interest of Watson
in the Loan, together with all accrued and unpaid interest thereon and fees with
respect thereto.

                  "Assigned Proceeds" means any and all present and future
rights with respect to cash, securities, interest, dividends and other property
which may be exchanged for or distributed or collected in respect of the
Assigned Loan, the Assigned Agreements or the Assigned Security, and the
proceeds thereof, including, without limitation, distributions in respect of
principal, together with interest accrued but unpaid as of the Effective Date
and fees with respect thereto, interest after the date hereof, fees, costs and
expenses, and distributions obtained by or through redemption, consummation of a
plan of reorganization or otherwise.

                  "Assigned Rights" means (i) the Assigned Loan; (ii) the
Assigned Agreements; (iii) the Assigned Security; and (iv) the Assigned
Proceeds.

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                  "Assigned Security" means all right, title and interest in and
to any property, whether real or personal, tangible or intangible, of whatever
kind and wherever located, whether now owned or hereafter acquired or created,
in which a lien, encumbrance, security interest, mortgage, deed of trust,
pledge, claim, set-off or charge of any kind (collectively, "Liens") has been
granted or purported to have been granted pursuant to any of the Watson Security
Documents and all right, title and interest in and to any and all instruments,
agreements and other writings evidencing such a Lien.

                  "Assignment of Intellectual Property" means the assignment of
Intellectual Property , substantially in the form of Exhibit 1.1(b).

                  "Bankruptcy Code" means the Bankruptcy Reform Act of 1978, 11
U.S.C. Sections 101 et seq., as amended.

                  "Bill of Sale" means the Bill of Sale and Assignment to be
executed by Halsey, substantially in the form of Exhibit 1.1(c).

                  "Claimant" means each of Essex Woodlands Health Ventures V,
L.P., Care Capital Investments, L.P., Galen Partners III, L.P., Galen Partners
International, L.P., and Galen Employee Fund III, L.P.

                  "Claimant Recovery Amount" means, on any date, with respect to
each Claimant, the amount equal to the aggregate value of all property received
by such Claimant from the Loan Parties with respect to such Claimant's
Debentures on or after the Effective Date. Notwithstanding anything to the
contrary in this Agreement, equity or debt securities of the Company received by
a Claimant with respect to the Debentures (including upon conversion or exchange
thereof) shall be excluded from the calculation of the value of property deemed
to have been received by such Claimant.

                  "Claimant Recovery Percentage" means, on any date, the amount
determined by dividing the Claimant Recovery Amount for such Claimant by the
face value of such Claimant's Debentures.

                  "Contingent Purchase Amount" shall have the meaning set forth
in Section 2.3(b) hereto.

                  "Contingent Purchase Amount Payment Date" means any day that
is five Business Days after any day on which a Claimant receives a payment or
other property from the Loan Parties after which the Claimant Recovery
Percentage exceeds the Watson Recovery Percentage.

                  "Contingent Purchase Termination Date" means the first to
occur of (i) December 31, 2004, (ii) the date on which 100% of the Debentures
shall have been exchanged for or

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converted into equity securities of the Company or (iii) the date on which the
Watson Recovery Amount equals $21,401,331.

                  "Consents" means the Halsey and Guarantor Transfer Consent and
the Secured Creditors' Transfer Consent.

                  "Debentures" means (i) the 2002 Debentures (as defined in the
Subordination Agreement) that were issued prior to January 1, 2004 and (ii) the
Existing Debentures (as defined in the Subordination Agreement).

                   "Encumbrance" means any security interest, pledge,
hypothecation, mortgage, lien (including environmental and tax liens),
violation, charge, lease, license, encumbrance, servient easement, adverse
claim, reversion, reverter, preferential arrangement, restrictive covenant,
condition or restriction of any kind, including any restriction on the use,
voting, transfer, receipt of income or other exercise of any attributes of
ownership.

                  "Environmental Laws" means all Laws, now or hereafter in
effect and as amended, and any judicial or administrative interpretation
thereof, including any judicial or administrative order, consent decree or
judgment, relating to the environment, health, safety, natural resources or
Hazardous Materials, including CERCLA; the Resource Conservation and Recovery
Act, 42 U.S.C. Sections 6901 et seq.; the Hazardous Materials Transportation
Act, 49 U.S.C. Sections 6901 et seq.; the Clean Water Act, 33 U.S.C. Sections
1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. Sections 2601 et seq.;
the Clean Air Act, 42 U.S.C. Sections 7401 et seq.; the Safe Drinking Water Act,
42 U.S.C. Sections 300f et seq.; the Atomic Energy Act, 42 U.S.C. Sections 2011
et seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C.
Sections 136 et seq.; and the Federal Food, Drug and Cosmetic Act, 21 U.S.C.
Sections 301 et seq.

                  "Governmental Authority" means any federal, national,
supranational, state, provincial, local, or similar government, governmental,
regulatory or administrative authority, agency or commission or any court,
tribunal, or judicial or arbitral body.

                  "Governmental Order" means any order, writ, judgment,
injunction, decree, stipulation, determination or award entered by or with any
Governmental Authority.

                  "Halsey/Investor Group Transaction" means the transactions
described in Section 2.1 of this Agreement.

                  "Halsey and Guarantor Transfer Consent" means the consent of
Halsey and the Guarantors to the transfer of the Assigned Rights to the Investor
in substantially the form of Exhibit 1.1(d).

                  "Hydrocodone Option Agreement" means the Hydrocodone Option
Agreement to be executed by Halsey and Watson, substantially in the form of
Exhibit 2.2(e).

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                  "Indemnified Party" means a Watson Indemnified Party, an
Investor Group Indemnified Party or a Halsey Indemnified Party, as the case may
be.

                  "Indemnifying Party" means Halsey pursuant to Section 5.1, an
Investor or the Investor Group pursuant to Section 5.2 and Watson pursuant to
Section 5.3, as the case may be.

                  "Intellectual Property" means (i) patents, patent
applications, and statutory invention registrations, (ii) trademarks, service
marks, domain names, trade dress, logos, trade names, corporate names, and other
identifiers of source or goodwill, including registrations and applications for
registration thereof and including the goodwill of the business symbolized
thereby or associated therewith, (iii) mask works and copyrights, including
copyrights in computer software, and registrations and applications for
registration thereof, and (iv) confidential and proprietary information,
including trade secrets, know-how and invention rights.

                  "Investor Group Nominee" means Galen.

                  "Investor Group Purchase Price Bank Account" means the account
of Halsey at LaSalle Bank, bearing account number 5800103177.

                  "Investor Group /Watson Transaction" means the transactions
described in Section 2.3 of this Agreement.

                  "Law" means any federal, national, supranational, state,
provincial, local or similar statute, law, ordinance, regulation, rule, code,
order, requirement or rule of law (including common law).

                  "Liabilities" means any and all debts, liabilities and
obligations, whether accrued or fixed, absolute or contingent, matured or
unmatured or determined or determinable, including those arising under any Law
(including any Environmental Law), Action or Governmental Order and those
arising under any contract, agreement, arrangement, commitment or undertaking.

                  "Loan Parties" means Halsey and the Guarantors.

                  "Parties" means collectively, Halsey, Watson and the Investor
Group.

                  "Person" means an individual, partnership, corporation,
statutory trust, joint stock company, trust, unincorporated association, limited
liability company, joint venture, governmental authority or other entity of
whatever nature.

                  "Pro Rata Portion" means, with respect to each Claimant, the
percentage determined by dividing (i) the aggregate outstanding amount of the
Debentures owned by such Claimant and its Affiliates as of January 1, 2004, by
(ii) the aggregate outstanding amount of the Debentures owned by all Claimants
and their Affiliates as of January 1, 2004.

                  "Purchased Assets " means the assets specified in Schedule I
hereto.

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                  "Right of First Negotiation Agreement" means that certain
Right of First Negotiation Agreement between Halsey and Watson dated March 29,
2000.

                  "Secured Creditors" has the meaning given to such term in the
Subordination Agreement.

                  "Secured Creditors' Transfer Consent" means the consent of the
Secured Creditors to the transfer of the Assigned Rights to Investor Group in
substantially the form of Exhibit 1.1(e).

                  "Subordination Agreement" means that certain Subordination
Agreement dated December 20, 2002 among Watson, Halsey, the Investors and
various other parties.

                  "Supply Agreements" means that certain Finished Goods Supply
Agreement by and between Halsey and Watson dated March 29, 2000, as amended,
that certain Active Ingredient Supply Agreement by and between Halsey and Watson
dated March 29, 2000 and that certain Finished Goods Supply Agreement ("Core
Products") by and between Halsey and Watson dated March 29, 2000, as amended.

                  "Third Amendment to Loan Agreement" means the Third Amendment
to Loan Agreement between Halsey and Watson, substantially in the form of
Exhibit 1.1(f) hereto.

                  "Transaction Documents" means this Agreement, the 2004
Debenture Purchase Agreement, the Third Amendment, the Consents and the
Ancillary Documents.

                  "Warrant to Purchase Common Stock Agreement" means that
certain Warrant to Purchase Common Stock, Par Value $.01 Per Share of Halsey
Drug Co., Inc. dated December 20, 2002.

                  "Watson/Halsey Transaction" means the transactions described
in Section 2.2 of this Agreement.

                  "Watson Loan Amendment Bank Account" means the account of
Watson at Bank of America, bearing account number 1496301300.

                  "Watson Loan Purchase Price Bank Account" means the account of
Watson at Bank of America, bearing account number 1496301300.

                  "Watson Recovery Amount" means, on any date, the amount equal
to (i) $5,658,516 (ii) plus the value of all property received by Watson from
the Claimants pursuant to Section 2.3(b)(ii) of this Agreement.

                  "Watson Recovery Percentage" means 26.44%

                  "Watson Security Documents" has the meaning specified in the
Loan Agreement.

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                  Section 1.2 Definitions. The following terms have the meanings
set forth in the Sections set forth below:

<TABLE>
<CAPTION>
Definition                                                   Location
----------                                                   --------
<S>                                                   <C>
"Agreement".......................................    Preamble
"Closing".........................................    3.1
"Effective Date"..................................    3.8
"Halsey"..........................................    Preamble
"Halsey Indemnified Party"........................    5.2(a)
"Investor"........................................    Preamble
"Investor Group Indemnified Party"................    5.3(a)
"Investor Group Information"......................    4.4(d)
"Investor Group Purchase Price"...................    2.1(b)
"Loan"............................................    Preliminary Statements
"Loan Agreement"..................................    Preliminary Statements
"Loss"............................................    5.1
"Restructuring"...................................    Preliminary Statements
"Third Amendment"                                     2.2(a)
"Third Amendment Cash Amount"                         2.2(b)
"Third Party Claim"...............................    5.4(b)
"Watson"..........................................    Preamble
"Watson Indemnified Party"........................    5.2(b)
"Watson Information"..............................    4.3(f)
"Watson Loan Purchase Cash Amount"                    2.3 (b)(i)
</TABLE>

                  Section 1.3 Interpretation and Rules of Construction. In this
Agreement, except to the extent otherwise provided or that the context otherwise
requires:

                  (a) when a reference is made in this Agreement to an Article,
         Section, Exhibit or Schedule, such reference is to an Article or
         Section of, or a Schedule or Exhibit to, this Agreement unless
         otherwise indicated;

                  (b) the table of contents and headings for this Agreement are
         for reference purposes only and do not affect in any way the meaning or
         interpretation of this Agreement;

                  (c) whenever the words "include", "includes" or "including"
         are used in this Agreement, they are deemed to be followed by the words
         "without limitation";

                  (d) the words "hereof", "herein" and "hereunder" and words of
         similar import, when used in this Agreement, refer to this Agreement as
         a whole and not to any particular provision of this Agreement;

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                  (e) all terms defined in this Agreement have the defined
         meanings when used in any certificate or other document made or
         delivered pursuant hereto, unless otherwise defined therein;

                  (f) the definitions contained in this Agreement are applicable
         to the singular as well as the plural forms of such terms;

                  (g) any Law defined or referred to herein or in any agreement
         or instrument that is referred to herein means such Law or statute as
         from time to time amended, modified or supplemented, including by
         succession of comparable successor Laws;

                  (h) references to a Person are also to its successors and
         permitted assigns; and

                  (i) the use of "or" is not intended to be exclusive unless
         expressly indicated otherwise.

                                   ARTICLE II

                                THE TRANSACTIONS

                  Section 2.1 The Halsey/Investor Group Transaction. Subject to
the terms and conditions of this Agreement and in reliance on the agreements,
representations and warranties contained herein and made pursuant hereto and the
2004 Debenture Purchase Agreement, on the Effective Date:

                  (a) Issuance of 2004 Debentures to Investor. Halsey and the
         Investor Group hereby agree to enter into the 2004 Debenture Purchase
         Agreement pursuant to which Halsey will issue convertible senior
         secured debentures in the principal amount of up to $14,000,000.00 (as
         such amount may be increased in accordance with the terms of such
         agreement) to the Investor Group and the other purchasers from time to
         time party thereto, all on the terms and conditions set forth in the
         2004 Debenture Purchase Agreement.

                  (b) Investor Group Purchase Price. Each Investor severally and
         not jointly agrees to pay the purchase price for the 2004 Debentures in
         the amount specified for such Investor in such agreement (collectively,
         the "Investor Group Purchase Price").

                  Section 2.2 The Watson/Halsey Transaction. Subject to the
terms and conditions of this Agreement and in reliance on the agreements,
representations and warranties contained herein and made pursuant hereto, on the
Effective Date:

                  (a) Third Amendment. Watson hereby agrees to enter into the
Third Amendment to the Loan Agreement pursuant to which Watson will restructure
certain of Halsey's obligations under the Loan Agreement in accordance with the
terms set forth therein (the "Third Amendment").

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                  (b) Third Amendment Purchase Price. In consideration for
Watson's agreement to enter into the Third Amendment, Halsey agrees, on the
Effective Date, (i) to pay or cause to be paid to Watson the purchase price as
follows: (i) payment in immediately available funds of an amount equal to
$[4,279,850] (the "Third Amendment Cash Amount") and (ii) to sell, assign,
transfer, convey and deliver, or cause to be sold, assigned, transferred,
conveyed and delivered to Watson the Purchased Assets, in each case free and
clear of any Encumbrances, and Watson hereby purchases from Halsey on such date,
the Purchased Assets, in each case free and clear of any Encumbrances. Watson
shall have full ownership of and title to the Purchased Assets, free and clear
of any Encumbrances. With respect to any physical assets among the Purchased
Assets, Halsey shall be responsible for any de-installation activities, costs
and expenses and Watson shall be responsible for any packing and shipping
activities, costs and expenses.

                  (c) Termination of Other Agreements. Halsey and Watson hereby
agree to terminate all pre-existing agreements between Halsey and Watson
(including without limitation, the Supply Agreements and the Right of First
Negotiation Agreement).

                  (d) Waiver of Dilution. Halsey and Watson hereby agree that
the Warrant to Purchase Common Stock Agreement is amended in accordance with the
terms of Exhibit 2.2(d) hereto.

                  (e) Hydrocodone Option. Halsey shall grant to Watson a
non-assignable, exclusive option (substantially in the form as set forth in
Exhibit 2.2(e) hereto), to enter into a supply agreement with Halsey pursuant to
which Halsey will supply, and Watson will purchase, on a non-exclusive,
preferential basis, hydrocodone bitartrate active pharmaceutical ingredient
manufactured using Halsey's proprietary hydrocodone bitartrate active
pharmaceutical ingredient process.

                  Section 2.3 The Investor/Watson Transaction. Subject to the
terms and conditions of this Agreement and in reliance on the agreements,
representations and warranties contained herein and made pursuant hereto, on the
Effective Date and immediately after the effectiveness of the Watson/Halsey
Transaction:

                  (a) Transfer of Assigned Rights to Investor. Watson hereby
         sells, assigns, transfers, conveys and delivers to Investor Group all
         of Watson's right, title and interest in the Assigned Rights, and
         hereby delegates to Investor Group all of its obligations, duties and
         liabilities under the Assigned Agreements, and Investor Group hereby
         purchases, accepts and assumes from Watson from and after the Effective
         Date, all of Watson's right, title and interest in the Assigned Rights,
         provided, that, nothing contained herein is intended to, or shall be
         construed or deemed to constitute an assignment of any right of Watson
         to assert a claim under Section 502(h) of the Bankruptcy Code due to,
         or arising from, Watson's return of money or property to the estate of
         Halsey or any of its subsidiaries in connection with the assertion, by
         the estate or its representative of Halsey or any of its subsidiaries,
         of avoiding powers provided under Sections 544, 545, 547, 548, 549 and
         550 of the Bankruptcy Code or analogous state law; it being understood
         and

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         agreed by the Parties that the right to assert any such claim under
         Section 502(h) of the Bankruptcy Code be and hereby is retained by
         Watson.

                  (b) Payment of Loan Purchase Price to Watson. As consideration
         for the sale, transfer and assignment of the Assigned Rights
         contemplated in Section 2.3(a): (i) on the Effective Date, the Investor
         Group agrees to pay Watson in immediately available funds an amount
         equal to $1,000,000.00 (the "Watson Loan Purchase Cash Amount"), and
         (ii) and, until such time as the Watson Recovery Amount equals
         $21,401,331.00, on each Contingent Purchase Amount Payment Date that
         occurs prior to the Contingent Purchase Termination Date, each Claimant
         that has triggered such Contingent Purchase Amount Payment Date shall
         make a payment to Watson equal to that portion of the Claimant Recovery
         Amount for such Claimant that results in the Claimant Recovery
         Percentage exceeding the Watson Recovery Percentage (the "Contingent
         Purchase Amount"). To the extent the relevant Claimant Recovery Amount
         includes property other than immediately available funds, the Claimants
         may include in any resulting Contingent Purchase Amount paid hereunder
         a proportionate amount of such other property. Notwithstanding anything
         to the contrary in this Agreement, no Claimant shall have any
         obligation to make any payment under clause (ii) of this Section 2.3(b)
         on or after the Contingent Purchase Termination Date.

                                   ARTICLE III

                                     CLOSING

                  Section 3.1 Closing. Subject to the terms and conditions of
this Agreement, the transactions contemplated by this Agreement shall take place
at a closing (the "Closing") to be held at the offices of St. John & Wayne,
L.L.C., Two Penn Plaza East, Newark, New Jersey 07105 at 10:00 A.M. New York
time on February 6, 2004 or such other time or place as the parties hereto may
agree.

                  Section 3.2 Closing Deliveries by Halsey to Investor Group. At
the Closing, Halsey shall deliver or cause to be delivered to the Investor Group
in connection with the Halsey/Investor Group Transaction:

                           (i)      executed counterparts of this Agreement and
                  the 2004 Debenture Purchase Agreement, in each case executed
                  by Halsey, and such other instruments, in form and substance
                  satisfactory to the Investors, as may be requested by the
                  Investors to evidence the issuance of the 2004 Debentures;

                           (ii)     notes evidencing the 2004 Debentures
                  registered in such names as the Investors may request in
                  writing at least one full Business Day before the Closing
                  Date;

                           (iii)    a receipt for the Investor Group Purchase
                  Price;

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                           (iv)     a true and complete copy, certified by the
                  Secretary or an Assistant Secretary of Halsey, of the
                  resolutions duly and validly adopted by the board of directors
                  of Halsey evidencing its authorization of the execution and
                  delivery of this Agreement and the 2004 Debenture Purchase
                  Agreement and the consummation of the transactions
                  contemplated hereby and thereby;

                           (v)      a certificate of the Secretary or an
                  Assistant Secretary of Halsey certifying the names and
                  signatures of the officers of Halsey authorized to sign this
                  Agreement, the 2004 Debenture Purchase Agreement and the other
                  documents to be delivered hereunder and thereunder;

                           (vi)     a certificate of a duly authorized officer
                  of Halsey certifying that the representations and warranties
                  of Halsey contained in this Agreement and the 2004 Debenture
                  Purchase Agreement shall be true and correct in all material
                  respects as of the Closing; and

                           (vii)    any other documents as shall be required to
                  be delivered pursuant to the terms of the 2004 Debenture
                  Purchase Agreement.

                  Section 3.3 Closing Deliveries by Halsey to Watson. At the
Closing, Halsey shall deliver or cause to be delivered to Watson in connection
with the Watson/Halsey Transaction:

                           (i)      the Third Amendment Cash Amount by wire
                  transfer in immediately available funds to the Watson Loan
                  Amendment Bank Account;

                           (ii)     a secured promissory note in the aggregate
                  principal amount of $5,000,000.00;

                           (iii)    executed counterparts of this Agreement and
                  the Third Amendment, in each case executed by Halsey;

                           (iv)     executed counterparts of the Bill of Sale
                  and the Assignment of Intellectual Property, in each case
                  executed by Halsey, and such other instruments, in form and
                  substance satisfactory to Watson, as may be requested by
                  Watson to transfer the Purchased Assets to Watson or evidence
                  such transfer on the public records;

                           (v)      executed counterparts of each Ancillary
                  Document to which Halsey is a party other than the Ancillary
                  Documents delivered pursuant to clauses (iii) and (iv) above;

                           (vi)     a true and complete copy, certified by the
                  Secretary or an Assistant Secretary of Halsey, of the
                  resolutions duly and validly adopted by the board of directors
                  of Halsey evidencing its authorization of the execution and
                  delivery of

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                  this Agreement, the Third Amendment and the Ancillary
                  Documents and the consummation of the transactions
                  contemplated hereby and thereby;

                           (vii)    a certificate of the Secretary or an
                  Assistant Secretary of Halsey certifying the names and
                  signatures of the officers of Halsey authorized to sign this
                  Agreement, the Third Amendment and the Ancillary Documents and
                  the other documents to be delivered hereunder and thereunder;

                           (viii)   a certificate of a duly authorized officer
                  of Halsey certifying that the representations and warranties
                  of Halsey contained in this Agreement shall be true and
                  correct in all material respects as of the Closing;

                           (ix)     a favorable opinion, dated the Effective
                  Date and addressed to Watson , from St. John & Wayne, L.L.C.,
                  special New York counsel for Halsey, in form and substance
                  satisfactory to Watson;

                           (x)      such UCC termination statements and other
                  documents as may be required by Watson to ensure that the
                  Purchased Assets are conveyed free and clear of any
                  Encumbrances; and

                           (xi)     fully executed copies of the Halsey and
                  Guarantor Transfer Consent, the Secured Creditors' Transfer
                  Consent and any other consents required for an effective
                  assignment of the Assigned Rights by Watson to Investor Group.

                  Section 3.4 Closing Deliveries by Investors to Halsey. At the
Closing, each Investor shall deliver or cause to be delivered to Halsey in
connection with the Halsey/Investor Group Transaction:

                           (i)      such Investor's portion of the Investor
                  Group Purchase Price by wire transfer in immediately available
                  funds to the Investor Group Purchase Price Bank Account;

                           (ii)     executed counterparts of this Agreement and
                  the 2004 Debenture Purchase Agreement; and

                           (iii)    all authorizations, consents, orders and
                  approvals of all Governmental Authorities and officials and
                  all third party consents and estoppel certificates, each in
                  form and substance satisfactory to Halsey in its sole
                  discretion, which Halsey in its sole discretion deems
                  necessary or desirable for the consummation of the
                  transactions contemplated by this Agreement and 2004 Debenture
                  Purchase Agreement including all third party consents required
                  under any contracts.

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                  Section 3.5 Closing Deliveries by the Investor Group to
Watson. At the Closing, the Investors shall deliver or cause to be delivered to
Watson in connection with the Investor Group/Watson Transaction:

                           (i)      the Watson Loan Purchase Cash Amount by wire
                  transfer in immediately available funds to the Watson Loan
                  Purchase Price Bank Account; and

                           (ii)     executed counterparts of this Agreement.

                  Section 3.6 Closing Deliveries by Watson to Halsey. At the
Closing, Watson shall deliver or cause to be delivered to Halsey in connection
with the transfer of the Purchased Assets:

                           (i)      a receipt for the Third Amendment Cash
                  Amount;

                           (ii)     executed counterparts of this Agreement, the
                  Third Amendment and the Ancillary Documents, in each case
                  executed by Watson;

                           (iii)    a true and complete copy, certified by the
                  Secretary or an Assistant Secretary of Watson, of the
                  resolutions duly and validly adopted by the Board of Directors
                  of Watson evidencing its authorization of the execution and
                  delivery of this Agreement, the Third Amendment, the Ancillary
                  Documents and the consummation of the transactions
                  contemplated hereby and thereby;

                           (iv)     a certificate of a duly authorized officer
                  of Watson certifying that the representations and warranties
                  of Watson contained in this Agreement shall be true and
                  correct in all material respects as of the Effective Date; and

                           (v)      the promissory note dated December 20, 2002
                  in the principal amount of $17,500,000 issued by Halsey, as
                  maker, to Watson, and the promissory note dated December 20,
                  2002 in the principal amount of $3,901,331 issued by Halsey,
                  as maker, to Watson, each marked "cancelled".

                  Section 3.7 Closing Deliveries by Watson to the Investors. At
the Closing, Watson shall deliver or cause to be delivered to the Investor Group
Nominee in connection with the Investor Group/Watson Transaction:

                           (i)      a receipt for the Watson Loan Purchase Cash
                  Amount; and

                           (ii)     executed counterparts of each Transaction
                  Document to which Watson is a party;

                           (iii)    the originally executed secured promissory
                  note in the aggregate principal amount of $5,000,000.00, duly
                  endorsed by Watson (without recourse

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                  or warranty to Watson except as set forth in this Agreement),
                  endorsing Watson's interest in such note to the Investor Group
                  Nominee; and

                           (iv)     all Assigned Security in the possession of
                  Watson.

                  Section 3.8 Effective Date. The effective date of the
Halsey/Investor Group Transaction, Watson/Halsey Transaction and the Investor
Group/Watson Transaction (the "Effective Date") shall be the date on which each
of the Parties have signed this Agreement and each of the requirements set forth
in Sections 3.2 to 3.7 of this Agreement shall have been satisfied. On the
Effective Date, the Investor Group/Watson Transaction shall become effective
immediately upon the effectiveness of the Watson/Halsey Transaction.

                                   ARTICLE IV

                 REPRESENTATIONS AND WARRANTIES OF THE PARTIES.

                  Section 4.1 Mutual Representations and Warranties. As an
inducement to the other Parties to enter into this Agreement, each Party hereby
severally and not jointly represents and warrants to the other Parties as
follows:

                  (a) Organization, Authority and Qualification. Such Party is
         duly organized, validly existing and in good standing under the laws of
         the jurisdiction of its formation and has all necessary power and
         authority to enter into this Agreement and the Transaction Documents to
         which it is a party, to carry out its obligations hereunder and
         thereunder and to consummate the transactions contemplated hereby and
         thereby. Such Party is duly licensed or qualified to do business and is
         in good standing in each jurisdiction which the properties owned or
         leased by it or the operation of its business makes such licensing or
         qualification necessary. The execution and delivery of this Agreement
         and the Transaction Documents by such Party, the performance by such
         Party of its obligations hereunder and thereunder and the consummation
         by such Party of the transactions contemplated hereby and thereby have
         been duly authorized by all requisite action on the part of such Party
         and its stockholders. This Agreement and the Transaction Documents,
         upon their execution shall have been duly executed and delivered by
         such Party, and (assuming due authorization, execution and delivery by
         the other Parties thereto) this Agreement and the Transaction Documents
         to which it is a party, upon their execution, shall constitute, legal,
         valid and binding obligations of such Party, enforceable against such
         Party in accordance with their respective terms, subject, as to
         enforceability, to bankruptcy, insolvency, moratorium, reorganization
         and other laws of general application relating to or affecting
         creditors' rights and to general equitable principles, provided,
         however, that Watson makes no representation with respect to the
         collectability of the Loan or any portion thereof.

                  (b) No Conflict. The execution, delivery and performance of
         this Agreement and the Transaction Documents to which it is a party do
         not and will not (a) violate, conflict

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         with or result in the breach of any provision of the certificate of
         incorporation or by-laws (or similar organizational documents) of such
         Party, (b) conflict with or violate any Law or Governmental Order
         applicable to such Party, or any of its assets, properties or
         businesses, or (c) conflict with, result in any breach of, constitute a
         default (or event which with the giving of notice or lapse of time, or
         both, would become a default) under, require any consent under, or give
         to others any rights of termination, amendment, acceleration,
         suspension, revocation or cancellation of, or result in the creation of
         any Encumbrance on any of the Purchased Assets or the Transaction
         Documents, as the case may be, pursuant to, any note, bond, mortgage or
         indenture, contract, agreement, lease, sublease, license, permit,
         franchise or other instrument or arrangement to which such Party is a
         party or by which any of its material assets is bound or affected.

                  (c) Litigation There are no pending or threatened actions,
         suits or proceedings against or affecting such Party or any of its
         properties by or before any court or administrative agency in respect
         of this Agreement, the Transaction Documents, the Purchased Assets or
         the 2004 Debentures, as the case may be, which are reasonably likely to
         materially adversely affect the ability of such Party to perform its
         obligations hereunder or call into question the validity of this
         Agreement or the Transaction Documents or the enforceability thereof in
         accordance with the respective terms thereof.

                  (d) Governmental Consents and Approval. Neither the execution
         and delivery by such Party of this Agreement or the Transaction
         Documents to which it is a party nor the consummation by such Party of
         any of the transactions contemplated hereby or thereby nor the
         performance by such Party of any of its obligations requires the
         consent or approval of, the giving of notice to, the filing or
         registration with, or the taking of any other action in respect of any
         Governmental Authority.

                  (e) Brokers. No broker, finder or investment banker is
         entitled to any brokerage, finder's or other fee or commission in
         connection with the transactions contemplated by this Agreement and the
         Transaction Documents based upon arrangements made by or on behalf of
         such Party.

                  (f) Arm's Length Transactions. The transactions entered into
         by and between the Parties hereto pursuant to this Agreement and the
         Transaction Documents are Arm's Length transactions. For purposes
         hereof, the term "Arm's Length" means a transaction or negotiation in
         which each party is completely independent of each other, seeks to
         obtain terms which are most favorable to it and has no economic or
         other interest in making concessions to the other party.

                  Section 4.2 Representations and Warranties of Halsey. As an
inducement to the Investor Group and Watson to enter into this Agreement, Halsey
hereby represents and warrants to the Investor Group and Watson as follows as of
the Effective Date:

                  (a) Title. Halsey has good and marketable title to all the
         Purchased Assets, free and clear of all Encumbrances. Halsey has the
         complete and unrestricted power and

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         unqualified right to sell, assign, transfer, convey and deliver the
         Purchased Assets to Watson without penalty or other adverse
         consequences. Following the consummation of the Watson/Halsey
         Transaction contemplated by this Agreement, the Third Amendment, and
         the Ancillary Documents and the execution of the instruments of
         transfer contemplated by this Agreement, the Third Amendment and the
         Ancillary Documents, Watson will own, with good, valid and marketable
         title, or lease, under valid and subsisting leases, or otherwise
         acquire the interests of Halsey in the Purchased Assets, free and clear
         of any Encumbrances, and without incurring any penalty or other adverse
         consequence, including any increase in rentals, royalties, or license
         or other fees imposed as a result of, or arising from, the consummation
         of the transactions contemplated by this Agreement.

                  (b) Closing Date Transactions. On the Effective Date, Watson
         will have had conveyed to it the Purchased Assets, free and clear of
         all Encumbrances.

                  (c) Insolvency. Halsey has not taken any action nor have any
         other steps been taken or legal proceedings commenced or threatened
         against Halsey for its dissolution, winding-up, bankruptcy,
         examination, administration, court protection, reorganization or
         appointment of a receiver, examiner, trustee or similar official with
         respect to Halsey or any of its assets or property or for the granting
         of suspension of payments to Halsey.

                  (d) Other Transactions. As of the Effective Date, except for
         this Agreement, there are no contracts or agreements to which Halsey is
         a party providing for any lease, sale, disposition of title or
         beneficial ownership of the Purchased Assets.

                  (e) Loan Documents. Halsey has provided to the Investor Group
         true, correct and complete copies of the Loan Agreement (including all
         waivers, supplements, forbearances and amendments thereto) and all
         schedules and exhibits to the Loan Agreement the other Loan Documents
         specified in Schedule II. Without in any way limiting the
         representations and warranties of Watson contained in this Agreement,
         Investor is assuming all risk with respect to the accuracy or
         sufficiency of such documents and information.

                  (f) Claimant Ownership. As of the Effective Date, the
         Claimants and their Affiliates collectively hold Debentures in an
         aggregate outstanding amount of $71,001,035 and such portion of
         Debentures held by the Claimants and their Affiliates collectively
         represents in excess of 79% of the aggregate outstanding amount of
         Debentures.

         EXCEPT AS OTHERWISE PROVIDED HEREIN, HALSEY MAKES NO OTHER WARRANTIES,
EXPRESS OR IMPLIED, WITH RESPECT TO THE PURCHASED ASSETS, INCLUDING ANY WARRANTY
OF MERCHANTABILITY OR WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE.

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                  Section 4.3 Representation and Warranties of the Investors.
(A) As an inducement to Watson to enter into this Agreement, each Investor
severally and not jointly hereby represents and warrants to Watson as follows as
of the Effective Date:

                  (a) Insolvency. Such Investor has not taken any action nor, to
         its knowledge have any other steps been taken or legal proceedings
         commenced or threatened against the Investor for its dissolution,
         winding-up, bankruptcy, examination, administration, court protection,
         reorganization or appointment of a receiver, examiner, trustee or
         similar official with respect to the Investor or any of its assets or
         property or for the granting of suspension of payments to the Investor.

                  (b) Information. Investor is a sophisticated buyer with
         respect to the Assigned Rights, has adequate information concerning the
         business and financial condition of Halsey to make an informed decision
         regarding the Assigned Rights, and has independently, without reliance
         upon Watson and based on such information as it deemed appropriate,
         made its own analysis and decision to enter into this Agreement, except
         that Investor has relied upon the representations, warranties and
         covenants of Watson contained in this Agreement. Investor acknowledges
         that Watson may possess material information with respect to Halsey not
         known to the Investor which may be material to a decision to buy the
         Assigned Rights (the "Watson Information"), that Investor has
         determined to acquire the Assigned Rights notwithstanding its lack of
         knowledge of Watson Information and that Watson shall have no liability
         to Investor to the extent such liability arises from, is caused by or
         relates to the non-disclosure of Watson Information and Investor hereby
         releases Watson therefrom with respect to such nondisclosure; provided,
         however, that the foregoing limitation shall not in any way limit the
         liability of Watson for a breach of its representations and warranties
         contained in this Agreement.

                  (c) Acknowledgments. Investor acknowledges that Watson has not
         made and does not make any representation or warranty, whether express
         or implied, except as expressly set forth in this Agreement. Investor
         acknowledges that the sale of the Assigned Rights by Watson to Investor
         is irrevocable, and that Investor shall have no recourse to Watson,
         except with respect to breaches of representations, warranties and
         covenants expressly set forth in this Agreement, and pursuant to the
         indemnities contained herein. Investor acknowledges that the
         consideration paid pursuant hereto for the purchase of the Assigned
         Rights may differ both in kind and amount from any payments or
         distributions which may ultimately be received with respect thereto.
         Investor acknowledges that it is assuming the risk of full or partial
         loss which is inherent with the credit, and all collectability risks
         associated therewith.

                  (d) Securities Act. Investor is an "accredited investor"
         within the meaning of Section 2(15) of the Securities Act of 1933, as
         amended, and the rules and regulations promulgated thereunder (the
         "Securities Act"). Without implying characterization of the Assigned
         Rights as a "security" within the meaning of any applicable securities
         laws,

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<PAGE>

         Investor is not purchasing the Assigned Rights with a view to resale or
         distribution in a manner that would violate applicable securities laws.

                  (e) No Reliance. Investor acknowledges that Watson has not
         given Investor any investment advice, credit information or opinion on
         whether the purchase of the Assigned Rights is prudent. Except as
         otherwise provided in this Agreement, Investor has not relied and will
         not rely on Watson to furnish or make available any documents or other
         information regarding the credit, affairs, financial condition or
         business of Halsey or any obligor, or any other matter concerning
         Halsey or any obligor. Investor is assuming all risk with respect to
         the accuracy or sufficiency of the Assigned Agreements, other than any
         representations, warranties or covenants made by Watson in this
         Agreement.

                  (f) Subordination Provisions. Investor expressly acknowledges
         that it has notice of Section 11 of the Subordination Agreement.

                  Section 4.4 Representation and Warranties of Watson. As an
inducement to the Investors to enter into this Agreement, Watson hereby
represents and warrants to the Investors as follows as of the Effective Date:

                  (a) Title. (A) Watson is the sole legal and beneficial owner
         and holder of the Assigned Rights and has good title to the Assigned
         Rights free and clear of any lien, security interest or other adverse
         claim; (B) the Assigned Agreements are the legal, valid and binding
         obligations of Watson, enforceable against Watson in accordance with
         their terms, subject, as to enforceability, to bankruptcy, insolvency,
         moratorium, reorganization and other laws of general application
         relating to or affecting creditors' rights and to general equitable
         principles, provided, however, that Watson makes no representation with
         respect to the collectability of the Loan or any portion thereof and
         (C) Watson has not received any written notice that (i) any payment or
         other transfer made to or for the account of Watson from or on account
         of Halsey or any of its subsidiaries under the Assigned Rights is or
         may be void or avoidable as an actual or constructive fraudulent
         transfer or as a preferential transfer or (ii) the Assigned Rights, or
         any portion of them, are void, voidable, unenforceable or subject to
         any claim, counterclaim, setoff, defense, action, demand, litigation
         (including administrative proceedings or derivative actions),
         encumbrance, right (including expungement, avoidance, reduction,
         contractual or equitable subordination, or otherwise) or defect, other
         than those created pursuant to the Loan Documents, the effect of which
         is, or would be, materially and adversely to affect the Assigned Rights
         in whole or in part.

                  (b) Insolvency. Watson has not taken any action nor, to its
         knowledge have any other steps been taken or legal proceedings
         commenced or threatened against Watson for its dissolution, winding-up,
         bankruptcy, examination, administration, court protection,
         reorganization or appointment of a receiver, examiner, trustee or
         similar official with respect to Watson or any of its assets or
         property or for the granting of suspension of payments to Watson.

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                  (c) Acknowledgments. Watson acknowledges that no Investor has
         made and does not make any representation or warranty, whether express
         or implied, except as expressly set forth in this Agreement. Watson
         acknowledges that the sale of the Assigned Rights by Watson to the
         Investor Group is irrevocable, and that Watson shall have no recourse
         to the Investors, except with respect to breaches of representations,
         warranties and covenants expressly set forth in this Agreement, and
         pursuant to the indemnities contained herein. Watson acknowledges that
         the consideration paid pursuant hereto for the purchase of the Assigned
         Rights may differ both in kind and amount from any payments or
         distributions which may ultimately be received with respect thereto.

                  (d) No Reliance. Watson acknowledges that the Investors have
         not given Watson any investment advice, credit information or opinion
         on whether the sale of the Assigned Rights is prudent. Except as
         otherwise provided in this Agreement, Watson has not relied and will
         not rely on the Investors to furnish or make available any documents or
         other information regarding the credit, affairs, financial condition or
         business of Halsey or any obligor, or any other matter concerning
         Halsey or any obligor.

                  (e) Securities Act. Watson is an "accredited investor" within
         the meaning of Section 2(15) of the Securities Act of 1933, as amended,
         and the rules and regulations promulgated thereunder. Without
         characterizing the Assigned Rights as a "security" within the meaning
         of applicable securities laws, Watson has not made any offers to sell,
         or solicitations of offers to buy, any portion of the Assigned Rights
         in violation of any applicable securities laws.

                  (f) Information. Watson is a sophisticated seller with respect
         to the Assigned Rights, has adequate information concerning the
         business and financial condition of Halsey to make an informed decision
         regarding the sale of the Assigned Rights and has independently,
         without reliance upon Investor and based on such information as Watson
         has deemed appropriate, made its own analysis and decision to enter
         into this Agreement, except that Watson has relied upon the
         representations, warranties and covenants of Investor contained in this
         Agreement. Watson acknowledges that the Investors currently may possess
         and hereafter may come into possession of certain information
         concerning the Assigned Rights, Halsey, or its affiliates which is not
         known to Watson and which may be material to a decision to sell the
         Assigned Rights (the "Investor Group Information"), that Watson has
         determined to sell the Assigned Rights notwithstanding its lack of
         knowledge of the Investor Group Information, and that Investors shall
         have no liability to Watson and Watson hereby waives and releases any
         claims which it might have against Investors or any Investor
         Indemnified Parties (as hereinafter defined), whether pursuant to
         applicable securities laws or otherwise, with respect to the
         non-disclosure of Investor Group Information; provided, however, that
         the foregoing limitation shall not in any way limit the liability of an
         Investor for a breach of its representations and warranties contained
         in this Agreement.

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                                   ARTICLE V

                                 INDEMNIFICATION

                  Section 5.1 Indemnification by Halsey. (a) Each Watson
Indemnified Party and each Investor Group Indemnified Party shall be indemnified
and held harmless by Halsey for and against any and all Liabilities, losses,
diminution in value, damages, claims, costs and expenses, interest, awards,
judgments and penalties (including attorneys' and consultants' fees and
expenses) actually suffered or incurred by them (including any Action brought or
otherwise initiated by any of them) (hereinafter a "Loss") (excluding indirect
consequential or punitive damages), arising out of or resulting from:

                           (i)      the breach of any representation, or
                  warranty made by Halsey contained in this Agreement, the Third
                  Amendment and the Ancillary Documents (it being understood
                  that such representations and warranties shall be interpreted
                  without giving effect to any limitations or qualifications as
                  to "materiality" (including the word "material") set forth
                  therein);

                           (ii)     the breach of any covenant or agreement by
                  Halsey contained in this Agreement, the Third Amendment and
                  the Ancillary Documents; and

                           (iii)    any and all Losses suffered or incurred by
                  Watson by reason of or in connection with any claim or cause
                  of action of any third party to the extent arising out
                  Halsey's use, manufacture, sale or distribution of the
                  Purchased Assets prior to the Effective Date.

                  (b) To the extent that Halsey's undertakings set forth in this
         Section 5.1 may be unenforceable, Halsey shall contribute the maximum
         amount that it is permitted to contribute under applicable Law to the
         payment and satisfaction of all Watson/Investor Losses incurred by the
         Watson/Investor Group Indemnified Parties.

                  Section 5.2 Indemnification by the Investor. (a) Halsey and
their Affiliates, officers, directors, employees, agents, successors and assigns
(each an "Halsey Indemnified Party") shall be indemnified and held harmless by
each Investor for and against any and all Losses (excluding indirect
consequential or punitive damages), arising out of or resulting from the breach
of any representation, warranty or covenant made by such Investor contained in
this Agreement or the Transaction Documents. To the extent that an Investor's
undertakings set forth in this Section 5.2 may be unenforceable, such Investor
shall contribute the maximum amount that it is permitted to contribute under
applicable Law to the payment and satisfaction of all Losses incurred by the
Halsey Indemnified Parties.

                  (b)      Watson and its Affiliates, officers, directors,
employees, agents, successors and assigns (each a "Watson Indemnified Party")
shall be indemnified and held harmless by each Investor for and against any and
all Losses arising out of or resulting from:

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<PAGE>

                           (i)      the breach of any representation or warranty
                  made by such Investor contained in this Agreement;

                           (ii)     the non-performance by such Investor of any
                  obligation of such Investor under this Agreement (to the
                  extent such obligations are to be performed on or after the
                  Effective Date);

                           (iii)    the Assigned Rights, the Loan or the
                  Assigned Agreements as a result or consequence of any act or
                  omission by such Investor or any of its Investor Indemnified
                  Parties occurring on or after the Effective Date; and

                           (iv)     the non-performance by such Investor of any
                  obligation assumed by Investor under this Agreement (to the
                  extent such obligations are to be performed on or after the
                  Effective Date).

                  (c)      Each Watson Indemnified Party shall be indemnified
and held harmless by the Claimants for and against any and all Losses arising
out of or resulting from the return of the Third Amendment Cash Amount by Watson
to the estate of Halsey or any of its subsidiaries or any other Losses suffered
or incurred by Watson by reason of or in connection with the assertion, by the
estate of Halsey or any of its subsidiaries or any trustee or other
representative appointed for any such estate, of avoiding powers provided under
Sections 544, 545, 547, 548, 549 and 550 of the Bankruptcy Code or analogous
state law, but in each case only with respect to such assertions made regarding
the Third Amendment Cash Amount. Notwithstanding anything to the contrary in
this Agreement, (i) the aggregate liability of the Claimants under this Section
5.2(c) shall be limited to $5,000,000.00 (it being agreed by the Claimants, for
the purposes of this Section 5.2(c), that reasonable attorneys' and consultants'
fees and expenses shall be separately indemnified by the Claimants and shall not
be included in the computation of aggregate liability under this clause (i)),
(ii) no Claimant shall have any liability under this Section 5.2(c) in excess of
its Pro Rata Portion of the aggregate liability of the Claimants hereunder and
(iii) the Claimants liability hereunder shall survive until the expiration of
applicable statute of limitations (with extensions) with respect to the matters
addressed in this Section 5.2(c).

                  (d)      To the extent that such Investor's undertakings set
forth in this Section 5.2(b) or Section 5.2(c) may be unenforceable, such
Investor shall contribute the maximum amount that it is permitted to contribute
under applicable Law to the payment and satisfaction of all Losses incurred by
the Watson Indemnified Parties.

                  Section 5.3 Indemnification by Watson. (a) Each Investor and
its respective Affiliates, officers, directors, employees, agents, successors
and assigns (each an "Investor Indemnified Party") shall be indemnified and held
harmless by Watson for and against any and all Losses (excluding indirect
consequential or punitive damages), arising out of or resulting from:

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<PAGE>

                           (i)      the breach of any of Watson's
                  representations, warranties, covenants or agreements in this
                  Agreement; and

                           (ii)     the non-performance by Watson of any
                  obligation of Watson under this Agreement (to the extent such
                  obligations are to be performed on or after the Effective
                  Date).

                  (b) Each Halsey Indemnified Party shall be indemnified and
         held harmless by Watson for and against any and all Losses suffered or
         incurred by Halsey by reason of or in connection with any claim or
         cause of action by any third party to the extent arising out of
         Watson's use, manufacture, sale or distribution of the Purchased Assets
         on or after the Effective Date.

                  (c) Notwithstanding anything to the contrary in this
         Agreement, the liability of Watson under (i) this Section 5.3(a) shall
         be limited to $1,000,000.00 and (ii) this Section 5.3(b) shall be
         limited to $4,658,516. To the extent that Watson's undertakings set
         forth in this Section 5.3 may be unenforceable, Watson shall contribute
         the maximum amount that it is permitted to contribute under applicable
         Law to the payment and satisfaction of all Losses incurred by the
         Investor Indemnified Parties or Halsey Indemnified Parties as the case
         may be.

                  Section 5.4 Notice of Loss; Third Party Claims. (a) An
Indemnified Party shall give the Indemnifying Party notice of any matter which
an Indemnified Party has determined has given or could give rise to a right of
indemnification under this Agreement, within 60 days of such determination,
stating the amount of the Loss, if known, and method of computation thereof, and
containing a reference to the provisions of this Agreement in respect of which
such right of indemnification is claimed or arises.

                  (b) If an Indemnified Party shall receive notice of any
         Action, audit, demand or assessment (each, a "Third Party Claim")
         against it or which may give rise to a claim for the Loss under this
         Article V, within 30 days of the receipt of such notice, the
         Indemnified Party shall give the Indemnifying Party notice of such
         Third Party Claim; provided, however, that the failure to provide such
         notice shall not release the Indemnifying Party from any of its
         obligations under this Article V except to the extent that the
         Indemnifying Party is materially prejudiced by such failure and shall
         not relieve the Indemnifying Party from any other obligation or
         Liability that it may have to any Indemnified Party otherwise than
         under this Article V. If the Indemnifying Party acknowledges in writing
         its obligation to indemnify the Indemnified Party hereunder against any
         Losses that may result from such Third Party Claim, then the
         Indemnifying Party shall be entitled to assume and control the defense
         of such Third Party Claim at its expense and through counsel of its
         choice if it gives notice of its intention to do so to the Indemnified
         Party within ten days of the receipt of such notice from the
         Indemnified Party; provided, however, that if there exists or is
         reasonably likely to exist a conflict of interest that would make it
         inappropriate in the reasonable judgment of the Indemnified

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<PAGE>

         Party for the same counsel to represent both the Indemnified Party and
         the Indemnifying Party, then the Indemnified Party shall be entitled to
         retain its own counsel in each jurisdiction for which the Indemnified
         Party determines counsel is required, at the expense of the
         Indemnifying Party. In the event that the Indemnifying Party exercises
         the right to undertake any such defense against any such Third Party
         Claim as provided above, the Indemnified Party shall cooperate with the
         Indemnifying Party in such defense and make available to the
         Indemnifying Party, at the Indemnifying Party's expense, all witnesses,
         pertinent records, materials and information in the Indemnified Party's
         possession or under the Indemnified Party's control relating thereto as
         is reasonably required by the Indemnifying Party. Similarly, in the
         event the Indemnified Party is, directly or indirectly, conducting the
         defense against any such Third Party Claim, the Indemnifying Party
         shall cooperate with the Indemnified Party in such defense and make
         available to the Indemnified Party, at the Indemnifying Party's
         expense, all such witnesses, records, materials and information in the
         Indemnifying Party's possession or under the Indemnifying Party's
         control relating thereto as is reasonably required by the Indemnified
         Party. No such Third Party Claim may be settled by the Indemnifying
         Party without the prior written consent of the Indemnified Party, which
         consent shall not be unreasonably withheld.

                  Section 5.5 Fees and Expenses. (a) Watson shall pay and be
liable for the payment of all costs and expenses of Watson in respect of the
Assigned Rights incurred or chargeable prior to the Effective Date.

                  (b) Investor Group shall pay and be liable for the payment of
         all costs and expenses of Investors in respect of the Assigned Rights
         incurred or chargeable to any period on and after the Effective Date.

                  (c) If Investor Group receives any reimbursement in cash paid
         by Halsey for the fees and/or expenses which previously were paid by
         Watson, Investor Group shall promptly deliver to Watson the portion of
         the fees and/or expenses received by Investor which previously had been
         paid by Watson.

                                   ARTICLE VI

                              ADDITIONAL AGREEMENTS

                  Section 6.1 Further Assurances. (a) Each of the Parties hereby
agree to execute and deliver, or cause to be executed and delivered, such other
documents, instruments and agreements, and take such other actions, as another
Party may reasonably request in connection with the transactions contemplated by
this Agreement, including, without limitation, compliance with Section 11(b) of
the Subordination Agreement, and the delivery of any notices or other documents
or instruments which may be required in connection with the transfer of the
Purchased Assets, the 2004 Debentures and the Assigned Rights.

                               Umbrella Agreement

                                       23

<PAGE>

                  Section 6.2 UCC Financing Statements. (a) Watson hereby
authorizes Investors to file one or more amendments to financing or continuation
statements, including, without limitation, one or more amendments to financing
statements indicating that Watson has assigned of record all of its power to
authorize an amendment to financing statements covering the assets or personal
property of Halsey or any of its subsidiaries, in each case without the
signature of Watson. Watson ratifies its authorization for the Investor Group
acting through the Investor Group Nominee to have filed such amendments to
financing statements or continuation statements filed prior to the date hereof.

                  (b)      Halsey hereby authorizes Watson to file one or more
amendments to financing or continuation statements, including, without
limitation, one or more amendments to financing statements indicating that
Halsey has assigned of record all of their power to authorize an amendment to
financing statements covering the Purchased Assets, in each case without the
signature of Halsey. Halsey ratifies its authorization for Watson to have filed
such amendments to financing statements or continuation statements filed prior
to the date hereof.

                  (c)      The Investor Group hereby releases any and all
Encumbrances against the Purchased Assets and hereby authorizes each of Halsey
and Watson to file one or more termination statements to any financing or
continuation statements to terminate any and all Encumbrances covering the
Purchased Assets (but only with respect to such Purchased Assets and not with
respect to any other property covered by such financing or continuation
statements), in each case without the signature of the Investor Group.

                  Section 6.3 Further Notices. Each Claimant hereby agrees to
provide Watson written notice of the following events within three Business Days
of their occurrence: (i) the receipt by a Claimant of any payment or other
property (other than equity or debt securities of the Company) on account of
such Claimant's Debentures, (ii) the commencement by or against any of the Loan
Parties of any bankruptcy, insolvency, arrangement, reorganization, receivership
or relief proceeding or similar case or proceeding under any federal or state
bankruptcy or similar law and (iii) any distribution of all or any of the assets
of the Loan Parties upon the dissolution, winding up, total or partial
liquidation, arrangement, reorganization, adjustment, protection, relief or
composition of such Loan Party or its debts, whether in any bankruptcy,
insolvency, arrangement, reorganization, receivership or relief proceeding or
similar case or proceeding under any federal or state bankruptcy or similar law
and (iv) any assignment for the benefit of creditors or any other marshalling of
the assets and liabilities of such Loan Parties or otherwise. The Claimants'
obligations under clause (i) of this Section 6.3 shall terminate upon the
Contingent Purchase Termination Date. The Claimants' obligations under clauses
(ii)-(iv) of this Section 6.3 shall terminate when the Claimants' obligation
under Section 5.2(c) expire.

                  Section 6.4 Subrogation. To the extent that any Party enforces
any claim for indemnification or other right, claim or remedy against another
Party under this Agreement and receives payment or another remedy from such
Party in respect of such right, claim or remedy, the Parties agree that to the
extent permitted by law and the Assigned Agreements, without the need for
further action on the part of any Party, the indemnifying Party shall be
subrogated to all

                               Umbrella Agreement

                                       24

<PAGE>

rights of the indemnified Party against any other entity with respect to such
right, claim or remedy to the extent that the indemnified Party receives such
payment or other remedy from the indemnifying Party (including, without
limitation, with respect to the rights reserved by Watson under Section 2.3(a)
in the event the Claimants make any payments under Section 5.2(c)).

                  Section 6.5 Public Announcements. Each Party agrees not to
make, or cause to be made, any press release or public announcement in respect
of this Agreement or the transactions contemplated hereby or otherwise
communicate with any news media without the prior written consent of Watson, the
Company and the Claimants, which consents shall not be unreasonably withheld,
and the Parties shall cooperate as to the timing and contents of any such press
release, public announcement or communication.

                                  ARTICLE VII

                               GENERAL PROVISIONS

                  Section 7.1 Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be given or
made (and shall be deemed to have been duly given or made upon receipt) by
delivery in person, by an internationally recognized overnight courier service,
by facsimile or registered or certified mail (postage prepaid, return receipt
requested) to the respective parties hereto at the following addresses (or at
such other address for a party as shall be specified in a notice given in
accordance with this Section 7.1):

                           If to Halsey, at:

                           Halsey Drug Co., Inc.
                           695 No. Perryville Road
                           Rockford, Illinois 61107
                           Attention: Chief Executive Officer
                           Fax: (815) 399-9710

                           If to Watson, at:

                           Watson Pharmaceuticals, Inc.,
                           311 Bonnie Circle
                           Corona, California 92880
                           Attention: Chief Financial Officer

                               Umbrella Agreement

                                       25

<PAGE>

                           Fax: (909) 279-8094
                           cc: General Counsel

                           If to the Investor Group, to the Investor Group
                           Nominee at:

                           Galen Partners III, L.P.
                           610 Fifth Avenue, 5th Fl.
                           New York, New York  10020
                           Attention: Chief Financial Officer
                           Fax: (212) 218-4999

                  Section 7.2 Expenses. Except as otherwise specified in this
Agreement or any other Transaction Document, all costs and expenses, including
fees and disbursements of counsel, financial advisors and accountants, incurred
in connection with this Agreement and the transactions contemplated by this
Agreement shall be paid by the party incurring such costs and expenses, whether
or not the Closing shall have occurred.

                  Section 7.3 Severability. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced by any Law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect for so long as the economic or
legal substance of the transactions contemplated hereby is not affected in any
manner materially adverse to either party hereto. Upon such determination that
any term or other provision is invalid, illegal or incapable of being enforced,
the Parties shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the Parties as closely as possible in an
acceptable manner in order that the transactions contemplated hereby are
consummated as originally contemplated to the greatest extent possible.

                  Section 7.4 Entire Agreement. This Agreement and the
Transaction Documents constitute the entire agreement of the Parties with
respect to the subject matter hereof and thereof and supersede all prior
agreements and undertakings, both written and oral, between the Parties with
respect to the subject matter hereof and thereof.

                  Section 7.5 Assignment. This Agreement may not be assigned by
operation of law or otherwise without the express written consent of each of the
Parties (which consent may be granted or withheld in the sole discretion of each
of the Parties); provided, however, that Watson may assign this Agreement or any
of its rights and obligations hereunder to one or more Affiliates of Watson
without the consent of the other Parties, provided further however that Watson
shall remain, upon such assignment, liable in respect of its obligations under
Section 5.3, 5.4, 6.1, 6.4 and 6.5.

                  Section 7.6 Amendment. This Agreement may not be amended or
modified except (a) by an instrument in writing signed by, or on behalf of, each
of the Parties or (b) by a waiver in accordance with Section 7.7.

                               Umbrella Agreement

                                       26

<PAGE>

                  Section 7.7 Waiver. Any party to this Agreement may (a) extend
the time for the performance of any of the obligations or other acts of the
other Parties, (b) waive any inaccuracies in the representations and warranties
of the other Parties contained herein or in any document delivered by the other
Parties pursuant hereto or (c) waive compliance with any of the agreements of
the other Parties or conditions to such Party's obligations contained herein.
Any such extension or waiver shall be valid only if set forth in an instrument
in writing signed by the Party to be bound thereby. Any waiver of any term or
condition shall not be construed as a waiver of any subsequent breach or a
subsequent waiver of the same term or condition, or a waiver of any other term
or condition of this Agreement. The failure of any Party hereto to assert any of
its rights hereunder shall not constitute a waiver of any of such rights. All
rights and remedies existing under this Agreement are cumulative to, and not
exclusive of, any rights or remedies otherwise available.

                  Section 7.8 No Third Party Beneficiaries. Except for the
provisions of Article V relating to indemnified parties, this Agreement shall be
binding upon and inure solely to the benefit of the Parties and their respective
successors and permitted assigns and nothing herein, express or implied, is
intended to or shall confer upon any other Person.

                  Section 7.9 Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of New York
applicable to contracts executed in and to be performed in that State. All
Actions arising out of or relating to this Agreement shall be heard and
determined exclusively in any New York federal court sitting in the Borough of
Manhattan of The City of New York, provided, however, that if such federal court
does not have jurisdiction over such Action, such Action shall be heard and
determined exclusively in any New York state court sitting in the Borough of
Manhattan of The City of New York. Consistent with the preceding sentence, the
Parties hereto hereby (a) submit to the exclusive jurisdiction of any federal or
state court sitting in the Borough of Manhattan of The City of New York for the
purpose of any Action arising out of or relating to this Agreement brought by
any party hereto and (b) irrevocably waive, and agree not to assert by way of
motion, defense, or otherwise, in any such Action, any claim that it is not
subject personally to the jurisdiction of the above-named courts, that its
property is exempt or immune from attachment or execution, that the Action is
brought in an inconvenient forum, that the venue of the Action is improper, or
that this Agreement or the transactions contemplated by this Agreement may not
be enforced in or by any of the above-named courts.

                  Section 7.10 Waiver of Jury Trial. Each of the Parties hereby
waives to the fullest extent permitted by applicable law any right it may have
to a trial by jury with respect to any litigation directly or indirectly arising
out of, under or in connection with this Agreement or the transactions
contemplated by this Agreement. Each of the Parties hereby (a) certifies that no
representative, agent or attorney of the other party has represented, expressly
or otherwise, that such other party would not, in the event of litigation, seek
to enforce the foregoing waiver and (b) acknowledges that it has been induced to
enter into this Agreement and the transactions contemplated by this Agreement,
as applicable, by, among other things, the mutual waivers and certifications in
this Section 7.10.

                               Umbrella Agreement

                                       27

<PAGE>

                  Section 7.11 Currency. Unless otherwise specified in this
Agreement, all references to currency, monetary values and dollars set forth
herein shall mean United States (U.S.) dollars and all payments hereunder shall
be made in United States dollars.

                  Section 7.12 Counterparts. This Agreement may be executed and
delivered (including by facsimile transmission) in one or more counterparts, and
by the different parties hereto in separate counterparts, each of which when
executed shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement.

                               Umbrella Agreement

                                       28

<PAGE>

                  IN WITNESS WHEREOF, the Parties have caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.

                                             HALSEY DRUG CO., INC.

                                             By:________________________________
                                                Name:
                                                Title:

                                             WATSON PHARMACEUTICALS, INC.

                                             By:________________________________
                                                Name:
                                                Title:

                               Umbrella Agreement

                                       29

<PAGE>

GALEN PARTNERS III, L.P.
By: Claudius, L.L.C., General Partner
610 Fifth Avenue, 5th Fl.
New York, New York  10019

___________________________
By: Srini Conjeevaram
Its: General Partner

GALEN PARTNERS INTERNATIONAL, III, L.P.     CARE CAPITAL INVESTMENTS II, LP
By: Claudius, L.L.C., General Partner       By: Care Capital II, LLC, as general
610 Fifth Avenue, 5th Floor                 partner
New York, New York  10020                   47 Hulfish St., Suite 310
                                            Princeton, NJ 08542

                                            By:_______________________________
___________________________                 Name:  David R. Ramsay
By: Srini Conjeevaram                       Title: Authorized Signatory
Its: General Partner
                                            ESSEX WOODLANDS HEALTH
GALEN EMPLOYEE FUND III, L.P.               VENTURES V, L.P.
By: Wesson Enterprises, Inc.                190 South LaSalle Street, Suite 2800
610 Fifth Avenue, 5th Floor                 Chicago, IL 60603
New York, New York 10020

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

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

___________________________                 __________________________________

DENNIS ADAMS
120 Kynlyn Road
Radnor, Pennsylvania  19312

___________________________

                               Umbrella Agreement

                                       30

<PAGE>

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

___________________________                 _________________________________

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

___________________________

                               Umbrella Agreement

                                       31

<PAGE>

                                                                      SCHEDULE I

                                PURCHASED ASSETS

1.       Halsey's Drug Master File for manufacturing doxycycline monohydrate
active pharmaceutical ingredient ("API") and any equivalent filings with the
governing health authorities of any other country.

2.       Any and all registrations, permits, licenses, authorizations,
approvals, presentations, notifications of filings, in Halsey's possession,
which are filed with or granted by the governing health authority of any
country, and which are required to develop, make, use, sell, import or export
doxycycline monohydrate, other than the doxycycline monohydrate API Drug Master
File.

3.       Halsey's Drug Master File for manufacturing doxycycline hyclate API and
any equivalent filings with the governing health authorities of any other
country.

4.       Any and all registrations, permits, licenses, authorizations,
approvals, presentations, notifications of filings, in Halsey's possession,
which are filed with or granted by the governing health authority of any
country, and which are required to develop, make, use, sell, import or export
doxycycline hyclate, other than the doxycycline hyclate API Drug Master File.

5.       Abbreviated New Drug Application No. 061717 for 50mg and 100mg
doxycylcine hyclate filed with the FDA by Halsey or its Affiliate, and any
supplements thereto.

6.       Abbreviated New Drug Application No. 089536 for 40mg, 50mg and 325mg
acetaminophen; butalbital; caffeine filed with the FDA by Halsey or its
Affiliate, and any supplements thereto.

7.       All doxycycline monohydrate API and doxycycline hyclate API related
equipment owned by Halsey, as described on Schedule IA attached hereto.

8.       The products set forth on the invoices set forth on Schedule IB hereto.
It being understood among the parties hereto that no additional consideration
shall be paid for such products, notwithstanding the prices set forth on such
invoices.

                               Umbrella Agreement

                                       32

<PAGE>

                                                                     SCHEDULE IA

                         DOXYCYCLINE MONOHYDRATE API AND
                        DOXYCYCLINE HYCLATE API EQUIPMENT

GENERALIZED EQUIPMENT LIST FOR DOXYCYCLINE HYCLATE AND DOXYCYCLINE MONOHYDRATE
                                   PRODUCTION
                                     1/19/04

     PLANT A- USED FOR THE MANUFACTURE OF DOXYCYCLINE HYCLATE

1.   600-gallon Hydrogenator (Methacycline HCl and Wilkinson's Catalyst)

2.   500-gallon Crystallizer (Precipitation)

3.   32 sq. ft Filter Box (Filtration)

4.   Atmospheric Tray Dryer*

5.   500-gallon Reactor (Neutralization)

6.   100-gallon Reactor (HCl /Ethanol absorption)

7.   Sparkle Filter (Filtration)

8.   250-gallon Clarity Tank (Clarification)

9.   Polishing Filter

10.  350-gallon Reactor (Holding Tank for clarified solution)

11.  10 sq ft PP Filter Box (used to obtain Doxy Hyclate wet cake)

12.  Atmospheric Tray Dryer* (Drying of final product)

13.  600-gallon Reactor (Waste Tank used for neutralization prior to transfer
     into tanker)

14.  Fitz-Mill (Shared between both Doxy Hyclate and Doxy Mono)

15.  V-blender (Shared between both Doxy Hyclate and Doxy Mono)

* The atmospheric tray dryers are powered by steam and cannot be easy relocated

     PLANT B- USED FOR THE MANUFACTURE OF DOXYCYCLINE MONOHYDRATE

1.   100-gallon Dissolution Tank (Doxy Hyclate, Acetone, Water)

2.   Inline Filter assembly (Clarification)

3.   300-gallon Precipitation Tank

4.   9 sq ft Filter Box (Doxy mono wet cake)

5.   2-vacuum dryers

6.   500-gallon Reactor (waste)

<PAGE>

                                                                     SCHEDULE IB

                            [Invoices to be attached]

<PAGE>

                                                                     SCHEDULE II

                                 LOAN DOCUMENTS

1.       Loan Agreement dated March 29, 2000

2.       Amendment to Loan Agreement dated March 31, 2000

3.       Second Amendment to Loan Agreement dated December 20, 2002

4.       Third Amendment to Loan Agreement dated February 6, 2004

5.       Secured Promissory Note for $17,500,000.00 dated March 31, 2000

6.       Secured Promissory Note for $17,500,000.00 dated December 20, 2002

7.       Secured Promissory Note for $3,901,331.00 dated December 20, 2002

8.       Secured Promissory Note for $5,000,000.00 dated as of December 20, 2002

9.       Watson Stock Pledge Agreement dated March 29, 2000

10.      Watson Security Agreement dated March 29, 2000

11.      Watson Guaranty dated March 29, 2000

12.      Watson Guarantors Security Agreement Dated March 29, 2000

13.      Real Estate Mortgage by Houba Inc., dated March 29, 2000

14.      Subordination Agreement (Mortgage) dated March 29, 2000

15.      Subordination Agreement dated March 29, 2000

16.      Subordination Agreement dated December 20, 2002

                               Umbrella Agreement

                                       1

<PAGE>

                                                                  EXHIBIT 1.1(a)

                    FORM OF 2004 DEBENTURE PURCHASE AGREEMENT

                                       2

<PAGE>

                                                                  EXHIBIT 1.1(b)

                   FORM OF ASSIGNMENT OF INTELLECTUAL PROPERTY

                  This ASSIGNMENT OF INTELLECTUAL PROPERTY (this "Assignment"),
effective the 6th day of February, 2004, is made and entered into by and between
Halsey Drug Co., Inc. a New York corporation ("Assignor"), and Watson
Pharmaceuticals, Inc., Inc. a Nevada corporation ("Assignee") (each a "Party,"
and collectively, the "Parties"). Capitalized terms used herein but not
otherwise defined herein shall have the meanings set forth in the Watson
Umbrella Agreement (defined below).

                  WHEREAS, Assignor is the owner of each of (i) the patents and
patent applications set forth on Schedule A hereto (the "Patents"); (ii) the
copyrights, copyright registrations and copyright applications set forth on
Schedule B hereto (the "Copyrights"); and (iii) the trademarks, trademark
registrations and trademark applications (including any and all goodwill
symbolized thereby) set forth on Schedule C hereto (the "Trademarks")
((i)-(iii), collectively, the "Purchased Intellectual Property");

                  WHEREAS, Assignor and Assignee entered into that certain
Watson Umbrella Agreement dated [____________] (the "Watson Umbrella
Agreement"), pursuant to which Assignee agreed to purchase the Purchased Assets
from Assignor, including all of Assignor's right, title and interest in and to
the Purchased Intellectual Property; and

                  WHEREAS, the execution and delivery of this Assignment is a
condition to Closing.

                  NOW THEREFORE, for the consideration set forth in the Watson
Umbrella Agreement, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as follows:

                  1. Assignment. Effective upon Closing, Assignor hereby assigns
to Assignee all of Assignor's right, title and interest in and to the Purchased
Intellectual Property, including all rights therein provided by international
conventions and treaties, and the right to sue for past, present and future
infringement thereof.

                  2. Additional Representations and Warranties. In addition to
the representations and warranties expressly provided in the Watson Umbrella
Agreement, Assignor hereby makes the following representations and warranties
with respect to the Purchased Intellectual Property:

                           1.       Assignor is the exclusive owner of the
                                    entire and unencumbered right, title and
                                    interest in and to the Purchased
                                    Intellectual Property and has a valid right
                                    to use the Purchased Intellectual Property.

                           2.       To the knowledge of Assignor after due
                                    inquiry, the Purchased Intellectual Property
                                    is not subject to any outstanding decree,
                                    order, injunction, judgment or ruling
                                    restricting the use of such

                                       3

<PAGE>

                                    Purchased Intellectual Property or that
                                    would impair the validity or enforceability
                                    of such Purchased Intellectual Property.

                           3.       No Actions or Claims have been asserted or
                                    are pending or, to the knowledge of Assignor
                                    after due inquiry, threatened against the
                                    Assignor or any subsidiary (i) based upon or
                                    challenging or seeking to deny or restrict
                                    the use by the Assignor or any its
                                    subsidiary of any of the Purchased
                                    Intellectual Property, (ii) alleging that
                                    any services provided by, processes used by,
                                    or products manufactured or sold by the
                                    Assignor or any of its subsidiary infringe
                                    or misappropriate any intellectual property
                                    right of any third party or (iii) alleging
                                    that the Purchased Intellectual Property is
                                    being licensed or sublicensed in conflict
                                    with the terms of any license or other
                                    agreement.

                           4.       No person is engaging in any activity that
                                    infringes the Purchased Intellectual
                                    Property, to the knowledge of Assignor after
                                    due inquiry. None of the Assignor or its
                                    subsidiary has granted any license or other
                                    right to any third party in respect to the
                                    Purchased Intellectual Property. The
                                    consummation of the transactions
                                    contemplated by this Agreement and the
                                    Watson Umbrella Agreement will not result in
                                    the termination or impairment of any of the
                                    Purchased Intellectual Property.

                  3. Further Assurances. Assignor shall, at the cost and expense
of Assignee, timely execute and deliver any additional documents and perform
such additional acts necessary or desirable to record and perfect the interest
of Assignee in and to the Purchased Intellectual Property, and shall not enter
into any agreement in conflict with this Assignment.

                  4. Governing Law. This Assignment shall be governed by and
construed in accordance with the laws of New York, without regard to the
conflicts of law rules of such state.

                  5. Counterparts. This Assignment may be executed in one or
more counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same agreement.

                                       4

<PAGE>

                  IN WITNESS WHEREOF, each Party has caused this Assignment to
be executed by its duly authorized representative.

                                                HALSEY DRUG CO., INC.

                                             By: _______________________________
                                                 Name: Andrew D. Reddick
                                                 Title: President

                                                HOUBA, INC.

                                             By: _______________________________
                                                 Name: Peter A. Clemens
                                                 Title: Vice President

                                                WATSON PHARMACEUTICALS, INC.

                                             By: _______________________________
                                             Name:
                                             Title:

                                       5

<PAGE>

                                   SCHEDULE A

<TABLE>
<CAPTION>
Country           Application No.           Patent No.           Filing Date           Issue Date
-------           ---------------           ---------            -----------           ----------
<S>               <C>                       <C>                  <C>                   <C>
</TABLE>

                                   SCHEDULE B

<TABLE>
<CAPTION>
Country           Title           App. No.           Reg. No.           Filing Date           Issue Date
-------           -----           --------           -------            -----------           ----------
<S>               <C>             <C>                <C>                <C>                   <C>
</TABLE>

                                   SCHEDULE C

<TABLE>
<CAPTION>
Country           Mark           App. No.           Reg. No.           Filing Date           Issue Date
-------           ----           --------           --------           -----------           ----------
<S>               <C>            <C>                <C>                <C>                   <C>
</TABLE>

                               Umbrella Agreement

                                       6

<PAGE>

                                                                  EXHIBIT 1.1(c)

                       FORM OF BILL OF SALE AND ASSIGNMENT

                  BILL OF SALE AND ASSIGNMENT, dated as of February 6, 2004
(this "Bill of Sale and Assignment"), from Halsey Drug Co., Inc. a New York
corporation (the "Seller"), to Watson Pharmaceuticals, Inc., Inc. a Nevada
corporation (the "Purchaser").

                  WHEREAS, the Seller and the Purchaser have entered into the
Umbrella Agreement, dated as of February 6, 2004 (the "Umbrella Agreement";
unless otherwise defined herein, capitalized terms shall be used herein as
defined in the Umbrella Agreement); and

                  WHEREAS, the execution and delivery of this Bill of Sale and
Assignment by the Seller is a condition to the obligations of the Purchaser to
consummate the transactions contemplated by the Umbrella Agreement;

                  NOW, THEREFORE, in consideration of the promises and mutual
agreements set forth in the Umbrella Agreement, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Seller does hereby agree as follows:

                  1.       Sale and Assignment of Purchased Assets and
Properties. The Seller hereby sells, assigns, transfers, conveys, grants,
bargains, sets over, releases, delivers, vests and confirms unto the Purchaser
and its successors and assigns, forever, the entire right, title and interest of
the Seller free and clear of all Encumbrances in and to any and all of the
Purchased Assets.

                  2.       Obligations and Liabilities Not Assumed. Nothing
expressed or implied in this Bill of Sale and Assignment shall be deemed to be
an assumption by the Purchaser or its subsidiaries of any Liabilities of the
Seller. Neither the Purchaser nor its subsidiaries by this Bill of Sale and
Assignment, agree to assume or agree to pay, perform or discharge any
liabilities of the Seller of any nature, kind or description whatsoever.

                  3.       Further Assurances. The Seller hereby covenants and
agrees that, at any time and from time to time after the date of this Bill of
Sale and Assignment, at the Purchaser's request, the Seller will do, execute,
acknowledge and deliver, or will cause to be done, executed, acknowledged and
delivered, any and all further acts, conveyances, transfers, assignments, and
assurances as necessary to grant, sell, convey, assign, transfer, set over to or
vest in the Purchaser any of the Purchased Assets.

                  4.       Power of Attorney. The Seller hereby constitutes and
appoints the Purchaser, its successors and assigns, the true and lawful attorney
and attorneys of the Seller, with full power of substitution, in the name of the
Purchaser or in the name and stead of the Seller, but on behalf of and for the
benefit of the Purchaser, its successors and assigns (and at the expense of the
Seller):

<PAGE>

                  (a)      to collect, demand and receive any and all Purchased
Assets transferred hereunder and to give receipts and releases for and in
respect of the same;

                  (b)      to institute and prosecute in the Seller's name, or
otherwise, at the expense and for the benefit of the Purchaser any and all
actions, suits or proceedings, at law, in equity or otherwise, which the
Purchaser may deem proper in order to collect, assert or enforce any claim,
right or title of any kind in or to the Purchased Assets hereby sold and
assigned to the Purchaser or intended so to be, to defend or compromise any and
all such actions, suits or proceedings in respect of any of such Purchaser
Purchased Assets, and to do all such acts and things in relation thereto as the
Purchaser shall deem advisable for the collection or reduction to possession of
any of such Purchased Assets;

                  (c)      to take any and all other reasonable action designed
to vest more fully in the Purchaser the Purchased Assets hereby sold and
assigned to the Purchaser or intended so to be and in order to provide for the
Purchaser the benefit, use, enjoyment and possession of such Purchased Assets;
and

                  (d)      to do all reasonable acts and things in relation to
the Purchased Assets sold and assigned hereunder.

                  The Seller acknowledges that the foregoing powers are coupled
with an interest and shall be irrevocable by it or upon its subsequent
dissolution or in any manner or for any reason. The Purchaser shall be entitled
to retain for its own account any amounts collected pursuant to the foregoing
powers, including any amounts payable as interest with respect thereto. The
Seller shall from time to time pay to the Purchaser, when received, any amounts
that shall be received directly or indirectly by the Seller (including amounts
received as interest) in respect of any Purchased Assets sold, assigned or
transferred to the Purchaser pursuant hereto.

                  5.       No Third Party Beneficiaries. This Bill of Sale and
Assignment shall be binding upon and inure solely to the benefit of the
Purchaser and its permitted assigns and nothing herein, express or implied, is
intended to or shall confer upon any other Person, any legal or equitable right,
benefit or remedy of any nature whatsoever, under or by reason of this
Agreement.

                  6.       Severability. If any term or other provision of this
Bill of Sale and Assignment is invalid, illegal or incapable of being enforced
by any Law or public policy, all other terms and provisions of this Bill of Sale
and Assignment shall nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated hereby is not
affected in any manner materially adverse to either the Seller or the Purchaser

                  7.       Governing Law. This Bill of Sale and Assignment shall
be governed by, and construed in accordance with, the laws of the State of New
York applicable to contracts executed in and to be performed in that State
(without regard to conflicts of law provisions thereof).

<PAGE>

                  IN WITNESS WHEREOF, this Bill of Sale and Assignment has been
executed by the Seller as of the date first above written.

                                             HALSEY DRUG CO., INC

                                             By: _______________________________
                                                 Name:
                                                 Title:

<PAGE>

                                                                  EXHIBIT 1.1(d)

                      HALSEY AND GUARANTOR TRANSFER CONSENT

To:      The Members of the
         Investor Group a
         Party to the Umbrella Agreement
         by and among Halsey Drug Co., Inc.,
         Watson Pharmaceuticals, Inc. and
         the Investor Group listed as signatories thereto

                  We refer to that certain Loan Agreement, dated as of March 29,
2000, as amended by a certain Amendment to Loan Agreement dated March 21, 2000,
as further amended by a certain Second Amendment to Loan Agreement dated
December 20, 2002, as further amended by a certain Third Amendment to Loan
Agreement dated February 6, 2004 (as so amended, the "Loan Agreement"), between
Halsey Drug Co. Inc., a New York corporation (the "Halsey") and Watson
Pharmaceuticals, Inc., a Nevada corporation (the "Lender"), the Watson Security
Documents and the Subordination Agreement. Capitalized terms used herein and not
otherwise defined shall have the meanings attributed to them in the Loan
Agreement.

                  The undersigned hereby waives any objection it may have or any
violation of the Loan Documents, in order to permit Watson to assign all of its
right, title and interest in and to the Loan and the Loan Documents to Care
Capital Investments II, LP, Essex Woodlands Health Ventures, L.P., Galen
Partners III, L.P. and the other purchasers of the Loan listed as signatories to
the Umbrella Agreement dated February 6, 2004 by and among Watson, Halsey and
the other signatories thereto (the "Investor Group") and to permit Investor
Group to assume the obligations of Watson in respect of the Loan and under the
Loan Documents. The undersigned also hereby agrees to cooperate with Investor in
modifying the Loan Documents in accordance with any reasonable request by
Investor Group in furtherance of the assignment and assumption contemplated
hereby.

                                    HALSEY DRUG CO., INC.

                                    By:_________________________________________
                                    Name: Andrew D. Reddick
                                    Title: President and Chief Executive Officer

                                    AXIOM PHARMACEUTICAL CORPORATION

                                    By:_________________________________________
                                    Name: Peter A. Clemens
                                    Title: Vice President

                                    HOUBA INC.

                                    By:_________________________________________
                                    Name: Peter A. Clemens
Date: February 6, 2004              Title: Vice President

<PAGE>

                                                                  EXHIBIT 1.1(e)

                       SECURED CREDITORS' TRANSFER CONSENT

To:      The Members  of the Investor
         Group a Party to the Umbrella Agreement
         by and among Halsey Drug Co., Inc.,
         Watson Pharmaceuticals, Inc. and the
         Investor Group listed as signatories thereto

                  We refer to that certain Subordination Agreement, dated as of
December 20, 2002 (the "Subordination Agreement"), between Halsey Drug Co. Inc.,
a New York corporation (the "Halsey"), Watson Pharmaceuticals, Inc., a Nevada
corporation (the "Lender") and the parties listed therein. Capitalized terms
used herein and not otherwise defined shall have the meanings attributed to them
in the Subordination Agreement.

         Pursuant to Section 11(a) of the Subordination Agreement, the
undersigned hereby consents to the assignment by Watson of all of its right,
title and interest in and to the Watson Term Loans, the Watson Loan Agreement,
the Watson Company Security Documents, the Watson Guaranty and the Watson
Guarantor Security Documents to Care Capital Investments II, LP, Essex Woodlands
Health Ventures V, L.P., Galen Partners III, L.P. and the other purchaser of the
Watson Term Loans listed as signatories to the Umbrella Agreement dated February
6, 2004 by and among Watson, Halsey and the other signatories thereto (the
"Investor Group"), and the assumption by the Investor Group of the obligations
of Watson in respect of the Watson Term Loans, the Watson Loan Agreement, the
Watson Company Security Documents, the Watson Guaranty and the Watson Guarantor
Security Documents. The undersigned also hereby agrees to cooperate with
Investor Group in modifying the Watson Company Security Documents and the Watson
Guarantor Security Documents to comply with the terms of Section 11(b) hereto
and in accordance with any reasonable request by Investor Group in furtherance
of the assignment and assumption contemplated hereby.

                  [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]

<PAGE>

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

___________________________                  ___________________________
By: Srini Conjeevaram                        By: Joel Liffman
Its: General Partner                         Its: Authorized Agent

GALEN PARTNERS INTERNATIONAL, III, L.P.      CARE CAPITAL INVESTMENTS II, LP
By: Claudius, L.L.C., General Partner        By: Care Capital II, LLC, as
610 Fifth Avenue, 5th Floor                  general partner
New York, New York 10020                     47 Hulfish St., Suite 310
                                             Princeton, NJ 08542

___________________________
By: Srini Conjeevaram                        By: _______________________
Its: General Partner                         Name: David R. Ramsay
                                             Title: Authorized Signatory

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

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

<PAGE>

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

___________________________                  ___________________________

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

___________________________                  ___________________________

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

___________________________                  ___________________________

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

___________________________                  ___________________________

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

___________________________                  ___________________________

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

___________________________                  ___________________________

<PAGE>

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

___________________________                  ___________________________
By: Varshah H. Shah                          By: Varshah H. Shah
Its: Custodian                               Its: Custodian

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

___________________________                  ___________________________

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

___________________________                  ___________________________
By: __________________________
Its: Trustee

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

___________________________                  ___________________________

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

___________________________
By: Michael K. Reicher
Its: Trustee

<PAGE>

                                                                  EXHIBIT 1.1(f)

                    FORM OF THIRD AMENDMENT TO LOAN AGREEMENT

<PAGE>

                                                                  EXHIBIT 2.2(d)

            AMENDMENT TO WARRANT TO PURCHASE COMMON STOCK AGREEMENT

         1.       Section 3(d)(v) of the Warrant to Purchase Common Stock
         Agreement is amended to delete the word "or" at the end of the
         paragraph.

         2.       Section 3(d)(vi) of the Warrant to Purchase Common Stock
         Agreement is amended to delete the period at the end of the paragraph
         and to substitute in its place, a semi-colon.

         3.       A new Section 3(d)(vii) is added to the Warrant to Purchase
         Common Stock Agreement to read as follows :

                  "(vii) the issuance of the Company's convertible senior
         secured debentures pursuant to that certain 2004 Debenture Purchase
         Agreement dated February 6, 2004 between the Company and the
         signatories to such agreement; or"

         4.       A new Section 3(d)(viii) is added to the Warrant to Purchase
         Common Stock to read as follows:

                  "(viii) the issuance of Series A Preferred Stock, Series B
         Preferred Stock, Series C-1 Preferred Stock, Series C-2 Preferred Stock
         or Series C-3 Preferred Stock pursuant to that certain Debenture
         Conversion Agreement dated February 6, 2004 between the Company and the
         signatories to such Agreement."

<PAGE>

                                                                  EXHIBIT 2.2(e)

                          HYDROCODONE OPTION AGREEMENT<PAGE>

                                                                   EXHIBIT 10.13

                       THIRD AMENDMENT, WAIVER AND CONSENT

                                       TO

                                 LOAN AGREEMENT

         THIS THIRD AMENDMENT, WAIVER AND CONSENT TO LOAN AGREEMENT, dated as of
February 6, 2004 (the "Third Amendment"), is made and entered into by and
between Halsey Drug Co., Inc., a New York corporation ("Borrower"), and Watson
Pharmaceuticals, Inc., a Nevada corporation ("Lender"). Capitalized terms used
herein and not otherwise defined shall have the meaning provided in the Loan
Agreement (as defined below).

                                    RECITALS

         WHEREAS, Borrower and Lender are parties to that certain Loan
Agreement, dated as of March 29, 2000, as amended by a certain Amendment to Loan
Agreement dated as of March 31, 2000, and as further amended by a certain Second
Amendment to Loan Agreement dated as of December 20, 2002 (as so amended, the
"Loan Agreement"); and

         WHEREAS, in accordance with the terms of the Loan Agreement, Borrower
has issued to Lender two Promissory Notes, the first dated December 20, 2002 in
the principal amount of $17,500,000 (the "Replacement Note"), and the second
dated December 20, 2002 in the principal amount of $3,901,331 (the "New Note",
and together with the Replacement Note, collectively, the "Old Notes"); and

         WHEREAS, in order to allow the Borrower to complete each of the
transactions contemplated pursuant to that certain Term Sheet dated December 19,
2003 between the Borrower and the other signatories thereto (the "Term Sheet
Transactions"), Borrower has requested Lender, and Lender has agreed, to consent
to the Term Sheet Transactions and to waive certain restrictions contained in
the Loan Agreement, as provided herein; and

         WHEREAS, pursuant to a certain Umbrella Agreement dated of even date
herewith (the "Umbrella Agreement") by and among Borrower, Lender, Care Capital
Investment II, L.P., Essex Woodlands Health Ventures V, LP, Galen Partners III,
L.P. and the other signatories

<PAGE>

thereto (collectively, but excluding the Borrower and Lender, the "Investor
Group"), in consideration of Borrower's payment to Lender of $4,000,000, Lender
has agreed to (i) cancel and discharge in full New Note in the principal amount
of $3,901,331, (ii) forgive $12,500,000 in principal amount of Replacement Note
and amend and restate Replacement Note as provided herein, and (iii) amend the
Loan Agreement as provided herein (collectively, the "Note and Loan Agreement
Amendments"); and

         WHEREAS, pursuant to the terms of the Umbrella Agreement, Lender will
transfer and convey to the Investor Group all of its right, title and interest
in and to the Loan Agreement and Replacement Note after giving effect to the
Note and Loan Agreement Amendments; and

         WHEREAS, it is a condition to the completion of the Term Sheet
Transactions and the Umbrella Agreement that the Note and Loan Agreement
Amendments be completed in accordance with the terms of this Third Amendment.

         NOW, THEREFORE, the parties hereto agree as follows:

                                    AGREEMENT

         1.       Loan Agreement Waivers. Lender hereby consents to the Term
Sheet Transactions and, on the date this Third Amendment becomes effective,
waives the following, which waivers are limited solely to the Term Sheet
Transactions:

         (a)      The requirements to give notice of adverse changes and to
                  comply with material agreements contained in Sections 7.3 and
                  7.4 of the Loan Agreement;

         (b)      The lien restrictions contained in Section 8.3 of the Loan
                  Agreement;

         (c)      The indebtedness restrictions contained in Section 8.4 of the
                  Loan Agreement;

         (d)      The restrictions against the amendment to the Certificate of
                  Incorporation and/or By-Laws of the Borrower or the
                  Guarantors, contained in Section 8.6 of the Loan Agreement;

         (e)      The restrictions against the Guarantors' guaranteeing any
                  obligation of any person, firm or entity contained in Section
                  8.7 of the Loan Agreement;

         (f)      The restrictions against engaging in any business other than
                  such business conducted by the Borrower contained in Section
                  8.10 of the Loan Agreement; and

                                       2

<PAGE>

         (g)      any and all Events of Default under the Loan Agreement and the
                  Loan Documents that have occurred and are continuing as of the
                  date hereof.

         2.       The fifth Recital to the Loan Agreement is hereby amended in
its entirety to read as follows:

         "WHEREAS, pursuant to that certain Debenture and Warrant Purchase
Agreement, dated May 26, 1999 (the "1999 Debenture Agreement"), executed by
Borrower in favor of the purchasers named therein, Borrower issued its 5%
Convertible Senior Secured Debentures due March 15, 2003 (such debentures, the
"Oracle Debentures").

         3.       Article One of the Loan Agreement is hereby amended in its
entirety to read as follows:

         "1. AMOUNT AND TERMS OF LOANS.

                  "1.1 Term Loans. Subject to the terms herein, Lender has
         previously loaned to Borrower the aggregate principal amount of Twenty
         One Million Four Hundred One Thousand Three Hundred Thirty One Dollars
         ($21,401,331) (the "Original Loan"). Effective the date of the Third
         Amendment to the Loan Agreement, (i) Lender forever forgives,
         discharges, cancels and renders null and void Borrower's obligation to
         repay Sixteen Million Four Hundred One Thousand Three Hundred Thirty
         One Dollars ($16,401,331) in principal amount, plus accrued and unpaid
         interest on such principal amount, of the Original Loan, resulting in a
         remaining principal balance of the Original Loan of Five Million
         Dollars ($5,000,000) (the "Loan"), and (ii) Lender forever forgives and
         discharges Borrower's obligation to pay interest under the Original
         Loan, as evidenced by the Old Notes, to the extent accrued and unpaid
         through and including the date of the Third Amendment to the Loan
         Agreement. The Old Notes previously issued by Borrower to Lender
         hereunder shall be amended or cancelled, as appropriate, in accordance
         with Section 1.2 below. Notwithstanding any prepayment of the Loan by
         Borrower, sums repaid may not be re-borrowed.

                  "1.2 Promissory Notes. Borrower's obligation to pay the
         principal of, and interest on, the Loan shall be evidenced by a
         promissory note dated as of December 20,

                                       3

<PAGE>

         2002 duly executed and delivered by Borrower in the form attached as
         Exhibit A to the Third Amendment to the Loan Agreement and representing
         the $5,000,000 principal balance of the Loan (the "Note"), which Note
         shall be an amendment and restatement of the Replacement Note. Upon
         execution and delivery of the Note, each of the Old Notes shall be null
         and void and of no further legal force or effect. Watson agrees to
         return to Borrower each of the original Old Notes on the date of
         execution of the Third Amendment to the Loan Agreement."

         4.       Section 7.2(b) of the Loan Agreement is hereby amended in its
entirety to read as follows:

                  "(b)     Within ninety (90) days after the end of each fiscal
                  year, consolidated statements of income and retained earnings
                  and cash flows of the Borrower and its Subsidiaries for the
                  period from the beginning of each fiscal year to the end of
                  such fiscal year, and consolidated balance sheets as at the
                  end of such fiscal year, setting forth in each case in
                  comparative form corresponding figures for the preceding
                  fiscal year, which statements will be prepared in accordance
                  with GAAP, consistently applied (except as approved by the
                  accounting firm examining such statements and disclosed by the
                  Borrower) and will be accompanied by the report of the
                  Borrower's independent certified public accountant firm;"

         5.       Section 7.8 of the Loan Agreement is hereby deleted in its
entirety.

         6.       Section 8.12 of the Loan Agreement is hereby deleted in its
entirety.

         7.       Section 8.13 of the Loan Agreement is hereby deleted in its
entirety.

         8.       Section 9.1(e) of the Loan Agreement is hereby amended in its
entirety to read as follows:

                  "(e)     If any default shall occur under any indenture,
                  mortgage, agreement, instrument or commitment evidencing or
                  under which there is outstanding indebtedness of the Borrower
                  or a Subsidiary aggregating in excess of $1

                                       4

<PAGE>

                  million, and which default results in such indebtedness
                  becoming due and payable prior to its due date and, if such
                  indenture or instrument so requires, the holder or holders
                  thereof shall have declared such indebtedness due and
                  payable;"

         9.       Section 9.1(i) of the Loan Agreement is hereby amended in its
entirety to read as follows:

                  "(i)     if any default shall occur and be continuing under
                  the terms of the Existing Debentures and such indebtedness has
                  become due and payable; or"

         10.      A new Section 9.1(j) is hereby added to the Loan Agreement as
follows:

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

         11.      Sections 9.2 and 9.3 of the Loan Agreement are hereby amended
in their entirety to read as follows:

                  "9.2     Remedies.

                  (a)      Subject to Section 9.4, upon the occurrence of an
         Event of Default, Lender may, at any time, unless all defaults shall
         theretofore have been remedied, at its option, by written notice or
         notices to Borrower (i) declare the Loan to be due and payable,
         whereupon the same shall forthwith mature and become due and payable,
         together with interest accrued thereon, without presentment, demand,
         protest or notice, all of which are hereby waived; and (ii) declare any
         other amounts payable to Lender under the Loan Documents or as
         contemplated hereby due and payable.

                  (b)      Subject to Section 9.4, upon the occurrence of any of
         the Events of Default described in Section 9.1(h) above, then,
         automatically and whether or not notice is given, (i) the Loan shall
         become immediately due and payable, together with interest

                                       5

<PAGE>

         accrued thereon, without presentment, demand, protest or notice, all of
         which are hereby waived; and (ii) any other amounts payable to Lender
         under the Loan Documents or as contemplated hereby shall become
         immediately due and payable.

                  (c)      Notwithstanding anything contained in Section 9.2(a),
         in the event that any time after the principal of the Loan shall so
         become due and payable and prior to the date of maturity stated in the
         Note, and all arrears of principal of and interest on the Loan (with
         interest at the rate specified in the Note) shall be paid by or for the
         account of Borrower, then Lender, by written notice or notices to
         Borrower, may (but shall not be obligated to) waive such Event of
         Default and its consequences and rescind or annul such declaration, but
         no such waiver shall extend to or affect any subsequent Event of
         Default or impair any right resulting therefrom.

                  9.3      Enforcement. Subject to Section 9.4, in case any one
         or more Events of Default shall occur and be continuing, Lender may
         proceed to protect and enforce its rights by an action at law, suit in
         equity or other appropriate proceeding, whether for the specific
         performance of any agreement contained herein or in the Note or for an
         injunction against a violation of any of the terms hereof or thereof,
         or in aid of the exercise of any power granted hereby or thereby or by
         law. In case of a default in the payment of any principal of or
         interest on the Loan, Borrower will pay to Lender such further amount
         as shall be sufficient to cover the cost and the expenses of
         collection, including, without limitation, reasonable attorneys' fees,
         expenses and disbursements. No course of dealing and no delay on the
         part of Lender in exercising any rights shall operate as a waiver
         thereof or otherwise prejudice Lender's rights. No right conferred
         hereby or by the Note upon Lender shall be exclusive of any other right
         referred to herein or therein or now available at law in equity, by
         statute or otherwise."

         12.      A new Section 9.4 is hereby added to the Loan Agreement as
follows:

                  "9.4     Waiver of Events of Default; Forbearance from
         Exercise of Remedies.

                  (a)      Borrower and Lender acknowledge and agree that as of
         the date of the Third Amendment to the Loan Agreement, certain Events
         of Default have occurred and are continuing, including without
         limitation, the Borrower's default in the payment of interest due under
         the Old Notes. Upon the date of the Third Amendment to the Loan

                                       6

<PAGE>

         Agreement, Lender will be deemed to have waived any and all Events of
         Default under the Loan Agreement, the Old Notes, and the Loan Documents
         that have occurred and are continuing as of the date hereof.

                  (b)      Notwithstanding anything to the contrary contained in
         the Loan Agreement, the Note or the Loan Documents, including, without
         limitation, Sections 9.1, 9.2 and 9.3 of the Loan Agreement, commencing
         with the occurrence and continuance of any Event of Default on or after
         the date of the Third Amendment to Loan Agreement and for a period of
         two (2) years thereafter, Lender shall forbear from the exercise and
         enforcement (and shall be prohibited from any exercise or enforcement)
         of any rights and remedies under the Loan Agreement, the Note, and the
         Loan Documents, including, without limitation, the right to declare the
         Loan due and payable, the acceleration of the maturity of the Loan, or
         the exercise or enforcement of any rights or remedies provided under
         the Watson Security Documents; provided, however, that Lender's
         forbearance obligations contained in this Section 9.4(b) shall not (i)
         impair, alter or otherwise diminish the exercise and enforcement of
         Lender's rights and remedies provided in the Loan Agreement, the Note
         and the Loan Documents solely upon the occurrence and continuance of an
         Event of Default under Sections 9.1(a), 9.1(c) (but limited solely to
         any default that affects the priority of the liens granted by Borrower
         and the Guarantors to Lender pursuant to the Loan Documents), 9.1(e),
         9.1.(h), 9.1(i) or 9.1(j) of the Loan Agreement, or (ii) in any
         circumstance extend beyond June 30, 2007 (regardless of whether the
         applicable Event of Default occurred less than two (2) years prior to
         such date)."

         13.      The definition of "Existing Debentures" set forth in Section
12.1 of the Loan Agreement is hereby amended in its entirety to read as follows:

                  ""Existing Debentures" shall mean, collectively, (i) the Galen
         Debentures, (ii) the Oracle Debentures, (iii) the convertible secured
         debentures due March 31, 2006 issued pursuant to that certain Debenture
         Purchase Agreement dated December 20, 2002 between the Borrower and the
         purchasers listed on the signature page thereto, and (iv) the
         convertible secured debentures due July 31, 2004 issued pursuant to
         that certain Debenture and Share Purchase Agreement dated February 6,
         2004 between the Borrower

                                       7

<PAGE>

         and the purchasers listed on the signature page thereto, as each of
         such debentures may be supplemented, amended, or otherwise modified
         from time to time."

         14.      The definition of "Existing Holders" set forth in Section 12.1
of the Loan Agreement is hereby amended in its entirety to read as follows:

                  ""Existing Holders" shall mean the holders of the Existing
         Debentures."

         15.      The definition of "Obligations" set forth in Section 12.1 of
the Loan Agreement is hereby amended in its entirety to read as follows:

                  "Obligations" shall mean all obligations, liabilities and
         indebtedness of every kind, nature and description of the Borrower and
         the Guarantors from time to time owing to the Lender or any Indemnitee
         under or in connection with the Loan Documents, whether direct or
         indirect, primary or secondary, joint or several, absolute or
         contingent, due or to become due, now existing or hereafter arising and
         however acquired and shall include, without limitation, all principal
         and interest on the Loan and, to the extent chargeable under any Loan
         Document, all charges, expenses, fees and reasonable attorney's fees."

         16.      Section 12.1 of the Loan Agreement is further amended by
adding the following definition in alphabetical order in its entirety:

                  ""Conversion Agreement" shall mean that certain Debenture
         Conversion Agreement dated February 6, 2004 by and among the Borrower
         and the holders of the Existing Debentures, as such agreement may be
         supplemented, amended or otherwise modified from time to time in
         accordance with its terms."

         17.      Section 12.1 of the Loan Agreement is further amended by
adding the following definition in alphabetical order in its entirety:

                  ""Conversion Event" shall mean the conversion of the Existing
         Debentures into Preferred Stock immediately upon the filing by the
         Borrower of the documents necessary to create the Preferred Stock."

                                       8

<PAGE>

         18.      Section 12.1 of the Loan Agreement is further amended by
adding the following definition in alphabetical order in its entirety:

                  ""Old Notes" shall mean, collectively, (i) the secured
         promissory note dated December 20, 2002 issued by Borrower to Lender in
         the principal amount of $17,500,000, and (ii) the secured promissory
         note dated December 20, 2002 issued by Borrower to Lender in the
         principal amount of $3,901,331."

         19.      Section 12.1 of the Loan Agreement is further amended by
adding the following definition in alphabetical order in its entirety:

                  ""Preferred Stock" shall mean, collectively, (i) the Series A
         Convertible Preferred Stock, $.01 par value, of the Borrower (now or
         hereafter issued), (ii) the Series B Convertible Preferred Stock, $.01
         par value, of the Borrower (now or hereafter issued), (iii) the Series
         C-1 Convertible Preferred Stock, $.01 par value, of the Borrower (now
         or hereafter issued), (iv) the Series C-2 Convertible Preferred Stock,
         $.01 par value, of the Borrower (now or hereafter issued), and (v) the
         Series C-3 Convertible Preferred Stock, $.01 par value, of the Borrower
         (now or hereafter issued)."

         20.      Section 12.3 of the Loan Agreement is hereby amended in its
entirety to read as follows:

                  "12.3 Governing Law. This Agreement and the rights of the
         Parties hereunder shall be governed in all respects by the laws of the
         State of New York wherein the terms of this Loan Agreement were
         negotiated."

         21.      Section 12.11 of the Loan Agreement is hereby amended in its
entirety to read as follows:

                  "12.11 Litigation. The Parties each hereby waive trial by jury
         in any action or proceeding of any kind or nature in any court in which
         an action may be commenced arising out of this Loan Agreement or the
         Loan Documents. The Parties hereto agree that the state and federal
         court which set in the City and State of New York shall have exclusive
         jurisdiction to hear and determine any claims or disputes between
         Borrower

                                       9

<PAGE>

         and Lender, pertaining directly or indirectly to this Loan Agreement or
         to any matter arising therefrom. The parties each expressly submit and
         consent in advance to such jurisdiction in any action or proceeding
         commenced in such courts provided that such consent shall not be deemed
         to be a waiver of personal service of the summons and complaint, or
         other process or papers issued therein. The choice of forum set forth
         in this Section 12.11 shall not be deemed to preclude the enforcement
         of any judgment obtained in such forum or the taking of any action
         under this Loan Agreement to enforce same in any appropriate
         jurisdiction. The Parties waive any objections based upon forum
         non-conveniens and any objection to venue of any action instituted
         hereunder."

         22.      Schedule I to the Loan Agreement is hereby amended in its
entirety as set forth in Schedule I to the Third Amendment to the Loan
Agreement.

         23.      Limitation of Amendment. Except as amended above, the terms of
the Loan Agreement shall remain in full force and effect.

         24.      Governing Law. This Third Amendment and the rights of the
parties hereunder shall be governed in all respects by the laws of the State of
New York wherein the terms of this Third Amendment were negotiated.

         25.      Counterparts. This Third Amendment may be executed in any
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.

         IN WITNESS WHEREOF, Borrower and Lender have caused this Third
Amendment to be duly executed by their duly authorized officers all as of the
day and year first above written.

"BORROWER"                                      "LENDER"

HALSEY DRUG CO., INC.                           WATSON PHARMACEUTICALS, INC.

By:____________________________                 By:_____________________________
Name:  Andrew D. Reddick                        Name:  _________________________
Title: President and Chief Executive Officer    Title: _________________________

                                       10

<PAGE>

                                    EXHIBIT A

                                      Note

<PAGE>

                                   SCHEDULE I

              Debentureholders Receiving In-Kind Interest Payments

                              All Existing Holders

                                       12

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