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                                                                    EXHIBIT 10.4

                            INVESTOR RIGHTS AGREEMENT

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

                             PRELIMINARY STATEMENTS

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

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

                                    AGREEMENT

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

                                   ARTICLE I

               BOARD OF DIRECTORS; INVESTOR APPROVAL FOR MATERIAL
                                  TRANSACTIONS

1.1.     BOARD MEMBERS AND MEETINGS

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

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

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

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

1.2.     CONSENT OF HOLDERS OF SERIES A PREFERRED

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

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

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

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

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

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

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

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

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or substantially all of the assets of the Company;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                  (ix)     any zoning or similar law or right reserved to or
         vested in any governmental office or agency to control or regulate the
         use of any real property;

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

                  (xi)     the Permitted Liens; and

                  (xii)    the replacement, extension or renewal of any lien
         permitted by this Section 1.2(l) upon or in the same property
         theretofore subject or the replacement, extension or renewal (without
         increase in the amount or change in any direct or contingent obligor)
         of the Indebtedness secured thereby.

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

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

                  (ii)     Indebtedness which may, from time to time be incurred
         or guaranteed by the Company which in the aggregate principal amount
         does not exceed $500,000 and is subordinate to the Watson Term Loan;

                  (iii)    Indebtedness existing on the date of the 2004
         Purchase Agreement and described in Section 10.4 of such agreement's
         Schedule of Exceptions;

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

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

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

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

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

                  (ix)     the Watson Term Loan.

         (n)      issue, or incur any obligation to issue, (i) any Series A
Preferred other than upon conversion of Convertible Senior Secured Debentures
issued pursuant to the 2004 Purchase Agreement, or (ii) any Series B Preferred
or Series C Preferred other than pursuant to the Conversion Agreement.

1.3.     CONSENT OF HOLDERS OF SERIES B PREFERRED

         The Corporation covenants and agrees that, so long as any of the Series
B Preferred remains outstanding, it will obtain the consent of the holders of at
least a majority of the issued and outstanding Series B Preferred prior to
making any material adverse change to the rights, preferences or privileges of
the Series B Preferred.

1.4.     CONSENT OF HOLDERS OF SERIES C PREFERRED

         The Corporation covenants and agrees that, so long as any of the Series
C Preferred remains outstanding, it will obtain the consent of the holders of at
least a majority of the issued and outstanding Series C Preferred prior to
making any material adverse change to the rights, preferences or privileges of
the Series C Preferred.

                                   ARTICLE II

                              AFFIRMATIVE COVENANTS

         The Company hereby covenants and agrees, so long as any Preferred Stock
remains outstanding, as follows:

2.1.     MAINTENANCE OF CORPORATE EXISTENCE; TAXES

         (a)      The Company shall maintain in full force and effect its
corporate existence, rights and franchises and all terms of licenses and other
rights to use licenses, trademarks, trade names,

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service marks, copyrights, patents, processes or any other Intellectual Property
Rights owned or possessed by it and necessary to the conduct of its business,
except where failure to maintain such rights, franchises and terms of licenses
and other rights to use such Intellectual Property Rights could not reasonably
be expected to have a Material Adverse Effect.

         (b)      The Company shall (i) promptly pay and discharge, or cause to
be paid and discharged when due and payable, all lawful taxes, assessments and
governmental charges or levies imposed upon the income, profits, assets,
property or business of the Company, (ii) withhold and promptly pay to the
appropriate tax authorities all amounts required to be withheld from wages,
salaries and other remuneration to employees, and (iii) promptly pay all
Indebtedness incident to the operations of the Company.

2.2.     COMPLIANCE WITH AGREEMENTS; COMPLIANCE WITH LAWS

         The Company shall comply with the terms and conditions of all material
agreements, commitments or instruments to which the Company or any of its
Subsidiaries is a party or by which it or they may be bound. The Company shall,
and shall cause each of its Subsidiaries to, duly comply with any Legal
Requirements relating to the conduct of their respective businesses, properties
or assets, including, but not limited to, the requirements of the FDA Act, the
Prescription Drug Marketing Act, the CSA, ERISA, the Environmental Protection
Act, the Occupational Safety and Health Act, the Foreign Corrupt Practices Act,
the Sarbanes-Oxley Act of 2002 and the rules and regulations of each of the
agencies administering such acts, in each case except for any such noncompliance
that could not reasonably be expected to have a Material Adverse Effect.

2.3.     PROTECTION OF LICENSES

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

2.4.     ACCOUNTS AND RECORDS; INSPECTIONS

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

         (b)      Subject to the holder's execution of a confidentiality
agreement in form and substance reasonably acceptable to the Company, the
Company shall permit each holder of Preferred Stock or any of such Person's
officers, employees or representatives during regular business hours of the
Company, upon reasonable notice and as often as such Person may reasonably
request, to visit and inspect the offices and properties of the Company and its
Subsidiaries and to make extracts or copies of the books, accounts and records
of the Company

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or its Subsidiaries, and to discuss the affairs, finances and accounts of the
Company and its Subsidiaries, with the Company's (or Subsidiary's) directors and
officers, its independent public accountants, consultants and attorneys.

         (c)      Nothing contained in this Section 2.4 shall be construed to
limit any rights that a holder of Preferred Stock may have with respect to the
books and records of the Company and its Subsidiaries, to inspect its properties
or to discuss its affairs, finances and accounts.

2.5.     MAINTENANCE OF OFFICE

         The Company will maintain its principal office at the address of the
Company set forth in Section 4.7 of this Agreement where notices in respect of
this Agreement may be made upon the Company, until such time as the Company
shall notify the holders of Preferred Stock in writing, at least 30 days prior
thereto, of any change of location of such office.

2.6.     INDEPENDENT COMMITTEE

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

                                  ARTICLE III

                              TRANSFER RESTRICTIONS

3.1.     DEFINITIONS

         As used in this Article III, the following terms shall have the
following respective meanings:

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

         "Fully-Diluted Stockholders" means the holders of all Shares.

         "Investor's Portion" means for purposes of Section 3.5 below, an amount
determined by multiplying (a) the number of shares of Offered Shares (as herein
defined) subject to the Co-Sale Right (as herein defined) by (b) the ratio
determined by dividing (i) the number of Restricted Shares (as herein defined)
held by a Restricted Investor by (ii) the aggregate number of Restricted Shares
held by all Restricted Investors.

         "New Securities" means all shares of capital stock of the Company other
than (a) any convertible securities that may be converted into shares of Common
Stock, as set forth on Schedule 3.1 to this Agreement; (b) the shares of Common
Stock issuable upon conversion of the convertible securities set forth on
Schedule 3.1 to this Agreement; (c) Common Stock or options to purchase Common
Stock issued to any officers, employees or directors of, or consultants to, the
Company pursuant to any agreement, plan or arrangement approved by the Board of

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Directors; (d) the shares of Common Stock issuable upon conversion of those
shares of Preferred Stock that were issued on or before the date hereof; (e) the
shares of any class of capital stock issued on a pro rata basis to all holders
of such class as a stock dividend or upon any stock split or other subdivision
of shares of capital stock; (f) any shares of Common Stock issued as
consideration in any acquisition, approved by the Board of Directors, of all or
substantially all of the capital stock or assets of any other entity; and (g)
any shares of Common Stock issued as consideration for or in connection with a
borrowing, approved by the Board of Directors, from an unaffiliated financial
institution upon customary terms or other strategic transactions approved by the
Board of Directors.

         "New Securities Portion" means such number of shares of New Securities,
which, when added to the number of Shares held by the Investors, shall be
sufficient to maintain the aggregate ownership percentage of the Company by the
Investors (on a fully-diluted basis) immediately following the issuance of New
Securities as it was immediately before that issuance.

         "Offered Shares" means the number of Shares set forth in a Seller
Notice (as defined in Section 3.3) which a Restricted Investor proposes to
Transfer.

         "Pro Rata Amount" means, as of any date with respect to a specified
Investor, the percentage equal to (a) the number of Shares held by such Investor
as of that date, divided by (b) the aggregate number of Shares held by all
Investors as of that date, each determined on an as converted and as if
exercised basis.

         "Public Shares" means any Shares that have at some point been sold
pursuant to an effective registration statement under the Securities Act, sold
through a broker pursuant to Rule 144 under the Securities Act or otherwise
acquired in the publicly traded markets.

         "Restricted Investor" means each of Essex, Care Capital, Galen, Oracle
(and their respective Permitted Transferees), and each holder of Series A
Preferred.

         "Restricted Shares" means (a) with respect to each of Essex, Care
Capital, Galen and Oracle (and their respective Permitted Transferees), all
Shares held by such Restricted Investor other than Public Shares, and (b) with
respect to each other Restricted Investor, all Series A Preferred held by such
Restricted Investor.

         "Shares" means and includes all shares of Common Stock and Preferred
Stock of the Company issued and outstanding at the relevant time plus (a) all
shares of Common Stock and Preferred Stock that may be issued upon exercise of
any options, warrants and other rights of any kind that are then exercisable,
and (b) all shares of Common Stock and Preferred Stock that may be issued upon
conversion of (i) any convertible securities, including, without limitation, any
debt securities then outstanding, which are by their terms then convertible into
or exchangeable for Common Stock or Preferred Stock of the Company or (ii) any
such convertible securities issuable upon exercise of options, warrants or other
rights that are then exercisable.

         "Transfer" means and includes any sale, assignment, encumbrance,
hypothecation, pledge, conveyance in trust, gift, transfer by bequest, devise or
descent, or other transfer or disposition of any kind, including but not limited
to transfers to receivers, levying creditors,

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trustees or receivers in bankruptcy proceedings or general assignees for the
benefit of creditors, whether voluntary or by operation of law, directly or
indirectly, including, without limitation, the following (provided that the
following are "Permitted Transfers"):

                  (a)      any Transfer of Shares by an Investor who is an
         individual to such Investor's spouse, lineal descendant or antecedent,
         father, mother, brother or sister of such Investor, the adopted child
         or adopted grandchild of such Investor, or the spouse of any child,
         adopted child, grandchild or adopted grandchild of such Investor, or to
         a trust or trusts or other entity (including family limited
         partnerships or family limited liability companies) for the exclusive
         benefit of or exclusively controlled by such Investor or such
         Investor's family members as described in this clause (a), or transfers
         of Shares by the Investor by devise or descent so long as such Transfer
         complies with Section 3.2 hereof;

                  (b)      any Transfer of Shares by an Investor made pursuant
         to (i) a merger or consolidation of the Company with or into another
         corporation or corporations, or (ii) the winding up and dissolution of
         the Company; and

                  (c)      any Transfer of Shares by an Investor which is an
         entity to its Affiliates, partners, limited partners, members or
         stockholders or any transfers to a family member or trust as described
         in clause (a) above of such partner, limited partner, member or
         stockholder so long as such Transfer complies with Section 3.2 hereof;

Transfers described in clauses (a), (b) or (c) of this definition of "Transfer"
and complying with the requirements of Section 3.2 are referred to herein as
"Permitted Transfers," and the transferees of Shares by virtue of such Permitted
Transfers are referred to herein as "Permitted Transferees."

3.2.     RESTRICTIONS ON TRANSFER OF PREFERRED STOCK

         This Section 3.2 and Section 3.6 shall apply to all Transfers of Shares
by an Investor and the remainder of Article III of this Agreement shall apply
solely to Restricted Investors. Notwithstanding any implication to the contrary
set forth in this Agreement, no Transfer shall have any force or effect unless:
(a) such a Transfer is made in accordance with each of the provisions of this
Agreement, (b) such a Transfer would not result in the violation of applicable
federal or state securities laws, (c) the transferee in any such Transfer is an
Accredited Investor, and (d) the intended transferee of such Transfer executes a
joinder to this Agreement pursuant to which such intended transferee agrees to
be bound by the provisions of this Agreement. Any attempt by an Investor to
transfer any Shares in violation of any provision of this Agreement will be void
and have no force or effect. The Company will not be required (i) to transfer on
its books any Shares that have been sold, gifted or otherwise Transferred in
violation of this Agreement or (ii) to treat as the owner of such Shares, or to
accord the right to vote or pay dividends to, any purchaser, donee or other
transferee to whom such Shares may have been so Transferred in violation of this
Agreement.

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3.3.     NOTICE OF PROPOSED TRANSFER

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

3.4.     RIGHT OF FIRST REFUSAL

         With respect to any Transfer by any Proposed Transferor (other than a
Permitted Transfer), the Company and each Restricted Investor shall have the
right of first refusal ("Right of First Refusal") to purchase the Offered
Shares, exercisable as set forth below:

         (a)      The Company shall have the right to purchase all, but not less
than all, of the Offered Shares. If the Company desires to purchase all of the
Offered Shares, the Company must, within the 10 day period (the "Company Refusal
Period") commencing on the date of receipt of the Seller Notice, give written
notice to the Proposed Transferor of the Company's election to purchase the
Offered Shares. In the event that the Company elects not to purchase all of the
Offered Shares, the Offered Shares may be purchased by the Restricted Investors
as set forth in Section 3.4(b). On or before the expiration of the Company
Refusal Period, the Company will give written notice (the "Company Waiver
Notice") to the Restricted Investors specifying either (i) that all of the
Offered Shares were subscribed by the Company's exercising its Right of First
Refusal or (ii) that the Company waived its right to purchase the Offered
Shares. Notwithstanding any failure by the Company to deliver a Company Waiver
Notice, a failure by the Company to exercise its Right of First Refusal within
the Company Refusal Period shall be deemed a waiver of such right.

         (b)      In the event the Company does not purchase all of the Offered
Shares, each Restricted Investor shall have the opportunity to purchase up to
such Restricted Investor's pro rata share of the Offered Shares. For purposes of
this Section 3.4(b), a Restricted Investor's pro rata share shall be determined
by dividing the number of Restricted Shares held by a Restricted Investor by the
total number of Restricted Shares held by all Restricted Investors purchasing
Offered Shares pursuant to this Section 3.4(b). If any Restricted Investor, or
its assignees who are Affiliates of such Restricted Investor, desires to
purchase the Offered Shares, such Restricted Investor must, within a 5 day
period (the "Investor Refusal Period") commencing on the later date of (i) the
Company Waiver Notice or (ii) the 10th day after the Seller Notice, give written
notice ("Investor Notice") to the Proposed Transferor and to the Company of such
Restricted Investor's election to purchase such Restricted Investor's pro rata
share of the remaining Offered Shares, or such lesser number as may be stated in
such Restricted Investor's Investor Notice.

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The participating Restricted Investors also may allocate the right to purchase
the Offered Shares between or among them in any proportion they choose as
reflected in a notice to the Proposed Transferor within the Investor Refusal
Period. In the event that any Restricted Investor elects not to purchase any of
the Offered Shares, such Restricted Investor shall, prior to the expiration of
the Investor Refusal Period, give written notice ("Investor Waiver Notice") to
the Proposed Transferor that the Restricted Investor is waiving such Restricted
Investor's right to purchase all such Offered Shares under this Section 3.4(b).
Notwithstanding any failure by a Restricted Investor to deliver an Investor
Waiver Notice, a failure by a Restricted Investor to exercise such Restricted
Investor's Right of First Refusal within the Investor Refusal Period shall be
deemed a waiver of such right. If any Restricted Investor does not exercise its
right of first refusal in full with respect to the Offered Shares within the
Investor Refusal Period, then each Restricted Investor who requested to purchase
in excess of its pro rata share of such Offered Shares shall be allowed to
purchase such excess. If the total number of shares to be purchased pursuant to
the foregoing sentence exceeds the number of remaining Offered Shares available
for purchase, then such remaining shares shall be allocated among such
Requesting Investors in proportion to the number of Restricted Shares owned by
each of them, or in any other manner to which they agree.

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

         (d)      If the Company or Restricted Investors exercise their Rights
of First Refusal to purchase all of the Offered Shares, then, upon consummation
of such purchase, the Proposed Transferor will have no further rights as a
holder of the Offered Shares except the right to receive payment for the Offered
Shares in accordance with the terms of this Agreement, and the Proposed
Transferor will promptly cause all certificate(s) evidencing such Offered
Shares, together with such other instruments and documents of transfer as the
Persons acquiring the Offered Shares shall reasonably request, to be surrendered
to the Company for Transfer to the Persons acquiring the Offered Shares (free
and clear of any and all liens, claims and encumbrances whatsoever except those
imposed by this Agreement and securities laws generally).

         (e)      If the Company or the Restricted Investors have not elected to
purchase all of the Offered Shares, then, subject to the Co-Sale Rights set
forth in Section 3.5, the Proposed Transferor may Transfer the remaining Offered
Shares to the Proposed Transferee, at the Offered Price or at a higher price,
provided that such Transfer (i) is consummated within 90 days after the date of
the Seller Notice and (ii) is in accordance with all the terms of this
Agreement. Any proposed Transfer at a price or on terms and conditions more
favorable than those described in the Seller Notice, as well as any subsequent
proposed Transfer of any of the Offered Shares by the Proposed Transferor, shall
again be subject to this Section 3.4 and shall require full compliance by the
Proposed Transferor with the procedures in this Section 3.4.

                                       11

<PAGE>

3.5.     CO-SALE RIGHTS

         Notwithstanding Section 3.4(e), no Proposed Transferor (each, a
"Co-Sale Seller") shall Transfer any of the Offered Shares pursuant to Section
3.4(e) to a Proposed Transferee until such Co-Sale Seller has given written
notice to each of the Restricted Investors of the right (the "Co-Sale Right"),
exercisable either within 5 days after the date of such Person's Investor Waiver
Notice or within 15 business days following receipt of the Seller Notice,
whichever is later, to sell to a Proposed Transferee all or part of such
Investor's Portion of the Offered Shares, on the same terms and conditions as
set forth in the Seller Notice (including the same price per Share), on an
as-converted-to-Common-Stock basis. A Restricted Investor may exercise the Right
of Co-Sale by delivering to the Co-Sale Seller at the closing of the Transfer of
Offered Shares to the Proposed Transferee one or more certificates, properly
endorsed for Transfer, representing such stock to be Transferred by the
Restricted Investor. At the closing of the Transfer of Offered Shares to the
Proposed Transferee, such certificates or other instruments will be Transferred
and delivered to the Proposed Transferee as set forth in the Seller Notice in
consummation of the Transfer of the Offered Shares pursuant to the terms and
conditions specified in such notice, and the Co-Sale Seller will remit, or will
cause the Proposed Transferee to remit, to the participating Restricted Investor
at closing that portion of the proceeds of the Transfer to which the Restricted
Investor is entitled by reason of the Restricted Investor's participation in
such Transfer pursuant to the Co-Sale Right. If the Offered Shares consists of
more than one series or class or type of stock and the Proposed Transferee is
not willing to purchase shares of a class of preferred stock held by the
Restricted Investors, then the Restricted Investors exercising a Right of
Co-Sale will have the opportunity to convert such shares of Preferred Stock into
Common Stock, and the Company will cooperate to effect such conversion.

3.6.     PREEMPTIVE RIGHT

         For so long as any Preferred Stock remains outstanding, each Investor
holding Preferred Stock shall have the right (the "Participation Right") to
purchase such Investor's Pro Rata Amount of any New Securities Portion that the
Company may from time to time propose to sell and issue after the date hereof,
at the price and upon the general terms specified in the New Issue Notice (as
defined below) regarding such New Securities and otherwise on the following
terms:

         (a)      Whenever the Company proposes to issue and sell any New
Securities, the Company shall give each Investor written notice (a "New Issue
Notice") describing the type and amount of New Securities proposed to be issued
and the price and general terms upon which the Company proposes to issue such
New Securities, specifying a proposed closing date and specifying in each case
the New Securities Portion and recipient's Pro Rata Amount as of the date of the
New Issue Notice.

         (b)      Each Investor may exercise its Participation Right with
respect to any proposed New Securities by notice to the Company, given within 15
days after the Investors shall have received the New Issue Notice describing the
New Securities.

         (c)      If any Investor does not exercise its Participation Right with
respect to any proposed New Securities within the 15 day period, then within 1
business day after the expiration of such 15 day period, the Company shall
notify each Investor who proposed to purchase not less

                                       12

<PAGE>

than such Investor's Pro Rata Amount of such New Securities of the number of
shares of New Securities which remain available for purchase. Upon receipt of
the notice specified in the preceding sentence, each such Investor shall have
the additional Participation Right to purchase such Investor's Pro Rata Amount
of the remaining New Securities Portion (considering the Shares held by all
Investors who purchased less than their Pro Rata Amount of the New Securities
not to be issued and outstanding for purposes of computing the Pro Rata Amount),
exercisable by written notice delivered to the Company within 2 business days
after receipt of the notice of the availability of the balance of the New
Securities. Such Investors also may allocate the right to purchase the New
Securities between or among them in any proportion they choose as reflected in a
written notice to the Company within such 15 day or 2 business day period, as
the case may be.

         (d)      The Company may sell the New Securities not committed for by
Investors at a price and upon general terms no more favorable to the purchasers
than those specified in the New Issue Notice with regard to such New Securities,
at any time during (and only during) the 90 days following the expiration of the
last notice period specified in Section 3.6(c).

         (e)      The sale of any New Securities to Investors pursuant to this
Section 3.6 shall be closed on the same terms, at the same place as, and
simultaneously with, the sale of any such New Securities to any other purchasers
(provided that the closing shall not take place earlier than the proposed
closing date specified in the applicable New Issue Notice without the consent of
all participating Investors).

3.7.     RESTRICTIVE LEGEND; STOP TRANSFER INSTRUCTIONS

         (a)      The Investors understand and agree that the Company will cause
the legend set forth below, or a legend substantially equivalent thereto, to be
placed upon any certificate(s) or other documents or instruments evidencing
ownership of Shares by the Investors (and each Investor agrees to provide each
of its certificates for Shares to the Company so that such legend may be
affixed):

         THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS
         ON TRANSFER, CERTAIN RIGHTS OF FIRST REFUSAL AND RESTRICTIONS ON VOTING
         RIGHTS, AS SET FORTH IN AN INVESTOR RIGHTS AGREEMENT ENTERED INTO BY
         THE HOLDER OF THESE SHARES, THE COMPANY AND CERTAIN STOCKHOLDERS OF THE
         COMPANY. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF
         THE COMPANY. NO TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE
         SHALL BE MADE EXCEPT AS PERMITTED BY THE INVESTOR RIGHTS AGREEMENT.

         (b)      Stop-Transfer Instructions. The Investors agree, to ensure
compliance with the restrictions referred to in this Agreement, that the Company
may issue appropriate "stop transfer" certificates or instructions and that, if
the Company transfers its own securities, it may make appropriate notations to
the same effect in its records.

                                       13

<PAGE>

3.8.     RIGHTS TO COMPEL SALE

         (a)      If Restricted Investors holding in excess of sixty-six and
two-thirds percent (66 2/3%) of all Restricted Shares then held by all
Restricted Investors (collectively the "Controlling Stockholders") wish to sell
to any Independent Third Party (the "Compelled Sale Purchaser") all Restricted
Shares held by the Controlling Stockholders in the aggregate (the "Compelled
Sale Transfer Offer"), then each and every one of the Restricted Investors other
than the Controlling Stockholders (the "Remaining Stockholders") agrees to sell
all Restricted Shares then held by such Remaining Stockholders to such Compelled
Sale Purchaser at the same time for the same price and on the same terms and
conditions as the Controlling Stockholders.

         (b)      The Controlling Stockholders shall exercise their rights
hereunder by written notice (the "Compelled Transfer Notice") to the Company,
and the Company shall deliver the Compelled Transfer Notice to the Remaining
Stockholders at least thirty (30) days prior to the expected closing date (the
"Expected Closing Date") of the transactions contemplated by the Compelled Sale
Transfer Offer. The Compelled Transfer Notice shall include the consideration
per share of Restricted Shares to be paid by the Compelled Sale Purchaser and
the other terms and conditions of the Compelled Sale Transfer Offer. On or
before ten (10) days prior to the Expected Closing Date, each of the Remaining
Stockholders shall deliver to a representative of the Controlling Stockholders
designated in the Compelled Sale Transfer Notice certificates representing the
Restricted Shares held by such Remaining Stockholder, free and clear of any and
all liens and encumbrances whatsoever, together with such other documents and
instruments of transfer that the Compelled Sale Purchaser may reasonably
request. The Remaining Stockholders also agree to otherwise cooperate with and
execute and deliver such other documents as may be reasonably requested in
connection with the transactions contemplated by the Compelled Sale Transfer
Offer including, without limitation, documents containing representations and
warranties as to title, power and authority and such other representations and
warranties as are appropriate in transactions of this type.

         (c)      If within one hundred twenty (120) days after the Expected
Closing Date, the Controlling Stockholders have not completed the sale of all
the relevant Restricted Shares (unless such failure is due to a Remaining
Stockholders' failure to surrender for transfer his or its certificates), the
Controlling Stockholders shall return to each of the Remaining Stockholders all
certificates representing the Restricted Shares previously delivered by the
Remaining Stockholders, and all the restrictions on Transfers contained in this
Agreement with respect to the Shares of the Company shall again be in effect.
Failure to complete the sale of all the Restricted Shares shall not be a breach
of any Controlling Stockholder's obligations under this Agreement and shall not
constitute a waiver of the rights of the Controlling Stockholders to again
exercise their rights under this Section 3.8 at any time thereafter; provided,
that the Controlling Stockholders may not exercise the rights under this Section
3.8 more than once in any 12 month period.

         (d)      Immediately upon consummation of the sale of Restricted Shares
of the Controlling Stockholders and Remaining Stockholders pursuant to this
Section 3.8, the Controlling Stockholders shall give notice thereof to the
Remaining Stockholders, shall remit to each of the Remaining Stockholders the
net sales proceeds of the Restricted Shares of such

                                       14

<PAGE>

Remaining Stockholders sold pursuant thereto (after deduction of a pro rata
amount among all Stockholders of amounts placed in escrow, reasonable fees and
expenses incurred in connection with the transaction and other appropriate
deductions), and shall furnish such other evidence of the completion of such
sale as may be reasonably requested by such Remaining Stockholders.

                  Notwithstanding anything to the contrary in this Section 3.8,
if the sale of Restricted Shares pursuant to this Section 3.8 would qualify
under the Company's Certificate of Incorporation as a "Liquidation Event" giving
rise to the rights of holders of Preferred Stock to receive liquidation
preferences, then the proceeds of the sale of Restricted Shares pursuant to this
Section 3.8 shall be allocated and remitted among the Restricted Investors
participating in such sale in proportion to the preferential amounts each would
be entitled to receive based on the relative liquidation preferences and
priorities of their respective Restricted Shares (after deduction of a pro rata
amount among all Stockholders of amounts placed in escrow, reasonable fees and
expenses incurred in connection with the transaction and other appropriate
deductions).

                                   ARTICLE IV

                                  MISCELLANEOUS

4.1.     REGULATORY FILINGS; BEST EFFORTS

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

                                       15

<PAGE>

4.2.     AMENDMENT AND WAIVER

         Except as otherwise provided herein, no modification, amendment,
termination or waiver of any provision of this Agreement shall be effective
against the Company or the Investors unless such modification, amendment or
waiver is approved in writing by the Company and the holders of sixty-six and
two-thirds percent (66 2/3)% of the issued and outstanding shares of Preferred
Stock; provided, that in addition to the foregoing, the prior written consent of
(a) the holders of at least sixty percent (60%) of the issued and outstanding
shares of Series A Preferred will be required to modify, amend or waive any
provision of Sections 1.1, 1.2 or 4.2(a) of this Agreement, (b) the holders of
at least a majority of the issued and outstanding shares of Series B Preferred
will be required to modify, amend or waive any provision of Sections 1.3 or
4.2(b) of this Agreement, (c) the holders of at least a majority of the issued
and outstanding shares of Series C Preferred will be required to modify, amend
or waive any provision of Sections 1.4 or 4.2(c) of this Agreement, and (d) the
holders of at least sixty percent (60%) of the issued and outstanding Restricted
Shares will be required to modify, amend or waive any provision of Sections 3.1,
3.2, 3.3, 3.4, 3.5, 3.8 or 4.2(d) of this Agreement. The failure of any party to
enforce any of the provisions of this Agreement shall in no way be construed as
a waiver of such provisions and shall not affect the right of such party
thereafter to enforce each and every provision of this Agreement in accordance
with its terms.

4.3.     SEVERABILITY

         Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.

4.4.     ENTIRE AGREEMENT

         Except as otherwise expressly set forth in this Agreement, the 2004
Purchase Agreement, the Conversion Agreement and the exhibits and schedules
hereto and thereto embody the complete agreement and understanding among the
parties hereto with respect to the subject matter hereof and supersede and
preempt any prior agreements or understandings by or among the parties, written
or oral, which may have related to the subject matter hereof.

4.5.     SUCCESSORS AND ASSIGNS

         Except as otherwise provided herein, this Agreement shall bind and
inure to the benefit of, and be enforceable by, (a) the Company and its
successors and assigns and (b) the holders of the Preferred Stock (including any
Common Stock issued upon conversion of such Preferred Stock) and any subsequent
holders of the Preferred Stock (including any Common Stock issued upon
conversion of such Preferred Stock) and the respective successors and assigns of
each of them, so long as they hold the Preferred Stock (including any Common
Stock issued upon conversion of such Preferred Stock).

                                       16

<PAGE>

4.6.     COUNTERPARTS

         This Agreement may be executed in separate counterparts, including by
facsimile copy, each of which shall be deemed an original and all of which taken
together shall constitute one and the same agreement.

4.7.     NOTICES

         All notices, demands or other communications to be given or delivered
under or by reason of the provisions of this Agreement will be in writing and
will be deemed to have been given when delivered personally, mailed by certified
or registered mail, return receipt requested and postage prepaid, or sent via a
nationally recognized overnight courier, or sent via facsimile to the recipient
accompanied by a certified or registered mailing. Such notices, demands or other
communications will be sent to the address indicated below:

                  To the Company:

                  Halsey Drug Co., Inc.
                  695 N. Perryville Road
                  Rockford, Illinois 61107
                  Attn: President
                  Fax: 815-399-9710

                  If to the holders of Preferred Stock:

                  To the address provided
                  on the signature pages hereto

or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
such notice, demand or communication shall be deemed to have been given (a) on
the date of delivery, if delivered personally, (a) on the date of facsimile
transmission, receipt confirmed, (c) one business day after delivery to a
nationally recognized overnight courier service, if marked for next day
delivery, or (d) five business days after the date of mailing, if mailed.

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

4.8.     GOVERNING LAW

         This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York wherein the terms of this Agreement were
negotiated, excluding to the

                                       17

<PAGE>

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

4.9.     JURISDICTION

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

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

4.10.    WAIVER OF JURY TRIAL

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

4.11.    AGREEMENT REGARDING MANDATORY CONVERSION

         No party hereto shall take any action, including the voting its shares
of the capital stock of the Company or the giving of any written consent, in
furtherance of the mandatory conversion of the Preferred Stock pursuant to
Section 1(d)(1)(ii)(B) of the Charter Amendment unless such mandatory conversion
has been approved by the holders of 75% of the Series A Preferred then held by
Care Capital, Essex and Galen.

                                       18

<PAGE>

         IN WITNESS WHEREOF, the parties hereto have executed this Investors
Rights Agreement as of the date first written above.

                                      HALSEY DRUG CO., INC.
                                      695 North Perryville Road
                                      Crimson Building #2
                                      Rockford, Illinois 61107

                                      __________________________________________
                                      By: Andrew D. Reddick
                                      Its: President and Chief Executive Officer

                                       19

<PAGE>

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

____________________________________       ____________________________________
By: Srini Conjeevaram                      By: Joel Liffmann
Its: General Partner                       Its: Authorized Agent

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

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

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

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

                                       20

<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
____________________________________      ____________________________________

                                       21

<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

                                       22

<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

____________________________________

                                       23

<PAGE>

                                  SCHEDULE 3.1

                             CONVERTIBLE SECURITIES

                                       24<PAGE>

                                                                    EXHIBIT 10.5

                      AMENDED AND RESTATED VOTING AGREEMENT

                  This AMENDED AND RESTATED VOTING AGREEMENT (this "Agreement")
dated as of February 6, 2004, among the Parties signatory hereto (the
"Parties"). Capitalized terms used herein and not otherwise defined shall have
the meaning provided in the Purchase Agreement (as defined below).

                  WHEREAS, Halsey Drug Co., Inc., a New York corporation (the
"Company"), has entered into the Debenture and Share Purchase Agreement dated of
even date herewith (the "Purchase Agreement"), by and among the Company, Care
Capital Investments II, LP ("Care Capital"), Essex Woodlands Health Ventures V,
L.P. ("Essex"), Galen Partners III, LP ("Galen") and other signatories thereto,
providing for the issuance by the Company of Convertible Senior Secured
Debentures (the "2004 Debentures") in the aggregate principal amount of up to
$14 million; and

                  WHEREAS, the 2004 Debentures are convertible into Series A
Preferred in accordance with the terms of the Purchase Agreement; and

                  WHEREAS, the Company has entered into the Debenture Conversion
Agreement dated of even date herewith (the "Conversion Agreement") by and among
the Company, Care Capital, Essex, Galen and the other holders of the Company's
5% Convertible Senior Secured Debentures due March 31, 2006 (the "Outstanding
Debentures"), providing for the conversion of all Outstanding Debentures into
classes of Series B Preferred and/or Series C Preferred; and

                  WHEREAS, the Company's Certificate of Incorporation currently
does not have authorized the Series A Preferred, Series B Preferred or Series C
Preferred (collectively, the "Preferred Shares") for issuance upon conversion of
the 2004 Debentures and the Outstanding Debentures pursuant to the terms of the
Purchase Agreement and the Conversion Agreement, respectively; and

                  WHEREAS, the Preferred Shares are to be convertible into the
Company's Common Stock, $.01 par value per share, (the "Common Stock") as
provided in the Purchase Agreement and the Conversion Agreement; and

                  WHEREAS, the Company does not have enough authorized and
unreserved shares of its Common Stock available for issuance upon the conversion
of the Preferred Shares; and

                  WHEREAS, the Parties contemplate that upon the conversion of
the 2004 Debentures into Series A Preferred and the exchange of the Outstanding
Debentures for Series B Preferred and/or Series C Preferred, the holders of such
Preferred Shares shall have the right to vote as part of the single class with
all holders of the Company's Common Stock and other voting security holders on
an as converted basis; and

                  WHEREAS, the Company desires to amend and restate its
Certificate of Incorporation to provide for (a) the authorization and creation
of each of the class of Series A

<PAGE>

Preferred, Series B Preferred and Series C Preferred having the rights and
preferences provided in the Company's Amended and Restated Certificate of
Incorporation appended as an Exhibit to each of the Purchase Agreement and the
Conversion Agreement and (b) the increase in the number of shares of Common
Stock in order to reserve a sufficient number of shares for issuance upon the
conversion of the Preferred Shares; and

                  WHEREAS, as additional consideration for the investment by
Care Capital, Essex and Galen in the Debentures, the Parties intend that so long
as each such party shall remain a holder of the Minimum Threshold (as
hereinafter defined) of Series A Preferred, the Parties desire to vote their
Securities (as defined below) in such a manner so as to elect a Care Capital
nominee, an Essex nominee, a Galen nominee and a collective nominee of each of
Care Capital, Essex and Galen, to the Board of Directors of the Company.

                  NOW, THEREFORE, in consideration of the foregoing and the
mutual agreements herein contained, the Parties hereto agree as follows:

                  1.       Amendment to Company's Certificate of Incorporation.
At the Company's next upcoming meeting of Shareholders, each Party hereto will
vote all (x) shares of Common Stock, (y) 5% Convertible Senior Secured
Debentures issued pursuant to that certain Debenture and Warrant Purchase
Agreement dated March 10, 1998 between the Company and the purchasers listed on
the signature page thereto, as amended (the "1998 Debentures"), and (z) 5%
Convertible Senior Secured Debentures issued pursuant to that certain Debenture
and Warrant Purchase Agreement dated May 26, 1999 between the Company and the
purchasers listed on the signature page thereto, as amended (the "1999
Debentures"), then owned by such Party in favor of the following proposed
amendments to the Company's Certificate of Incorporation:

                  (a)      Increasing the number of shares of the Company's
                           Common Stock authorized for issuance from 80,000,000
                           to 650,000,000 shares;

                  (b)      Providing authorization to issue up to 45,000,000
                           shares of Series A Preferred having the rights and
                           preferences provided in the Amended and Restated
                           Certificate of Incorporation attached as Exhibit D to
                           the Purchase Agreement;

                  (c)      Providing authorization to issue up to 25,000,000
                           shares of Series B Preferred having the rights and
                           preferences provided in the Amended and Restated
                           Certificate of Incorporation attached as Exhibit A to
                           the Conversion Agreement; and

                  (d)      Providing authorization to issue up to 220,000,000
                           shares of Series C Preferred (consisting of up to
                           70,000,000 shares of Series C-1 Preferred, 50,000,000
                           shares of Series C-2 Preferred and 100,000,000 shares
                           of Series C-3 Preferred) having the rights and
                           preferences provided in the Amended and Restated
                           Certificate of Incorporation attached as Exhibit A to
                           the Conversion Agreement.

                  2.       Election of Director Nominees. Commencing upon the
Company's next

                                       2

<PAGE>

upcoming meeting of shareholders, each Party and Care Capital, Essex and Galen
(each of Care Capital, Essex and Galen being referred to herein as a
"Designating Party") agree as follows:

                  (a)      Each Party holding Common Stock, 1998 Debentures,
                           1999 Debentures, Series A Preferred, Series B
                           Preferred and Series C Preferred (collectively, the
                           "Securities") shall vote its Securities, and take or
                           cause to be taken such other actions, as may be
                           required from time to time to (i) ensure that the
                           Board of Directors consists of no more than seven
                           directors, and (ii) elect to the Board of Directors
                           of the Company (A) one person designated by each
                           Designating Party, (B) one person designated
                           collectively by Care Capital, Essex and Galen by
                           consent of at least two (2) of such three (3)
                           entities (the "Group Designating Party") (C) one
                           person who shall be the Chief Executive Officer of
                           the Company, and (D) two persons who shall be
                           independent directors (as defined in Rule 4200(a)(15)
                           of the National Association of Securities' Dealers
                           Listing Standards, as may be modified or
                           supplemented) nominated and elected to the Board of
                           Directors by the then current directors. Without
                           limiting the generality of the foregoing, at each
                           annual meeting of the shareholders of the Company,
                           and at each special meeting of the shareholders and
                           debentureholders of the Company called for the
                           purpose of electing directors of the Company, and at
                           any time at which the shareholders and
                           debentureholders of the Company have the right to
                           elect directors of the Company, in each such event,
                           each Party shall vote all Securities owned by them
                           (or shall consent in writing in lieu of a meeting of
                           shareholders and debentureholders of the Company, as
                           the case may be), or take such other actions as shall
                           be necessary, to elect the Designating Party's
                           designee and the Group Designating Party's designee
                           as a director of the Company in accordance with the
                           preceding provisions of this Section 2(a);

                  (b)      Each Party shall take all actions necessary to remove
                           forthwith the director designated by a Designating
                           Party or the Group Designating Party when such
                           removal is requested for any reason, with or without
                           cause, by such Designating Party or the Group
                           Designating Party. In the case of the death,
                           resignation or removal as herein provided of a
                           Designating Party's designee or the Group Designating
                           Party's designee, each Party shall vote all
                           Securities held by it to elect another person
                           designated by such Designating Party or the Group
                           Designating Party pursuant to Section 2(a);

                  (c)      Each Party hereby agrees that it will not vote any of
                           its Securities in favor of the removal of any
                           director that shall have been designated by a
                           Designating Party or the Group Designating Party,
                           unless the Designating Party or the Group Designating
                           Party that has designated such director shall have
                           consented to such removal in writing.

                           In the event that any Party shall fail to vote the
                           Securities held by it in accordance with Section 2(a)
                           and (b), such Party shall, upon such failure

                                       3

<PAGE>

                           to so vote, be deemed immediately to have granted to
                           each Designating Party or the Group Designating
                           Party, as applicable, a proxy to vote its Securities
                           solely for the election of the nominee of such
                           Designating Party or the Group Designating Party, as
                           applicable, or the removal of such Designating
                           Party's or the Group Designating Party's designated
                           director, as the case may be. Such Party acknowledges
                           that each such proxy granted hereby, including any
                           successive proxy, if necessary, is being given to
                           secure the performance of an obligation hereunder, is
                           coupled with an interest, and shall be irrevocable
                           until such obligation is performed;

                  (d)      No Party shall grant any proxy or enter into or agree
                           to be bound by any voting trust with respect to the
                           Securities held by such Party, or enter into any
                           shareholder agreement or arrangement of any kind with
                           any person with respect to the Securities held by
                           such person that is, in either case, inconsistent
                           with the terms of this Agreement (whether or not such
                           agreement and arrangement was or is with other
                           shareholders of the Company that are or are not
                           parties to this Agreement);

                  (e)      The Company shall take, or cause to be taken, such
                           actions as may be required from time to time to
                           establish and maintain executive, audit and
                           compensation committees of the Board of Directors, as
                           well as such other committees of the boards of
                           directors of the Company as the Board of Directors
                           shall determine, having such duties and
                           responsibilities as are customary for such
                           committees. The designees of each Designating Party
                           and the Group Designating Party shall be, if so
                           requested by such Designating Party or the Group
                           Designating Party, in its sole discretion, a member
                           of each such committee; and

                  (f)      The rights and obligations provided in this Section 2
                           shall be applied separately for each Designating
                           Party and for the Group Designating Party. The rights
                           of a Designating Party shall terminate on the date
                           such Designating Party ceases to be a holder of the
                           Minimum Threshold (but only after the conversion of
                           the 2004 Debentures). The right of a Designating
                           Party to be a member of the Group Designating Party
                           shall terminate on the date such Designating Party
                           ceases to be a holder of the Minimum Threshold (but
                           only after the conversion of the 2004 Debentures).
                           For purposes hereof, "Minimum Threshold" shall mean
                           at least 50% of the shares of Series A Preferred
                           issued to such Designating Party upon conversion of
                           its 2004 Debentures (or at least 50% of the shares of
                           Common Stock issued upon conversion thereof).

                  3.       Liability. No Party who shall vote or consent or
withhold consent or make a request with respect to any Securities subject to
this Agreement on, to or from any matter in compliance with the terms hereof
that shall, as a result of any such vote or consent or withholding of consent or
making of a request, have any obligation or liability to any other Party
(whether such other Party shall also vote or consent or withhold consent or make
a request with

                                       4

<PAGE>

respect to any Securities, then subject to this Agreement).

                  4.       Certain Remedies. Without intending to limit the
remedies available to any of the Parties, each Party agrees that damages at law
will be an insufficient remedy in the event such Party violates the terms hereof
or the powers granted hereunder and each of the Parties hereto further agrees
that each of the other Parties hereto may apply for and have injunctive or other
equitable relief in any court of competent jurisdiction to restrain the breach
or threatened breach of, or otherwise specifically to enforce, any of such
Party's agreements or the powers granted hereunder set forth herein.

                  5.       Representations. Each Party represents and warrants
to each other Party that this Agreement is its legal, valid and binding
obligation, enforceable against such Party in accordance with its terms, and
will not result in any (a) violation or breach of, or be in conflict with, each
Party's respective organizational documents or material contracts, or (b)
violation of any statutes, laws, rules, regulations, orders or judgments
applicable to such Party.

                  6.       Transfer of Securities. Except as otherwise set forth
in the Transaction Documents (as defined in the Purchase Agreement), nothing
shall prohibit or in any manner restrict any Party's ability to freely transfer,
assign, convey, or otherwise dispose of or convert its Securities; provided,
that upon the transfer, assignment, conveyance or disposition of any Securities
by a Party, such transferring Party shall cause the transferee to which the
Securities are transferred, assigned, conveyed or otherwise disposed to agree to
be bound by the terms hereof (unless such transfer is made pursuant to an
effective registration agreement under the Securities Act or through a broker
pursuant to Rule 144).

                  7.       Term. Except as provided in Sections 2(f) and 6
hereof, this Agreement and the Parties' obligations hereunder shall continue in
effect for so long as any of Care Capital, Essex or Galen owns the Minimum
Threshold.

                  8.       Amendment. Any term of this Agreement or the powers
granted hereunder may be amended and the observance of any such term or power
may be waived (either generally or in a particular instance and either
retroactively or prospectively) only with the written consent of a majority of
the Securities then subject to this Agreement, which majority must include each
of Care Capital, Essex and Galen so long as it owns the Minimum Threshold.

                  9.       Binding Effect. (a) This Agreement and the powers
granted hereunder shall be binding upon, and shall inure to the benefit of, Care
Capital, Essex and Galen and the Parties.

                  (b)      Nothing in this Agreement or the powers granted
hereunder shall obligate any Party hereto, in his or her capacity as an
employee, officer or director of the Company or any of its subsidiaries, to take
or refrain from taking any action in any such capacity or shall otherwise affect
the rights or obligations of any such party in any such capacity.

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

                                       5

<PAGE>

return receipt requested, to the address for each Party as provided on the
signature pages hereto, or to such other address as any such Party shall
designate in writing. Any such notice, demand or communication shall be deemed
to have been given (a) on the date of delivery, if delivered personally, (b) on
the date of facsimile transmission, receipt confirmed, (c) one business day
after delivery to a nationally recognized overnight courier service, if marked
for next day delivery or (d) five business days after the date of mailing, if
mailed.

                  11.      Miscellaneous. The section headings herein are
inserted for convenience of reference only and shall not affect the meaning or
interpretation hereof. This Agreement and the powers granted hereunder contain
the entire agreement among the Parties hereto with respect to the matters
contemplated herein. If for any reason any provision hereof shall be invalid,
unenforceable or inoperative, the validity and effect of the other provisions
hereof shall not be affected herein. This Agreement may be executed in one or
more counterparts, and by the Parties hereto in separate counterparts, each of
which, when so executed and delivered, shall be deemed to be an original but all
of which taken together shall constitute one and the same agreement. This
Agreement shall become effective as to each signatory hereto upon the execution
and delivery hereof by such signatory. This Agreement and the powers granted
hereunder shall be governed in all respects by the laws of the State of New York
wherein the terms of this Agreement were negotiated, excluding to the greatest
extent permitted by law any rule of law that would cause the application of the
laws of any jurisdiction other than the State of New York.

                  12.      Board Observers. So long as Galen has the right to
designate a director pursuant to Section 2(a) hereof, the Company will permit
one observer selected by Galen to attend all meetings of the Board of Directors
of the Company, and shall provide such observer with such notice and other
information with respect to such meetings as are delivered to the directors of
the Company; provided, that such observer shall not be permitted to attend any
meeting or portion thereof or have access to such other information if, in the
judgment of the Company under advice of counsel, such observer's presence or
receipt of such information would adversely affect attorney-client privilege
with respect to such meeting or information.

                  13.      Termination of Original Agreement. The Parties
acknowledge and agree that this Agreement is entered into in replacement of that
certain Voting Agreement dated December 20, 2002 between the Company and the
other Parties that are party thereto (the "Original Agreement"), and that upon
effectiveness of this Agreement, the Original Agreement shall be terminated and
no further legal force or effect.

                            [SIGNATURE PAGES FOLLOW]

                                       6

<PAGE>

         IN WITNESS WHEREOF, each of the Parties hereto has executed this
Agreement on the date first above written.

                                          HALSEY DRUG CO., INC.

                                          By:____________________________
                                             Name:
                                             Title:

                                       7

<PAGE>

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

_______________________________________    _____________________________________
By: Srini Conjeevaram                      By: Joel Liffmann
Its: General Partner                       Its: Authorized Agent

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

_______________________________________    By:  ____________________________
By: Srini Conjeevaram                      Name:  David R. Ramsay
Its: General Partner                       Title: Authorized Signatory

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

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

                                       8

<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

_______________________________________    _____________________________________

                                       9

<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

                                       10

<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

_______________________________________

                                       11

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