Document:

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                                                                   EXHIBIT 10.14

                             SECURED PROMISSORY NOTE

$5,000,000                                               As of December 20, 2002
                                                         Corona, California

1.       Promise to Pay. For good and valuable consideration, the receipt of
which is hereby acknowledged, HALSEY DRUG CO., INC., a New York corporation
("Maker"), promises to pay to WATSON PHARMACEUTICALS, INC., a Nevada corporation
("Watson"), or order (either, the "Holder"), on the Maturity Date (as defined
below), unless sooner paid as provided in Section 5 hereof, the principal sum of
Five Million Dollars ($5,000,000), plus accrued unpaid interest thereon. The
outstanding principal balance of this Note shall bear interest at a variable
rate equal to the prime rate announced from time to time by Bank of America (the
"Prime Rate") plus four and one half percent (4.5%) per annum (the "Interest
Rate") from January __, 2004 to the date the principal sum is paid in full.
Interest payments shall be made as provided in Section 2 below. All payments
under this Note shall be made to the order of the Holder at the address Holder
may designate in writing to Maker. All payments of principal under this Note
shall be made in U.S. dollars.

2.       Payment of Interest. Interest shall be paid on each March 31, June 30,
September 30 and December 31 during the term of this Note, commencing March 31,
2004 (each such date being an "Interest Payment Date"). The payment of accrued
interest on this Note shall be made in the form of Maker's common stock, par
value $.01 per share (the "Common Stock") with the number of shares of Maker's
Common Stock equal to the quotient of (x) the interest payment amount, divided
by (y) the average of the closing bid and asked prices for Maker's Common Stock
as reported in the Over-The-Counter Bulletin Board ("OTC Bulletin Board") (or
such other over-the-counter market or exchange on which the Maker's Common Stock
may then be traded or admitted for trading) for the twenty (20) trading days
immediately preceding such Interest Payment Date, rounded up to the nearest
whole share of Maker's Common Stock. No cash interest payments shall be made on
this Note.

3.       Maturity Date. The date that this Note shall mature, and the principal
amount outstanding hereunder, plus accrued unpaid interest thereon and any
charges pertaining thereto, shall become due and payable (the "Maturity Date")
shall be June 30, 2007.

4.       Loan and Security Agreements. Maker and Watson are party to that
certain Loan Agreement, dated as of March 29, 2000, as amended by that certain
Amendment to Loan Agreement dated as of March 31, 2000, as further amended by
that certain Second Amendment to Loan Agreement dated as of December 20, 2002
and as further amended by that certain Third Amendment, Waiver and Consent to
Loan Agreement dated as of January __, 2004 (as so amended, the "Loan
Agreement"). The full and punctual payment and performance of this Note by Maker
are secured and guaranteed by the Company General Security Agreement, the
Company Collateral Assignments, the Stock

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Pledge Agreement, the Guaranties, the Guarantors Security Agreement, the
Guarantor Collateral Assignments and the Mortgage, as those terms are defined in
the Loan Agreement (the "Security Agreements"). The security interest granted to
Holder under the Security Agreements extends to the proceeds of any sale or
other transfer or disposition of such assets, whether by Maker, its affiliates,
the Holder or any other person, that occurs prior to the payment in full of this
Note. Copies of the Loan Agreement and the Security Agreements may be obtained
from Maker without charge.

5.       Prepayments. Maker may voluntarily prepay this Note either in whole or
in part without penalty or premium.

6.       Waivers. Maker hereby waives diligence, presentment for payment,
demand, protest, notice of non-payment, notice of dishonor, notice of protest,
and any and all other notices and demands whatsoever. Maker shall remain bound
under this Note until all principal and interest and any other amounts that are
payable hereunder or under the Loan Agreement or the Security Agreements have
been paid in full, notwithstanding any extensions or renewals granted with
respect to this Note or the release of any party liable hereunder or any
security for the payment of this Note. Maker, and any and all endorsers hereof,
also waive the right to plead any and all statutes of limitations as a defense
to any demand on this Note or any and all obligations or liabilities arising out
of or in connection with this Note, the Loan Agreement or the Security
Agreements, to the fullest extent permitted by law.

7.       Events of Default. Any of the following events shall constitute an
event of default by Maker under this Note (an "Event of Default"):

         (a)      the failure of Maker to pay to Holder, on the Maturity Date,
any and all principal amounts due and owing under this Note;

         (b)      the failure of Maker to pay to Holder interest payments when
due; or

         (c)      there occurs any other event or circumstance that constitutes
an "Event of Default" as defined in Section 9.1 of the Loan Agreement.

Subject to the forbearance provisions contained in Section 9.4 of the Loan
Agreement, upon the occurrence of any Event of Default, as defined herein above,
at Holder's option, Holder may declare immediately due and payable, and on any
such declaration there shall become immediately due and payable, the entire
unpaid principal balance of this Note, together with all accrued and unpaid
interest under this Note and any other sums owing at the time of such
declaration pursuant to this Note, the Loan Agreement or the Security
Agreements, and Holder shall be entitled to exercise all rights and remedies
available to Holder under this Note, under the Loan Agreement and the Security
Agreements and under applicable law, all of which rights and remedies shall be
cumulative. Without limiting the generality of the foregoing, upon the
occurrence of an Event of Default, the interest rate at which interest shall
accrue on the principal sum and any other amounts that are due under this Note
shall increase to the lower of (i) the Prime Rate plus six and

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one-half percent (6.5%) per annum or (ii) the maximum interest rate permitted
under applicable law (the "Default Rate"), until all such amounts have been paid
in full.

8.       No Waiver by Holder. Subject to the forbearance provisions contained in
Section 9.4 of the Loan Agreement, any delay or omission on the part of Holder
to exercise any of Holder's rights or remedies hereunder, under the Loan
Agreement or the Security Agreements or under applicable law, including, without
limitation, the right to accelerate amounts owing under this Note, shall not be
deemed a waiver of that right or remedy or of any other right or remedy of
Holder in respect thereof. The acceptance by Holder of any payment pursuant to
the terms of this Note which is less than payment in full of all amounts due and
payable at the time of such payment shall not constitute a waiver of the right
to exercise any of the Holder's rights or remedies under this Note, the Loan
Agreement, the Security Agreements or under applicable law at that time or at
any subsequent time or nullify any prior exercise of any such rights or remedies
without the express written consent of Holder, except as and to the extent
provided to the contrary by applicable law.

9.       Governing Law. This Note shall be governed by and construed according
to and enforced under the internal laws of the State of New York without giving
effect to its choice of laws rules.

10.      Enforcement of the Note. Maker agrees that the Superior Court in and
for the County of New York, New York shall have exclusive jurisdiction over any
disputes, between the Maker and Holder and any action, suit or other proceeding
brought by Maker or Holder relating to the interpretation or enforcement of this
Note, and Maker agrees as follows: (a) Maker shall accept and not contest the
personal or subject matter jurisdiction of such Court; (b) Maker shall accept
and not object to or challenge the venue of such Court or assert the doctrine of
forum non conveniens with respect to such Court; (c) Maker shall accept and not
contest the validity or effectiveness of service of process in any such action,
suit or other proceeding by registered or certified first class mail; and (d) TO
THE MAXIMUM EXTENT PERMITTED BY LAW, MAKER WAIVES AND SHALL WAIVE ANY RIGHT TO A
TRIAL BY JURY IN ANY ACTION OR OTHER PROCEEDING BROUGHT WITH RESPECT TO THIS
NOTE OR ITS ENFORCEMENT OR INTERPRETATION. If Maker fails to pay any amounts due
hereunder when due, then Maker shall pay all costs of enforcement and
collection, including, without limitation, reasonable attorneys' fees and costs
incurred by Holder, whether or not enforcement and collection includes the
filing of a lawsuit, and whether or not that lawsuit is prosecuted to judgment.
The costs of enforcement and collection shall be added to the principal amount
of the Note and shall accrue interest at the Default Rate from the Date incurred
until the date paid by Maker.

11.      Binding Nature. The provisions of this Note shall be binding on Maker
and shall inure to the benefit of Holder.

12.      Usury Savings Provisions. In the event Holder receives any sums under
this Note which constitute interest in an amount in excess of that permitted by
any applicable law,

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then, all such sums constituting interest in excess of that permitted to be paid
under applicable law shall, at Holder's option, either be credited to the
payment of principal owing hereunder or returned to Maker. The provisions of
this Section 12 control the other provisions of this Note and any other
agreement between Maker and Holder.

13.      Severability. If, but only to the extent that, any provision of this
Note shall be invalid or unenforceable, then, such offending provision shall be
deleted from this Note, but only to the extent necessary to preserve the
validity and effectiveness of this Note to the fullest extent permitted by
applicable law.

14.      Interpretation. No provision of this Note shall be interpreted for or
against Maker or Holder because that person or that person's legal
representative drafted such provision. Unless otherwise indicated elsewhere in
this Note, (a) the term "or" shall not be exclusive, (b) the term "including"
shall mean "including, but not limited to," and (c) the terms "below," "above,"
"herein," "hereof," "hereto," "hereunder" and other terms similar to such terms
shall refer to this Note as a whole and not merely to the specific section,
subsection, paragraph or clause where such terms may appear. The section and
sub-section headings in this Note are included for convenience of reference only
and shall be ignored in the construction or interpretation of this Note.

15.      Amended and Restated Note. This Note is issued in accordance with that
certain Third Amendment to Loan Agreement dated as of January __, 2004, between
Maker and Watson (the "Third Amendment"), and is issued by Maker as an amendment
and restatement of that certain Secured Promissory Note issued by Maker to
Watson in the principal amount of $17,500,000 dated December 20, 2002 (the
"Original Note"). Upon execution and delivery of this Note to Watson, the
Original Note shall be null and void and of no further legal force or effect.

                           [SIGNATURE PAGE TO FOLLOW]

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                                      "MAKER"

                                      HALSEY DRUG CO., INC.

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

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                                                                   EXHIBIT 10.15

                     HYDROCODONE API SUPPLY OPTION AGREEMENT

                  HYDROCODONE API SUPPLY OPTION AGREEMENT (this "Agreement")
dated as of February 6, 2004 between HALSEY DRUG CO, INC., a New York
corporation ("HDC"), HOUBA, INC., an Indiana corporation ("Houba" and together
with HDC, collectively, "Halsey") and WATSON PHARMACEUTICALS INC., a Nevada
corporation ("Watson", and together with Halsey, the "Parties").

                              PRELIMINARY STATEMENT

                  Halsey desires to provide Watson with an exclusive option to
enter into a supply agreement with Halsey for hydrocodone bitartrate active
pharmaceutical ingredient on the terms and subject to the conditions set forth
herein.

                  NOW, THEREFORE, the parties hereto agree as follows:

                  1.       DEFINED TERMS; RULES OF CONSTRUCTION; CALCULATIONS.

                  1.1      Rules of Construction. This Agreement shall be
subject to the Rules of Construction set forth herein.

                  1.2      Definitions. As used in this Agreement, capitalized
terms defined in the preamble and other Sections of this Agreement shall have
the meanings set forth therein, and terms defined in Exhibit A shall have the
meanings set forth therein and capitalized terms used herein but not otherwise
defined herein shall have the meanings set forth as follows:

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

                  "Business Day" means any day other than a Saturday, Sunday or
         day which banks are generally closed in the State of California.

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

                  "Environmental Laws" means all Laws, now or hereafter in
         effect and as amended, and any judicial or administrative
         interpretation thereof, including any judicial or administrative order,
         consent decree or judgment, relating to the environment, health,
         safety, natural resources or Hazardous Materials, including CERCLA; the
         Resource Conservation and Recovery Act, 42 U.S.C. Sections 6901 et
         seq.; the Hazardous Materials

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         Transportation Act, 49 U.S.C. Sections 6901 et seq.; the Clean Water
         Act, 33 U.S.C. Sections 1251 et seq.; the Toxic Substances Control Act,
         15 U.S.C. Sections 2601 et seq.; the Clean Air Act, 42 U.S.C. Sections
         7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. Sections 300f et
         seq.; the Atomic Energy Act, 42 U.S.C. Sections 2011 et seq.; the
         Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Sections
         136 et seq.; and the Federal Food, Drug and Cosmetic Act, 21 U.S.C.
         Sections 301 et seq.

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

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

                  "Halsey Indemnified Party" has the meaning given such term in
         Section 7(b).

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

                  "Indemnifying Party" means Halsey pursuant to Section 7(a) and
         Watson pursuant to Section 7(b), as the case may be.

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

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

                  "Option Exercise Date" means the date that the Option Exercise
         Notice shall have been given to Halsey, as provided in Section 3(a) of
         the Agreement.

                  "Option Period" means the period commencing on the date of
         this Agreement and expiring on the 180th day following the date of this
         Agreement.

                  "Third Party Claim" has the meaning given such term in Section
         7(d)(ii).

                  "Watson Indemnified Party" has the meaning given such term in
         Section 7(a).

                  2.       GRANT OF OPTION. Subject to the conditions set forth
herein, Halsey hereby grants to Watson or its designee a non-assignable
exclusive option (the "Option") to enter into a supply agreement with Halsey
(the "Supply Agreement") pursuant to which Halsey will

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supply, and Watson will purchase, on a non-exclusive, preferential basis,
hydrocodone bitartrate active pharmaceutical ingredient ("Hydrocodone API")
manufactured using Halsey's proprietary hydrocodone bitartrate API process (the
"Hydrocodone Process") which Option is exercisable at any time during the Option
Period by delivery of an Election Notice in accordance with Section 3.

                  3.       EXERCISE OF OPTION.

                  (a)      Exercise Notice. Watson may only exercise the Option
by giving a written notice (the "Election Notice") with respect to such exercise
during the Option Period. Such notice shall be given in accordance with Section
6 to Halsey on a Business Day.

                  (b)      Option Exercise Conditions. Watson may exercise the
Option if the following conditions shall have been satisfied or waived by Halsey
in its sole discretion:

                  (i)               the Option Exercise Date occurs during the
                                    Option Period;

                  (ii)              the Election Notice contains a commitment by
                                    Watson to fund (A) fifty percent (50%), up
                                    to an aggregate maximum of $3,500,000, of
                                    the Development and Scale-Up Expenses (as
                                    defined in Exhibit A) to develop the
                                    Hydrocodone Process through commercial
                                    scale-up and final regulatory approvals for
                                    commercial distribution in the United
                                    States. Such funding by Watson shall be paid
                                    on a monthly basis within thirty (30) days
                                    after the end of each month in which Halsey
                                    actually incurs such Development and
                                    Scale-Up Expenses;

                  (iii)             Watson commits to negotiate in good faith
                                    with Halsey the terms of the Supply
                                    Agreement for a period of 75 days following
                                    Halsey's receipt of the Election Notice,
                                    which shall include, without limitation, the
                                    terms specified in Exhibit A hereto.

                  (c)      Promptly following Halsey's receipt of the Election
Notice, (i) Halsey shall use commercially reasonable efforts to obtain financing
dedicated to its portion of the Development and Scale-Up Expenses, and (ii) the
Parties shall negotiate in good faith the terms of the Supply Agreement and
shall use reasonable best efforts to execute the Supply Agreement within sixty
(60) days following Halsey's receipt of the Election Notice; provided, however,
that if during the sixty (60) day period following Halsey's receipt of the
Election Notice Halsey is unable, despite using commercially reasonable efforts,
to obtain financing dedicated to the cost of its portion of the Development and
Scale-Up Expenses, the Parties shall discuss and negotiate in good faith
alternatives relating to Halsey's development and scale-up of the Hydrocodone
Process.

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

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                  5.       REPRESENTATIONS AND WARRANTIES. (a) Halsey hereby
represents and warrants as follows:

                  (i)      Halsey is a corporation duly organized, validly
         existing and in good standing under the laws of the jurisdiction of its
         incorporation and has all necessary power and authority to enter into
         this Agreement and the related documents to which it is a party, to
         carry out its obligations hereunder and thereunder and to consummate
         the transactions contemplated hereby and thereby. Halsey is duly
         licensed or qualified to do business and is in good standing in each
         jurisdiction which the properties owned or leased by it or the
         operation of its business makes such licensing or qualification
         necessary, except where the failure to be so qualified will not have a
         material adverse effect on its operations or financial condition. The
         execution and delivery of this Agreement and the related documents
         (upon execution and delivery) by Halsey, the performance by Halsey of
         its obligations hereunder and thereunder and the consummation by Halsey
         of the transactions contemplated hereby and thereby have been duly
         authorized by all requisite action on the part of Halsey and its
         stockholders. This Agreement and the related documents, upon their
         execution shall have been duly executed and delivered by Halsey, and
         (assuming due authorization, execution and delivery by the other
         Parties thereto) this Agreement and the related documents to which it
         is a party, upon their execution, shall constitute, legal, valid and
         binding obligations of Halsey, enforceable against Halsey in accordance
         with their respective terms, subject, as to enforceability, to
         bankruptcy, insolvency, moratorium, reorganization and other laws of
         general application relating to or affecting creditors' rights and to
         general equitable principles.

                  (ii)     The execution, delivery and performance of this
         Agreement and the related documents (upon execution and delivery) to
         which it is a party do not and will not (a) violate, conflict with or
         result in the breach of any provision of the certificate of
         incorporation or by-laws (or similar organizational documents) of
         Halsey, (b) conflict with or violate any Law or Governmental Order
         applicable to Halsey, or any of its assets, properties or businesses,
         or (c) conflict with, result in any breach of, constitute a default (or
         event which with the giving of notice or lapse of time, or both, would
         become a default) under, require any consent under, or give to others
         any rights of termination, amendment, acceleration, suspension,
         revocation or cancellation of any note, bond, mortgage or indenture,
         contract, agreement, lease, sublease, license, permit, franchise or
         other instrument or arrangement to which Halsey is a party or by which
         the Hydrocodone Process, as the case may be, is bound or affected.

                  (iii)    There are no pending or threatened actions, suits or
         proceedings against or affecting Halsey or any of its properties by or
         before any court or administrative agency in respect of this Agreement,
         the Hydrocodone Process, as the case may be, which are reasonably
         likely to materially adversely affect the ability of Halsey to perform
         its obligations hereunder or call into question the validity of this
         Agreement and the related documents (upon execution and delivery) or
         the enforceability thereof in accordance with the respective terms
         thereof.

                  (iv)     Neither the execution and delivery by Halsey of this
         Agreement and the related documents (upon execution and delivery) to
         which it is a party nor the

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         consummation by Halsey of any of the transactions contemplated hereby
         or thereby nor the performance by Halsey of any of its obligations
         requires the consent or approval of, the giving of notice to, the
         filing or registration with, or the taking of any other action in
         respect of any Governmental Authority.

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

                  (vi)     There are no contracts or agreements to which Halsey
         is a party providing for any lease, sale, disposition of title or
         beneficial ownership of Halsey's rights in or to the Hydrocodone
         Process.

                  (b)      Watson hereby represents and warrants as follows:

                  (i)      The execution and delivery of this Agreement by
         Watson, the performance by Watson of its obligations hereunder and the
         consummation by Watson of the transactions contemplated hereby have
         been duly authorized by all requisite action on the part of Watson.
         This Agreement constitutes the legal, valid and binding obligation of
         Watson and is enforceable against Watson in accordance with its terms,
         except as the enforceability thereof may be limited by the effect of
         any applicable bankruptcy, insolvency, reorganization, moratorium or
         similar laws affecting creditors' rights generally and by general
         principles of equity.

                  (ii)     The execution, delivery and performance by Watson of
         this Agreement does not contravene its constituent documents or any Law
         or material contractual restriction binding on or affecting it.

                  6.       NOTICES. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given or made
(and shall be deemed to have been duly given or made upon receipt) by delivery
in person, by an internationally recognized overnight courier service, by
facsimile or registered or certified mail (postage prepaid, return receipt
requested) to the respective parties hereto at the following addresses (or at
such other address for a party as shall be specified in a notice given in
accordance with this Section 7):

                           If to Halsey, at:

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

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                           If to Watson, at:

                           Watson Pharmaceuticals, Inc.,
                           311 Bonnie Circle
                           Corona, California 92880
                           Attention: Chief Financial Officer
                           Fax: (909) 279-8094
                           cc: General Counsel

                  7.       INDEMNIFICATION. (a) Indemnification by Halsey.
Watson and its Affiliates, officers, directors, employees, agents, successors
and assigns (each a "Watson Indemnified Party") shall be indemnified and held
harmless by Halsey for and against any and all Liabilities, losses, diminution
in value, damages, claims, costs and expenses, interest, awards, judgments and
penalties (including attorneys' and consultants' fees and expenses) actually
suffered or incurred by them (including any Action brought or otherwise
initiated by any of them) (hereinafter a "Loss"), arising out of or resulting
from the breach of any representation, warranty or covenant made by Halsey
contained in this Agreement.

To the extent that Halsey's undertakings set forth in this Section 7(a) may be
unenforceable, Halsey shall contribute the maximum amount that it is permitted
to contribute under applicable Law to the payment and satisfaction of all Losses
incurred by Halsey Indemnified Parties.

                  (b)      Indemnification by Watson. Halsey and its Affiliates,
officers, directors, employees, agents, successors and assigns (each a "Halsey
Indemnified Party") shall be indemnified and held harmless by Watson for and
against any and all Losses, arising out of or resulting from the breach of any
representation or warranty made by the Watson contained in this Agreement. To
the extent that Watson's undertakings set forth in this Section 7(b) may be
unenforceable, Watson shall contribute the maximum amount that it is permitted
to contribute under applicable Law to the payment and satisfaction of all Losses
incurred by the Halsey Indemnified Parties.

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

                  (ii)     If an Indemnified Party shall receive notice of any
Action, audit, demand or assessment (each, a "Third Party Claim") against it or
which may give rise to a claim for the Loss under this Section 7, within 30 days
of the receipt of such notice, the Indemnified Party shall give the Indemnifying
Party notice of such Third Party Claim; provided, however, that the failure to
provide such notice shall not release the Indemnifying Party from any of its
obligations under this Section 7 except to the extent that the Indemnifying
Party is materially prejudiced by such failure and shall not relieve the
Indemnifying Party from any other obligation or Liability

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that it may have to any Indemnified Party otherwise than under this Section 7.
If the Indemnifying Party acknowledges in writing its obligation to indemnify
the Indemnified Party hereunder against any Losses that may result from such
Third Party Claim, then the Indemnifying Party shall be entitled to assume and
control the defense of such Third Party Claim at its expense and through counsel
of its choice if it gives notice of its intention to do so to the Indemnified
Party within ten days of the receipt of such notice from the Indemnified Party;
provided, however, that if there exists or is reasonably likely to exist a
conflict of interest that would make it inappropriate in the judgment of the
Indemnified Party in its sole and absolute discretion for the same counsel to
represent both the Indemnified Party and the Indemnifying Party, then the
Indemnified Party shall be entitled to retain its own counsel in each
jurisdiction for which the Indemnified Party determines counsel is required, at
the expense of the Indemnifying Party. In the event that the Indemnifying Party
exercises the right to undertake any such defense against any such Third Party
Claim as provided above, the Indemnified Party shall cooperate with the
Indemnifying Party in such defense and make available to the Indemnifying Party,
at the Indemnifying Party's expense, all witnesses, pertinent records, materials
and information in the Indemnified Party's possession or under the Indemnified
Party's control relating thereto as is reasonably required by the Indemnifying
Party. Similarly, in the event the Indemnified Party is, directly or indirectly,
conducting the defense against any such Third Party Claim, the Indemnifying
Party shall cooperate with the Indemnified Party in such defense and make
available to the Indemnified Party, at the Indemnifying Party's expense, all
such witnesses, records, materials and information in the Indemnifying Party's
possession or under the Indemnifying Party's control relating thereto as is
reasonably required by the Indemnified Party. No such Third Party Claim may be
settled by the Indemnifying Party without the prior written consent of the
Indemnified Party, which consent shall not be unreasonably withheld or delayed.

                  8.       AMENDMENTS. No change or modification of this
Agreement shall be valid unless the same shall be in writing and signed by the
Parties.

                  9.       ASSIGNMENTS. This Agreement shall not be assignable
by any of the Parties hereto.

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

                                       7

<PAGE>

                  11.      BENEFIT AND BINDING EFFECT. This Agreement shall be
binding upon and shall inure to the benefit of the Parties and their respective
successors, heirs and assigns; provided that the Parties hereby consent to the
appointment by Watson of any of its affiliate as its designee for purposes of
exercising the Option.

                  12.      SEVERABILITY OF PROVISIONS. Except as otherwise
provided in the succeeding sentence, every provision of this Agreement is
intended to be severable, and, if any term or provision of this Agreement is
illegal or invalid for any reason whatsoever, such illegality or invalidity
shall not affect the validity or legality of the remainder of this Agreement.
The preceding sentence of this Section shall be of no force or effect if the
consequence of enforcing the remainder of this Agreement without such illegal or
invalid term or provision would be to cause any Party to lose the benefit of its
economic bargain.

                  13.      HEADINGS. Section headings in this Agreement are
included herein for the convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.

                  14.      COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by the different Parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.

                  15.      WAIVER OF JURY TRIAL. Each of the Parties hereby
waives to the fullest extent permitted by applicable law any right it may have
to a trial by jury with respect to any litigation directly or indirectly arising
out of, under or in connection with this Agreement or the transactions
contemplated by this Agreement. Each of the Parties hereby (a) certifies that no
representative, agent or attorney of the other party has represented, expressly
or otherwise, that such other party would not, in the event of litigation, seek
to enforce the foregoing waiver and (b) acknowledges that it has been induced to
enter into this Agreement and the transactions contemplated by this Agreement,
as applicable, by, among other things, the mutual waivers and certifications in
this Section 15.

                                       8

<PAGE>

                  IN WITNESS WHEREOF, the Parties hereto have signed this
Agreement as of the day and year first above written.

                                    HALSEY DRUG CO., INC.

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

                                    HOUBA, INC.

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

                                    WATSON PHARMACEUTICALS INC.

                                    By: _______________________________
                                        Name:
                                        Title:

<PAGE>

                                    EXHIBIT A

            TERMS TO BE INCLUDED IN HYDROCODONE API SUPPLY AGREEMENT

A.       Watson will fund fifty percent (50%), subject to an aggregate maximum
         of $3,500,000, of the cost to develop and commercialize the Hydrocodone
         Process, including, without limitation, the capital improvements
         required at Halsey's Culver, Indiana facility, the purchase,
         installation and validation of associated manufacturing equipment, the
         preparation and filing of the Drug Master File for the Hydrocodone API
         and the related direct labor expenses (the "Development and Scale Up
         Expenses"). Such funding by Watson shall be paid on a monthly basis
         within thirty (30) days after the end of each month in which Halsey
         actually incurs such Development and Scale-Up Expenses;

B.       Halsey will supply to Watson and Watson shall purchase on a
         preferential basis up to a maximum annual quantity of 4,600 kg of
         Hydrocodone API;

C.       The transfer price to Watson for the Hydrocodone API shall be Halsey's
         fully absorbed manufacturing cost as determined based on US GAAP plus
         50% of the difference between such manufacturing cost and the lowest
         price available to Watson from an alternative supplier for comparable
         quantities of Hydrocodone API; provided, however, that the transfer
         price shall not be less than Halsey's fully absorbed manufacturing
         costs plus 35%.

D.       The Supply Agreement shall have a term of five (5) years.

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