Document:

<PAGE>

                                                                    EXHIBIT 10.2

                         DEBENTURE CONVERSION AGREEMENT

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

                             PRELIMINARY STATEMENTS

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

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

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

                                    AGREEMENT

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

                                    ARTICLE I

                                   DEFINITIONS

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

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

<PAGE>

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

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

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

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

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

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

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

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

                                       2

<PAGE>

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

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

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

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

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

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

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

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

                                       3

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

                                       4

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

                                       5

<PAGE>

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

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

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

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

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

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

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

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

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

                                   ARTICLE II

                               RELATED AGREEMENTS

2.1      RELATED AGREEMENTS

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

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

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

                                       6

<PAGE>

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

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

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

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

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

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

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

2.2      EFFECT OF TERMINATIONS AND AMENDMENTS

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

                                       7

<PAGE>

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

2.3      POWER OF ATTORNEY

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

                                   ARTICLE III

                         EXCHANGE OF EXISTING DEBENTURES

3.1      EXCHANGE UPON EFFECTIVE TIME

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

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

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

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

                                       8

<PAGE>

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

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

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

3.2      EXCHANGE PROCEDURE.

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

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

3.3      CERTAIN OTHER AGREEMENTS

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

                                       9

<PAGE>

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

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

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

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

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

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

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

3.4      EFFECT OF TERMINATIONS

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

                                       10

<PAGE>

3.5      POWER OF ATTORNEY

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

                                   ARTICLE IV

                      CONSENT AND WAIVER OF CERTAIN RIGHTS

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

                                    ARTICLE V

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

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

5.1      ORGANIZATION AND EXISTENCE

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

5.2      AUTHORIZATION

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

                                       11

<PAGE>

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

5.3      BINDING OBLIGATIONS; NO MATERIAL ADVERSE CONTRACTS

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

5.4      FINANCIAL INFORMATION; SEC DOCUMENTS

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

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

                                       12

<PAGE>

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

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

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

5.5      OFFERING EXEMPTION

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

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

5.6      DISCLOSURE

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

                                       13

<PAGE>

                                   ARTICLE VI

                  REPRESENTATIONS AND WARRANTIES OF THE HOLDERS

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

6.1      ORGANIZATION AND GOOD STANDING

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

6.2      DUE QUALIFICATION

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

6.3      DUE AUTHORIZATION

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

6.4      INVESTMENT EXPERIENCE; ACCREDITED INVESTOR

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

                                       14

<PAGE>

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

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

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

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

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

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

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

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

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

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

                                       15

<PAGE>

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

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

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

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

                                   ARTICLE VII

                                  MISCELLANEOUS

7.1      ENTIRE AGREEMENT

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

7.2      ASSIGNMENT; BENEFIT

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

7.3      COUNTERPARTS

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

7.4      GOVERNING LAW

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

                                       16

<PAGE>

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

7.5      WAIVER OF JURY TRIAL

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

7.6      JURISDICTION

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

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

7.7      RIGHTS AND OBLIGATIONS; SEVERABILITY

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

7.8      SPECIFIC PERFORMANCE

                                       17

<PAGE>

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

7.9      NOTICES

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

         (a)      if to the Company:

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

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

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

7.10     TITLES AND SUBTITLES

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

                                       18

<PAGE>

7.11     REPRESENTATION BY COUNSEL

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

7.12     CONSTRUCTION

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

7.13     DELAYS, OMISSIONS OR WAIVERS

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

7.14     THIRD PARTY BENEFICIARIES

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

7.15     FURTHER ASSURANCES

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

7.16     AMENDMENT

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

                                       19

<PAGE>

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

                                       COMPANY:

                                       HALSEY DRUG CO., INC.

                                       By:______________________________________
                                       Name:
                                       Title:

                                    HOLDERS:

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

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

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

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

_______________________________________

<PAGE>

                             SCHEDULES AND EXHIBITS

SCHEDULES:

Schedule I        -        Holders and their respective addresses and Debentures

EXHIBITS:

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

<PAGE>

                                   SCHEDULE I

                                  See attached.<PAGE>

                                                                    EXHIBIT 10.3

                      RESTATED CERTIFICATE OF INCORPORATION

                                       OF

                              HALSEY DRUG CO., INC.

                Under Section 807 of the Business Corporation Law

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

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

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

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

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

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

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

<PAGE>

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

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

                           SECTION 1. PREFERRED STOCK

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

                                       2

<PAGE>

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

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

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

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

                                       3

<PAGE>

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

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

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

                                       4

<PAGE>

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

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

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

                                       5

<PAGE>

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

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

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

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

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

                                       6

<PAGE>

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

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

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

                            (d)    Conversion.

                                       7

<PAGE>

                                   (1)     Terms of Conversion.

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

                                           (ii)   Mandatory Conversion.

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

                                       8

<PAGE>

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

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

                                   (2)     Mechanics of Conversion.

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

                                       9

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

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

                                       10

<PAGE>

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

                                   (3)     Adjustment of Conversion Prices.

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

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

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

                                       11

<PAGE>

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

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

                                       12

<PAGE>

                                           (iv)   Adjustment upon Certain
                        Issuances.

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

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

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

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

                                       13

<PAGE>

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

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

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

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

                                                  (v)    Convertible Securities.

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

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

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

                                       14

<PAGE>

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

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

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

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

                                       15

<PAGE>

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

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

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

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

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

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

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

                                       16

<PAGE>

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

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

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

                                       17

<PAGE>

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

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

                             SECTION 2. COMMON STOCK

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

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

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

                                       18

<PAGE>

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

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

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

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

                                        Attention:  President

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

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

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

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

                                       19

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

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

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

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

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

                                       20

<PAGE>

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

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

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

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

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

         SECTION 1. PREFERRED STOCK

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

                                       21

<PAGE>

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

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

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

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

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

                                       22

<PAGE>

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

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

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

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

                                       23

<PAGE>

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

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

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

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

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

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

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

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

                                       24

<PAGE>

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

                  (d)      Conversion.

                           (1)      Terms of Conversion.

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

                                    (ii)     Mandatory Conversion.

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

                                       25

<PAGE>

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

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

                           (2)      Mechanics of Conversion.

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

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

                                       26

<PAGE>

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

                           (3)      Adjustment of Conversion Prices.

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

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

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

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

                                       27

<PAGE>

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

                                    (iv)     Adjustment upon Certain Issuances.

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

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

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

                                       28

<PAGE>

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

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

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

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

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

                                    (v)    Convertible Securities.

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

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

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

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

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

                                       29

<PAGE>

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

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

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

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

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

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

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

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

                                       30

<PAGE>

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

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

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

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

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

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

                                       31

<PAGE>

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

         SECTION 2. COMMON STOCK

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

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

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

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

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

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

                            Attention: President

         FIFTH:  The duration of said Corporation shall be perpetual.

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

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

                                       32

<PAGE>

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

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

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

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

                                       33

<PAGE>

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

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

                                               ______________________________
                                               Andrew D. Reddick
                                               President

                                               ______________________________
                                               Peter A. Clemens
                                               Secretary

                                       34

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00060-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00060-of-00352.parquet"}]]