Document:

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                                                                   Exhibit 10.73

THIS CONVERTIBLE SENIOR SECURED DEBENTURE AND THE COMMON STOCK ISSUABLE UPON
CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") NOR UNDER ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED,
SOLD, ASSIGNED, HYPOTHECATED OR OTHERWISE TRANSFERRED UNTIL (1) A REGISTRATION
STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE ACT AND ANY APPLICABLE
STATE SECURITIES LAW OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE
COMPANY OR OTHER COUNSEL TO THE HOLDER OF SUCH DEBENTURE REASONABLY SATISFACTORY
TO THE COMPANY THAT SUCH DEBENTURE AND/OR COMMON STOCK MAY BE PLEDGED, SOLD,
ASSIGNED, HYPOTHECATED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAWS.

                              HALSEY DRUG CO., INC.
                     5% CONVERTIBLE SENIOR SECURED DEBENTURE
                               DUE MARCH 15, 2003

$5,000,000                                                               No. N-1
May 28, 1999

         HALSEY DRUG CO., INC., a corporation organized under the laws of the
State of New York (the "Company"), for value received, hereby promises to pay to
ORACLE STRATEGIC PARTNERS, L.P., or registered assigns (the "Payee" or "Holder")
upon due presentation and surrender of this Debenture, on March 15, 2003 (the
"Maturity Date"), the principal amount of Five Million Dollars ($5,000,000) and
accrued interest thereon as hereinafter provided.

         This Debenture was issued by the Company pursuant to a certain
Debenture and Warrant Purchase Agreement dated as of May 26, 1999 among the
Company and certain persons, including the Payee (together with the Schedules
and Exhibits thereto, the "Purchase Agreement") relating to the purchase and
sale of 5% Convertible Senior Secured Debentures maturing March 15, 2003 (the
"Debentures") in the aggregate principal amount of $22,862,603.04. The holders
of such Debentures are referred to hereinafter as the "Holders." The Payee is
entitled to the benefits of the Purchase Agreement, including, without
limitation, the rights on the occurrence of an Event of Default (as defined in
the Purchase Agreement). Reference is made to the Purchase Agreement with
respect to certain additional rights of the Holder and obligations of the
Company not set forth herein.

                                    ARTICLE I

              PAYMENT OF PRINCIPAL AND INTEREST; METHOD OF PAYMENT

                  1.1 Payment of the principal and accrued interest on this
Debenture shall be made in such coin or currency of the United States of America
as at the time of payment shall be legal tender for the payment of public and
private debts. Interest (computed on the basis of a 360-day year of twelve
30-day months) on the unpaid portion of said principal amount from time to time
outstanding shall be paid by the Company at the rate of five percent (5%) per
annum (the "Stated Interest Rate"), in like coin and currency, payable to the
Payee in three (3) month intervals on each January 1, April 1,
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July 1 and October 1 during the term of this Debenture (commencing July 1, 1999)
(an "Interest Payment Date") and on the Maturity Date. Both principal hereof and
interest thereon are payable at the Holder's address above or such other address
as the Holder shall designate from time to time by written notice to the
Company. The Company will pay or cause to be paid all sums becoming due hereon
for principal and interest by check, sent to the Holder's above address or to
such other address as the Holder may designate for such purpose from time to
time by written notice to the Company, without any requirement for the
presentation of this Debenture or making any notation thereon, except that the
Holder hereof agrees that payment of the final amount due shall be made only
upon surrender of this Debenture to the Company for cancellation. Prior to any
sale or other disposition of this instrument, the Holder hereof agrees to
endorse hereon the amount of principal paid hereon and the last date to which
interest has been paid hereon and to notify the Company of the name and address
of the transferee.

                  1.2 In the event any payment of principal or interest or both
shall remain unpaid for a period of ten (10) days or more, a late charge
equivalent to five (5%) percent of each installment shall be charged. Interest
on the indebtedness evidenced by this Debenture after default or maturity
accelerated shall be due and payable at the rate of seven (7%) percent per
annum, subject to the limitations of applicable law.

                  1.3 If this Debenture or any installment hereof becomes due
and payable on a Saturday, Sunday or public holiday under the laws of the State
of New York, the due date hereof shall be extended to the next succeeding full
business day and interest shall be payable at the rate of five (5%) percent per
annum during such extension. All payments received by the Holder shall be
applied first to the payment of all accrued interest payable hereunder.

                                   ARTICLE II

                                    SECURITY

                  2.1 The obligations of the Company under this Debenture are
secured pursuant to security interests on and collateral assignments of, assets,
tangible and intangible, of the Company granted by the Company to the Payee
pursuant to a security agreement dated as of May 26, 1999 and collateral
assignments referred to in the Purchase Agreement. In addition, each of Houba,
Inc. ("Houba") and Halsey Pharmaceuticals, Inc., each a wholly-owned subsidiary
of the Company (individually a "Guarantor" and collectively, the "Guarantors"),
has executed in favor of the Holder a certain Continuing Unconditional Guaranty,
dated as of May 26, 1999, guaranteeing the full and unconditional payment when
due of the amounts payable by the Company to the Holder pursuant to the terms of
this Debenture (each the "Guaranty"). The obligations of each Guarantor under
its Guaranty are secured pursuant to security interests on and collateral
assignments of, assets, tangible and intangible, of such Guarantor granted by
the Guarantor to the Payee pursuant to a security agreement of even date
herewith and collateral assignments referred to in the Purchase Agreement. The
obligations of Houba under its Guaranty are also secured pursuant to a Mortgage
on real property located at 16235 State Road 17, Culver, Indiana.

                                   ARTICLE III
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                                   CONVERSION

                  3.1 Conversion at Option of Holder. (a) Except as set forth in
Section 3.1(b) hereof, at any time and from time to time on and after May 26,
1999 (the "Initial Conversion Date") until the earlier of (i) the Maturity Date
or (ii) the conversion of the Debenture in accordance with Section 3.2 hereof,
this Debenture is convertible in whole or in part at the Holder's option into
shares of Common Stock of the Company upon surrender of this Debenture, at the
office of the Company, accompanied by a written notice of conversion in the form
of Attachment II hereto, or otherwise in form reasonably satisfactory to the
Company duly executed by the registered Holder or its duly authorized attorney.
This Debenture is convertible on or after the Initial Conversion Date into
shares of Common Stock at a price per share of Common Stock equal to $1.404 per
share (the "Conversion Price"). Interest shall accrue to and including the day
prior to the date of conversion and shall be paid on the last day of the month
in which conversion rights hereunder are exercised. No fractional shares or
scrip representing fractional shares will be issued upon any conversion, but an
adjustment in cash will be made, in respect of any fraction of a share which
would otherwise be issuable upon the surrender of this Debenture for conversion.
The Conversion Price is subject to adjustment as provided in Section 3.5 and
Section 3.7 hereof. As soon as practicable following conversion and upon the
Holder's compliance with the conversion procedure described in Section 3.3
hereof, the Company shall deliver a certificate for the number of full shares of
Common Stock issuable upon conversion and a check for any fractional share and,
in the event the Debenture is converted in part, a new Debenture of like tenor
in the principal amount equal to the remaining principal balance of this
Debenture after giving effect to such partial conversion.

                  (b) Notwithstanding anything to the contrary contained herein,
in no event shall this Debenture be convertible into, and the Company shall have
no obligation to issue, an amount exceeding 484,349 shares of the Company's
Common Stock until such time as the Company's shareholders shall have approved
the issuance of shares of Common Stock in an amount exceeding 19.9% of the
Company's outstanding Common Stock (determined as of the date hereof) at a price
less than the current fair market value of the Common Stock upon the conversion
of the Debentures and exercise of the Warrants ("Shareholder Approval").
Immediately upon receipt of Shareholder Approval, this Debenture shall be
convertible in whole or in part into shares of the Company's Common Stock as
provided in Sections 3.1 and 3.2 hereof. In accordance with the provisions of
Section 9.12 of the Purchase Agreement, the Company covenants to seek
Shareholder Approval as required pursuant to this Section 3.1(b).
Notwithstanding anything to the contrary contained herein, upon the occurrence
of an Event of Default under Section 12.1(i) of the Purchase Agreement
(concerning the failure to obtain shareholder approval of the matters described
in such Section) the Purchasers' shall have the right to require the Company,
upon notice, to redeem the Debentures at par, together with outstanding
interest, plus a default interest payment computed at the annual rate of five
percent (5%) accruing from the date of issuance of the Debentures until redeemed
by the Company. Not later than fifteen (15) days following the receipt of such
notice, the Company shall remit to the Purchasers, against the surrender of the
Debentures and the Warrants issued to the Purchaser pursuant to this Agreement,
the sum of the principal amount of the Debentures, plus accrued and unpaid
interest through the date of redemption computed at the annual rate of five
percent (5%), plus a default interest payment computed at the annual rate of
five percent (5%) from the date of issuance of the Debentures through and
including the date of redemption. The Company's redemption obligations under
Section 12.2(c) of the Purchase Agreement are conditioned upon the Purchaser's
surrender of the
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Debentures and Warrants issued pursuant to this Agreement. In the event a
Purchaser demands the redemption by the Company of less than the entire
principal amount of a Debenture, the Company will issue a new Debenture of like
tenor to the Purchaser in a principal amount equal to the unredeemed principal
amount of such Debenture.

                  3.2 Conversion at Option of the Company. Provided that an
Event of Default as provided in Section 12.1(a) of the Purchase Agreement
(relating to the failure to pay principal and interest under the Debentures)
shall not have occurred and then be continuing and subject to the terms of
Section 3.1(b) hereof, in the event that either (a) following the second
anniversary of May 26, 1999, the closing price per share of the Company's Common
Stock on the American Stock Exchange ("AMEX") or the NASDAQ National Market
("NNM") or such other exchange as the Shares may then be listed exceeds $4.75
per share for each of twenty (20) consecutive trading days or (b) following the
third anniversary of May 26, 1999, the closing price per share of the Company's
Common Stock on the AMEX or NNM or such other exchange as the Share may then be
listed exceeds $7.25 per share for each of twenty (20) consecutive trading days,
then at any time thereafter until the Maturity Date the Company may upon written
notice to the Holders of all Debentures (the "Mandatory Conversion Notice")
require that all, but not less than all, of the outstanding principal amount of
the Debentures be converted into shares of Common Stock at a price per share
equal to the Conversion Price (as such Conversion Price may be adjusted as
provided in Sections 3.5 and 3.7 hereof). The Mandatory Conversion Notice shall
state (1) the date fixed for conversion (the "Conversion Date") (which date
shall not be prior to the date the Mandatory Conversion Notice is given), (2)
any disclosures required by law, (3) the trading dates and closing prices of the
Common Stock giving rise to the Company's option to require conversion of the
Debenture, (4) that the Debentures shall cease to accrue interest after the day
immediately preceding the Conversion Date, (5) the place where the Debentures
shall be delivered and (6) any other instructions that Holders must follow in
order to tender their Debentures in exchange for certificates for Common Stock.
No failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such conversion, except as to a
Holder (x) to whom notice was not mailed or (y) whose notice was defective. An
affidavit of the Secretary or an Assistant Secretary of the Company or an agent
employed by the Company that notice of conversion has been mailed postage
prepaid to the last address of the Holder appearing on the Debenture registry
books kept by the Company shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. On and after the Conversion Date, except
as provided in the next two sentences, Holders of the Debentures shall have no
further rights except to receive, upon surrender of the Debentures, a
certificate or certificates for the number of shares of Common Stock as to which
the Debenture shall have been converted. Interest shall accrue to and including
the day prior to the Conversion Date and shall be paid on the last day of the
month in which Conversion Date occurs. No fractional shares or scrip
representing fractional shares will be issued upon any conversion, but an
adjustment in cash will be made, in respect of any fraction of a share which
would otherwise be issuable upon the surrender of this Debenture for conversion.

                  3.3 Registration of Transfer; Conversion Procedure. The
Company shall maintain books for the transfer and registration of the
Debentures. Upon the transfer of any
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Debenture in accordance with the provisions of the Purchase Agreement, the
Company shall issue and register the Debenture in the names of the new holders.
The Debentures shall be signed manually by the Chairman, Chief Executive
Officer, President or any Vice President and the Secretary or Assistant
Secretary of the Company. The Company shall convert, from time to time, any
outstanding Debentures upon the books to be maintained by the Company for such
purpose upon surrender thereof for conversion properly endorsed and, in the case
of a conversion pursuant to Section 3.1 hereof, accompanied by a properly
completed and executed Conversion Notice attached hereto as Attachment II.
Subject to the terms of this Debenture, upon surrender of this Debenture the
Company shall issue and deliver with all reasonable dispatch to or upon the
written order of the Holder of such Debenture and in such name or names as such
Holder may designate, a certificate or certificates for the number of full
shares of Common Stock due to such Holder upon the conversion of this Debenture.
Such certificate or certificates shall be deemed to have been issued and any
person so designated to be named therein shall be deemed to have become the
Holder of record of such Shares as of the date of the surrender of this
Debenture.

                  3.4 Company to Provide Common Stock. The Holder acknowledges
that the Company has no authorized and unreserved Shares available to reserve
for issuance upon the conversion of the Debentures. In accordance with the
provisions of Section 9.12 of the Purchase Agreement, the Company covenants to
seek the approval of its shareholders to amend its Certificate of Incorporation
to increase its authorized shares from 40,000,000 to 75,000,000 shares of Common
Stock and to provide voting rights to the Holders on an as converted basis.
Promptly upon receipt of shareholder approval to amend its certificate of
incorporation to increase its authorized shares, the Company shall reserve out
of its authorized but unissued common stock a sufficient number of shares to
permit the conversion of the Debentures in full. The shares of Common Stock
which may be issued upon the conversion of the Debentures shall be fully paid
and non-assessable and free of preemptive rights. The Company will comply with
all securities laws regulating the offer and delivery of the Shares upon
conversion of the Debentures and will list such shares on each national
securities exchange upon which the Common Stock is listed.

                  3.5 Dividends; Reclassifications, etc. In the event that the
Company shall, at any time prior to the earlier to occur of (i) exercise of
conversion rights hereunder and (ii) the Maturity Date: (i) declare or pay to
the holders of the Common Stock a dividend payable in any kind of shares of
capital stock of the Company; or (ii) change or divide or otherwise reclassify
its Common Stock into the same or a different number of shares with or without
par value, or in shares of any class or classes; or (iii) transfer its property
as an entirety or substantially as an entirety to any other company or entity;
or (iv) make any distribution of its assets to holders of its Common Stock as a
liquidation or partial liquidation dividend or by way of return of capital;
then, upon the subsequent exercise of conversion rights, the Holder thereof
shall receive, in addition to or in substitution for the shares of Common Stock
to which it would otherwise be entitled upon such exercise, such additional
shares of stock or scrip of the Company, or such reclassified shares of stock of
the Company, or such shares of the securities or property of the Company
resulting from transfer, or such assets of the Company, which it would have been
entitled to receive had it exercised these conversion rights prior to the
happening of any of the foregoing events.

                  3.6 Notice to Holder. If, at any time while this Debenture is
outstanding, the
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Company shall pay any dividend payable in cash or in Common Stock, shall offer
to the holders of its Common Stock for subscription or purchase by them any
shares of stock of any class or any other rights, shall enter into an agreement
to merge or consolidate with another corporation, shall propose any capital
reorganization or reclassification of the capital stock of the Company,
including any subdivision or combination of its outstanding shares of Common
Stock or there shall be contemplated a voluntary or involuntary dissolution,
liquidation or winding up of the Company, the Company shall cause notice thereof
to be mailed to the registered Holder of this Debenture at its address appearing
on the registration books of the Company, at least thirty (30) days prior to the
record date as of which holders of Common Stock shall participate in such
dividend, distribution or subscription or other rights or at least thirty (30)
days prior to the effective date of the merger, consolidation, reorganization,
reclassification or dissolution. If, at any time prior to the earlier of (a) the
Maturity Date, or (b) the Conversion of the Debenture, the number of outstanding
shares of Common Stock is (i) increased by a stock dividend payable in shares of
Common Stock or by a subdivision or split up of shares of Common Stock, or (ii)
decreased by a combination of shares of Common Stock, then, simultaneously with
the occurrence of such event, the Conversion Price shall be adjusted
automatically to a new amount equal to the product of (A) the Conversion Price
in effect on such record date and (B) the quotient obtained by dividing (x) the
number of shares of Common Stock outstanding on such record date (without giving
effect to the events referred to in the foregoing clauses (i) or (ii)) by (y)
the number of shares of Common Stock which would be outstanding immediately
after the event referred to in the foregoing clauses (i) or (ii).

                  3.7 Adjustments to Conversion Price. In order to prevent
dilution of the conversion right granted hereunder, the Conversion Price shall
be subject to adjustment from time to time in accordance with this Section 3.7.
Upon each adjustment of the Conversion Price pursuant to this Section 3.7, the
Holder of this Debenture shall thereafter be entitled to acquire upon conversion
under Section 3.1 or Section 3.2, at the Applicable Conversion Price (as
hereinafter defined), the number of shares of Common Stock obtainable by
multiplying the Conversion Price in effect immediately prior to such adjustment
by the number of shares of Common Stock acquirable immediately prior to such
adjustment and dividing the product thereof by the Applicable Conversion Price
resulting from such adjustment.

                  The Conversion Price in effect at the time of the exercise of
conversion rights hereunder set forth in Section 3.1 shall be subject to
adjustment from time to time as follows:

                      (a) If at any time after the date of issuance hereof the
Company shall grant or issue any shares of Common Stock, or grant or issue any
rights or options for the purchase of, or stock or other securities convertible
into, Common Stock (such convertible stock or securities being herein
collectively referred to as "Convertible Securities") other than:

                           (i) shares issued in a transaction described in
                  subsection (b) of this Section 3.7; or

                           (ii) shares issued, subdivided or combined in
                  transactions described in Section 3.5 if and to the extent
                  that the number of shares of Common Stock received
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                  upon conversion of this Debenture shall have been previously
                  adjusted pursuant to Section 3.5 as a result of such issuance,
                  subdivision or combination of such securities;

for a consideration per share which is less than the Fair Market Value (as
hereinafter defined) of the Common Stock, then the Conversion Price in effect
immediately prior to such issuance or sale (the "Applicable Conversion Price")
shall, and thereafter upon each issuance or sale for a consideration per share
which is less than the Fair Market Value of the Common Stock, the Applicable
Conversion Price shall, simultaneously with such issuance or sale, be adjusted,
so that such Applicable Conversion Price shall equal a price determined by
multiplying the Applicable Conversion Price by a fraction, the numerator of
which shall be:

                  (A) the sum of (x) the total number of shares of Common Stock
                  outstanding when the Applicable Conversion Price became
                  effective, plus (y) the number of shares of Common Stock which
                  the aggregate consideration received, as determined in
                  accordance with subsection 3.7(c) for the issuance or sale of
                  such additional Common Stock or Convertible Securities deemed
                  to be an issuance of Common Stock as provided in subsection
                  3.7(d), would purchase (including any consideration received
                  by the Company upon the issuance of any shares of Common Stock
                  since the date the Applicable Conversion Price became
                  effective not previously included in any computation resulting
                  in an adjustment pursuant to this Section 3.7(a)) at the Fair
                  Market Value of the Common Stock; and the denominator of which
                  shall be

                  (B) the total number of shares of Common Stock outstanding (or
                  deemed to be outstanding as provided in subsection 3.7(d)
                  hereof) immediately after the issuance or sale of such
                  additional shares.

                  For purposes of this Section 3.7, "Fair Market Value" shall
mean the average of the closing price of the Common Stock for each of the twenty
(20) consecutive trading days prior to such issuance or sale on the principal
national securities exchange on which the Common Stock is traded, or if shares
of Common Stock are not listed on a national securities exchange during such
period, the closing price per share as reported by the National Association of
Securities Dealers Automatic Quotation System ("NASDAQ") National Market System
if the shares are quoted on such system during such period, or the average of
the bid and asked prices of the Common Stock in the over-the-counter market at
the close of trading during such period if the shares are not traded on an
exchange or listed on the NASDAQ National Market System, or if the Common Stock
is not traded on a national securities exchange or in the over-the-counter
market, the fair market value of a share of Common Stock during such period as
determined in good faith by the Board of Directors.

                  If, however, the Applicable Conversion Price thus obtained
would result in the issuance of a lesser number of shares upon conversion than
would be issued at the initial Conversion Price specified in Section 3.1, as
appropriate, the Applicable Conversion Price shall be such initial Conversion
Price.

                  Upon each adjustment of the Conversion Price pursuant to this
subsection (a), the
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total number of shares of Common Stock into which this Debenture shall be
convertible shall be such number of shares (calculated to the nearest tenth)
purchasable at the Applicable Conversion Price multiplied by a fraction, the
numerator of which shall be the Conversion Price in effect immediately prior to
such adjustment and the denominator of which shall be the exercise price in
effect immediately after such adjustment.

                      (b) Anything in this Section 3.7 to the contrary
notwithstanding, no adjustment in the Conversion Price shall be made in
connection with:

                  (i) the grant, issuance or exercise of any Convertible
                  Securities pursuant to the Company's qualified or
                  non-qualified Employee Stock Option Plans or any other bona
                  fide employee benefit plan or incentive arrangement, adopted
                  or approved by the Company's Board of Directors or approved by
                  the Company's shareholders, as may be amended from time to
                  time, or under any other bona fide employee benefit plan
                  hereafter adopted by the Company's Board of Directors; or

                  (ii) the grant, issuance or exercise of any Convertible
                  Securities in connection with the hire or retention of any
                  officer, director or key employee of the Company, provided
                  such grant is approved by the Company's Board of Directors; or

                  (iii) the issuance of any shares of Common Stock pursuant to
                  the grant or exercise of Convertible Securities outstanding as
                  of the date hereof (exclusive of any subsequent amendments
                  thereto).

                      (c) For the purpose of subsection 3.7(a), the following
provisions shall also be applied:

                  (i) In case of the issuance or sale of additional shares of
                  Common Stock for cash, the consideration received by the
                  Company therefor shall be deemed to be the amount of cash
                  received by the Company for such shares, before deducting
                  therefrom any commissions, compensation or other expenses paid
                  or incurred by the Company for any underwriting of, or
                  otherwise in connection with, the issuance or sale of such
                  shares.

                  (ii) In the case of the issuance of Convertible Securities,
                  the consideration received by the Company therefor shall be
                  deemed to be the amount of cash, if any, received by the
                  Company for the issuance of such rights or options, plus the
                  minimum amounts of cash and fair value of other consideration,
                  if any, payable to the Company upon the exercise of such
                  rights or options or payable to the Company upon conversion of
                  such Convertible Securities.

                  (iii) In the case of the issuance of shares of Common Stock or
                  Convertible Securities for a consideration in whole or in
                  part, other than cash, the consideration other than cash shall
                  be deemed to be the fair market value thereof as reasonably
                  determined in good faith by the Board of Directors of the
                  Company (irrespective of
<PAGE>   9
                  accounting treatment thereof); provided, however, that if such
                  consideration consists of the cancellation of debt issued by
                  the Company, the consideration shall be deemed to be the
                  amount the Company received upon issuance of such debt (gross
                  proceeds) plus accrued interest and, in the case of original
                  issue discount or zero coupon indebtedness, accrued value to
                  the date of such cancellation, but not including any premium
                  or discount at which the debt may then be trading or which
                  might otherwise be appropriate for such class of debt.

                  (iv) In case of the issuance of additional shares of Common
                  Stock upon the conversion or exchange of any obligations
                  (other than Convertible Securities), the amount of the
                  consideration received by the Company for such Common Stock
                  shall be deemed to be the consideration received by the
                  Company for such obligations or shares so converted or
                  exchanged, before deducting from such consideration so
                  received by the Company any expenses or commissions or
                  compensation incurred or paid by the Company for any
                  underwriting of, or otherwise in connection with, the issuance
                  or sale of such obligations or shares, plus any consideration
                  received by the Company in connection with such conversion or
                  exchange other than a payment in adjustment of interest and
                  dividends. If obligations or shares of the same class or
                  series of a class as the obligations or shares so converted or
                  exchanged have been originally issued for different amounts of
                  consideration, then the amount of consideration received by
                  the Company upon the original issuance of each of the
                  obligations or shares so converted or exchange shall be deemed
                  to be the average amount of the consideration received by the
                  Company upon the original issuance of all such obligations or
                  shares. The amount of consideration received by the Company
                  upon the original issuance of the obligations or shares so
                  converted or exchanged and the amount of the consideration, if
                  any, other than such obligations or shares, received by the
                  Company upon such conversion or exchange shall be determined
                  in the same manner as provided in paragraphs (i) and (ii)
                  above with respect to the consideration received by the
                  Company in case of the issuance of additional shares of Common
                  Stock or Convertible Securities.

                  (v) In the case of the issuance of additional shares of Common
                  Stock as a dividend, the aggregate number of shares of Common
                  Stock issued in payment of such dividend shall be deemed to
                  have been issued at the close of business on the record date
                  fixed for the determination of stockholders entitled to such
                  dividend and shall be deemed to have been issued without
                  consideration; provided, however, that if the Company, after
                  fixing such record date, shall legally abandon its plan to so
                  issue Common Stock as a dividend, no adjustment of the
                  Applicable Conversion Price shall be required by reason of the
                  fixing of such record date.

                      (d) For purposes of the adjustment provided for in
subsection 3.7(a) above, if at any time the Company shall issue any Convertible
Securities, the Company shall be deemed to have issued at the time of the
issuance of such Convertible Securities the maximum number of shares of Common
Stock issuable upon conversion of the total amount of such Convertible
Securities.
<PAGE>   10
                      (e) On the expiration, cancellation or redemption of any
Convertible Securities, the Conversion Price then in effect hereunder shall
forthwith be readjusted to such Conversion Price as would have been obtained (a)
had the adjustments made upon the issuance or sale of such expired, canceled or
redeemed Convertible Securities been made upon the basis of the issuance of only
the number of shares of Common Stock theretofore actually delivered upon the
exercise or conversion of such Convertible Securities (and the total
consideration received therefor) and (b) had all subsequent adjustments been
made on only the basis of the Conversion Price as readjusted under this
subsection 3.7(e) for all transactions (which would have affected such adjusted
Conversion Price) made after the issuance or sale of such Convertible
Securities.

                      (f) Anything in this Section 3.7 to the contrary
notwithstanding, no adjustment in the Conversion Price shall be required unless
such adjustment would require an increase or decrease of at least 1% in such
Conversion Price; provided, however, that any adjustments which by reason of
this subsection 3.7(f) are not required to be made shall be carried forward and
taken into account in making subsequent adjustments. All calculations under this
Section 3.7 shall be made to the nearest cent.

                      (g) Upon any adjustment of any Conversion Price, then and
in each such case the Company shall promptly deliver a notice to the registered
Holder of this Debenture, which notice shall state the Conversion Price
resulting from such adjustment, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.

                  3.8 Reorganization of the Company. If the Company is a party
to a merger or other transaction which reclassifies or changes its outstanding
Common Stock, upon consummation of such transaction this Debenture shall
automatically become convertible into the kind and amount of securities, cash or
other assets which the Holder of this Debenture would have owned immediately
after such transaction if the Holder had converted this Debenture at the
Conversion Price in effect immediately before the effective date of the
transaction. Concurrently with the consummation of such transaction, the person
obligated to issue securities or deliver cash or other assets upon conversion of
this Debenture shall execute and deliver to the Holder a supplemental Debenture
so providing and further providing for adjustments which shall be as nearly
equivalent as may be practical to the adjustments provided in this Article 3.
The successor Company shall mail to the Holder a notice describing the
supplemental Debenture.

                  If securities deliverable upon conversion of this Debenture,
as provided above, are themselves convertible into the securities of an
affiliate of a corporation formed, surviving or otherwise affected by the merger
or other transaction, that issuer shall join in the supplemental Debenture which
shall so provide. If this section applies, Section 3.5 does not apply.

                                   ARTICLE IV

                                  MISCELLANEOUS

                  4.1 Default. Upon the occurrence of any one or more of the
events of default specified or referred to in the Purchase Agreement or in the
other documents or instruments
<PAGE>   11
executed in connection therewith, all amounts then remaining unpaid on this
Debenture may be declared to be immediately due and payable as provided in the
Purchase Agreement.

                  4.2 Collection Costs. In the event that this Debenture shall
be placed in the hands of an attorney for collection by reason of any event of
default hereunder, the undersigned agrees to pay reasonable attorney's fees and
disbursements and other reasonable expenses incurred by the Holder in connection
with the collection of this Debenture.

                  4.3 Rights Cumulative. The rights, powers and remedies given
to the Payee under this Debenture shall be in addition to all rights, powers and
remedies given to it by virtue of the Purchase Agreement, any document or
instrument executed in connection therewith, or any statute or rule of law.

                  4.4 No Waivers. Any forbearance, failure or delay by the Payee
in exercising any right, power or remedy under this Debenture, the Purchase
Agreement, any documents or instruments executed in connection therewith or
otherwise available to the Payee shall not be deemed to be a waiver of such
right, power or remedy, nor shall any single or partial exercise of any right,
power or remedy preclude the further exercise thereof.

                  4.5 Amendments in Writing. No modification or waiver of any
provision of this Debenture, the Purchase Agreement or any documents or
instruments executed in connection therewith shall be effective unless it shall
be in writing and signed by the Payee, and any such modification or waiver shall
apply only in the specific instance for which given.

                  4.6 Governing Law. This Debenture and the rights and
obligations of the parties hereto, shall be governed, construed and interpreted
according to the laws of the State of New York, without giving effect to its
conflicts of laws rules wherein it was negotiated and executed, and the
undersigned consents and agrees that the State and Federal Courts which sit in
the State of New York, County of New York shall have exclusive jurisdiction of
all controversies and disputes arising hereunder.

                  4.7 No Counterclaims. The undersigned waives the right to
interpose counterclaims or set-offs of any kind and description in any
litigation arising hereunder and waives the right in any litigation with the
Payee (whether or not arising out of or relating to this Debenture) to trial by
jury.

                  4.8 Successors. The term "Payee" and "Holder" as used herein
shall be deemed to include the Payee and its successors, endorsees and assigns.

                  4.9 Certain Waivers. The Company hereby waives presentment,
demand for payment, protest, notice of protest and notice of non-payment hereof.

                  4.10 Stamp Tax. The Company will pay any documentary stamp
taxes attributable to the initial issuance of the Common Stock issuable upon the
conversion of this
<PAGE>   12
Debenture; provided, however, that the Company shall not be required to pay any
tax or taxes which may be payable in respect of any transfer involved in the
issuance or delivery of any certificates for the Common Stock in a name other
than that of the Holder in respect of which such Common Stock is issued, and in
such case the Company shall not be required to issue or deliver any certificate
for the Common Stock until the person requesting the same has paid to the
Company the amount of such tax or has established to the Company's satisfaction
that such tax has been paid.

                  4.11 Mutilated, Lost, Stolen or Destroyed Debentures. In case
this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated Debenture, or in lieu of and substitution for the Debenture,
mutilated, lost, stolen or destroyed, a new Debenture of like tenor and
representing an equivalent right or interest, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction and an
indemnity, if requested, also reasonably satisfactory to it.

                  4.12 Maintenance of Office. The Company covenants and agrees
that so long as this Debenture shall be outstanding, it will maintain an office
or agency in New York (or such other place as the Company may designate in
writing to the holder of this Debenture) where notices, presentations and
demands to or upon the Company in respect of this Debenture may be given or
made.
<PAGE>   13
                      IN WITNESS WHEREOF, Halsey Drug Co., Inc. has caused this
Debenture to be signed by its President and to be dated the day and year first
above written.

ATTEST [SEAL]                                        HALSEY DRUG CO., INC.

                                                     By: /s/ Michael Reicher
--------------------------                               -----------------------
                                                     Name:    Michael Reicher
                                                     Title:   President
<PAGE>   14
                                  ATTACHMENT I

                                   Assignment

                  For value received, the undersigned hereby assigns subject to
the provisions of Section of the Purchase Agreement, to ________
$_________________ principal amount of the 5% Convertible Senior Secured
Debenture due March 15, 2003 evidenced hereby and hereby irrevocably appoint
_______________ attorney to transfer the Debenture on the books of the within
named corporation with full power of substitution in the premises.

Dated:

In the presence of:

--------------------------------          --------------------------------------
<PAGE>   15
                                  ATTACHMENT II

                                CONVERSION NOTICE

                           TO:      HALSEY DRUG CO., INC.

              The undersigned holder of this Debenture hereby irrevocably
exercises the option to convert $ principal amount of such Debenture (which may
be less than the stated principal amount thereof) into shares of Common Stock of
Halsey Drug Co., Inc., in accordance with the terms of such Debenture, and
directs that the shares of Common Stock issuable and deliverable upon such
conversion, together with a check (if applicable) in payment for any fractional
shares as provided in such Debenture, be issued and delivered to the undersigned
unless a different name has been indicated below. If shares of Common Stock are
to be issued in the name of a person other than the undersigned holder of such
Debenture, the undersigned will pay all transfer taxes payable with respect
thereto.

                                                     Name and address of Holder

                                                     Signature of Holder

            Principal amount of Debenture to be converted $

            If shares are to be issued otherwise then to the holder:

------------------------------------
Name of Transferee
                                            Address of Transferee

                                            Social Security Number of Transferee<PAGE>   1
                               WARRANT TO PURCHASE
                     COMMON STOCK, PAR VALUE $.01 PER SHARE

                                       OF

                              HALSEY DRUG CO., INC.

THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") NOR UNDER
ANY STATE SECURITIES LAW AND MAY NOT BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED OR
OTHERWISE TRANSFERRED UNTIL (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAW OR (2) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR OTHER COUNSEL TO THE
HOLDER OF SUCH WARRANT REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH WARRANT
AND/OR COMMON STOCK MAY BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED OR TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR APPLICABLE STATE
SECURITIES LAWS.

            This certifies that, for value received, ORACLE STRATEGIC PARTNERS,
L.P., or registered assigns ("Warrantholder"), is entitled to purchase from
HALSEY DRUG CO., INC. (the "Company"), subject to the provisions of this
Warrant, at any time during the Exercise Period (as hereinafter defined) 505,050
shares of the Company's Common Stock, par value $.01 per share ("Warrant
Shares"). The purchase price payable upon the exercise of this Warrant shall be
$1.404 per Warrant Share. The purchase price and the number of Warrant Shares
which the Warrantholder is entitled to purchase are subject to adjustment upon
the occurrence of the contingencies set forth in this Warrant, and as adjusted
from time to time, such purchase price is hereinafter referred to as the
"Warrant Price."

            For purposes of this Warrant, the term "Exercise Period" means the
period commencing on the date of issuance of this Warrant and ending on the
seventh anniversary of such date.

            This Warrant is subject to the following terms and conditions:

            1.    Exercise of Warrant.

                  (a) Subject to the terms of Section 1(e) hereof, this Warrant
may be exercised in whole or in part but not for a fractional share. Upon
delivery of this Warrant at the offices of the Company or at such other address
as the Company may designate by notice in writing to the registered holder
hereof with the Subscription Form annexed hereto duly executed, accompanied by
payment of the Warrant Price for the number of Warrant Shares purchased (in
<PAGE>   2
cash, by certified, cashier's or other check acceptable to the Company, by
Common Stock or other securities of the Company having a Market Value (as
hereinafter defined) equal to the aggregate Warrant Price for the Warrant Shares
to be purchased, or any combination of the foregoing), the registered holder of
this Warrant shall be entitled to receive a certificate or certificates for the
Warrant Shares so purchased. Such certificate or certificates shall be promptly
delivered to the Warrantholder. Upon any partial exercise of this Warrant, the
Company shall execute and deliver a new Warrant of like tenor for the balance of
the Warrant Shares purchasable hereunder.

                  (b) In lieu of exercising this Warrant pursuant to Section
1(a), the holder may elect to receive shares of Common Stock equal to the value
of this Warrant determined in the manner described below (or any portion thereof
remaining unexercised) upon delivery of this Warrant at the offices of the
Company or at such other address as the Company may designate by notice in
writing to the registered holder hereof with the Notice of Cashless Exercise
Form annexed hereto duly executed. In such event the Company shall issue to the
holder a number of shares of the Company's Common Stock computed using the
following formula:

                                   X = Y (A-B)
                                       -------
                                          A

Where X = the number of shares of Common Stock to be issued to the holder.

       Y  =  the number of shares of Common Stock purchasable under this
             Warrant (at the date of such calculation).

       A  =  the Market Value of the Company's Common Stock on the business day
             immediately preceding the day on which the Notice of Cashless
             Exercise is received by the Company.

       B  =  Warrant Price (as adjusted to the date of such calculation).

                  (c) The Warrant Shares deliverable hereunder shall, upon
issuance, be fully paid and non-assessable and the Company agrees that at all
times during the term of this Warrant it shall cause to be reserved for issuance
such number of shares of its Common Stock as shall be required for issuance and
delivery upon exercise of this Warrant.

                  (d) For purposes of Section 1(b) of this Warrant, the Market
Value of a share of Common Stock on any date shall be equal to (A) the closing
sale price per share as published by a national securities exchange on which
shares of Common Stock are traded (an "Exchange") on such date or, if there is
no sale of Common Stock on such date, the average of the bid and asked prices on
such Exchange at the close of trading on such date or, (B) if shares of Common
Stock are not listed on an Exchange on such date, the closing price per share as
published on the National Association of Securities Dealers Automatic Quotation
System ("NASDAQ") National Market System if the shares are quoted on such system
on such date, or (C) the average of the bid and asked prices in the
over-the-counter market at the close of trading on
<PAGE>   3
such date if the shares are not traded on an Exchange or listed on the NASDAQ
National Market System, or (D) if the security is not traded on an Exchange or
in the over-the-counter market, the fair market value of a share of Common Stock
on such date as determined in good faith by the Board of Directors. If the
holder disagrees with the determination of the Market Value of any securities of
the Common Stock determined by the Board of Directors under Section 1(d)(i)(D)
the Market Value shall be determined by an independent appraiser acceptable to
the Company and the holder. If they cannot agree on such an appraiser, then each
of the Company and the holder shall select an independent appraiser, such two
appraisers shall select a third independent appraiser and Market Value shall be
the median of the appraisals made by such appraisers). If there is one
appraiser, the cost of the appraisal shall be shared equally between the Company
and the holder. If there are three appraisers, each of the Company and the
holder shall pay for its own appraiser and shall share equally the cost of the
third appraiser.

                  (e) Notwithstanding anything to the contrary contained herein,
and in accordance with Section 713 of the American Stock Exchange Company Guide,
in no event shall this Warrant to be exercisable for, and the Company shall have
no obligation to issue, an amount exceeding 68,704 shares of the Company's
Common Stock until such time the Company's shareholders shall have approved the
issuance of shares in an amount exceeding 19.9% of the Company's outstanding
Common Stock (determined as of the date hereof) at a price less than the current
fair market value of the Common Stock upon the conversion of the Debentures and
the exercise of the Warrants ("Shareholder Approval"). Immediately upon receipt
of Shareholder Approval, this Warrant shall be exercisable in whole or in part
in accordance with the provisions of Section 1 hereof. In accordance with the
provisions of Section 9.12 of the Purchase Agreement, the Company covenants to
seek Shareholder Approval as provided herein in this Section 1(e).

            2. Transfer or Assignment of Warrant.

                  (a) Any assignment or transfer of this Warrant shall be made
by surrender of this Warrant at the offices of the Company or at such other
address as the Company may designate in writing to the registered holder hereof
with the Assignment Form annexed hereto duly executed and accompanied by payment
of any requisite transfer taxes, and the Company shall, without charge, execute
and deliver a new Warrant of like tenor in the name of the assignee for the
portion so assigned in case of only a partial assignment, with a new Warrant of
like tenor to the assignor for the balance of the Warrant Shares purchasable.

                  (b) Prior to any assignment or transfer of this Warrant, the
holder thereof shall deliver an opinion of counsel to the Company to the effect
that the proposed transfer may be effected without registration under the
Securities Act of 1933, as amended (the "Securities Act"). Each Warrant issued
upon or in connection with such transfer shall bear the restrictive legend set
forth on the front of this Warrant unless, in the opinion of the Company's
counsel, such legend is no longer required to insure compliance with the
Securities Act.

            3. Adjustments to Warrant Price and Warrant Shares -- Anti-Dilution
Provisions. In order to prevent dilution of the exercise right granted
hereunder, the Warrant Price shall be subject to adjustment from time to time in
accordance with this Section 3. Upon each adjustment of the Warrant Price
pursuant to this Section 3, the holder shall thereafter be entitled
<PAGE>   4
to acquire upon exercise of this Warrant, at the Applicable Warrant Price (as
hereinafter defined), the number of shares of Common Stock obtainable by
multiplying the Warrant Price in effect immediately prior to such adjustment by
the number of shares of Common Stock acquirable immediately prior to such
adjustment and dividing the product thereof by the Applicable Warrant Price
resulting from such adjustment.

            The Warrant Price in effect at the time of the exercise of this
Warrant shall be subject to adjustment from time to time as follows:

            (a) In the event that the Company shall at any time: (i) declare or
pay to the holders of the Common Stock a dividend payable in any kind of shares
of capital stock of the Company; or (ii) change or divide or otherwise
reclassify its Common Stock into the same or a different number of shares with
or without par value, or in shares of any class or classes; or (iii) transfer
its property as an entirety or substantially as an entirety to any other company
or entity; or (iv) make any distribution of its assets to holders of its Common
Stock as a liquidation or partial liquidation dividend or by way of return of
capital; then, upon the subsequent exercise of this Warrant, the holder thereof
shall receive, in addition to or in substitution for the shares of Common Stock
to which it would otherwise be entitled upon such exercise, such additional
shares of stock or scrip of the Company, or such reclassified shares of stock of
the Company, or such shares of the securities or property of the company
resulting from transfer, or such assets of the Company, which it would have been
entitled to receive had it exercised these rights prior to the happening of any
of the foregoing events. If, at any time during the Exercise Period, the number
of outstanding shares of Common Stock is (i) increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split up of shares of
Common Stock, or (ii) decreased by a combination of shares of Common Stock,
then, simultaneously with the occurrence of such event, the Warrant Price shall
be adjusted automatically to a new amount equal to the product of (A) the
Warrant Price in effect on such record date and (B) the quotient obtained by
dividing (x) the number of shares of Common Stock outstanding on such record
date (without giving effect to the events referred to in the foregoing clauses
(i) or (ii)) by (y) the number of shares of Common Stock which would be
outstanding immediately after the event referred to in the foregoing clauses (i)
or (ii).

            (b) If at any time after the date of issuance hereof the Company
shall grant or issue any shares of Common Stock, or grant or issue any rights or
options for the purchase of, or stock or other securities convertible into,
Common Stock (such convertible stock or securities being herein collectively
referred to as "Convertible Securities") other than:

            (i) shares issued in a transaction described in subsection 3(c); or

            (ii) shares issued, subdivided or combined in transactions described
in subsection 3(a) if and to the extent that the number of shares of Common
Stock receivable upon exercise of this Warrant shall have been previously
adjusted pursuant to subsection 3(a) as a result of such issuance, subdivision
or combination of such securities;

for a consideration per share which is less than the Fair Market Value (as
hereinafter defined) of the Common Stock, then the Warrant Price in effect
immediately prior to such issuance or sale (the "Applicable Warrant Price")
shall, and thereafter upon each issuance or sale for a
<PAGE>   5
consideration per share which is less than the Fair Market Value of the Common
Stock, the Applicable Warrant Price shall, simultaneously with such issuance or
sale, be adjusted, so that such Applicable Warrant Price shall equal a price
determined by multiplying the Applicable Warrant Price by a fraction, the
numerator of which shall be:

            (A) the sum of (x) the total number of shares of Common Stock
            outstanding when the Applicable Warrant Price became effective, plus
            (y) the number of shares of Common Stock which the aggregate
            consideration received, as determined in accordance with subsection
            3(d) for the issuance or sale of such additional Common Stock or
            Convertible Securities deemed to be an issuance of Common Stock as
            provided in subsection 3(e), would purchase (including any
            consideration received by the Company upon the issuance of any
            shares of Common Stock since the date the Applicable Warrant Price
            became effective not previously included in any computation
            resulting in an adjustment pursuant to this subsection 3(b)) at the
            Fair Market Value of the Common Stock; and the denominator of which
            shall be

            (B) the total number of shares of Common Stock outstanding (or
            deemed to be outstanding as provided in subsection 3(e) hereof)
            immediately after the issuance or sale of such additional shares.

            For purposes of this Section 3, "Fair Market Value" shall mean the
average of the closing price of the Common Stock for each of the twenty (20)
consecutive trading days prior to such issuance or sale on an Exchange or if
shares of Common Stock are not listed on an Exchange during such period, the
closing price per share as reported by NASDAQ National Market System if the
shares are quoted on such system during such period, or the average of the bid
and asked prices of the Common Stock in the over-the-counter market at the close
of trading during such period if the shares are not traded on an Exchange or
listed on the NASDAQ National Market System, or if the Common Stock is not
traded on an Exchange or in the over-the-counter market, the fair market value
of a share of Common Stock during such period as determined in good faith by the
Board of Directors.

If, however, the Applicable Warrant Price thus obtained would result in the
issuance of a lesser number of shares upon conversion than would be issued at
the initial Warrant Price, the Applicable Warrant Price shall be such initial
Warrant Price.

            Upon each adjustment of the Warrant Price pursuant to this
subsection 3(b), the total number of shares of Common Stock for which this
Warrant shall be exercisable shall be such number of shares (calculated to the
nearest tenth) purchasable at the Applicable Warrant Price multiplied by a
fraction, the numerator of which shall be the Warrant Price in effect
immediately prior to such adjustment and the denominator of which shall be the
exercise price in effect immediately after such adjustment.

            (c) Anything in this Section 3 to the contrary notwithstanding, no
adjustment in the Warrant Price shall be made in connection with:
<PAGE>   6
            (i) the grant, issuance or exercise of any Convertible Securities
            pursuant to the Company's qualified or non-qualified Employee Stock
            Option Plans or any other bona fide employee benefit plan or
            incentive arrangement, adopted or approved by the Company's Board of
            Directors or approved by the Company's shareholders, as may be
            amended from time to time, or under any other bona fide employee
            benefit plan hereafter adopted by the Company's Board of Directors;
            or

            (ii) the grant, issuance or exercise of any Convertible Securities
            in connection with the hire or retention of any officer, director or
            key employee of the Company, provided such grant is approved by the
            Company's Board of Directors; or

            (iii) the issuance of any shares of Common Stock pursuant to the
            grant or exercise of Convertible Securities outstanding as of the
            date hereof (exclusive of any subsequent amendments thereto).

            (d) For the purpose of subsection 3(b), the following provisions
shall also be applied:

            (i) In case of the issuance or sale of additional shares of Common
            Stock for cash, the consideration received by the Company therefor
            shall be deemed to be the amount of cash received by the Company for
            such shares, before deducting therefrom any commissions,
            compensation or other expenses paid or incurred by the Company for
            any underwriting of, or otherwise in connection with, the issuance
            or sale of such shares.

            (ii) In the case of the issuance of Convertible Securities, the
            consideration received by the Company therefor shall be deemed to be
            the amount of cash, if any, received by the Company for the issuance
            of such rights or options, plus the minimum amounts of cash and fair
            value of other consideration, if any, payable to the Company upon
            the exercise of such rights or options or payable to the Company
            upon conversion of such Convertible Securities.

            (iii) In the case of the issuance of shares of Common Stock or
            Convertible Securities for a consideration in whole or in part,
            other than cash, the consideration other than cash shall be deemed
            to be the fair market value thereof as reasonably determined in good
            faith by the Board of Directors of the Company (irrespective of
            accounting treatment thereof); provided, however, that if such
            consideration consists of the cancellation of debt issued by the
            Company, the consideration shall be deemed to be the amount the
            Company received upon issuance of such debt (gross proceeds) plus
            accrued interest and, in the case of original issue discount or zero
            coupon indebtedness, accrued value to the date of such cancellation,
            but not including any premium or discount at which the debt may then
            be trading or which might otherwise be appropriate for such class of
            debt.

            (iv) In case of the issuance of additional shares of Common Stock
            upon the conversion or exchange of any obligations (other than
            Convertible Securities), the amount of the consideration received by
            the Company for such Common Stock
<PAGE>   7
            shall be deemed to be the consideration received by the Company for
            such obligations or shares so converted or exchanged, before
            deducting from such consideration so received by the Company any
            expenses or commissions or compensation incurred or paid by the
            Company for any underwriting of, or otherwise in connection with,
            the issuance or sale of such obligations or shares, plus any
            consideration received by the Company in connection with such
            conversion or exchange other than a payment in adjustment of
            interest and dividends. If obligations or shares of the same class
            or series of a class as the obligations or shares so converted or
            exchanged have been originally issued for different amounts of
            consideration, then the amount of consideration received by the
            Company upon the original issuance of each of the obligations or
            shares so converted or exchange shall be deemed to be the average
            amount of the consideration received by the Company upon the
            original issuance of all such obligations or shares. The amount of
            consideration received by the Company upon the original issuance of
            the obligations or shares so converted or exchanged and the amount
            of the consideration, if any, other than such obligations or shares,
            received by the Company upon such conversion or exchange shall be
            determined in the same manner as provided in paragraphs (i) and (ii)
            above with respect to the consideration received by the Company in
            case of the issuance of additional shares of Common Stock or
            Convertible Securities.

            (v) In the case of the issuance of additional shares of Common Stock
            as a dividend, the aggregate number of shares of Common Stock issued
            in payment of such dividend shall be deemed to have been issued at
            the close of business on the record date fixed for the determination
            of stockholders entitled to such dividend and shall be deemed to
            have been issued without consideration; provided, however, that if
            the Company, after fixing such record date, shall legally abandon
            its plan to so issue Common Stock as a dividend, no adjustment of
            the Applicable Conversion Price shall be required by reason of the
            fixing of such record date.

            (e) For purposes of the adjustment provided for in subsection 3(b)
above, if at any time the Company shall issue any Convertible Securities, the
Company shall be deemed to have issued at the time of the issuance of such
Convertible Securities the maximum number of shares of Common Stock issuable
upon conversion of the total amount of such Convertible Securities.

            (f) On the expiration, cancellation or redemption of any Convertible
Securities, the Warrant Price then in effect hereunder shall forthwith be
readjusted to such Warrant Price as would have been obtained (a) had the
adjustments made upon the issuance or sale of such expired, canceled or redeemed
Convertible Securities been made upon the basis of the issuance of only the
number of shares of Common Stock theretofore actually delivered upon the
exercise or conversion of such Convertible Securities (and the total
consideration received therefor) and (b) had all subsequent adjustments been
made on only the basis of the Warrant Price as readjusted under this subsection
3(f) for all transactions (which would have affected such adjusted Warrant
Price) made after the issuance or sale of such Convertible Securities.

            (g) Anything in this Section 3 to the contrary notwithstanding, no
adjustment in the Warrant Price shall be required unless such adjustment would
require an increase or decrease of at least 1% in such Warrant Price; provided,
however, that any adjustments which by
<PAGE>   8
reason of this subsection 3(g) are not required to be made shall be carried
forward and taken into account in making subsequent adjustments. All
calculations under this Section 3 shall be made to the nearest cent.

            (h) If, at any time while this Warrant is outstanding, the Company
shall pay any dividend payable in cash or in Common Stock, shall offer to the
holders of its Common Stock for subscription or purchase by them any shares of
stock of any class or any other rights, shall enter into an agreement to merge
or consolidate with another corporation, shall propose any capital
reorganization or reclassification of the capital stock of the Company,
including any subdivision or combination of its outstanding shares of Common
Stock or there shall be contemplated a voluntary or involuntary dissolution,
liquidation or winding up of the Company, the Company shall cause notice thereof
to be mailed to the registered holder of this Warrant at its address appearing
on the registration books of the Company, at least thirty (30) days prior to the
record date as of which holders of Common Stock shall participate in such
dividend, distribution or subscription or other rights or at least thirty (30)
days prior to the effective date of the merger, consolidation, reorganization,
reclassification or dissolution. Upon any adjustment of any Warrant Price, then
and in each such case the Company shall promptly deliver a notice to the
registered holder of this Warrant, which notice shall state the Warrant Price
resulting from such adjustment, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.

            (i) If the Company is a party to a merger or other transaction which
reclassifies or changes its outstanding Common Stock, upon consummation of such
transaction this Warrant shall automatically become exercisable for the kind and
amount of securities, cash or other assets which the holder of this Warrant
would have owned immediately after such transaction if the holder had converted
this Warrant at the Warrant Price in effect immediately before the effective
date of the transaction. Concurrently with the consummation of such transaction,
the person obligated to issue securities or deliver cash or other assets upon
exercise of this Warrant shall execute and deliver to the holder a supplemental
Warrant so providing and further providing for adjustments which shall be as
nearly equivalent as may be practical to the adjustments provided in this
Section 3. The successor company shall mail to the holder a notice describing
the supplemental Warrant.

            If securities deliverable upon exercise of this Warrant, as provided
above, are themselves convertible into or exercisable for the securities of an
affiliate of a corporation formed, surviving or otherwise affected by the merger
or other transaction, that issuer shall join in the supplemental Warrant which
shall so provide. If this subsection 3(i) applies, subsection 3(a) does not
apply.

            4. Charges, Taxes and Expenses. The issuance of certificates for
Warrant Shares upon any exercise of this Warrant shall be made without charge to
the holder of this Warrant for any tax or other expense in respect to the
issuance of such certificates, all of which taxes and expenses shall be paid by
the Company, and such certificates shall be issued only in the name of the
holder of this Warrant.

            5. Miscellaneous.

                  (a) The terms of this Warrant shall be binding upon and shall
inure to the benefit of any successors or assigns of the Company and of the
holder or holders hereof and
<PAGE>   9
of the shares of Common Stock issued or issuable upon the exercise hereof.

                  (b) No holder of this Warrant, as such, shall be entitled to
vote or receive dividends or be deemed to be a stockholder of the Company for
any purpose, nor shall anything contained in this Warrant be construed to confer
upon the holder of this Warrant, as such, any rights of a stockholder of the
Company or any right to vote, give or withhold consent to any corporate action,
receive notice of meetings, receive dividends or subscription rights, or
otherwise.

                  (c) Receipt of this Warrant by the holder hereof shall
constitute acceptance of an agreement to the foregoing terms and conditions.

                  (d) The Warrant and the performance of the parties hereunder
shall be construed and interpreted in accordance with the laws of the State of
New York without giving effect to its conflict of laws rules wherein it was
negotiated and executed and the parties hereunder consent and agree that the
State and Federal Courts which sit in the State of New York and the County of
New York shall have exclusive jurisdiction with respect to all controversies and
disputes arising hereunder.

                  (e) This Warrant is subject to certain provisions contained in
the Debenture and Warrant Purchase Agreement dated May 26, 1999 among the
Company and various other parties, (including, without limitation, the
registration rights provisions of Article XI thereof) copies of which are on
file with the Secretary of the Company. Shares issued upon exercise of this
Warrant shall contain a legend substantially to the same effect as the legend
set forth on the first page of this Warrant.

            IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
by its duly authorized officer and its corporate seal to be affixed hereto.

Dated as of May 26, 1999

                                    HALSEY DRUG CO., INC.

                                    BY:
                                          ---------------------
                                          Name: Michael Reicher
                                          Title: President
<PAGE>   10
                                SUBSCRIPTION FORM

                    (TO BE EXECUTED BY THE REGISTERED HOLDER
                     IF HE DESIRES TO EXERCISE THE WARRANT)

      TO:   HALSEY DRUG CO., INC.

            The undersigned hereby exercises the right to purchase _________
shares of Common Stock, par value $.01 per share, covered by the attached
Warrant in accordance with the terms and conditions thereof, and herewith makes
payment of the Warrant Price for such shares in full.

                                    SIGNATURE

                                     ADDRESS

DATED:_____________
<PAGE>   11
                   NOTICE OF EXERCISE OF COMMON STOCK WARRANT
             PURSUANT TO NET ISSUE ("CASHLESS") EXERCISE PROVISIONS

<TABLE>
<CAPTION>
                                                       [ Date ]
----------------------------------------------------------------------------
<S>                                <C>                                   <C>
                                   Aggregate Price of                 $
Halsey Drug Co., Inc.
a New York corporation             of Warrant
695 N. Perryville Road             Aggregate Price
                                   Being
Rockford, Illinois 61107           Exercised:                         $
Attention:______________

                                   Warrant Price
                                   (per share):                       $

                                   Market Value
                                   (per share):                       $

                                   Number of Shares
                                   of Common Stock
                                   under this
                                   Warrant:

                                   Number of Shares
                                   of Common Stock
                                   to be Issued
                                   Under this
                                   Notice:
</TABLE>

                                CASHLESS EXERCISE

Gentlemen:

            The undersigned, the registered holder of the Warrant to Purchase
Common Stock delivered herewith ("Warrant"), hereby irrevocably exercises such
Warrant for, and purchases thereunder, shares of the Common Stock of HALSEY DRUG
CO., INC., a New York corporation, as provided below. Capitalized terms used
herein, unless otherwise defined herein, shall have the meanings given in the
Warrant. The portion of the Aggregate Price (as hereinafter defined) to be
applied toward the purchase of Common Stock pursuant to this Notice of Exercise
is $     , thereby leaving a remainder Aggregate Price (if any) equal to $    .
Such exercise shall be pursuant to the net issue exercise provisions of
Section 1(b) of the Warrant; therefore, the holder makes no payment with this
Notice of Exercise. The number of shares to be issued pursuant to this exercise
shall be determined by reference to the formula in Section 1(b) of the Warrant
which requires the use of the Market Value (as defined in Section 1(d) of the
Warrant) of the Company's Common Stock on the business day immediately
preceding the day on which this Notice is received by the Company. To the
extent the foregoing exercise is for less than the full Aggregate Price of the
Warrant, the remainder of the Warrant representing a number
<PAGE>   12
of Shares equal to the quotient obtained by dividing the remainder of the
Aggregate Price by the Warrant Price (and otherwise of like form, tenor and
effect) may be exercised under Section 1(a) of the Warrant. For purposes of this
Notice the term "Aggregate Price" means the product obtained by multiplying the
number of shares of Common Stock for which the Warrant is exercisable times the
Warrant Price.

                                    SIGNATURE

                                    Date:___________________
                                    Address
<PAGE>   13
                                   ASSIGNMENT

                    (TO BE EXECUTED BY THE REGISTERED HOLDER
                     IF HE DESIRES TO TRANSFER THE WARRANT)

            FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto the right to purchase shares of Common Stock of HALSEY DRUG CO.,
INC., evidenced by the within Warrant, and does hereby irrevocably constitute
and appoint ____________ Attorney to transfer the said Warrant on the books of
the Company, with full power of substitution.

                                    Signature

                                     Address

Dated:___________________

In the Presence of:

_________________________

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