<PAGE>1


                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                  SCHEDULE 13D

                    Under the Securities Exchange Act of 1934


                              HALSEY DRUG CO., INC.
                                (Name of Issuer)

                          COMMON STOCK, $.01 PAR VALUE
                         (Title of Class of Securities)

                                    406369108
                                 (CUSIP Number)

                             Mr. Daniel Schloendorn
                            Willkie Farr & Gallagher
                               One Citicorp Center
                              153 East 53rd Street
                          New York, New York 10022-4677
                                 (212) 821-8265
                       (Name, Address and Telephone Number
                     of Person Authorized to Receive Notices
                               and Communications)



                                November 27, 1995
                      (Date of Event which Requires Filing
                               of this Statement)


If the filing person has previously  filed a statement on Schedule 13G to report
the  acquisition  which is the subject of this  Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box |_|.


Check the following box if a fee is being paid with the statement |X|.



<PAGE>2




                                 SCHEDULE 13D

CUSIP No. 406369108

1.  NAME OF REPORTING PERSON
    S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON

         Mr. William W. Priest

2.  CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP*
                                                            a[ ]
                                                            b[ ]
3.  SEC USE ONLY

4.  SOURCE OF FUNDS*
         PF

5.  CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
    PURSUANT TO ITEMS 2(d) OR 2(e)                           [ ]

6.  CITIZENSHIP OR PLACE OF ORGANIZATION
         United States

                    7.  SOLE VOTING POWER

                         540,500

 NUMBER OF          8.  SHARED VOTING POWER
  SHARES
BENEFICIALLY             0
 OWNED BY
   EACH             9.  SOLE DISPOSITIVE POWER
 REPORTING
  PERSON                 540,500
   WITH
                   10.  SHARED DISPOSITIVE POWER

                         0

11.  AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
          540,500

12.  CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES
     CERTAIN SHARES*                                         [ ]

13.  PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
          5.4%

14.  TYPE OF REPORTING PERSON*
                  IN


<PAGE>3




Item 1.           Security and Issuer.

                  This statement relates to the Common Stock, par value $.01 per
share (the  "Common  Stock" or the  "Shares"),  of Halsey  Drug Co.,  Inc.  (the
"Company"),  which has its principal  executive  offices at 1827 Pacific Street,
Brooklyn, New York 11233.

Item 2. Identity and Background.

                  This statement is being filed by Mr. William W. Priest ("Mr.
Priest").  The business address of Mr. Priest is c/o BEA Associates, One
Citicorp Center, 153 East 53rd Street, New York, New York 10022.  Mr.  Priest
is Chief Executive Officer of BEA Associates, an investment management firm.

                  Mr. Priest has not, during the last five years, been convicted
in a criminal proceeding (excluding traffic violations or similar misdemeanors),
nor  has Mr.  Priest,  during  the  last  five  years,  been a party  to a civil
proceeding of a judicial or administrative  body of competent  jurisdiction as a
result  of which he was or is  subject  to a  judgment,  decree  or final  order
enjoining future violations of, or prohibiting or mandating  activities  subject
to,  federal or state  securities  laws or finding any violation with respect to
such laws.

                  Mr. Priest is a citizen of the United States.

Item 3.  Source and Amount of Funds or Other Consideration.
                  Pursuant  to a  Subscription  Agreement,  dated as of July 13,
1995 (the  "July  Subscription  Agreement,"  a copy of which is filed  with this
Schedule 13D as Exhibit 1 and incorporated herein


<PAGE>4


by  reference),  between  Mr.  Priest  and the  Company,  Mr.  Priest  agreed to
subscribe  for 50 units of the  Company  (the  "July  Units"),  each  such  unit
consisting of a 10% Convertible  Subordinated  Debenture in the principal amount
of $10,000  (each,  a  "Debenture")  and 750  Redeemable  Common Stock  Purchase
Warrants  (each, a "Warrant"),  for an aggregate  purchase price of $500,000.  A
copy of the Debenture purchased pursuant to the July Subscription  Agreement, in
the principal amount of $500,000 (the "July  Debenture"),  is attached hereto as
Exhibit  2  and  incorporated  herein  by  reference.  A  copy  of  the  Warrant
Certificate  issued  pursuant  to the July  Subscription  Agreement  (the  "July
Warrant") is attached hereto as Exhibit 3 and incorporated herein by reference.

                  Pursuant to a Subscription Agreement, dated as of November 27,
1995 (the "November Subscription  Agreement," a copy of which is filed with this
Schedule 13D as Exhibit 4 and  incorporated  herein by  reference),  between Mr.
Priest and the  Company,  Mr.  Priest  agreed to  subscribe  for 55 units of the
Company (the "November  Units" and,  together with the July Units, the "Units"),
each such unit  consisting of a 10%  Convertible  Subordinated  Debenture in the
principal amount of $10,000 and 750 Warrants, for an aggregate purchase price of
$550,000.   A  copy  of  the  Debenture   purchased  pursuant  to  the  November
Subscription  Agreement,  in the  principal  amount of $550,000  (the  "November
Debenture"), is attached hereto as Exhibit 5 and incorporated


<PAGE>5


herein by reference.  A copy of the Warrant  Certificate  issued pursuant to the
November  Subscription  Agreement (the "November Warrant") is attached hereto as
Exhibit 6 and incorporated herein by reference.

                  On March 18, 1996,  Mr. Priest  exercised (i) the July Warrant
for  37,500  Shares  at an  aggregate  exercise  price of  $75,000  and (ii) the
November Warrant for 33,000 Shares at an aggregate exercise price of $82,500. On
July 18, 1996, pursuant to Section 8.2 of the July Debenture, the July Debenture
automatically  converted  into  250,000  shares of Common  Stock at a conversion
price of $2.00 per share.

                  At the election of Mr. Priest, all or any part of the November
Debenture may be converted into Common Stock at a conversion  price of $2.50 per
Share,  subject to adjustment as more fully set forth in the November Debenture,
until the earlier of (i) November 28, 2000,  (ii) receipt by Mr. Priest from the
Company of Notice of Redemption (as defined in the November Debenture) and (iii)
the automatic  conversion of the November  Debenture in accordance  with Section
8.2 of the November Debenture.

                  The foregoing  summaries of the July  Subscription  Agreement,
the July Debenture,  the July Warrant, the November Subscription Agreement,  the
November  Debenture and the November  Warrant are qualified in their entirety by
reference to such documents, copies of which have been filed as Exhibits hereto.



<PAGE>6


                  As of the date hereof,  Mr. Priest  beneficially owned 540,500
shares of Common Stock, comprised of (i) 37,500 shares of Common Stock purchased
upon exercise of the July Warrant,  (ii) 33,000 shares of Common Stock purchased
upon  exercise of the November  Warrant,  (iii)  250,000  Shares issued upon the
automatic conversion of the July Debenture and (iv) 220,000 Shares issuable upon
conversion of the November  Debenture at the current  conversion  price of $2.50
per Share.


Item 4. Purpose of Transaction.

                  Mr.  Priest  purchased the Units in order to acquire an equity
interest in the Company. Pursuant to Section 5.14 of the November Debenture, the
Company  has  agreed to use its best  efforts to cause the  election  of two (2)
members of the Board of Directors of the Company  reasonably  acceptable  to the
holders of a majority in interest in the principal amount of the Debentures. The
holders of a majority  in interest in the  principal  amount of the  Debentures,
including  Mr.  Priest,  have  exercised  their rights under Section 5.14 of the
November Debenture by selecting Mr. Richard H. Francis and Mr. William G. Skelly
for election as members of the Board of Directors.

                  As of the date hereof,  Mr. Priest is holding the Common Stock
and  November  Debenture  solely  for  investment  and has no  present  plans or
proposals  with  respect to any  material  change in the  Company's  business or
corporate structure or, generally,  any other action referred to in instructions
(a)  through  (j) of Item 4 of the form of  Schedule  13D.  Depending  on market
conditions


<PAGE>7


and other  factors,  Mr. Priest may continue  purchases of Common Stock or other
equity  securities  of the  Company or may sell or  otherwise  dispose of all or
portions of such  securities,  if such sales and  purchases  would be  desirable
investments.


Item 5. Interest in Securities of the Issuer.

                  As of the date  hereof,  Mr.  Priest  beneficially  owned  the
aggregate number and percentage of outstanding Common Stock set forth below:

                  Number of Shares                   Percentage
                  540,500(1)                         5.4%(2)

                  Except as set forth within, no transactions in the securities
of the Company were effected by Mr. Priest within the period beginning 60 days
prior to November 27, 1995 and ending on the date of this filing.

Item 6.  Contracts, Arrangements, Understandings or Relationships with Respect
         to Securities of the Issuer.

                  Pursuant to the July  Subscription  Agreement described  more
fully in Item 3 above,  which  agreement is filed as Exhibit 1 to this
Schedule 13D, Mr. Priest purchased (i) the July Debenture,  which automatically
converted into 250,000 shares of

- -----------------------------------
(1)      As to all Shares, there is sole voting power and sole power to
         dispose or to direct the disposition of such Shares.

(2)      Based on 10,058,353  shares of Common Stock deemed  outstanding  on
         the date hereof,  derived from the sum of (a) 9,588,353 Shares as
         indicated in the  Company's  Form 10-Q for the  quarterly  period
         ended June 30, 1996,  (b) 250,000 Shares yet to be issued as a result
         of the automatic conversion of the July Debenture and (c) 220,000
         Shares  issuable upon conversion of the November Debenture.


<PAGE>8


Common Stock, and (ii) the July Warrant, which Mr. Priest exercised for 37,500
shares of Common Stock.

                  Pursuant to the November Subscription Agreement described
         more fully in Item 3 above, which agreement is filed as Exhibit 4 to
this Schedule  13D, Mr. Priest  purchased (i) the November  Debenture,  which
is  convertible  into  220,000  shares of Common Stock,  and (ii) the November
Warrant,  which Mr.  Priest  exercised for 33,000 shares of Common Stock.

                  Except as otherwise set forth in this  statement,  to the best
knowledge   of  the   undersigned,   there  are  no   contracts,   arrangements,
understandings  or  relationships  (legal or  otherwise)  among or  between  the
undersigned  and any other person with respect to any securities of the Company,
including  but not  limited  to  transfer  or voting  of any of the  securities,
finder's  fees,  joint  ventures,  loan or option  arrangements,  puts or calls,
guarantees of profits, division of profits or loss, or the giving or withholding
of proxies.

Item 7.  Material to be Filed as Exhibits.

         Exhibit 1.          Subscription Agreement, dated July 13,
                             1995, by and between Mr. Priest and the
                             Company.

         Exhibit 2.          10% Convertible  Subordinated  Debenture,
                             dated  July 18,  1995,  due  July 17,  2000,
                             executed  by the  Company  in  favor  of Mr.
                             Priest in the aggregate  principal amount of
                             $500,000.

         Exhibit 3.          Redeemable  Common Stock Purchase Warrant
                             Certificate,   dated  July  18,   1995,   to
                             purchase  from the Company  37,500 shares of
                             Common Stock.

         Exhibit 4.          Subscription Agreement, dated November 27,
                             1995, by and between Mr. Priest and the
                             Company.



<PAGE>9



         Exhibit 5.          10% Convertible  Subordinated  Debenture,
                             dated  November 29,  1995,  due November 28,
                             2000,  executed  by the  Company in favor of
                             Mr. Priest in the aggregate principal amount
                             of $550,000.

         Exhibit 6.          Redeemable  Common Stock Purchase Warrant
                             Certificate,  dated  November 29,  1995,  to
                             purchase  from the Company  33,000 shares of
                             Common Stock.




<PAGE>10




                  After reasonable  inquiry and to the best knowledge and
belief of the undersigned,  the undersigned certifies that the information set
forth in this statement is true, complete and correct.

Date:    September 5, 1996


                                              /s/ William W. Priest
                                              William W. Priest



<PAGE>11






                                  Exhibit Index

Exhibit

Exhibit 1.       Subscription Agreement, dated July 13, 1995,
                 by and between Mr. Priest and the Company.

Exhibit 2.       10% Convertible  Subordinated  Debenture,
                 dated  July 18,  1995,  due  July 17,  2000,
                 executed  by the  Company  in  favor  of Mr.
                 Priest in the aggregate  principal amount of
                 $500,000.

Exhibit 3.       Redeemable  Common Stock Purchase Warrant
                 Certificate,   dated  July  18,   1995,   to
                 purchase  from the Company  37,500 shares of
                 Common Stock.

Exhibit 4.       Subscription Agreement, dated November 27,
                 1995, by and between Mr. Priest and the Company.

Exhibit 5.       10% Convertible  Subordinated  Debenture,
                 dated  November 29,  1995,  due November 28,
                 2000,  executed  by the  Company in favor of
                 Mr. Priest in the aggregate principal amount
                 of $550,000.

Exhibit 6.       Redeemable  Common Stock Purchase Warrant
                 Certificate,  dated  November 29,  1995,  to
                 purchase  from the Company  33,000 shares of
                 Common Stock.











<PAGE>1
                              HALSEY DRUG CO., INC.

                             SUBSCRIPTION AGREEMENT


To:              Halsey Drug Co., Inc.
                 1827 Pacific Street
                 Brooklyn, New York 11233
                 Attention:  Rosendo Ferran,
                        President and CEO

                  1. The  undersigned  hereby  subscribes for 50 Units,  each
Unit  consisting of a 10%  Convertible  Subordinated  Debenture in the principal
amount of $10,000 (each a "Debenture") and 750 Redeemable  Common Stock Purchase
Warrants (the "Warrants") of Halsey Drug Co., Inc. (the "Company"),  which Units
are offered pursuant to the Company's Private Placement  Memorandum,  dated June
29, 1995 (the  "Memorandum").  Each Unit is offered at a  subscription  price of
$10,000, and the minimum subscription is one Unit per investor.  The undersigned
delivers  herewith  the full  subscription  price for the Units  subscribed  for
herein.

                  The undersigned  agrees that this subscription is and shall be
irrevocable,  but that it may be rejected,  in whole or in part, by the Company,
0and that the  obligations of the  undersigned  hereunder will terminate if this
subscription is not accepted by the Company.  The undersigned  understands  that
the Company will notify  him/it if this  subscription  has been rejected for any
reason. If this subscription is rejected, the payment tendered by him/it will be
returned  to
  him/it   forthwith,   without  interest  or  deduction.   If  this
subscription is accepted by the Company,  the amount of the payment  tendered by
him/it  will be  applied in  accordance  with the  description  set forth in the
Memorandum.

                  2. The  undersigned  understands and agrees that an investment
in  the  Units  is not a  liquid  investment.  In  particular,  the  undersigned
recognizes, acknowledges and agrees that:

                    (a)  The   undersigned   must  bear  the  economic  risk  of
investment  in the Units for an  indefinite  period of time,  since  neither the
Units, the Debentures nor the Warrants have been registered under the Securities
Act of 1933, as amended (the "Act") or applicable  state securities laws ("State
Acts"),  and,  therefore,  cannot be  transferred or sold unless either they are
subsequently registered under the Act and applicable State Acts, or an exemption
from registration is available and a favorable opinion of counsel to that effect
is obtained.






                                       1

<PAGE>2


                    (b) The  undersigned  will only have those limited rights to
register the Common Stock  underlying  the Debentures and the Warrants under the
Act and  applicable  State Acts as are provided in the  Memorandum  to which the
undersigned and the Company hereby agree.

                    (c) There is presently no established  public market for the
Units,  the Debentures or the Warrants and the holders of the Debentures and the
Warrants have no registration rights with respect to such securities.

                  3. The  undersigned  represents to and agrees with the Company
that:

                    (a) The undersigned and his/its purchaser representative(s),
if  any,  have  carefully  reviewed  and  understand  the  risks  of  and  other
considerations relating to a purchase of the Units.

                    (b) The undersigned and his/its purchaser representative(s),
if any, have been afforded the opportunity to obtain any  information  necessary
to verify the accuracy of any  representations  or information  set forth in the
Memorandum and have had all of their inquiries to the Company  answered in full,
and have been  furnished all requested  materials  relating to the Company,  the
offering and sale of the Units and any other matter described in the Memorandum.

                    (c)  Neither   the   undersigned   nor   his/its   purchaser
representative(s),  if any, have been  furnished any offering  literature by the
Company,  the Placement Agent or any of their affiliates,  associates or agents,
other than the  Memorandum  and the  exhibits  and  attachments  thereto and the
undersigned has not received or heard any print or electronic media  advertising
with respect to this Offering.

                    (d) The  undersigned  is acquiring the Units for which he/it
hereby subscribes as principal for his/its own investment  account,  and not (1)
with a view to the resale or  distribution  of all or any part thereof or (2) on
behalf of another person who has not made the foregoing representation.

                    (e) The undersigned is an accredited investor, as defined in
Rule 501(a) of  Regulation  D  promulgated  pursuant to the Act by virtue of the
fact that (initial applicable choices):

                  __X___ (i) The undersigned had individual income (exclusive of
                  any income  attributable  to spouse) of more than  $200,000 in
                  each of the most  recent  two years or joint  income  with the
                  undersigned's spouse in excess of



                                       2

<PAGE>3




                  $300,000 in each of such years and reasonably  expects to have
                  income of at least the same level for the current year.

                  __X___ (ii) The  undersigned has an individual net worth, or a
                  combined net worth with the undersigned's spouse, in excess of
                  $1,000,000.  For  purposes  of  this  Subscription  Agreement,
                  "individual  net worth"  means the  excess of total  assets at
                  fair market value, including home and personal property,  over
                  total liabilities.

                  ______  (iii)  The  undersigned  is a  director  or  executive
                  officer of the Company.

                  Accredited  partnership,  corporation,  trust or other  entity
                  investors   must  initial  at  least  one  of  the   following
                  statements.

                  ______  (iv) The  undersigned  is a bank as defined in section
                  3(a)(2) of the Act, or a savings and loan association or other
                  institution  as  defined  in  section  3(a)(5)(A)  of the  Act
                  whether  acting in its  individual  or fiduciary  capacity;  a
                  broker or dealer  registered  pursuant  to  section  15 of the
                  Securities  Exchange  Act of 1934;  an  insurance  company  as
                  defined in section  2(13) of the Act;  an  investment  company
                  registered  under  the  Investment  Company  Act of  1940 or a
                  business development company as defined in section 2(a)(48) of
                  the Act; a Small Business  Investment  Company licensed by the
                  U.S. Small Business Administration under section 301(c) or (d)
                  of  the  Small  Business   Investment  Act  of  1958;  a  plan
                  established   and   maintained  by  a  state,   its  political
                  subdivisions,  or any agency or  instrumentality of a state or
                  its political  subdivisions,  for the benefit of its employees
                  if such plan has total  assets  in  excess of  $5,000,000;  an
                  employee  benefit  plan  within the  meaning  of the  Employee
                  Retirement  Income  Security  Act of  1974  if the  investment
                  decision  is made by a plan  fiduciary,  as defined in section
                  3(21) of such Act,  which is either a bank,  savings  and loan
                  association,   insurance  company,  or  registered  investment
                  adviser,  or if the employee  benefit plan has total assets in
                  excess  of  $5,000,000,  or,  if a  self-directed  plan,  with
                  investment   decisions   made  solely  by  persons   that  are
                  accredited investors.

                  ______ (v) The undersigned is a private  business  development
                  company as defined in  section  202(a)(22)  of the  Investment
                  Advisers Act of 1940.





                                       3

<PAGE>4



                  ______ (vi) The  undersigned is an  organization  described in
                  section  501(c)(3) of the Internal Revenue Code,  corporation,
                  Massachusetts or similar  business trust, or partnership,  not
                  formed of the  specific  purpose of acquiring  the  securities
                  offered, with total assets in excess of $5,000,000.

                  ______ (vii) The undersigned is a trust,  with total assets in
                  excess of $5,000,000,  not formed for the specific  purpose of
                  acquiring the securities  offered,  whose purchase is directed
                  by a sophisticated  person as described in Rule  506(b)(2)(ii)
                  of Regulation D.

                  ______  (viii)  All of the  equity  owners of the  undersigned
                  qualify as accredited  investors  under one of the  statements
                  set forth above.

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

                    (g) The undersigned  understands the fundamental  aspects of
and  risks  involved  in  an  investment  in  the  Company,  including  (1)  the
speculative  nature  of the  investment,  (2) the  financial  hazards  involved,
including  the risk of losing the entire  investment,  (3) the lack of liquidity
and the  restrictions on  transferability  of the Units, (4) the business of the
Company,  (5)  the  limited  registration  rights  regarding  the  Common  Stock
underlying the  Debentures  and the Warrants,  and (6) the fact that the Company
has a recent  history of losses,  limited  capital  resources  and will  require
additional financing within the next 12 months.

                    (h) The  address  set  forth on the  Subscription  Agreement
Signature Page hereof is the undersigned's  true and correct principal  address,
and the undersigned has no present intention of becoming a resident of any other
state or jurisdiction.

                    (i) The undersigned, if a corporation, partnership, trust or
other form of business entity, (1) is authorized and otherwise duly qualified to
purchase  and hold the Units,  (2) has its  principal  place of  business at its
residence address set forth on the Subscription Agreement Signature Page hereof,
(3) has not been formed for the specific purpose of acquiring the Units, and (4)
has submitted and executed all documents  required  pursuant to the  Certificate
for Corporate,  Partnership, Trust and Joint Purchasers and Special Subscription
Instructions.  The person  executing this  Subscription  Agreement and all other
documents  related to the offering hereby  represents that he is duly authorized
to execute all such documents on behalf of the entity. IF THE UNDERSIGNED IS ONE
OF THE AFOREMENTIONED ENTITIES, IT HEREBY



                                       4

<PAGE>5




AGREES TO SUPPLY ANY ADDITIONAL WRITTEN  INFORMATION THAT MAY BE REQUIRED BY THE
COMPANY.




                    (j)  All  of  the  information   that  the  undersigned  has
heretofore furnished to the Company, or that is set forth herein with respect to
himself/itself,  his/its financial position, and his/its business and investment
experience,  is correct and complete as of the date hereof, and, if there should
be any material change in such  information  prior to the closing of the sale of
the Units,  the undersigned  will  immediately  furnish the revised or corrected
information to the Company.

                    (k) The  undersigned  agrees to be bound by all of the terms
and conditions of the offering made by the Memorandum and the exhibits thereto.

                    (l) No person other than the undersigned  will have a direct
or indirect interest in the Units subscribed for hereby.

                    (m) The undersigned consents to the placement of a legend on
any certificate or other document  evidencing the Debentures and the Warrants as
well as the Common Stock  issuable  upon  conversion of the  Debentures  and the
Warrants  stating that they have not been  registered  under the Act and setting
forth or referring to the restrictions on transferability and sale thereof.  The
undersigned  is aware that the Company  will make a notation in its  appropriate
records  with  respect  to the  restrictions  on  the  transferability  of  such
securities.

                    (n) The undersigned understands that the Company will review
this Subscription  Agreement and is hereby given authority by the undersigned to
call  his/its bank or place of  employment  or  otherwise  review the  financial
standing of the undersigned;  and it is further agreed that the Company reserves
the  unrestricted  right to reject or limit in whole or in part any subscription
and to close the offer at any time.

                    (o) Wisconsin  Residents.  In making an investment  decision
investors must rely on their own  examination of the issuer and the terms of the
offering,  including the merits and risks  involved.  These  securities have not
been  recommended  by any federal or state  securities  commission or regulatory
authority.  Furthermore,  the  foregoing  authorities  have  not  confirmed  the
accuracy of this  document.  Any  representation  to the  contrary is a criminal
offense.

These securities are subject to restrictions on  transferability  and resale and
may not be transferred or resold except as permitted under the securities act of
1933, as amended, and the applicable state



                                       5

<PAGE>6




securities  laws,  pursuant to  registration or exemption  therefrom.  Investors
should be aware that they may be  required to bear the  financial  risks of this
investment for an indefinite period of time.

                    (p) Connecticut Residents. The undersigned acknowledges that
the  Units  and the  Component  securities  have not been  registered  under the
Connecticut  Uniform  Securities Act, as amended (the "Connecticut Act") and are
subject to restrictions on  transferability  and sale of securities as set forth
herein.  The  undersigned  hereby  agrees  that  such  securities  will  not  be
transferred or sold without  registration under the Connecticut Act or exemption
therefrom.

                    (q) Colorado  Residents.  The undersigned  acknowledges that
the  Units  and the  component  securities  have not been  registered  under the
Colorado  Securities Act (the "Colorado  Act"),  and therefore cannot be sold or
transferred  by the investor  except in a transaction  which is exempt under the
Colorado Act or pursuant to an effective registration thereunder.

                    (r) Florida  Residents.  As  described  in the  introductory
pages of the Memorandum,  Florida investors have, under certain circumstances, a
right  of  recision  pursuant  to  Section   517.061(11)(a)(5)  of  the  Florida
Securities and Investor Protection Act.

                    (s) Massachusetts  Residents.  The undersigned  acknowledges
that the Units and the component  securities have not been registered  under the
Securities Act of 1933, as amended, or the Massachusetts Uniform Securities Act,
by reason of specific exemptions thereunder relating to the limited availability
of the  offering.  Such  securities  cannot be sold,  transferred  or  otherwise
disposed of to any person or entity  unless  subsequently  registered  under the
Securities Act of 1933, as amended, or the Massachusetts Securities Act, if such
registration  is required.  Commonwealth  accredited  investors  who are natural
persons,  shall not invest more than 25% of the purchaser's net worth (excluding
principal  residence  and its  furnishings).  The  purchaser's  net worth  shall
include the net worth of his or her spouse.

                    (t) New Jersey Residents.  The undersigned acknowledges that
the Units and the component  securities offered hereby have not been approved or
disapproved  by the Bureau of  Securities of the State of New Jersey nor has the
Bureau passed on or endorsed the merits of this offering.  Any representation to
the contrary is unlawful.

                    (u) New York Residents. Each New York purchaser of the Units
understands  that this offering of Units of the Company has not been reviewed by
the attorney general of the State of New York. The undersigned  understands that
any  offering  literature  used in  connection  with this  offering has not been
pre-filed  with the attorney  general and has not been  reviewed by the attorney
general prior to its use. The attorney general of the state of New York



                                       6

<PAGE>7




has not passed on or endorsed the merits of this offering. Any representation to
the contrary is unlawful.  The Units are being  purchased for the  undersigned's
own account for investment,  and not for  distribution or resale to others.  The
undersigned  agrees that he will not sell or otherwise transfer the Units or the
component securities unless they are registered under the federal Securities Act
of 1933 or  unless  an  exemption  from  such  registration  is  available.  The
undersigned  represents  that he has adequate means of providing for his current
needs and possible personal contingencies, and that he has no need for liquidity
of this investment.

                    (v)   Pennsylvania   Residents.   The   undersigned   hereby
acknowledges that the Company is relying upon the exemption from registration of
Units set forth in Section 203(d) of the Pennsylvania Securities Act of 1972, as
amended (the "Pennsylvania Act") in connection with the sale of the Units to the
undersigned.  In  accordance  with the  requirements  of  Section  203(d) of the
Pennsylvania  Act, the  undersigned  hereby agrees not to sell his Units (or the
underlying  securities)  within  twelve (12)  months from the date of  purchase,
unless such Units,  (or the underlying  securities) are registered under the Act
and the Pennsylvania Act. Additionally, the undersigned is aware of the right of
withdrawal  under Section 207(m) of the  Pennsylvania Act described in the cover
pages of the Memorandum.

                    (w) Texas  Residents.  The undersigned  hereby  acknowledges
that the Units and the  component  securities  cannot  be sold  unless  they are
subsequently  registered  under the Securities Act of 1933, as amended,  and the
Texas  Securities  Act, or an exemption  from  registration  is  available.  The
undersigned  further  acknowledges  that because such securities are not readily
transferable, he must bear the economic risk of his investment for an indefinite
period of time.

                  4. The Terms of Subscription.

                    (a)  The  subscription  will  begin  as of the  date  of the
Memorandum  and will  terminate  at 11:59 p.m.  eastern  time on August 31, 1995
unless extended by the Company to September 30, 1995 (the  "Termination  Date").
The Units will be offered on a "best efforts"  basis; no minimum number of Units
will be required to be sold in the offering.  The Company  reserves the right in
its discretion, to offer and sell Units in excess of the maximum.

                    (b)  Pending  receipt and  acceptance  by the Company of all
subscription  documents and payment  (collected  funds) for the Debentures,  all
funds hereunder  shall be held by Weiss,  Peck & Greer of New York, New York, as
escrow agent, in a trust account. Upon such receipt and acceptance,  the Company
shall,  with  reasonable  promptness,  issue  and  mail  Units so  purchased  to
investors.  The Company will continue this procedure if, as and when  additional
Units are purchased,  until the earlier of (i) the Termination  Date or (ii) the
purchase of the maximum number of Units offered.  The Company reserves the right
to sell Units in excess of the maximum



                                       7

<PAGE>8




offered.  No minimum  number of Units  must be sold for the  Company to accept a
subscription under this offering.

                  5. The foregoing  representations  are true and accurate as of
the date  hereof,  shall be true and  accurate  as of the date of the closing of
this  offering,  and  shall  survive  such  closing.  If, in any  respect,  such
representations  shall not be true and accurate  prior to or upon the closing of
this  offering,  the  undersigned  shall give written notice of such fact to the
Company,  specifying  which  representations  are not true and  accurate and the
reasons therefor, with a copy to his/its purchaser representative(s), if any.

                 6. The  undersigned  agrees to indemnify  and hold harmless the
Company,  the Placement Agent, their affiliate and respective legal counsel, and
each of the officers,  directors,  partners and  shareholders  of each, from and
against any loss,  damage or liability  due to or arising out of a breach of any
of the foregoing representations.

                 7. If the  undersigned  is more than one person or entity,  the
obligations   of  the   undersigned   shall  be  joint  and   several   and  the
representations  and the  indemnification  obligation  herein contained shall be
deemed  to be made by and be  binding  upon  each  such  person  and his  heirs,
executors, administrators, successor and assigns.

                  8. This  subscription is not transferable or assignable by the
undersigned.

                  9. This subscription, upon acceptance by the Company, shall be
binding upon the heirs, executors, administrators, successors and assigns of the
undersigned.

                  10.  This   Subscription   Agreement  shall  be  construed  in
accordance  with and  governed  by the laws of the  State of New  York,  without
giving effect to conflict of laws principles.









                                       8

<PAGE>9


                              HALSEY DRUG CO., INC.


                      SUBSCRIPTION AGREEMENT SIGNATURE PAGE

                 The undersigned  hereby  subscribes for the number of Units set
forth below as described  in the Private  Placement  Memorandum,  dated June 29,
1995 issued by Halsey Drug Co., Inc., a corporation  organized under the laws of
the State of New York. The entire Subscription  Agreement,  of which this is the
Signature Page, is provided as Exhibit B to the Memorandum.

                    1.   Dated: July 13, 1995

                    2.   Number of Units:  50

                    3.   Subscription   Price   ($10,000   per   Unit,   minimum
                         Subscription, one (1) Unit): $500,000


William W. Priest
Name of Person/Entity Subscribing


/s/ William W. Priest                         289-38-2455
Signature of Subscriber                       Taxpayer Identification or
(and title, if applicable)                    Social Security Number



- ------------------------------                ---------------------------------
Signature of Joint Purchaser                  Taxpayer Identification or
(if any)                                      Social Security Number

Name and Residence Address                    Mailing Address, if Different
(Not Post Office Address)                     from Residence Address:



William W. Priest                             ---------------------------------
Name (please print)                           Name (please print)


2 E. 70th Street                              ---------------------------------
Number of Street                              Number and Street


New York, New York  10021                     ---------------------------------
City      State     Zip Code                  City      State     Zip Code




Subscription for 50 Units accepted as of July 13, 1995.



                              HALSEY DRUG CO., INC.


                              By:  /s/ Rosendo Ferran
                                 Name:   Rosendo Ferran
                                 Title:  President and Chief Executive Officer





<PAGE>1


THIS  CONVERTIBLE  SUBORDINATED  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  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.
                     10% Convertible Subordinated Debenture
                                Due July 17, 2000


$500,000                                                 No. DB-3
July 18, 1995


      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
William W. Priest  residing at 2 East 70th Street,  New York,  New York 10021 or
registered assigns (the "Payee" or "Holder") upon due presentation and surrender
of this Debenture,  on July 17, 2000 (the "Maturity Date"), the principal amount
of FIVE HUNDRED  THOUSAND
 AND 00/100  DOLLARS  ($500,000)  and accrued  interest
thereon as hereinafter provided.

      This  debenture  was issued by the Company  pursuant to a certain  Private
Placement  Memorandum dated June 29, 1995 (together with the Attachments thereto
the  "Private  Placement  Memorandum")  relating  to an  offering  of units (the
"Units"), each Unit consisting of a 10% Convertible  Subordinated Debenture (the
"Debentures") in the principal amount of $10,000 and 750 redeemable common stock
purchase warrants (the "Warrants").  The holders of such Debentures are referred
to hereinafter as the "Holders."






<PAGE>2










                                    ARTICLE I

              PAYMENT OF PRINCIPAL AND INTEREST; METHOD OF PAYMENT
              ----------------------------------------------------

      Payment of the principal 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 ten percent (10%) per annum (the "Stated Interest Rate"), in like
coin and  currency,  payable to the Payee in three (3) month  intervals  on each
September  30,  December  31,  March  31 and  June 30  during  the  term of this
Debenture  (commencing  September 30, 1995) (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.

                                    ARTICLE 2

                                  SUBORDINATION
                                  -------------

           2.1  Subordination  to Senior  Debt.  The  Company,  for itself,  its
successors and assigns,  covenants and agrees, and the Payee and each successive
Holder by acceptance of this Debenture,  likewise  covenants and agrees that the
payment of the principal of and interest on this  Debenture is  subordinated  in
right of  payment to the  payment of all  existing  and future  Senior  Debt (as
hereinafter  defined) of the  Company.  "Senior  Debt" means the  principal  of,
premium,  if any,  and accrued and unpaid  interest on  Indebtedness  (as herein
after  defined) of the Company,  whether  outstanding on the date of issuance of
this  Debenture  or  thereafter  created,  incurred or assumed,  unless,  in the
agreement or instrument creating or evidencing the same or pursuant to which the
same is  outstanding,  it is provided that such  Indebtedness is not superior in
right of payment to this Debenture. Notwithstanding the foregoing, "Senior Debt"
with  respect to the  Company  shall not  include  (i) any  Indebtedness  of the
Company to any  subsidiary  or affiliate  (as such terms are defined in Rule 405
under the Act) or money  borrowed or advanced from such  subsidiary or affiliate
and (ii) any  Indebtedness  representing  the redemption  price of any preferred
stock.

           2.2  Indebtedness.  "Indebtedness"  means  (a) any  liability  of the
Company to banks and other institutional lenders (i) for borrowed money, or (ii)
evidenced  by a  note,  debenture,  bond or  other  instrument  of  indebtedness
(including, without limitation, a purchase money obligation), given in


<PAGE>3


connection  with the acquisition of property,  assets or services,  or (iii) for
the payment of rent or other amounts relating to capitalized lease  obligations,
(b) any purchase money liability of the Company in connection with  acquisitions
in the ordinary course of the Company's business provided it is not in excess of
the  purchase  price of the  asset(s)  purchased,  (c) any  liability  of others
described in the preceding  clause (a) which the Company has guaranteed or which
is otherwise its legal liability; and (d) any modification,  renewal, extension,
replacement  or  refunding  of any such  liability  described  in the  preceding
clauses (a) and (c);  provided,  however,  that  notwithstanding  the foregoing,
"Indebtedness" does not include unsecured trade debt.

           2.3  Default.  The Company may not pay  principal  or interest on the
Debentures  and may not  acquire,  redeem or retire any  Debentures  for cash or
property other than capital stock of the Company if (i) a default on Senior Debt
occurs and is continuing  that permits  holders of Senior Debt to accelerate its
maturity,  and (ii) the default is the subject of  judicial  proceedings  or the
Company  receives  notice of a default  from a holder of the  Senior  Debt.  The
Company may resume payments on the Debentures and may acquire,  redeem or retire
them when (A) the default is cured or waived,  or (B) 120 days have passed after
the notice of default is given by the holder of the Senior  Debt if the  default
is not the subject of judicial proceedings.

           2.4 Liquidation;  Dissolution;  Bankruptcy.  Upon any distribution to
creditors of the Company in a liquidation  or dissolution of the Company or in a
bankruptcy,  reorganization,  insolvency,  receivership  or  similar  proceeding
relating  to the  Company or its  property  (i)  holders of Senior Debt shall be
entitled to receive  payment in full in cash of the principal of and interest to
the date of payment on the Senior  Debt  before  Holders  shall be  entitled  to
receive any payment of  principal  of or  interest on the  Debentures;  and (ii)
until the Senior  Debt is paid in full in cash,  any  distribution  to which the
Holder  would be  entitled  but for this  Article 2 shall be made to  Holders of
Senior  Debt as their  interests  may appear,  except  that  Holders may receive
securities  that are  subordinated to Senior Debt to at least the same extent as
the Debentures.

           2.5  Acceleration  of  Debentures.  If payment of the  Debentures  is
accelerated  because of an Event of Default as defined in Article 7 hereof,  the
Company shall promptly  notify holders of Senior Debt of the  acceleration.  The
Company may pay the Debentures when 120 days have passed after the  acceleration
occurs if this Article 2 permits the payment at such time.

           2.6 Subrogation.  After all Senior Debt is paid in full and until the
Debentures  are paid in full,  Holders  shall be subrogated to the rights of the
holders of the Senior Debt to receive distributions applicable to Senior Debt. A
distribution  made under this  Article 2 to holders of Senior  Debt which  would
otherwise  have been made to Holders  is not,  as between  the  Company  and the
Holders, a payment by the Company on this Debenture

           2.7 Relative  Rights.  This Article 2 defines the relative  rights of
the Holder and the holders of Senior Debt.  Nothing in this Debenture  shall (i)
impair,  as between the Company and the Holder,  the  obligation of the Company,
which is absolute  and  unconditional,  to pay  principal  and  interest on this
Debenture in accordance  with its terms;  (ii) affect the relative rights of the
Holder and


<PAGE>4


creditors of the Company other than the holders of Senior Debt; or (iii) prevent
any Holder from  exercising  its  available  remedies  upon an Event of Default,
subject  to the  rights of  holders  of  Senior  Debt to  receive  distributions
otherwise payable to the Holders.

           2.8  Article  2  Subordination  Not  Designed  to  Prevent  Events of
Default.  The failure of the  Company to make a payment on account of  principal
and  interest on this  Debenture  by reason of any  provision  of this Article 2
shall not be construed as preventing the occurrence of an Event of Default under
Article 7 hereof.

                                    ARTICLE 3

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY
                  ---------------------------------------------

           3.1 The  Company  represents  and  warrants  to the Holder  that the
Company:

            (a) is a corporation  duly organized,  validly  existing and in good
standing under the laws of the State of New York;

            (b) has all requisite power and authority and all necessary licenses
and permits to own and operate its  properties  and to carry on its  business as
now conducted and as presently proposed to be conducted;

            (c) is duly  licensed  or  qualified  and is in good  standing  as a
foreign  corporation  in each  jurisdiction  wherein the nature of the  business
transacted by it or any of its  subsidiaries or the nature of the property owned
or  leased  by  it  or  any  of  its  subsidiaries,   makes  such  licensing  or
qualification  necessary,  except for those jurisdiction in which the failure so
to qualify can be cured without having a material  adverse effect on the Company
taken as a whole;

            (d) the Company has all  requisite  power and  authority to execute,
deliver and perform its  obligations  under this  Debenture.  This Debenture has
been duly and validly authorized, executed and delivered by the Company and is a
valid and binding obligation of the Company,  enforceable against the Company in
accordance with its terms,  except as the enforceability  thereof may be limited
by bankruptcy, insolvency, reorganization or other laws relating to or affecting
the rights of creditors generally;

            (e)  except  as  otherwise   described  in  the  Private   Placement
Memorandum,  the  Company  is not,  and will not be at the time of the  original
issuance of this  Debenture  by the Company,  in default  under the terms of any
Senior Debt or other  indebtedness and the Company is not aware, nor has it been
notified by the holder of any Senior Debt or other  indebtedness,  that  grounds
for default exist with respect to any Senior Debt or other indebtedness;

            (f) the execution and delivery of the  Debentures by the Company and
the consummation by the Company of the transactions contemplated pursuant to the
Private Placement


<PAGE>5


Memorandum  (a) are not in  violation  or  breach  of, do not  conflict  with or
constitute a default under any of the terms of the charter  documents or by-laws
of the  Company;  (b) will not result in a  violation  under any law,  judgment,
decree,   order,  rule,   regulation  or  other  legal  requirement  or  of  any
governmental  authority,  court or arbitration tribunal whether federal,  state,
municipal or local at law or in equity,  and applicable to the Company;  and (c)
will not violate or  constitute a breach of or  constitute  a default  under any
Senior Debt of the Company or any subsidiary or affiliate of the Company; and

            (g) the Private  Placement  Memorandum does not, and will not at the
time of the  original  issuance of this  Debenture  by the  Company,  contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements  therein,  in light of the
circumstances under which they were made, not misleading.

                                    ARTICLE 4

                                   REDEMPTION
                                   ----------

           4.1 Optional.  The Debentures may be redeemed by the Company in whole
or from time to time in part,  at the option of the  Company,  at any time on or
after July 17, 1996 at a redemption  price equal to 105% of the principal amount
thereof, in each case together with accrued interest to the Redemption Date.

           4.2  Notice of  Redemption.  Notice of  Redemption  will be mailed at
least 30 days but not  more  than 60 days  before  the  Redemption  Date to each
Holder of Debentures  to be redeemed at his  registered  address.  Debentures in
denominations  larger  than  $1,000  may be  redeemed  in part but only in whole
multiples  of  $1,000.  In the  event of a  redemption  of less  than all of the
Debentures,  the  Debentures  will be  chosen  for  redemption  by the  Company,
generally  pro rata or by lot.  The  Notice of  Redemption  shall  identify  the
Debentures to be redeemed and shall state (i) the redemption date and redemption
price;  (ii) the conversion  price, as determined  pursuant to Article 8 hereof;
(iii) that Debentures  called for redemption may be converted at any time before
the  close  of  business  on the  redemption  date;  (iv)  that  Holders  of the
Debentures who want to convert the Debentures  must satisfy the  requirements of
Article 8 hereof;  (v) that Debentures called for redemption must be surrendered
to the Company or a designated  paying agent specified in the Redemption  Notice
to collect the redemption  price; and (vi) that,  unless the Company defaults in
making the redemption  payment,  interest on the Debentures  ceases to accrue on
and after the redemption date.

           4.3  Effective  Notice of  Redemption.  Once Notice of  Redemption is
mailed,  Debentures  called  for  redemption  become  due  and  payable  on  the
redemption date at the redemption price.

           4.4 Deposit of Redemption  Price.  On or before the Redemption  Date,
the Company shall deposit in a bank account  solely  dedicated for this purpose,
or  deposit  with a  designated  paying  agent,  money  sufficient  to  pay  the
redemption  price of and accrued  interest on all  Debentures  to be redeemed on
that date.



<PAGE>6



           4.5 Debentures  Redeemed in Part.  Upon surrender of a Debenture that
is  redeemed in part,  the Company  shall issue for the Holder at the expense of
the Company a new Debenture equal in principal amount to the unredeemed  portion
of the Debenture surrendered.

                                    ARTICLE 5

                                    COVENANTS
                                    ---------

           5.1 Payment of Debentures. The Company shall pay the principal of and
interest on this  Debenture in the time and in the manner  provided in Article 1
hereof.  The  Company  shall pay  interest  quarterly  (including  post-petition
interest in any proceeding  under any bankruptcy law) on (i) overdue  principal,
at the rate required by this Debenture and (ii) overdue installments of interest
(including  interest  contemplated  by  clause  (i) and  without  regard  to any
applicable grace period) at the same rate.

           5.2  Reporting  Requirements.  The  Company  shall  comply  with  its
reporting  and  filing  obligations  pursuant  to  Section  13 or  15(d)  of the
Securities  Exchange Act of 1934, as amended (the "Exchange  Act").  The Company
shall make such reports,  including,  without limitation,  reports on Form 10-K,
10-Q, 8-K and Schedule 14A promulgated  under the Exchange Act, or substantially
the same information  required to be contained in any successor form,  available
to the Holder.

           5.3  Limitation on Dividends;  Stock  Purchase.  The Company will not
declare or pay any cash  dividends on, or make any  distribution  to the holders
of,  any  shares of  capital  stock of the  Company,  other  than  dividends  or
distributions  payable in such  capital  stock,  and neither the Company nor any
subsidiary  will purchase,  redeem or otherwise  acquire or retire for value any
shares of capital  stock of the Company or  warrants  or rights to acquire  such
capital  stock  except for the shares of the  Company's  Common  Stock  owned by
Ranbaxy  Pharmaceuticals,  Inc. to be repurchased by the Company as described in
the Private Placement Memorandum.

           5.4 Stay,  Extension and Usury Laws.  The Company  covenants  that it
will not at any time insist upon,  plead, or in any manner  whatsoever  claim or
take the benefit or  advantage  of, any stay,  extension  or usury law  wherever
enacted, now or at any time hereinafter in force, which may affect the covenants
or the performance of this Debenture;  and the Company hereby  expressly  waives
all benefit or  advantage of any such law,  and  covenants  that it will not, by
resort  to any such law,  hinder,  delay or impede  the  execution  of any power
herein  granted to the Holder but will suffer and permit the  execution of every
such power as though no such law had been enacted.

           5.5  Corporate  Existence.  Subject to Article 6 hereof,  the Company
will do or cause to be done all things  necessary  to preserve  and keep in full
force and effect its  corporate  existence and that of each  subsidiary  and the
rights   (charter  and   statutory)  and  franchises  of  the  Company  and  its
subsidiaries;  provided,  however,  that the  Company  shall not be  required to
preserve  any such  right  or  franchise  if the  Company  shall  in good  faith
determine that the preservation thereof is


<PAGE>7


no longer  desirable  in the  conduct of the  business  of the  Company  and its
subsidiaries   considered   as  a  whole  and  that  the  loss  thereof  is  not
disadvantageous in any material respect to the Holder.

           5.6  Maintenance of  Properties.  The Company will cause all property
used or useful in the conduct of its business or the business of any  subsidiary
to be  maintained  and kept in good  condition,  repair  and  working  order and
supplied  with all  necessary  equipment and will cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as in
the judgment of the Company may be necessary so that the business  carried on in
connection therewith may be properly and advantageously  conducted at all times;
provided,  however,  that nothing in this section shall prevent the Company from
discontinuing the operation and maintenance of any such properties, or disposing
of any of  them,  if such  discontinuance  or  disposal  is,  in the  reasonable
judgment of the Company or any subsidiary concerned, desirable in the conduct of
its  business or  business  of any  subsidiary  and not  disadvantageous  in any
material respect to the Holder.

           5.7 Liquidation.  The Company shall not adopt any plan of liquidation
which provides for, contemplates or the effectuation of which is preceded by (A)
the sale, lease,  conveyance or other disposition of all or substantially all of
the assets of the Company or any subsidiary  otherwise than  substantially as an
entirety in accordance with Article 6 hereof and (B) the  distribution of all or
substantially  all the  proceeds  of  such  sale,  lease,  conveyance  or  other
disposition  and the  remaining  assets of the  Company to the holders of common
stock of the Company,  unless the Company shall in connection  with the adoption
of such plan make provision  for, or agree that prior to making any  liquidating
distributions  it will make  provision  for, the  satisfaction  of the Company's
obligations under this Debenture as to the payment of principal and interest.

           5.8  Limitation  on   Indebtedness.   Neither  the  Company  nor  any
subsidiary will incur, create or assume any indebtedness except: (i) Senior Debt
in  existence  as of the date of this  Debenture  aggregating  $3,278,000;  (ii)
indebtedness to any banks or other financial  institutions with whom the Company
may  contract to replace or  refinance  its current  Senior Debt  provided  such
replacement  or  refinancing  does not  increase  the  principal  amount  of the
Company's  Senior Debt to an amount in excess of $5,522,000;  and (iii) purchase
money  obligations  incurred in the ordinary course of business;  and (iv) trade
indebtedness incurred in the ordinary course of business.

           5.9 Liens.  Neither  the Company nor any  subsidiary  will  mortgage,
pledge,  grant or permit to exist any lien or other security  interest in any of
its assets,  of any kind, now owned or hereafter  acquired,  nor  hypothecate or
grant a lien or security interest in its capital,  net worth, equity accounts or
any capital  stock,  as the case may be,  except for (i) the security  interests
granted by the  Company as of the date  hereof to the holders of its Senior Debt
and to Mallinckrodt Chemical, Inc.; (ii) the security interest held by any banks
or other financial institutions with whom the Company may contract to replace or
refinance its current Senior Debt, provided such replacement or refinancing does
not increase the  principal  amount of its Senior Debt to an amount in excess of
$5,522,000;  (iii) a lien or security  interest created with respect to purchase
money  obligations  incurred by the Company or its  subsidiaries in the ordinary
course of  business  and  provided  the  indebtedness  related to such  security
interest does not exceed the purchase price of the subject asset(s).



<PAGE>8



           5.10  Authorization  of  Shares of Common  Stock  for  Issuance  Upon
Conversion.  The  Company  will at all times cause  there to be  authorized  and
reserved for issuance upon conversion of this Debenture,  or otherwise available
from treasury shares, such number of shares of common stock as would be issuable
upon conversion of this Debenture.

           5.11  Payment  of Taxes and Other  Claims.  The  Company  will pay or
discharge  or cause to be paid or  discharged,  before  the  same  shall  become
delinquent (i) all taxes, assessments and governmental charges levied or imposed
upon the Company or any subsidiary  upon the income,  profits or property of the
Company or any subsidiary,  and (ii) all lawful claims for labor,  materials and
supplies which,  if unpaid,  might by law become a lien upon the property of the
Company or any  subsidiary;  provided,  however,  that the Company  shall not be
required to pay or  discharge  or cause to be paid or  discharged  any such tax,
assessment,  charge or claim which  amount,  applicability  or validity is being
contested  in good  faith by  appropriate  proceedings  and for  which  adequate
reserves have been maintained by the Company.

           5.12 Transactions  with Affiliates.  The Company shall not, and shall
not permit any  subsidiary to,  directly or indirectly,  pay any funds to or for
the  account  or benefit  of, or enter into or permit to exist any  transaction,
including,  without  limitation,  the purchase,  sale,  lease or exchange of any
property or assets or securities or any loan transaction or the rendering of any
service,  with any Affiliate  unless such  transaction  is for fair value to the
Company or its  subsidiary and on terms and conditions not less favorable to the
Company or such subsidiary  than could be obtained on an arms-length  basis from
unrelated third parties, as determined in each case by the Board of Directors of
the Company (as evidenced by resolutions  duly adopted by the Board);  provided,
however,  that the  provisions  of this  Section  5.10  shall  not  apply to (a)
reasonable  compensation  for services in connection with employment or services
as a  director,  or (b)  payments  to  Affiliates  of the  Company in respect of
contracts or transactions in existence on the date hereof which are described or
referred to in the Private Placement Memorandum pursuant to which this Debenture
was originally sold. For purposes of this Section 5.10 the terms "Affiliate" and
"Control" shall have the meanings ascribed thereto in Rule 405 under the Act.

      5.13  Listing  of Common  Stock.  As  promptly  as  practicable  after the
execution of this Debenture, the Company shall file the appropriate applications
for listing on the American Stock Exchange and any other applicable  exchange or
national  security system with respect to the Shares.  The Company shall use its
best  efforts and work  diligently  to  accomplish  such  listing as promptly as
practicable after the execution of this Debenture.




<PAGE>9

                                    ARTICLE 6

                                   SUCCESSORS
                                   ----------

           6.1 When Company May Merge, etc. The Company shall not consolidate or
merge  with or into,  or sell,  lease,  convey or  otherwise  dispose  of all or
substantially all of its assets to, any person unless:

            1. The  person  formed by or  surviving  any such  consolidation  or
      merger  (if  other  than the  Company),  or to  which  such  sale,  lease,
      conveyance or other disposition shall have been made, is (x) a corporation
      organized  and  existing  under the laws of the United  States,  any state
      thereof or the District of Columbia or (y) a  corporation  or a comparable
      legal  entity  organized  under the laws of a foreign  jurisdiction  whose
      equity  securities  are listed on a national  securities  exchange  in the
      United States or authorized for quotation on the National Market System of
      National  Association of Securities  Dealers  Automated  Quotation  System
      ("NASDAQ"),  and in each case,  the net worth of such person  formed by or
      surviving any such consolidation or merger is equal to or greater than the
      consolidated  net  worth  of  the  Company   immediately   preceding  such
      consolidation or merger;

            2. The corporation  formed by or surviving any such consolidation or
      merger  (if  other  than  the  Company)  or to  which  such  sale,  lease,
      conveyance  or  other  disposition  shall  have  been  made,   assumes  by
      supplemental  agreement,  all the  obligations  of the  Company  under the
      Debentures  and  this  Debenture,  except  that it  need  not  assume  the
      obligations  of the Company as to the  conversion  of this  Debenture  if,
      pursuant to a  reorganization  of the Company as provided in Section  8.8,
      the Company or another person enters into a separate agreement, obligating
      it to deliver  the  securities,  cash and other  assets  deliverable  upon
      conversion of the Debentures;

            3. Immediately after the transaction, no Event of Default as defined
      in Article 7 hereof exists; and

            4. Such  transaction  does not  adversely  affect  the  validity  or
      enforceability of the Debentures.

           6.2 Successor  Corporations  Substituted.  Upon any  consolidation or
merger,  or  any  sale,  lease,  conveyance  or  other  disposition  of  all  or
substantially  all of the assets of the Company in  accordance  with Section 6.1
hereof,  the successor  corporation formed by such consolidation or into or with
which the Company is merger or to which such sale,  lease,  conveyance  or other
disposition is made shall succeed to, and be  substituted  for, and may exercise
every right and power of, the Company under this  Debenture with the same effect
as if such  successor  person had been named as the  Company  herein;  provided,
however,  that the predecessor Company in the case of a sale, lease,  conveyance
or other  disposition  shall  not be  released  from the  obligation  to pay the
principal of and interest on this Debenture.





<PAGE>10

                                    ARTICLE 7

                                EVENTS OF DEFAULT
                                -----------------

           7.1 A. An Event of Default occurs if (i) the Company  defaults in the
payment of interest on this  Debenture  when the same become due and payable and
such default  continues for a period of 30 days,  whether or not such payment is
prohibited by the provisions of Article 2 hereof;  (ii) the Company  defaults in
the payment of principal on this Debenture when the same becomes due and payable
upon  maturity,  upon  redemption  or  otherwise;  (iii) any  representation  or
warranty  made or furnished  by the Company in this  Debenture or in the Private
Placement  Memorandum,  shall be false,  incorrect or incomplete when made as to
any  material  fact or facts;  (iv) the Company  fails to comply with any of its
other covenants or other agreements in this Debenture and solely with respect to
the  covenants  set forth in Sections  5.2,  5.11 and 5.12 hereof,  such failure
continues for a period of 30 days following written notice from the Holder;  (v)
the  Company  or any of its  subsidiaries  fail to pay  when due or  within  any
applicable  grace period any principal or interest on any  Indebtedness or shall
be in breach or default with respect to any Indebtedness,  if the effect of such
failure  to pay,  default  or  breach is to cause the  holder or  holders  (or a
trustee on behalf of such holder or holders) to  accelerate  such  Indebtedness;
(vi) the  Company or any  subsidiary  pursuant  to or within the  meaning of any
Bankruptcy  Law (A) commences a voluntary  case, (B) consents to the entry of an
order  for  relief  against  it in an  involuntary  case,  (C)  consents  to the
appointment of a custodian of it for all or  substantially  all of its property,
or (D) makes a general  assignment  for the  benefit of its  creditors;  (vii) a
court of competent  jurisdiction  enters an order or decree under any Bankruptcy
Law that (A) is for relief against the Company or a subsidiary in an involuntary
case,  (B)  appoints  a  custodian  of the  Company or a  subsidiary  for all or
substantially all of its property,  or (C) orders the liquidation of the Company
or any subsidiary, and the order or decree remains unstayed and in effect for 60
days of the entry  thereof;  (viii)  trading in any securities of the Company or
any of its subsidiaries  shall be suspended for a period exceeding five (5) days
by  the  Securities  and  Exchange  Commission,  any  stock  exchange  or in the
over-the-counter  market or a minimum  or  maximum  price  for  trading  in such
securities shall be established; (ix) a judgment in an amount exceeding $250,000
is entered against the Company or any of its  subsidiaries  and such judgment is
not  satisfied  or stayed  within  sixty  (60)  days;  or (x) the  holder of any
Indebtedness  or other debt of the Company  aggregating  at least $250,000 shall
commence any proceeding,  or take any action to collect on such  Indebtedness or
debt, or seize,  dispose of or apply in  satisfaction  of such  Indebtedness  or
debt, any assets of the Company having a fair market value in excess of $250,000
individually or in the aggregate.

           B. The term "Bankruptcy Law" means Title 11, U.S. Code or any similar
Federal or State law for the relief of debtors.  The term "Custodian"  means any
receiver, trustee, assignee, liquidator or similar official under any Bankruptcy
Law.

           C. A Default  under  Section  7.1A(iv)  (other  than  Defaults  under
Sections 5.7, 6.1, 8.1 or 9.1 which Defaults shall be Events of Default with the
Notice but without the passage of time  specified in this  paragraph) or Section
7.1A(v)  is not an Event of  Default  until the  Holders  of at least 25% in the
principal  amount of the then outstanding  Debentures  notify the Company of the
Default  and the  Company  does not cure the  Default  within 30 days after such
Notice. The Notice must specify the Default and demand that it be remedied.



11
<PAGE>


           7.2  Acceleration.  If an Event of Default  occurs and is continuing,
subject to the  provisions  of Section 7.1C  hereof,  the Holder may declare the
principal  of and accrued  interest on this  Debenture  to be due and payable by
written  notice to the Company in the manner  provided in Section  11.2  hereof.
Upon such declaration, the principal and interest on this Debenture shall be due
and  payable  immediately.  The  Holder  may  rescind  an  acceleration  and its
consequences  if the  rescission  would not conflict with any judgment or decree
and if all  existing  Events  of  Default  have  been  cured  or  waived  except
nonpayment  of  principal  or  interest  that has become  due solely  because of
acceleration. No such rescission shall affect any subsequent Event of Default or
impair any right consequent thereto.

           7.3 Other Remedies.  If an Event of Default occurs and is continuing,
the Holder may pursue any  available  remedy to collect the payment of principal
of and interest on this Debenture or to enforce the performance of any provision
of this Debenture.  A delay or omission by the Holder in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.

                                    ARTICLE 8

                                   CONVERSION
                                   ----------

           8.1 Exercise of  Conversion  Privilege.  At any time and from time to
time commencing from the date hereof (the "Initial  Conversion  Date") until the
earlier of (i) the Maturity Date, (ii) receipt by the Holder from the Company of
Notice of  Redemption  and (iii) the  automatic  conversion  of the Debenture in
accordance with Section 8.2 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 form reasonably satisfactory to the Company duly
executed  by the  registered  Holder or its duly  authorized  attorney.  "Common
Stock" of the Company means common stock of the Company as it exists on the date
this Debenture is originally  signed.  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 $2.00 per share (the "Conversion  Price").  Interest shall
accrue to and  including  the business 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  8.5 and  Section  8.7  hereof.  As soon as
practicable  following  conversion  and upon the  Holder's  compliance  with the
conversion  procedure described in Section 8.3 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  in the  principal  amount equal to the
remaining  principal  balance  of this  Debenture  after  giving  effect to such
partial conversion.




<PAGE>12


           8.2 Automatic  Conversion.  Notwithstanding  anything to the contrary
contained in this Debenture,  the Debentures  shall be  automatically  converted
into Common Stock in the event that following the first  anniversary of the date
hereof the closing price per share of the  Company's  Common Stock as listed and
reported on the  American  Stock  Exchange or in the NASDAQ  National  Market or
Small-Cap  System  exceeds two dollars  ($2.00) per share for each of the twenty
(20)  consecutive  trading days following such one year anniversary and prior to
conversion.  In such event, the Company shall notify the Holder of the effective
date of the automatic conversion.

           8.3 Registration of Transfer; Conversion Procedure. The Company shall
maintain books for the transfer and  registration  of the  Debentures.  Upon the
transfer of any Debenture in accordance  with the  provisions of Section 10.1 or
Section 10.2 hereof,  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 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 (the  "Shares").  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;  provided, however, that if, at the
date of surrender  the transfer  books of the Common Stock shall be closed,  the
certificates for the Shares shall be issuable as of the date on which such books
shall be  opened  and  until  such  date the  Company  shall be under no duty to
deliver any certificate for such Shares; provided,  further,  however, that such
transfer books,  unless  otherwise  required by law or by applicable rule of any
national securities  exchange,  shall not be closed at any one time for a period
longer than twenty (20) days.

           8.4 Company to Provide  Common  Stock.  The Company has  reserved and
shall continue to reserve out of its authorized but unissued Common Stock or its
Common  Stock  held in  treasury  enough  shares of Common  Stock 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  endeavor to
comply with all securities  laws regulating the offer and delivery of the shares
of  Common  Stock  upon  conversion  of  the  Debentures,   including,   without
limitation, compliance with provisions of Article 9 hereof, and will endeavor to
list such  shares on each  national  securities  exchange  upon which the Common
Stock is listed.

           8.5  Dividends;  Reclassifications,  etc..  In the event
that the  Company  shall,  at any time  prior  to the  exercise  of
conversion  rights  hereunder:  (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)


<PAGE>13


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.

           8.6  Notice  to  Holder.  If, at any time  while  this  Debenture  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 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.

           8.7 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  8.7.  Upon each
adjustment of the  Conversion  Price pursuant to this Section 8.7, the Holder of
this Debenture shall thereafter be entitled to acquire upon  conversion,  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 Sections 8.1 and 8.2 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 8.7; or



<PAGE>14




               (ii) shares   issued,   subdivided  or  combined  in transactions
described  in  Section  8.5 if and to the  extent  that the  number of shares of
Common  Stock  received  upon  conversion  of this  Debenture  shall  have  been
previously  adjusted  pursuant  to  Section  8.5 as a result  of such  issuance,
subdivision or combination of such securities;

for a consideration  per share which is less than the Conversion Price, 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 greater of the Conversion
Price or the Applicable Conversion Price, 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
           8.7(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  8.7(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  8.7(a))  at  the  Applicable
           Conversion Price; 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  8.7(d)  hereof)
           immediately after the issuance or sale of such additional shares.

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 8.1 or 8.2, as appropriate,
the Applicable Conversion Price shall be such initial Conversion Price.

           The provision of this  subparagraph  (a) can be illustrated  with the
following examples:

           1.   Company  sells  100,000  shares of stock at a price
of $1.50 per share

           -    Applicable  Conversion  Price for the  Debentures =
                $2.00
           -    Total  shares   outstanding  prior  to  issuance  -
                1,000,000
           -    Number of  shares  of stock  that  would be  purchased  with the
                proceeds  received by the  Company  from the sale of the 100,000
                shares at the Applicable Conversion Price - 75,000 shares



<PAGE>15



           Dilution Adjustment Calculation:

           2 x [1,000,000 +  75,000] = 2 x .97727 = 1.9545
           1,000,000 + 100,000

           2. Company  issues  warrants to Senior  Creditor to purchase  100,000
shares at an exercise price of $1.50 per share

           -    Applicable Conversion Price = $1.95
           -    Total shares  outstanding prior to warrant issuance
                - 1,100,000
           -    Number of  shares  of stock  that  would be  purchased  with the
                proceeds  received by the Company upon  exercise of the Warrants
                at the Applicable Conversion Price = 76,923

           Dilution Adjustment Calculation:

           1.95 x [1,100,000 +  76,923] = 1.95 x .980769 = 1.9125
                1,100,000 + 100,000

           Upon  each  adjustment  of the  Conversion  Price  pursuant  to  this
subsection  (a),  the 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   8.7  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  and  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 annual grant of options to Joseph F. Limongelli to purchase
           up to 10,000  shares of the  Company's  Common  Stock at an  exercise
           price  equal  to  closing  price  of the  Company's  Common  Stock as
           reported on the American  Stock  Exchange,  or successor  exchange or
           over-the-counter  market on which the Common Stock is then traded, on
           the date of grant; or



<PAGE>16



           (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)
           including, without limitation, the conversion of any Debenture issued
           in the same placement of securities  pursuant to which this Debenture
           was issued by the Company, whether or not outstanding on the issuance
           date hereof.

                (c)  For  the  purpose  of  subsection   8.7(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,
           compensations  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,  accreted 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


<PAGE>17


           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
8.7(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.

                 (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, cancelled 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 8.7(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   8.7  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  8.7(f) are not required to be made shall be carried forward and
taken into


<PAGE>18


account in making subsequent  adjustments.  All calculations  under this Section
8.7 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.

           8.8  Reorganization  of the  Company.  If the Company is a party to a
transaction  subject to Article 6 or a merger  which  classifies  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 the consolidation, merger, transfer or lease 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 8. 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 the formed,  surviving,  transferee or lessee corporation,  that issuer shall
join in the  supplemental  debenture  which  shall so provide.  If this  section
applies, Section 8.5 does not apply.

                                    ARTICLE 9

              REGISTRATION RIGHTS UNDER THE SECURITIES ACT OF 1933
              ----------------------------------------------------

           9.1(a) Issuance of Stock Registered under the Act by the Company upon
Conversion.  Not later than 90 days from the date of this Debenture, the Company
will file a registration  statement  under the Act with respect to the number of
shares  of  Common  Stock  issuable  upon  conversion  of  the  Debentures  (the
"Registrable Securities") in order to provide for the issuance by the Company of
Common Stock upon conversion of the Debentures  which has been registered  under
the Act, and shall use its best effort to cause such  registration  statement to
become and remain  effective until such time as all of the Debentures shall have
been converted in accordance with the provisions of section 8.1 or 8.2 hereof.

            (b) Supplemental  Registration  Rights.  In the event the Company is
precluded by the U.S. Securities and Exchange Commission (the "Commission") from
registering  under  the  Act  the  Registrable   Securities  for  issuance  upon
conversion  of  this  Debenture  or if the  Holder  shall  have  converted  this
Debenture prior to the effectiveness of the registration  statement described in
subparagraph (a) above, the Holder shall have the following registration rights:



<PAGE>19



                 (i) Piggyback Registration Rights. The Company shall advise the
Holder  or its  transferee,  whether  the  Holder  holds the  Debentures  or has
converted the Debentures and holds the Common Stock  underlying the  Debentures,
by written  notice at least four weeks  prior to the filing of any  registration
statement  under the Act covering  any  securities  of the Company,  for its own
account or for the account of others,  and will,  until the Maturity Date,  upon
the  request of the  Holder,  register  under the Act all or any  portion of the
Registrable  Securities  and cause  such  registration  statement  to become and
remain effective as provided in paragraph 9(c) hereof.

                 (ii) Demand Registration  Rights. If any 51% Holder (as defined
in Section  9.1(f)  hereof)  shall give notice to the Company at any time to the
effect that such holder  desires to have the Company  register under the Act any
Registrable Securities,  the Company will promptly, but no later than four weeks
after receipt of such notice,  file a registration  statement under the Act with
respect to such number of  Registrable  Securities  as shall be indicated in the
notice to the Company by the Holder and the Company will use its best efforts to
cause such registration  statement to become and remain effective (including the
taking of such steps as are  necessary to obtain the removal of any stop order);
provided, that the Holder shall furnish the Company with appropriate information
in connection  therewith as the Company may reasonably  request in writing.  The
Holder may, at its option,  request the filing of a registration statement under
the Act on one occasion until the Maturity Date. Within ten days after receiving
any such  notice  pursuant  to this  subsection  (b)(ii) of this  Article 9, the
Company shall give notice to the other Holders of the  Debentures and any Common
Stock issued upon the conversion of any Debentures  advising that the Company is
proceeding  with such  registration  statement and offer to include  therein the
Common Stock underlying the Debentures of the other Holders,  provided that they
shall  furnish the Company with such  appropriate  information  (relating to the
intentions  of such  holders)  in  connection  therewith  as the  Company  shall
reasonably request in writing.

           If the Company  elects to include  securities to be sold by it in any
registration  statement  pursuant to this Section  9(b)(ii),  such  registration
shall be deemed to have been a registration under Section 9(b)(i).

                 (c) Registration Covenants of the Company. A. In the event that
any  Registrable  Securities  are to be registered  pursuant to Sections 9(a) or
9(b) of this Debenture,  the Company  covenants and agrees that the Company will
use its best efforts to effect the registration and cooperate in the sale of the
Registrable Securities to be registered and will as expeditiously as possible:

                    (i)  prepare  and file with the  Commission  a  registration
statement with respect to the  Registrable  Securities (as well as any necessary
amendments   or   supplements   thereto)(a   "Registration   Statement")   which
Registration Statement (A) will state that the holders of Registrable Securities
covered thereby may sell such  Registrable  Securities  under such  Registration
Statement or pursuant to Rule 144 (or any similar rule then in effect), (B) when
it  becomes  effective,  and  when  any  post-effective  amendment  thereof  and
supplement  thereto is filed,  the  Registration  Statement,  as then amended or
supplemented, will comply in all material respects with the applicable


<PAGE>20


provisions of the Act and the rules and  regulations  thereunder and, except for
information  provided in writing by the Holder for inclusion in the Registration
Statement  for  which  the  Company  does not  represent  or  warrant  as to its
accuracy,  will not contain an untrue  statement  or a material  fact or omit to
state a material  fact  required to be stated  therein or  necessary to make the
statements therein, in light of the circumstances under which they are made, not
misleading;

                    (ii)  furnish  to the  Holders  copies of such  Registration
Statement and any amendments or supplements thereto and any prospectus forming a
part thereof prior to filing,  which  documents will be subject to the review of
counsel for the Holders;

                    (iii)  use its  best  efforts  to  cause  such  Registration
Statement to become effective;

                    (iv) notify the Holders,  promptly  after the Company  shall
receive notice thereof,  of the time when said  Registration  Statement  becomes
effective or when any amendment or supplement to any  prospectus  forming a part
of said Registration Statement has been filed;

                    (v)  notify  the  Holders  promptly  of any  request  by the
Commission for the amending or supplementing of such  Registration  Statement or
prospectus or for additional information;

                    (vi) advise the  Holders  after the  Company  shall  receive
notice  or  obtain  knowledge  thereof  of  the  issuance  of any  order  by the
Commission  suspending the effectiveness of any such  Registration  Statement or
amendment thereto or of the initiation or threatening of any proceeding for that
purpose, and promptly use its reasonable best efforts to prevent the issuance of
any stop order or to obtain its withdrawal promptly if such stop order should be
issued;

                    (vii) prepare and file with the Commission  such  amendments
and supplements to such Registration Statement and the prospectus forming a part
thereof as may be necessary to keep such Registration Statement effective (a) in
the case of a Registration  Statement filed and declared  effective  pursuant to
Section 9(a) hereof, until such time as all Holders of the Debentures shall have
converted the Debentures into Common Stock, or (b) in the case of a Registration
Statement filed and declared  effective  pursuant to Section 9(b) hereof,  until
such time as the Holders pursuant to such  Registration  Statement have disposed
of all such Registrable Securities but in no event exceeding five (5) years from
the date of effectiveness;

                    (viii)  furnish to each Holder such number of copies of such
Registration  Statement,  each amendment and supplement thereto,  the prospectus
included in such Registration Statement (including each preliminary  prospectus)
and such  other  documents  as that  Holder may  reasonably  request in order to
facilitate the disposition of the Registrable Securities owned by such Holder.




<PAGE>21


                    (ix) use its reasonable  best efforts to register or qualify
such Registrable Securities under such other securities or blue sky laws of such
jurisdictions  as  determined  by the  Holders and do any and all other acts and
things which may be  reasonably  necessary or advisable to enable the Holders to
consummate the disposition in such  jurisdictions of the Registrable  Securities
(provided that the Company will not be required to: (A) qualify  generally to do
business  in any  jurisdiction  where it would  not  otherwise  be  required  to
qualify; (B) subject itself to taxation in any such jurisdiction; or (C) consent
to general service of process in any such jurisdiction);

                    (x)  notify  the  Holders  at any  time  when  a  prospectus
relating  thereto is required to be delivered under the Act, of the happening of
any event as a result of which such  Registration  Statement  contains an untrue
statement of a material  fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading,  and,
at the  request  of the  Holder,  prepare  a  supplement  or  amendment  to such
Registration  Statement so that such Registration Statement will not contain, to
the Company's knowledge, an untrue statement of a material fact or omit to state
any  material  fact  required  to be stated  therein  or  necessary  to make the
statements therein not misleading;

                    (xi) cause all  Registrable  Securities to be listed on each
securities  exchange on which similar  securities issued by the Company are then
listed;

                    (xii)  provide a  transfer  agent  for all such  Registrable
Securities not later than the effective date of such Registration Statement;

                    (xiii) enter into such  customary  agreements  (including an
underwriting agreement in customary form) and take all such other actions as the
participating  Holders or the underwriters,  if any, reasonably request in order
to expedite or facilitate the disposition of the Registrable Securities;

                    (xiv) make  available  for  inspection by the Holder of such
Registrable  Securities,   any  underwriter  participating  in  any  disposition
pursuant to such  Registration  Statement and any attorney,  accountant or other
professional  retained  by any such  Holder or  underwriter  (collectively,  the
"Inspectors"),  all financial and other records,  pertinent  corporate documents
and properties of the Company as shall be reasonably necessary to enable them to
exercise their due diligence  responsibility,  and cause the Company's officers,
directors and employees to supply all  information  reasonably  requested by any
Inspectors in connection with such Registration Statement; and

                    (xv)  use  its   reasonable   best   efforts  to  cause  the
Registrable  Securities covered by such Registration  Statement to be registered
with or approved by such other  governmental  agencies or  authorities as may be
necessary  to  enable  the  Holders  to  consummate  the   disposition  of  such
Registrable Securities.




<PAGE>22


           B. The Holder  covenants  and agrees to  reasonably  cooperate in the
preparation of the  Registration  Statement by providing such information as the
Company  shall  reasonably  need from the  Holder  to  include  the  Registrable
Securities in the Registration Statement.

                 (d)  Expenses.  All expenses in connection  with  preparing and
filing  any  Registration  Statement  including,  without  limitation,  costs of
complying with federal and state securities laws and regulations, attorney's and
accounting fees of the Company,  printing  expenses and federal and state filing
fees  shall be  borne  in full by the  Company,  except  that  the  underwriting
commissions  and  expenses   attributable  to  the  Registrable   Securities  so
registered and the fees and disbursements of counsel,  if any, to the Holders of
the Registrable Securities shall be borne by such Holders.

                 (e)  Indemnification.  Each  Holder of  Registrable  Securities
exercising  the rights under  paragraphs  9(a) or 9(b) hereof will indemnify the
Company,  and each person who controls the Company within the meaning of Section
15 of the Act, from and against any and all losses,  claims,  damages,  expenses
and  liabilities  caused by any untrue  statement or statement  contained in any
registration  statement or statement  contained in a prospectus  furnished under
the Act or caused by omission to state a material fact therein necessary to make
the statements therein not misleading,  insofar as such losses, claims, damages,
expenses and liabilities  are caused by such untrue  statement or omission based
upon  information  furnished  in  writing  to the  Company  by any  such  Holder
expressly for use in any registration statement or prospectus and will reimburse
each such  indemnified  person,  as  incurred,  for any legal or other  expenses
reasonably  incurred by them in investigating,  defending or preparing to defend
any such loss, claim, damage, liability, action or proceeding. In addition, each
Holder  will  execute and deliver all such  documents  and  undertakings  as the
Company may  reasonably  deem  necessary or desirable for purposes of compliance
with applicable  federal and state securities laws. This indemnity  agreement is
in addition to any liability  which the Holder may otherwise have. The Company's
obligations  as set forth in  paragraph  9(a),  (b) and (c) with respect to each
Holder are contingent on such Holder's  satisfaction  of his or its  obligations
set forth in this paragraph 9(e).

                The Company  agrees to indemnify  and hold  harmless the Holders
(and each person,  if any,  who  controls the Holders  within the meaning of the
Act) from and against any loss, claim, damage or liability, joint or several, to
which they may become subject (under the Act or otherwise) insofar as such loss,
claim,  damage or liability (or action or proceeding in respect  thereof) arises
out of, or is based upon, (A) any untrue  statement or alleged untrue  statement
of a material fact contained (x) in the Registration Statement,  any preliminary
prospectus,  if used prior to the effective date of the Registration  Statement,
or any final prospectus,  or any amendment thereof or supplement thereto, or (y)
in any blue sky application or other document executed by the Company,  or based
upon written information  furnished by the Company,  filed in any state or other
jurisdiction in order to qualify any or all of the Registrable  Securities under
the securities laws thereof (as such application,  document or information being
hereinafter  called a "Blue Sky  Application"),  or (B) the  omission or alleged
omission to state in the Registration Statement, any preliminary prospectus,  if
used prior to the effective  date of the  Registration  Statement,  or any final
prospectus,  or any amendment thereof or supplement  thereto, or in any Blue Sky
Application, of a material fact required to be stated therein or


<PAGE>23


necessary to make the statements  therein,  in light of the circumstances  under
which they were made, not misleading;  and will reimburse each such  indemnified
person, as incurred, for any legal or other expenses reasonably incurred by them
in investigating, defending or preparing to defend any such loss, claim, damage,
liability,  action or proceeding;  provided, however, that the Company shall not
be liable  in any such case to the  extent,  but only to the  extent,  that such
loss,  claim,  damage  or  liability  arises  out of or is based  upon an untrue
statement or an alleged untrue statement or omission or alleged omission made in
such Registration  Statement or in any Blue Sky Application in reliance upon and
in conformity with written information  furnished to the Company by or on behalf
of such Holder specifically for use in preparation of the Registration Statement
or any such preliminary prospectus or the final prospectus or any such amendment
thereof  or  supplement  thereto,   or  any  Blue  Sky  Application   (including
information concerning the manner in which the Holders intend to effect sales of
the  Registrable  Securities).  This  indemnity  agreement is in addition to any
liability which the Company may otherwise have.

            (f) The term "51% Holder" as used in this Section 9.1 shall mean the
holders of at least 51% of the shares of common stock into which the  Debentures
are  convertible  (considered  in the  aggregate) and shall include any owner or
combination  of owners of Debentures in any  combination  if the holdings of the
aggregate  amount of: (i) the common stock held by him or among them as a result
of the conversion of the Debentures, plus (ii) the common stock which he or they
would be holding if the  Debentures  owned by him or among them were  converted,
would  constitute 51% or more of the common stock into which the Debentures were
originally convertible. The Company's agreement with respect to the registration
of the  Common  Stock in this  Section  9.1 shall  survive  the  conversion  and
surrender of the  Debentures  and upon  conversion  in full,  the Company  shall
deliver to the Holder an agreement  evidencing  the Company's  obligation  under
this Section 9.1.

                                   ARTICLE 10

               TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933
               --------------------------------------------------

           10.1 The Holder of this  Debenture,  each  transferee  hereof and any
Holder and transferee of any Shares, by his acceptance  thereof,  agrees that no
public distribution of Debentures or Shares will be made in violation of the Act
or  applicable  state  securities  laws.  The Holder of this  Debenture and each
transferee  hereof  further  agrees  that if any  distribution  of any Shares is
proposed to be made by them otherwise  than by delivery of a prospectus  meeting
the requirements of Section 10 of the Act, such action shall be taken only after
submission to the Company of an opinion of counsel,  reasonably  satisfactory in
form and  substance to the  Company's  counsel,  to the effect that the proposed
distribution  will not be in  violation of the Act or of  applicable  state law.
Furthermore,  it shall be a condition to the transfer of this Debenture that any
transferee thereof deliver to the Company his written agreement to accept and be
bound by all of the terms and conditions contained in this Debenture.




<PAGE>24


           10.2 This  Debenture  or the shares of the Common  Stock or any other
security issued or issuable upon conversion of this Debenture may not be sold or
otherwise disposed of except as follows:

                 (1) To a person  who,  in the opinion of counsel for the Holder
reasonably  acceptable  to the  Company,  is a person to whom this  Debenture or
shares of Common Stock may legally be transferred without registration under the
Act and then only against  receipt of an agreement of such person to comply with
the  provisions  of this  Section  10.2  with  respect  to any  resale  or other
disposition of such securities which agreement shall be satisfactory in form and
substance to the Company and its counsel;  provided that the foregoing shall not
apply to any such  Debenture,  shares of Common  Stock or other  security  as to
which such  Holder  shall have  received an opinion  letter from  counsel to the
Company  or  other  counsel  reasonably  acceptable  to the  Company,  as to the
exemption thereof from the registration under the Act pursuant to Rule 144 under
the Act; or

                 (2) to any person upon  delivery of a  prospectus  then meeting
the requirements of the Act relating to such securities and the offering thereof
for such sale or disposition.

                10.3 STATE LEGENDS.

               Notice to Wisconsin Purchasers.  IN MAKING AN INVESTMENT DECISION
INVESTORS MUST RELY ON THEIR OWN  EXAMINATION OF THE ISSUER AND THE TERMS OF THE
OFFERING,  INCLUDING THE MERITS AND RISKS  INVOLVED.  THESE  SECURITIES HAVE NOT
BEEN  RECOMMENDED  BY ANY FEDERAL OR STATE  SECURITIES  COMMISSION OR REGULATORY
AUTHORITY.  FURTHERMORE,  THE  FOREGOING  AUTHORITIES  HAVE  NOT  CONFIRMED  THE
ACCURACY OF THIS  DOCUMENT.  ANY  REPRESENTATION  TO THE  CONTRARY IS A CRIMINAL
OFFENSE.

THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON  TRANSFERABILITY  AND RESALE AND
MAY NOT BE  TRANSFERRED  OR  RESOLD  EXCEPT AS  PERMITTED  UNDER THE ACT AND THE
APPLICABLE  STATE  SECURITIES  LAWS,   PURSUANT  TO  REGISTRATION  OR  EXEMPTION
THEREFROM.  INVESTORS  SHOULD  BE AWARE  THAT THEY MAY BE  REQUIRED  TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.

                10.4 Each certificate for Shares shall bear a legend relating to
the  non-registered  status of such shares under the Act,  unless at the time of
conversion of this  Debenture  such shares of Common Stock have been  registered
under the Act or are in the  opinion of  counsel  reasonably  acceptable  to the
Company transferable without registration under the Act.





<PAGE>25


                                   ARTICLE 11

                                  MISCELLANEOUS
                                  -------------

           11.1 No Recourse. No recourse, whatsoever, either directly or through
the Company or any trustee,  receiver of assignee,  shall be had in any event or
in any manner  against  any past,  present or future  stockholder,  director  or
officer of the Company for the payment of the redemption price,  principal of or
interest  on this  Debenture  or any of them or for any claim  based  thereon or
otherwise in respect this Debenture, this Debenture being a corporate obligation
only.

           11.2  Notices.  All  communications  provided  hereunder  shall be in
writing and, if to the Company,  delivered or mailed by  registered or certified
mail addressed to Halsey Drug Co., Inc., 1827 Pacific Street, Brooklyn, New York
11233,  Attention:  President,  with a copy to Kenneth Goodwin,  Esq., Coleman &
Rhine,  LLP,  1120 Avenue of the  Americas,  New York,  New York,  or, if to the
Holder at the address shown for the Holder in the registration  books maintained
by the Company.

           11.3 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 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.

           11.4 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
satisfactory to the Company of such loss, theft or destruction and an indemnity,
if requested, also satisfactory to it.

           11.5 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.

           11.6 Governing  Law. This Debenture  shall be construed in accordance
with and governed by the laws of the State of New York, without giving effect to
conflict of laws principles.

           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.



/s/ Authorized Signatory                By: /s/ Rosendo Ferran
Name:                                      Rosendo Ferran
Title:                                     President



<PAGE>26




                                  ATTACHMENT I
                                  ------------

                                   Assignment


           For value  received,  I hereby  assign  subject to the  provisions of
Section 10, to $_____________  principal amount of the Convertible  Subordinated
Debenture due ________,  2000 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>27




                                  ATTACHMENT II
                                  -------------

                                CONVERSION NOTICE
                                -----------------

                TO:  HALSEY DRUG CO., INC.


           The undersigned holder of this Debenture hereby irrevocable 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 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


VOID AFTER 5:00 P.M., EASTERN STANDARD TIME ON JULY 17, 2000.

THIS  WARRANT  AND THE SHARES OF COMMON  STOCK  ISSUABLE  UPON  EXERCISE  HEREOF
(COLLECTIVELY THE "SECURITIES")  HAVE BEEN ACQUIRED FOR INVESTMENT ONLY AND HAVE
NOT BEEN REGISTERED  UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR
ANY  STATE  SECURITIES  LAW,  AND MAY NOT BE  SOLD,  PLEDGED,  HYPOTHECATED,  OR
OTHERWISE  TRANSFERRED  IN THE ABSENCE OF AN  EFFECTIVE  REGISTRATION  STATEMENT
UNDER THE ACT OR AN OPINION OF COUNSEL  REASONABLY  SATISFACTORY  TO HALSEY DRUG
CO., INC. THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.


                              HALSEY DRUG CO., INC.

                        REDEEMABLE COMMON STOCK PURCHASE
                              WARRANT CERTIFICATE
                               TO PURCHASE 37,500
                             SHARES OF COMMON STOCK



Certificate  No. W-3

      This  Warrant   Certificate   certifies   that  WILLIAM  W.  PRIEST,   SS#
289-38-2455,  residing  at 2 E.  70th  Street,  New  York,  New York  10021,  or
registered assigns, is the registered Holder (the "Holder") of 37,500 Redeemable
Common Stock Purchase Warrants (the "Warrants") to purchase shares of the common
stock,  $.01 par value (the "Common Stock") of Halsey Drug Co., Inc., a New York
corporation (the "Company").

      The  Warrants  represented  by this Warrant  Certificate  were issued as a
component  of a Unit  offered  by the  Company  pursuant  to a
  certain  Private
Placement  Memorandum dated June 29, 1995 (the "Private Placement  Memorandum").
In  addition  to Warrants  to  purchase  750 shares of Common  Stock,  each Unit
consists of a Convertible Subordinated Debenture of the Company in the principal
amount of $10,000 (the "Debentures").

      THIS WARRANT IS  REDEEMABLE  AT THE OPTION OF THE COMPANY  UNDER CERTAIN
CIRCUMSTANCES.  SEE SECTION 11.






<PAGE>2





      1.    EXERCISE OF WARRANT.

            (A) Each Warrant  enables the Holder,  subject to the  provisions of
this Warrant  Certificate to purchase from the Company at any time and from time
to time commencing on the date of issuance (the "Initial Exercise Date") through
and including 5:00 p.m., Eastern Standard Time on July 17, 2000 (the "Expiration
Date") one (1) fully paid and  non-assessable  share of Common Stock  ("Shares")
upon due presentation and surrender of this Warrant  Certificate  accompanied by
payment of the purchase price of $2.00 per Share (the "Exercise Price"). Payment
shall be made in lawful money of the United States of America by certified check
payable to the Company at its principal office at 1827 Pacific Street, Brooklyn,
New York 11233. As hereinafter provided, the Exercise Price and number of Shares
purchasable  upon the exercise of the Warrants  are subject to  modification  or
adjustment upon the happening of certain events.

            (B) This Warrant  Certificate is exercisable at any time on or after
the  Initial  Exercise  Date in whole or in part by the  Holder  in person or by
attorney duly authorized in writing at the principal office of the Company.

      2.    EXCHANGE, FRACTIONAL SHARES, TRANSFER.

            (A) Upon surrender to the Company,  this Warrant  Certificate may be
exchanged for another Warrant Certificate or Warrant  Certificates  evidencing a
like  aggregate  number  of  Warrants.  If this  Warrant  Certificate  shall  be
exercised in part, the Holder shall be entitled to receive upon surrender hereof
another  Warrant  Certificate or Warrant  Certificates  evidencing the number of
Warrants not exercised;

            (B)  Anything  herein to the contrary  notwithstanding,  in no event
shall the Company be obligated to issue Warrant  Certificates  evidencing  other
than a whole number of Warrants or issue  certificates  evidencing  other than a
whole number of Shares upon the exercise of this Warrant Certificate;  provided,
however, that the Company shall pay with respect to any such fraction of a Share
an amount of cash based upon the current public market value (or book value,  if
there shall be no public  market  value) for Shares  purchasable  upon  exercise
hereof, as determined in accordance with subparagraph (A) of Section 11 hereof;

            (C) The  Company  may deem and treat the  person in whose  name this
Warrant  Certificate  is registered as the absolute true and lawful owner hereof
for all purposes whatsoever; and

            (D)  This  Warrant  Certificate  may not be  transferred  except  in
compliance  with the provisions of the Act or applicable  state  securities laws
and in accordance with the provisions of Section 12 hereof.




                                       2

<PAGE>3





      3.  RIGHTS OF A  HOLDER.  No  Holder  shall be deemed to be the  Holder of
Common  Stock or any other  securities  of the  Company  that may at any time be
issuable on the  exercise  hereof for any purpose nor shall  anything  contained
herein be construed to confer upon the Holder any of the rights of a shareholder
of the Company or any right to vote for the  election of  directors  or upon any
matter  submitted to  shareholders at any meeting thereof or to give or withhold
consent to any corporate  action (whether upon any  reorganization,  issuance of
stock,   reclassification   or  conversion  of  stock,   change  of  par  value,
consolidation,  merger,  conveyance,  or  otherwise)  or to  receive  notice  of
meetings or to receive  dividends or  subscription  rights or otherwise  until a
Warrant  shall have been  exercised  and the Common Stock  purchasable  upon the
exercise thereof shall have become issuable.

      4.  REGISTRATION  OF TRANSFER.  The Company shall  maintain  books for the
transfer  and  registration  of  Warrants.  Upon the transfer of any Warrants in
accordance with the provisions of Section 2(D) hereof (a "Permitted  Transfer"),
the  Company  shall  issue and  register  the  Warrants  in the names of the new
Holder.  The Warrants 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  transfer,  from time to time,  any
outstanding  Warrants  upon the books to be  maintained  by the Company for such
purpose upon surrender  thereof for transfer properly endorsed or accompanied by
appropriate  instructions  for  transfer.  Upon any  Permitted  Transfer,  a new
Warrant  Certificate  shall be  issued  to the  transferee  and the  surrendered
Warrants  shall be cancelled  by the  Company.  Warrants may be exchanged at the
option of the Holder, when surrendered at the office of the Company, for another
Warrant,  or other  Warrants  of  different  denominations,  of like  tenor  and
representing  in the  aggregate  the right to  purchase a like number of Shares.
Subject  to the  terms of this  Warrant  Certificate,  upon such  surrender  and
payment of the purchase  price at any time after the Initial  Exercise Date, the
Company  shall issue and  deliver  with all  reasonable  dispatch to or upon the
written  order of the Holder of such  Warrants and in such name or names as such
Holder may  designate,  a  certificate  or  certificates  for the number of full
Shares so purchased  upon the exercise of such  Warrants.  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 such  Warrants  and  payment  of the
purchase  price;  provided,  however,  that  if,  at the date of  surrender  and
payment, the transfer books of the Company shall be closed, the certificates for
the Shares  shall be issuable as of the date on which such books shall be opened
and  until  such  date  the  Company  shall  be  under  no duty to  deliver  any
certificate  for such Shares;  provided,  further,  however,  that such transfer
books,  unless  otherwise  required by law or by applicable rule of any national
securities exchange or interdealer  quotation system, shall not be closed at any
one time for a period longer than 20 days. The rights of purchase represented by
the Warrants shall be exercisable,  at the election of the Holders, either as an
entirety  or from  time to time for only  part of the  Shares  at any time on or
after the Initial Exercise Date.




                                       3

<PAGE>4

      5.  STAMP  TAX.  The  Company  will  pay  any   documentary   stamp  taxes
attributable to the initial issuance of the Shares issuable upon the exercise of
the Warrants;  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 Shares in a name other than that of
the  Holder in respect of which  such  Shares are  issued,  and in such case the
Company shall not be required to issue or deliver any  certificate for Shares or
any  Warrant  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.

      6. DESTROYED, LOST, STOLEN OR MUTILATED CERTIFICATES. In case this Warrant
Certificate shall be destroyed,  lost, stolen or mutilated,  the Company may, in
its  discretion,  issue and deliver in exchange  and  substitution  for and upon
cancellation  of  the  mutilated  Warrant   Certificate,   or  in  lieu  of  and
substitution  for the  lost,  stolen or  destroyed  Warrant  Certificate,  a new
Warrant  Certificate of like tenor representing an equivalent right or interest,
but  only  upon  receipt  of  evidence  satisfactory  to  the  Company  of  such
destruction,  loss,  theft or mutilation  and an indemnity,  if requested,  also
satisfactory to it.

      7. RESERVED  SHARES.  The Company  warrants that there have been reserved,
and covenants that at all times in the future it shall keep reserved, out of the
authorized and unissued  Common Stock, a number of Shares  sufficient to provide
for  the  exercise  of the  rights  of  purchase  represented  by  this  Warrant
Certificate.  The Company  agrees that all Shares  issuable upon exercise of the
Warrants shall be, at the time of delivery of the  certificates for such Shares,
validly  issued  and  outstanding,  fully paid and  non-assessable  and that the
issuance  of such  Shares  will not give rise to  preemptive  rights in favor of
existing stockholders.

      8.    ANTI-DILUTION PROVISIONS.

            (A) Dividends; Reclassifications, etc. In the event that the Company
shall, at any time prior to the exercise of this Warrant:  (i) declare or pay to
the  holders  of the Common  Stock a  dividend  payable in any kind of shares of
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 (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 shall receive, in addition to or
in  substitution  for the shares of Common Stock to which it would  otherwise be
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



                                       4

<PAGE>5

from such  transfer,  or such  assets of the  Company,  which it would have been
entitled to receive had it exercised  this Warrant prior to the happening of any
of the foregoing events.

            (B)  Notice of  Certain  Transactions.  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,  or shall
enter into an agreement to merge or consolidate  with another  corporation,  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 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 30 days  prior  to the  effective  date of the  merger  or  consolidation.
Failure to give notice as required by this Section, or any defect therein, shall
not  affect  the  legality  or  validity  of  any  dividend,   distribution   or
subscription or other right.

            (C)  Adjustments to Exercise Price. 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  subparagraph  (D) of
     this Paragraph 8; or

          (ii) shares issued,  subdivided or combined in transactions  described
     in  subparagraph  (A) of  this  Paragraph  8 if and to the  extent  that an
     adjustment to the Exercise Price shall have been  previously  made pursuant
     to  subparagraph  (A) of this  Paragraph  8 as a result  of such  issuance,
     subdivision or combination of such securities;

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

          (a) the  sum of (x)  the  total  number  of  shares  of  Common  Stock
     outstanding  immediately  prior to such  issuance  plus (y) the  number  of
     shares of Common  Stock  which the  aggregate  consideration  received,  as
     determined in accordance  with  subparagraph  (E) below for the issuance or
     sale of such additional Common Stock or Convertible Securities deemed to be
     an issuance of Common Stock as provided in  subparagraph  (F) below,  would
     purchase  (including  any  consideration  received by the Company  upon the
     issuance of any



                                       5

<PAGE>6

     shares  of  Common  Stock  or  Convertible  Securities  since  the date the
     Applicable  Exercise Price became effective not previously  included in any
     computation  resulting in an adjustment  pursuant to this subparagraph (C))
     at the Applicable Exercise Price; 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 subparagraph  (E))  immediately  after the
     issuance or sale of such additional shares.

If,  however,  the  Applicable  Exercise Price thus obtained would result in the
issuance of a lesser  number of shares upon  conversion  than would be issued at
the initial  Exercise Price  specified in Paragraph 1, the  Applicable  Exercise
Price shall be such initial Exercise Price.

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

             (D)   Exclusions.   Anything  in  this   Paragraph  8  to  contrary
notwithstanding, no adjustment in the Exercise 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 by the Company's Board of Directors, as may be amended from time to
     time;

          (ii) The annual grant of options to Joseph F.  Limongelli  to purchase
     up to 10,000  shares of the  Company's  Common  Stock at an exercise  price
     equal to the closing price of the Company's Common Stock as reported on the
     American Stock Exchange,  or successor Exchange or over-the-counter  market
     on which the Common Stock is then traded, on the date of grant; 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
     including,  without  limitation,  the exercise of any Warrant issued in the
     same  placement  of  securities  in which  this  Warrant  was issued by the
     Company, whether or not outstanding on the issuance date hereof.





                                       6

<PAGE>7

             (E) Calculation of  Consideration.  For the purpose of subparagraph
(C) above, 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, compensations or other expenses
     paid or incurred by the Company for any  underwriting  or placement  of, or
     otherwise in connection with the issuance or sale of such shares.

          (ii)  In  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 Convertible Securities, 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 on  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  the  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,  accredited 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  compensations  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



                                       7

<PAGE>8

     obligations  or shares so converted or exchanged  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  subparagraphs  (E)(i) and  (E)(iii)  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 Exercise Price shall be required
     by reason of the fixing of such record date.


             (F)  Deemed   Issuances  of  Common  Stock.  For  purposes  of  the
adjustments  provided for in subparagraph (C) 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.

             (G)   Readjustments   of  Exercise   Price.   On  the   expiration,
cancellation  or redemption of any  Convertible  Securities,  the Exercise Price
then in effect hereunder shall forthwith be readjusted to such Exercise Price as
would have been obtained (a) had the adjustments  made upon the issuance or sale
of such expired, cancelled 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 only on the  basis of the  Exercise  Price as
readjusted under this  subparagraph  (G) for all transactions  (which would have
affected such adjusted  Exercise  Price) made after the issuance or sale of such
Convertible Securities.

             (H)  Carry  Forwards.   Anything  in  this  Paragraph  8  to  the
contrary  notwithstanding,  no  adjustment  in the  Exercise  Price  shall  be
required unless such adjustment



                                       8

<PAGE>9

would  require an increase or  decrease of at least 1% in such  Exercise  Price;
provided, however, that any adjustments which by reason of this subparagraph (H)
are not  required to be made shall be carried  forward and taken into account in
making subsequent adjustments.  All calculations under this Paragraph 8 shall be
made to the nearest cent or to the nearest tenth of a share, as the case may be.

             (I) Notice of  Adjustments.  Upon any  adjustment  of the  Exercise
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 Exercise
Price  resulting from such  adjustment and the increase or decrease,  if any, in
the number of Shares purchasable at such price upon the exercise hereof, setting
forth in reasonable  detail the method of  calculation  and the facts upon which
such calculation is based.

      9.  CONSOLIDATION OR MERGER. The Company covenants and agrees that it will
not  merge or  consolidate  with or into or sell or  otherwise  transfer  all or
substantially all of its assets to any other corporation or entity unless at the
time of or prior to such  transaction  such other  corporation  or other  entity
shall  expressly  assume all of the  liabilities  and obligations of the Company
under this Warrant and (without  limiting the generality of the foregoing) shall
expressly agree that the Holder of this Warrant shall  thereafter have the right
(subject to subsequent  adjustment as nearly  equivalent as  practicable  to the
adjustments  provided  for in  Paragraph 8 of this  Warrant) to receive upon the
exercise  of this  Warrant  the  number  and kind of  shares  of stock and other
securities  and property  receivable  upon such  transaction  by a Holder of the
number and kind of shares which would have been  receivable upon the exercise of
this Warrant immediately prior to such transaction.

      10.   REGISTRATION RIGHTS UNDER THE SECURITIES ACT OF 1933.

            A.  Issuance of Stock  Registered  under the Act by the Company upon
Exercise. Not later than 90 days from the date of this Warrant, the Company will
file a registration statement under the Act with respect to the number of shares
of Common Stock  issuable  upon the  exercise of this Warrant (the  "Registrable
Securities") in order to provide for the issuance by the Company of Common Stock
upon exercise of this Warrant which has been registered under the Act, and shall
use its best efforts to cause such  registration  statement to become and remain
effective  until such time as all of the Warrants  shall have been exercised and
the Common Stock issuable thereunder has been issued by the Company.

            B.    Supplemental   Registration   Rights.   In  the   event  the
Company is  precluded by the U.S.  Securities  and  Exchange  Commission  (the
"Commission")  from registering  under the Act the Registrable  Securities for
issuance upon exercise of this Warrant or if the Holder



                                       9

<PAGE>10

shall have exercised this Warrant prior to the effectiveness of the registration
statement  described in Subsection A above,  the Holder shall have the following
registration rights:

                  Piggyback  Registration  Rights.  If (i)  any 51%  Holder  (as
defined in Section 10.F hereof)  shall give notice to the Company at any time to
the effect that such holder desires to have the Company registered under the Act
any common stock issuable upon conversion of the Debentures, or (ii) the Company
proposes  to  file a  registration  statement  covering  any  securities  of the
Company,  for its own  account or for the account of others,  the Company  shall
advise the Holder or its transferee, whether the Holder holds the Warrant or has
converted  the Warrant and holds the Common Stock  underlying  the  Warrant,  by
written  notice at least  four  weeks  prior to the  filing of any  registration
statement under the Act, and will,  until the Expiration  Date, upon the request
of the  Holder,  register  under the Act all or any  portion of the  Registrable
Securities and cause such registration  statement to become and remain effective
as provided in Subsection C hereof.

            C. Registration  Covenants of the Company. (a) In the event that any
Registrable  Securities  are to be registered  pursuant to Subsections A or B of
this  Warrant,  the Company  covenants  and agrees that the Company will use its
best  efforts  to  effect  the  registration  and  cooperate  in the sale of the
Registrable Securities to be registered and will as expeditiously as possible:

               (i) prepare and file with the Commission a registration statement
with respect to the Registrable  Securities (as well as any necessary amendments
or supplements thereto)(a "Registration Statement") which Registration Statement
(A) will state that the holders of Registrable  Securities  covered  thereby may
sell such Registrable  Securities under such Registration  Statement or pursuant
to Rule 144 (or any similar rule then in effect), (B) when it becomes effective,
and when any  post-effective  amendment thereof and supplement thereto is filed,
the Registration Statement, as then amended or supplemented,  will comply in all
material  respects with the  applicable  provisions of the Act and the rules and
regulations  thereunder and,  except for information  provided in writing by the
Holder for  inclusion in the  Registration  Statement for which the Company does
not  represent  or  warrant  as to its  accuracy,  will not  contain  an  untrue
statement  or a material  fact or omit to state a material  fact  required to be
stated  therein or necessary  to make the  statements  therein,  in light of the
circumstances under which they are made, not misleading;

               (ii) furnish to the Holders copies of such Registration Statement
and any  amendments or  supplements  thereto and any  prospectus  forming a part
thereof  prior to  filing,  which  documents  will be  subject  to the review of
counsel for the Holders;

               (iii) use its best efforts to cause such  Registration  Statement
to become effective;




                                       10

<PAGE>11

               (iv) notify the Holders, promptly after the Company shall receive
notice thereof,  of the time when said Registration  Statement becomes effective
or when any  amendment or supplement  to any  prospectus  forming a part of said
Registration Statement has been filed;

               (v) notify the Holders  promptly of any request by the Commission
for the amending or supplementing of such  Registration  Statement or prospectus
or for additional information;

               (vi) advise the Holders after the Company shall receive notice or
obtain  knowledge  thereof  of the  issuance  of  any  order  by the  Commission
suspending the  effectiveness  of any such  Registration  Statement or amendment
thereto or of the  initiation or threatening of any proceeding for that purpose,
and promptly use its reasonable best efforts to prevent the issuance of any stop
order or to obtain its withdrawal promptly if such stop order should be issued;

               (vii) prepare and file with the  Commission  such  amendments and
supplements to such  Registration  Statement and the  prospectus  forming a part
thereof as may be necessary to keep such Registration Statement effective (a) in
the case of a Registration  Statement filed and declared  effective  pursuant to
Subsection A hereof,  until such time as all Holders of the Warrants  shall have
exercised the Warrants, or (b) in the case of a Registration Statement filed and
declared  effective  pursuant  to  Subsection  B hereof,  until such time as the
Holders  pursuant  to such  Registration  Statement  have  disposed  of all such
Registrable Securities but in no event exceeding five (5) years from the date of
effectiveness;

               (viii)  furnish  to each  Holder  such  number  of copies of such
Registration  Statement,  each amendment and supplement thereto,  the prospectus
included in such Registration Statement (including each preliminary  prospectus)
and such  other  documents  as that  Holder may  reasonably  request in order to
facilitate the disposition of the Registrable Securities owned by such Holder;

               (ix) use its reasonable  best efforts to register or qualify such
Registrable  Securities  under  such other  securities  or blue sky laws of such
jurisdictions  as  determined  by the  Holders and do any and all other acts and
things which may be  reasonably  necessary or advisable to enable the Holders to
consummate the disposition in such  jurisdictions of the Registrable  Securities
(provided that the Company will not be required to: (A) qualify  generally to do
business  in any  jurisdiction  where it would  not  otherwise  be  required  to
qualify; (B) subject itself to taxation in any such jurisdiction; or (C) consent
to general service of process in any such jurisdiction);




                                       11

<PAGE>12

               (x) notify the  Holders  at any time when a  prospectus  relating
thereto is required to be delivered under the Act, of the happening of any event
as a result of which such Registration Statement contains an untrue statement of
a  material  fact or omits to state  any  material  fact  required  to be stated
therein or necessary to make the statements therein not misleading,  and, at the
request of the Holder,  prepare a supplement  or amendment to such  Registration
Statement so that such Registration Statement will not contain, to the Company's
knowledge,  an untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the  statements  therein
not misleading;

               (xi)  cause  all  Registrable  Securities  to be  listed  on each
securities  exchange on which similar  securities issued by the Company are then
listed;

               (xii)  provide  a  transfer   agent  for  all  such   Registrable
Securities not later than the effective date of such Registration Statement;

               (xiii)  enter  into  such  customary  agreements   (including  an
underwriting agreement in customary form) and take all such other actions as the
participating  Holders or the underwriters,  if any, reasonably request in order
to expedite or facilitate the disposition of the Registrable Securities;

               (xiv)  make  available  for  inspection  by the  Holder  of  such
Registrable  Securities,   any  underwriter  participating  in  any  disposition
pursuant to such  Registration  Statement and any attorney,  accountant or other
professional  retained  by any such  Holder or  underwriter  (collectively,  the
"Inspectors"),  all financial and other records,  pertinent  corporate documents
and properties of the Company as shall be reasonably necessary to enable them to
exercise their due diligence  responsibility,  and cause the Company's officers,
directors and employees to supply all  information  reasonably  requested by any
Inspectors in connection with such Registration Statement; and

               (xv) use its  reasonable  best  efforts to cause the  Registrable
Securities  covered by such  Registration  Statement  to be  registered  with or
approved by such other governmental  agencies or authorities as may be necessary
to  enable  the  Holders  to  consummate  the  disposition  of such  Registrable
Securities.


             (b) The Holder covenants and agrees to reasonably  cooperate in the
preparation of the  Registration  Statement by providing such information as the
Company  shall  reasonably  need from the  Holder  to  include  the  Registrable
Securities in the Registration Statement.

                                       12


<PAGE>13

            D.  Expenses.  All expenses in connection  with preparing and filing
any Registration  Statement  including,  without limitation,  costs of complying
with  federal  and  state  securities  laws  and  regulations,   attorney's  and
accounting fees of the Company,  printing  expenses and federal and state filing
fees  shall be  borne  in full by the  Company,  except  that  the  underwriting
commissions  and  expenses   attributable  to  the  Registrable   Securities  so
registered and the fees and disbursements of counsel,  if any, to the Holders of
the Registrable Securities shall be borne by such Holders.

            E. Indemnification. Each Holder of Registrable Securities exercising
the rights under Subsections A or B hereof will indemnify the Company,  and each
person who  controls  the  Company  within the meaning of Section 15 of the Act,
from and against any and all losses, claims,  damages,  expenses and liabilities
caused by any  untrue  statement  or  statement  contained  in any  registration
statement or statement  contained  in a  prospectus  furnished  under the Act or
caused by  omission  to state a  material  fact  therein  necessary  to make the
statements  therein not  misleading,  insofar as such losses,  claims,  damages,
expenses and liabilities  are caused by such untrue  statement or omission based
upon  information  furnished  in  writing  to the  Company  by any  such  Holder
expressly for use in any registration statement or prospectus and will reimburse
each such  indemnified  person,  as  incurred,  for any legal or other  expenses
reasonably  incurred by them in investigating,  defending or preparing to defend
any such loss, claim, damage, liability, action or proceeding. In addition, each
Holder  will  execute and deliver all such  documents  and  undertakings  as the
Company may  reasonably  deem  necessary or desirable for purposes of compliance
with applicable  federal and state securities laws. This indemnity  agreement is
in addition to any liability  which the Holder may otherwise have. The Company's
obligations  as set forth in  Subsections A, B and C with respect to each Holder
are contingent on such Holder's satisfaction of his or its obligations set forth
in this Subsection E.

            The Company  agrees to indemnify  and hold harmless the Holders (and
each person,  if any,  who  controls the Holders  within the meaning of the Act)
from and against any loss,  claim,  damage or  liability,  joint or several,  to
which they may become subject (under the Act or otherwise) insofar as such loss,
claim,  damage or liability (or action or proceeding in respect  thereof) arises
out of, or is based upon, (A) any untrue  statement or alleged untrue  statement
of a material fact contained (x) in the Registration Statement,  any preliminary
prospectus,  if used prior to the effective date of the Registration  Statement,
or any final prospectus,  or any amendment thereof or supplement thereto, or (y)
in any blue sky application or other document executed by the Company,  or based
upon written information  furnished by the Company,  filed in any state or other
jurisdiction in order to qualify any or all of the Registrable  Securities under
the securities laws thereof (as such application,  document or information being
hereinafter  called a "Blue Sky  Application"),  or (B) the  omission or alleged
omission to state in the Registration Statement, any preliminary prospectus,  if
used prior to the effective  date of the  Registration  Statement,  or any final
prospectus,  or any amendment thereof or supplement  thereto, or in any Blue Sky
Application, of a



                                       13

<PAGE>14

material fact required to be stated  therein or necessary to make the statements
therein,  in  light  of the  circumstances  under  which  they  were  made,  not
misleading;  and will reimburse each such indemnified  person, as incurred,  for
any  legal or  other  expenses  reasonably  incurred  by them in  investigating,
defending or preparing to defend any such loss, claim, damage, liability, action
or proceeding;  provided,  however,  that the Company shall not be liable in any
such case to the extent, but only to the extent,  that such loss, claim,  damage
or  liability  arises out of or is based upon an untrue  statement or an alleged
untrue  statement  or omission  or alleged  omission  made in such  Registration
Statement or in any Blue Sky Application in reliance upon and in conformity with
written  information  furnished  to the  Company by or on behalf of such  Holder
specifically  for use in preparation of the  Registration  Statement or any such
preliminary  prospectus or the final prospectus or any such amendment thereof or
supplement  thereto,  or  any  Blue  Sky  Application   (including   information
concerning  the  manner in which  the  Holders  intend  to  effect  sales of the
Registrable  Securities).  This  indemnity  agreement  is  in  addition  to  any
liability which the Company may otherwise have.

            F. The term "51%  Holder" as used in this  Section 10 shall mean the
Holders of at least 51% of the shares of common stock into which the  Debentures
comprising  a portion of the Units  offered  pursuant to the  Private  Placement
Memorandum are convertible  (considered in the aggregate) and shall included any
owner or combination of owners of Debentures in any  combination if the holdings
of the aggregate  amount of: (i) the common stock held by him or among them as a
result of the conversion of the Debentures,  plus (ii) the common stock which he
or they  would be  holding  if the  Debentures  owned by him or among  them were
converted,  would  constitute  51% or more of the  common  stock  into which the
Debentures were originally convertible.  The Company's agreement with respect to
the  registration  of the  common  stock in this  Section 10 shall  survive  the
exercise and  surrender of this Warrant and upon  exercise in full,  the Company
shall deliver to the Holder an agreement  evidencing  the Company's  obligations
under this Section 10.

      11.   REDEMPTION.

            (A) This Warrant Certificate may be redeemed on not less than thirty
(30) days'  notice,  at a  redemption  price of $.01 per  Warrant,  provided the
market price of the Common Stock  receivable upon exercise of such Warrant shall
exceed $2.00 per share (the "Target Price"),  subject to adjustment as set forth
in Subsection  (D) below.  Market price for the purpose of this Section 11 shall
mean as  applicable  (i) the  closing  sale price,  for twenty (20)  consecutive
trading days (during which the Shares are registered  pursuant to the Securities
Act), of the Common Stock as reported by the National  Association of Securities
Dealers,  Inc. Automated Quotation System; or (ii) the last reported sale price,
for twenty (20) consecutive trading days (during which the Shares are registered
pursuant to the  Securities  Act,  on the  primary  exchange on which the Common
Stock  is  traded,  if the  Common  Stock is  traded  on a  national  securities
exchange; or (iii) the closing bid



                                       14

<PAGE>15

price,  for twenty (20)  consecutive  trading days (during  which the Shares are
registered  pursuant to the Act) in the  over-the-counter  market as reported by
the National Quotation Bureau or similar information provider.

            (B) The notice of redemption shall specify (i) the redemption price,
(ii)  the  date  fixed  for  redemption,  (iii)  the  place  where  the  Warrant
Certificates  shall be delivered and the redemption price paid and (iv) that the
right to exercise the Warrant  shall  terminate at 5:00 P.M.  (Eastern  Standard
Time) on the business day  immediately  preceding the date fixed for redemption.
The date  fixed for the  redemption  of the  Warrants  shall be the  "Redemption
Date." No failure to mail such  notice nor any defect  therein or in the mailing
thereof shall affect the validity of the proceedings for such redemption  except
as to a Holder  (a) to whom  notice  was not  mailed  or (b)  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 redemption  has been
mailed  postage  prepaid  to the last  address of the  Holder  appearing  on the
Warrant Certificate  registry books kept by the Company shall, in the absence of
fraud,  be prima  facie  evidence  of the  facts  stated  therein.  Any right to
exercise a Warrant shall terminate at 5:00 P.M.  (Eastern  Standard Time) on the
business  day  immediately  preceding  the  Redemption  Date.  On and  after the
Redemption Date,  Holders of the Warrants shall have no further rights except to
receive, upon surrender of the Warrant, the redemption price.

            (C) From and after the date  specified for  redemption,  the Company
shall, at the place specified in the notice of redemption, upon presentation and
surrender  to the  Company by or on behalf of the Holder  thereof of one or more
Warrants to be redeemed, deliver or cause to be delivered to or upon the written
order of such  Holder a sum in cash equal to the  redemption  price of each such
Warrant.  From and after the date fixed for  redemption  and upon the deposit or
setting  aside by the  Company of a sum  sufficient  to redeem all the  Warrants
called for redemption, such Warrants shall expire and become void and all rights
hereunder,  except the right to receive payment of the redemption  price,  shall
cease.

            (D) If the shares of the  Company's  Common Stock are  subdivided or
combined into a greater or smaller number of shares of Common Stock,  the Target
Price shall be  proportionally  adjusted by the ratio which the total  number of
shares of Common Stock outstanding  immediately prior to such event bears to the
total number of shares of Common Stock to be outstanding  immediately after such
event.

            (E) If less than all of the  Warrants are called for  redemption  by
the Company,  the particular  Warrants to be redeemed shall be redeemed pro-rata
in accordance  with the Warrants then  outstanding.  If there shall be drawn for
redemption   less  than  all  of  the  Warrants   represented  by  this  Warrant
Certificate,  the Company  shall  execute and  deliver,  upon  surrender of this
Warrant



                                       15

<PAGE>16

Certificate,   without  charge  to  the  Holder,   a  new  Warrant   Certificate
representing the unredeemed  balance of the Warrant  represented by this Warrant
Certificate.

      12.   TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.

            (A) The Holder of this Warrant  Certificate,  each transferee hereof
and any Holder and transferee of any Shares, by his acceptance  thereof,  agrees
that (a) no public  distribution of Warrants or Shares will be made in violation
of the Act,  and (b) during such period as the  delivery  of a  prospectus  with
respect to Warrants or Shares may be required by the Act, no public distribution
of Warrants or Shares will be made in a manner or on terms  different from those
set forth in, or without delivery of, a prospectus then meeting the requirements
of Section 10 of the Act and in  compliance  with  applicable  state  securities
laws. The Holder of this Warrant  Certificate and each transferee hereof further
agrees that if any  distribution of any of the Warrants or Shares is proposed to
be  made  by them  otherwise  than  by  delivery  of a  prospectus  meeting  the
requirements  of Section 10 of the Act,  such  action  shall be taken only after
submission to the Company of an opinion of counsel,  reasonably  satisfactory in
form and  substance to the  Company's  counsel,  to the effect that the proposed
distribution  will not be in  violation of the Act or of  applicable  state law.
Furthermore,  it shall be a condition to the  transfer of the Warrants  that any
transferee thereof deliver to the Company his written agreement to accept and be
bound by all of the terms and conditions contained in this Warrant Certificate.

            (B) This  Warrant  or the  Shares  or any other  security  issued or
issuable upon exercise of this Warrant may not be sold or otherwise  disposed of
except as follows:

                (1) To a person  who,  in the  opinion of counsel for the Holder
reasonably acceptable to the Company, is a person to whom this Warrant or Shares
may legally be transferred  without  registration  and without the delivery of a
current  prospectus  under the Act with  respect  thereto and then only  against
receipt of an  agreement  of such person to comply with the  provisions  of this
subsection  (B)(1)  with  respect  to any  resale or other  disposition  of such
securities  which  agreement  shall be satisfactory in form and substance to the
Company and its counsel; provided that the foregoing shall not apply to any such
Warrant, Shares or other security as to which such Holder shall have received an
opinion letter from counsel to the Company as to the exemption  thereof from the
registration under the Act pursuant to Rule 144 under the Act; or

                (2) To any person upon delivery of a prospectus then meeting the
requirements of the Act relating to such securities and the offering thereof for
such sale or disposition.

            (C) Each certificate for Shares issued upon exercise of this Warrant
shall bear a legend relating to the  non-registered  status of such Shares under
the Act, unless at the time of



                                       16

<PAGE>17

exercise  of this  Warrant  such  Shares are  subject to a  currently  effective
registration statement under the Act.

      13.   MISCELLANEOUS.

            (A) LAW TO GOVERN.  This Warrant  shall be governed by and construed
in accordance with the substantive laws of the State of New York, without giving
effect to conflict of laws principles.

            (B) ENTIRE  AGREEMENT.  This  Warrant  Certificate  constitutes  and
expresses the entire  understanding  between the parties  hereto with respect to
the  subject  matter  hereof,  and  supersedes  all  prior  and  contemporaneous
agreements  and  understandings,  inducements or conditions  whether  express or
implied,  oral or written.  Neither this Warrant  Certificate nor any portion or
provision hereof may be changed, waived or amended orally or in any manner other
than by an agreement in writing signed by the Holder and the Company.

            (C)  NOTICES.   Except  as   otherwise   provided  in  this  Warrant
Certificate, all notices, requests, demands and other communications required or
permitted under this Warrant Certificate or by law shall be in writing and shall
be deemed to have been duly given, made and received only when delivered against
receipt or when  deposited in the United States  mails,  certified or registered
mail, return receipt requested, postage prepaid, addressed as follows:

Company:    Halsey Drug Co., Inc.
            1827 Pacific Street
            Brooklyn, New York  11233
            Attn:  President

Holder:     At the address shown for the
            Holder in the registration
            book maintained by the
            Company.

            (D)  SEVERABILITY.  If any provision of this Warrant  Certificate is
prohibited by or is unlawful or  unenforceable  under any  applicable law of any
jurisdiction,  such provision shall, as to such jurisdiction be in effect to the
extent of such prohibition without invalidating the remaining provisions hereof;
provided,  however,  that any such  prohibition  in any  jurisdiction  shall not
invalidate such provision in any other jurisdiction;  and provided, further that
where the provisions of any such applicable law may be waived,  that they hereby
are waived by the Company and the Holder to the full extent permitted by law and
to the end that  this  Warrant  instrument  shall be  deemed  to be a valid  and
binding agreement in accordance with its terms.




                                       17

<PAGE>18

      IN WITNESS  WHEREOF,  Halsey  Drug Co.,  Inc.  has caused  this  Warrant
Certificate  to be signed by its duly  authorized  officers as of the 18th day
of July, 1995.



                                          HALSEY DRUG CO., INC.



                                          By: /s/ Rosendo Ferran
                                             Rosendo Ferran, President

Attest:

/s/ Authorized Signatory




[CORPORATE SEAL]




                                       18

<PAGE>19






                                  PURCHASE FORM





To:  Halsey Drug Co., Inc.
                 , 19



      The undersigned hereby irrevocably elects to exercise the attached Warrant
Certificate,  Certificate No. W- , to the extent of Shares of Common Stock, $.01
par value per share of Halsey Drug Co.,  Inc.,  and hereby makes payment of $ in
payment of the aggregate exercise price thereof.


                   INSTRUCTIONS FOR REGISTRATION OF SECURITIES



Name:
     (Please typewrite or print in block letters)


Address:







                                       By:



                                       19





<PAGE>1
                              HALSEY DRUG CO., INC.

                             SUBSCRIPTION AGREEMENT


To:  Halsey Drug Co., Inc.
     1827 Pacific Street
     Brooklyn, New York 11233
     Attention:  Rosendo Ferran,
                 President and CEO

          1. The undersigned  hereby  subscribes for 55 Units, each Unit
consisting of a 10% Convertible  Subordinated  Debenture in the principal
amount of $10,000 (each a  "Debenture")  and 600 Redeemable  Common Stock
Purchase  Warrants (the "Warrants")  of Halsey Drug Co., Inc. (the  "Company"),
which Units are offered pursuant to the Company's Private Placement Memorandum,
dated November 20, 1995 (the "Memorandum"). Each Unit is offered at a
subscription price of $10,000, and the minimum  subscription  is one Unit per
investor.  The  undersigned  delivers herewith the full subscription price for
the Units subscribed for herein.

          The  undersigned  agrees  that  this  subscription  is  and  shall  be
irrevocable,  but that it may be rejected,  in whole or in part, by the Company,
and that the  obligations  of the  undersigned  hereunder will terminate if this
subscription is not accepted by the Company.  The undersigned  understands  that
the Company will notify  him/it if this  subscription  has been rejected for any
reason. If this subscription is rejected, the payment tendered by him/it will be
returned
  to  him/it   forthwith,   without  interest  or  deduction.   If  this
subscription is accepted by the Company,  the amount of the payment  tendered by
him/it  will be  applied in  accordance  with the  description  set forth in the
Memorandum.

          2. The  undersigned  understands  and agrees that an investment in the
Units is not a liquid  investment.  In particular,  the undersigned  recognizes,
acknowledges and agrees that:

             (a) The  undersigned  must bear the economic  risk of investment in
the Units for an  indefinite  period  of time,  since  neither  the  Units,  the
Debentures  nor the Warrants have been  registered  under the  Securities Act of
1933, as amended (the "Act") or applicable state securities laws ("State Acts"),
and,   therefore,   cannot  be  transferred  or  sold  unless  either  they  are
subsequently registered under the Act and applicable State Acts, or an exemption
from registration is available and a favorable opinion of counsel to that effect
is obtained.

             (b) The undersigned will only have those limited rights to register
the Common Stock  underlying  the  Debentures and the Warrants under the Act and
applicable State Acts as are provided in the Memorandum to which the undersigned
and the Company hereby agree.



<PAGE>2


             (c) There is presently no established  public market for the Units,
the  Debentures  or the  Warrants  and the  holders  of the  Debentures  and the
Warrants have no registration rights with respect to such securities.

          3. The undersigned represents to and agrees with the Company that:

             (a) The undersigned  and his/its  purchaser  representative(s),  if
any,  have   carefully   reviewed  and   understand   the  risks  of  and  other
considerations relating to a purchase of the Units.

             (b) The undersigned  and his/its  purchaser  representative(s),  if
any, have been afforded the opportunity to obtain any  information  necessary to
verify the  accuracy  of any  representations  or  information  set forth in the
Memorandum and have had all of their inquiries to the Company  answered in full,
and have been  furnished all requested  materials  relating to the Company,  the
offering and sale of the Units and any other matter described in the Memorandum.

             (c)    Neither    the    undersigned    nor    his/its    purchaser
representative(s),  if any, have been  furnished any offering  literature by the
Company,  the Placement Agent or any of their affiliates,  associates or agents,
other than the  Memorandum  and the  exhibits  and  attachments  thereto and the
undersigned has not received or heard any print or electronic media  advertising
with respect to this Offering.

             (d) The  undersigned  is acquiring the Units for which he/it hereby
subscribes as principal for his/its own investment  account,  and not (1) with a
view to the resale or  distribution  of all or any part thereof or (2) on behalf
of another person who has not made the foregoing representation.

             (e) The undersigned is an accredited  investor,  as defined in Rule
501(a) of  Regulation  D  promulgated  pursuant to the Act by virtue of the fact
that (INITIAL APPLICABLE CHOICES):

           X (i) The undersigned had individual  income (exclusive of any income
attributable  to spouse) of more than  $200,000  in each of the most  recent two
years or joint  income  with the  undersigned's  spouse in excess of $300,000 in
each of such years and  reasonably  expects to have  income of at least the same
level for the current year.

           X (ii) The undersigned has an individual net worth, or a combined net
worth with the undersigned's  spouse,  in excess of $1,000,000.  For purposes of
this  Subscription  Agreement,  "individual net worth" means the excess of total
assets at fair market value,  including home and personal  property,  over total
liabilities.

             (iii) The  undersigned  is a director or  executive  officer of the
Company.

             Accredited   partnership,   corporation,   trust  or  other  entity
investors must initial at least one of the following statements.




                                       2

<PAGE>3

             (iv) The undersigned is a bank as defined in section 3(a)(2) of the
Act,  or a savings  and loan  association  or other  institution  as  defined in
section  3(a)(5)(A)  of the Act whether  acting in its  individual  or fiduciary
capacity; a broker or dealer registered pursuant to section 15 of the Securities
Exchange Act of 1934;  an insurance  company as defined in section  2(13) of the
Act; an investment  company  registered under the Investment Company Act of 1940
or a business  development  company as defined in section 2(a)(48) of the Act; a
Small  Business   Investment   Company  licensed  by  the  U.S.  Small  Business
Administration  under section 301(c) or (d) of the Small Business Investment Act
of  1958;  a  plan   established  and  maintained  by  a  state,  its  political
subdivisions,  or any  agency  or  instrumentality  of a state or its  political
subdivisions,  for the benefit of its employees if such plan has total assets in
excess of  $5,000,000;  an  employee  benefit  plan  within  the  meaning of the
Employee  Retirement  Income Security Act of 1974 if the investment  decision is
made by a plan  fiduciary,  as defined in  section  3(21) of such Act,  which is
either a bank, savings and loan association,  insurance  company,  or registered
investment  adviser,  or if the employee benefit plan has total assets in excess
of $5,000,000,  or, if a  self-directed  plan,  with  investment  decisions made
solely by persons that are accredited investors.

             (v) The undersigned is a private  business  development  company as
defined in section 202(a)(22) of the Investment Advisers Act of 1940.

             (vi)  The  undersigned  is an  organization  described  in  section
501(c)(3) of the Internal  Revenue Code,  corporation,  Massachusetts or similar
business trust, or partnership,  not formed of the specific purpose of acquiring
the securities offered, with total assets in excess of $5,000,000.

             (vii) The  undersigned  is a trust,  with total assets in excess of
$5,000,000,  not formed for the  specific  purpose of acquiring  the  securities
offered,  whose purchase is directed by a  sophisticated  person as described in
Rule 506(b)(2)(ii) of Regulation D.

             (viii)  All of the  equity  owners of the  undersigned  qualify  as
accredited investors under one of the statements set forth above.

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

             (g) The  undersigned  understands  the  fundamental  aspects of and
risks  involved in an investment in the Company,  including (1) the  speculative
nature of the investment, (2) the financial hazards involved, including the risk
of losing the entire investment,  (3) the lack of liquidity and the restrictions
on  transferability  of the Units,  (4) the  business  of the  Company,  (5) the
limited registration rights regarding the Common Stock underlying the Debentures
and the  Warrants,  and (6) the fact that the  Company  has a recent  history of
losses,  limited capital resources and will require additional  financing within
the next 12 months.





                                       3

<PAGE>4

             (h) The address set forth on the Subscription  Agreement  Signature
Page hereof is the  undersigned's  true and correct principal  address,  and the
undersigned  has no present  intention of becoming a resident of any other state
or jurisdiction.

             (i) The undersigned, if a corporation,  partnership, trust or other
form of business  entity,  (1) is  authorized  and otherwise  duly  qualified to
purchase  and hold the Units,  (2) has its  principal  place of  business at its
residence address set forth on the Subscription Agreement Signature Page hereof,
(3) has not been formed for the specific purpose of acquiring the Units, and (4)
has submitted and executed all documents  required  pursuant to the  Certificate
for Corporate,  Partnership, Trust and Joint Purchasers and Special Subscription
Instructions.  The person  executing this  Subscription  Agreement and all other
documents  related to the offering hereby  represents that he is duly authorized
to execute all such documents on behalf of the entity. IF THE UNDERSIGNED IS ONE
OF THE  AFOREMENTIONED  ENTITIES,  IT HEREBY  AGREES TO  SUPPLY  ANY  ADDITIONAL
WRITTEN INFORMATION THAT MAY BE REQUIRED BY THE COMPANY.

             (j) All of the  information  that the  undersigned  has  heretofore
furnished  to the  Company,  or  that  is  set  forth  herein  with  respect  to
himself/itself,  his/its financial position, and his/its business and investment
experience,  is correct and complete as of the date hereof, and, if there should
be any material change in such  information  prior to the closing of the sale of
the Units,  the undersigned  will  immediately  furnish the revised or corrected
information to the Company.

             (k) The  undersigned  agrees  to be bound by all of the  terms  and
conditions of the offering made by the Memorandum and the exhibits thereto.

             (l) No  person  other  than the  undersigned  will have a direct or
indirect interest in the Units subscribed for hereby.

             (m) The  undersigned  consents to the  placement of a legend on any
certificate or other document evidencing the Debentures and the Warrants as well
as the Common Stock issuable upon  conversion of the Debentures and the Warrants
stating that they have not been  registered  under the Act and setting  forth or
referring  to  the  restrictions  on  transferability  and  sale  thereof.   The
undersigned  is aware that the Company  will make a notation in its  appropriate
records  with  respect  to the  restrictions  on  the  transferability  of  such
securities.

             (n) The undersigned  understands  that the Company will review this
Subscription  Agreement and is hereby given authority by the undersigned to call
his/its bank or place of employment or otherwise  review the financial  standing
of the  undersigned;  and it is further  agreed  that the Company  reserves  the
unrestricted  right to reject or limit in whole or in part any  subscription and
to close the offer at any time.

             (o) Wisconsin Residents. In making an investment decision investors
must rely on their own  examination of the issuer and the terms of the offering,
including  the  merits  and  risks  involved.  These  securities  have  not been
recommended by any federal or state securities



                                       4

<PAGE>5

commission or regulatory authority.  Furthermore, the foregoing authorities have
not confirmed the accuracy of this document.  Any representation to the contrary
is a criminal offense.

These securities are subject to restrictions on  transferability  and resale and
may not be transferred or resold except as permitted under the securities act of
1933,  as  amended,  and the  applicable  state  securities  laws,  pursuant  to
registration or exemption therefrom.  Investors should be aware that they may be
required to bear the financial risks of this investment for an indefinite period
of time.

             (p) Connecticut  Residents.  The undersigned  acknowledges that the
Units  and  the  Component   securities  have  not  been  registered  under  the
Connecticut  Uniform  Securities Act, as amended (the "Connecticut Act") and are
subject to restrictions on  transferability  and sale of securities as set forth
herein.  The  undersigned  hereby  agrees  that  such  securities  will  not  be
transferred or sold without  registration under the Connecticut Act or exemption
therefrom.

             (q) Colorado Residents. The undersigned acknowledges that the Units
and the  component  securities  have  not been  registered  under  the  Colorado
Securities Act (the "Colorado Act"), and therefore cannot be sold or transferred
by the investor  except in a transaction  which is exempt under the Colorado Act
or pursuant to an effective registration thereunder.

             (r) Florida  Residents.  As described in the introductory  pages of
the Memorandum,  Florida investors have, under certain circumstances, a right of
recision  pursuant to Section  517.061(11)(a)(5)  of the Florida  Securities and
Investor Protection Act.

             (s) Massachusetts  Residents. The undersigned acknowledges that the
Units and the component securities have not been registered under the Securities
Act of 1933, as amended, or the Massachusetts  Uniform Securities Act, by reason
of specific exemptions  thereunder  relating to the limited  availability of the
offering.  Such securities cannot be sold,  transferred or otherwise disposed of
to any person or entity unless subsequently  registered under the Securities Act
of 1933, as amended,  or the Massachusetts  Securities Act, if such registration
is required.  Commonwealth  accredited investors who are natural persons,  shall
not  invest  more than 25% of the  purchaser's  net worth  (excluding  principal
residence and its furnishings).  The purchaser's net worth shall include the net
worth of his or her spouse.

             (t) New Jersey  Residents.  The undersigned  acknowledges  that the
Units and the  component  securities  offered  hereby have not been  approved or
disapproved  by the Bureau of  Securities of the State of New Jersey nor has the
Bureau passed on or endorsed the merits of this offering.  Any representation to
the contrary is unlawful.

             (u) New  York  Residents.  Each  New York  purchaser  of the  Units
understands  that this offering of Units of the Company has not been reviewed by
the attorney general of the State of New York. The undersigned  understands that
any  offering  literature  used in  connection  with this  offering has not been
pre-filed  with the attorney  general and has not been  reviewed by the attorney
general prior to its use. The attorney  general of the state of New York has not
passed on or endorsed the merits of this  offering.  Any  representation  to the
contrary is unlawful.  The Units are being purchased for the  undersigned's  own
account for investment, and not for distribution or resale to



                                       5

<PAGE>6

others.  The undersigned  agrees that he will not sell or otherwise transfer the
Units or the component  securities  unless they are registered under the federal
Securities  Act of 1933  or  unless  an  exemption  from  such  registration  is
available.  The  undersigned  represents that he has adequate means of providing
for his current needs and possible  personal  contingencies,  and that he has no
need for liquidity of this investment.

             (v) Pennsylvania  Residents.  The undersigned  hereby  acknowledges
that the Company is relying upon the exemption  from  registration  of Units set
forth in Section 203(d) of the  Pennsylvania  Securities Act of 1972, as amended
(the  "Pennsylvania  Act")  in  connection  with  the  sale of the  Units to the
undersigned.  In  accordance  with the  requirements  of  Section  203(d) of the
Pennsylvania  Act, the  undersigned  hereby agrees not to sell his Units (or the
underlying  securities)  within  twelve (12)  months from the date of  purchase,
unless such Units,  (or the underlying  securities) are registered under the Act
and the Pennsylvania Act. Additionally, the undersigned is aware of the right of
withdrawal  under Section 207(m) of the  Pennsylvania Act described in the cover
pages of the Memorandum.

             (w)Texas  Residents.  The undersigned hereby  acknowledges that the
Units and the component  securities  cannot be sold unless they are subsequently
registered  under  the  Securities  Act of  1933,  as  amended,  and  the  Texas
Securities Act, or an exemption from registration is available.  The undersigned
further acknowledges that because such securities are not readily  transferable,
he must bear the economic risk of his  investment  for an  indefinite  period of
time.

          4. The Terms of Subscription.

             (a) The  subscription  will begin as of the date of the  Memorandum
and will  terminate  at 11:59 p.m.  eastern  time on  December  31,  1995 unless
extended by the Company to January 31, 1996 (the "Termination  Date"). The Units
will be offered on a "best  efforts"  basis;  no minimum number of Units will be
required  to be sold in the  offering.  The  Company  reserves  the right in its
discretion, to offer and sell Units in excess of the maximum.

             (b)  Pending   receipt  and   acceptance  by  the  Company  of  all
subscription  documents and payment  (collected  funds) for the Debentures,  all
funds hereunder  shall be held by Weiss,  Peck & Greer of New York, New York, as
escrow agent, in a trust account. Upon such receipt and acceptance,  the Company
shall,  with  reasonable  promptness,  issue  and  mail  Units so  purchased  to
investors.  The Company will continue this procedure if, as and when  additional
Units are purchased,  until the earlier of (i) the Termination  Date or (ii) the
purchase of the maximum number of Units offered.  The Company reserves the right
to sell Units in excess of the maximum offered.  No minimum number of Units must
be sold for the Company to accept a subscription under this offering.

          5. The foregoing  representations are true and accurate as of the date
hereof,  shall  be true  and  accurate  as of the  date of the  closing  of this
offering,   and  shall   survive  such  closing.   If,  in  any  respect,   such
representations  shall not be true and accurate  prior to or upon the closing of
this  offering,  the  undersigned  shall give written notice of such fact to the
Company,  specifying  which  representations  are not true and  accurate and the
reasons therefor, with a copy to his/its purchaser representative(s), if any.




                                       6

<PAGE>7
          6. The undersigned  agrees to indemnify and hold harmless the Company,
the Placement Agent,  their affiliate and respective legal counsel,  and each of
the officers, directors, partners and shareholders of each, from and against any
loss,  damage  or  liability  due to or  arising  out of a breach  of any of the
foregoing representations.

          7.  If the  undersigned  is  more  than  one  person  or  entity,  the
obligations   of  the   undersigned   shall  be  joint  and   several   and  the
representations  and the  indemnification  obligation  herein contained shall be
deemed  to be made by and be  binding  upon  each  such  person  and his  heirs,
executors, administrators, successor and assigns.




                                       7

<PAGE>8

          8.  This  subscription  is  not  transferable  or  assignable  by  the
undersigned.

          9. This subscription, upon acceptance by the Company, shall be binding
upon  the  heirs,  executors,  administrators,  successors  and  assigns  of the
undersigned.

          10. This Subscription  Agreement shall be construed in accordance with
and  governed  by the laws of the State of New York,  without  giving  effect to
conflict of laws principles.




                                       8

<PAGE>9




                              HALSEY DRUG CO., INC.

                      SUBSCRIPTION AGREEMENT SIGNATURE PAGE

          The  undersigned  hereby  subscribes for the number of Units set forth
below as described in the Private Placement Memorandum,  dated November 20, 1995
issued by Halsey Drug Co., Inc., a corporation  organized  under the laws of the
State of New York.  The  entire  Subscription  Agreement,  of which  this is the
Signature Page, is provided as Exhibit 4 to the Memorandum.


          1. Dated: November 27, 1995

          2. Number of Units: 55

          3. Subscription Price ($10,000 per Unit, minimum Subscription, one (1)
             Unit): $550,000


William W. Priest
Name of Person/Entity Subscribing

/s/ William W. Priest                           289-38-2455
Signature of Subscriber                         Taxpayer Identification or
(and title, if applicable)                      Social Security Number



Signature of Joint Purchaser                    Taxpayer Identification or
(if any)                                        Social Security Number

Name and Residence Address                      Mailing Address, if Different
(Not Post Office Address)                       from Residence Address:


William W. Priest
Name (please print)                             Name (please print)


2 E. 70th Street
Number of Street                                Number and Street


New York, New York  10021
City      State      Zip Code                   City     State    Zip Code



<PAGE>10

Subscription for 55 Units accepted as of November 27, 1995.



                                HALSEY DRUG CO., INC.


                                By: /s/ Rosendo Ferran
                                   Name:  Rosendo Ferran
                                   Title: President and Chief Executive Officer





<PAGE>1

THIS  CONVERTIBLE  SUBORDINATED  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  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.
                     10% Convertible Subordinated Debenture
                              Due November 28, 2000


$550,000                                       No. DB5
November 29, 1995



      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
William W. Priest  residing at 2 East 70th Street,  New York,  New York 10021 or
registered assigns (the "Payee" or "Holder") upon due presentation and surrender
of this  Debenture,  on November 28, 2000 (the "Maturity  Date"),  the principal
amount of Five Hundred
 Fifty Thousand and 00/100 Dollars  ($550,000) and accrued
interest thereon as hereinafter provided.

      This  debenture  was issued by the Company  pursuant to a certain  Private
Placement  Memorandum  dated November 20, 1995  (together  with the  Attachments
thereto the  "Private  Placement  Memorandum")  relating to an offering of units
(the "Units"), each Unit consisting of a 10% Convertible  Subordinated Debenture
(the  "Debentures") in the principal amount of $10,000 and 600 redeemable common
stock purchase  warrants (the  "Warrants").  The holders of such  Debentures are
referred to hereinafter as the "Holders."






<PAGE>2




                                    ARTICLE I

              PAYMENT OF PRINCIPAL AND INTEREST; METHOD OF PAYMENT

      Payment of the principal 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 ten percent (10%) 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,  February 1 and October 1 during the term of this  Debenture
(commencing  January 1, 1996) (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.

                                    ARTICLE 2

                                  SUBORDINATION

           2.1  Subordination  to Senior  Debt.  The  Company,  for itself,  its
successors and assigns,  covenants and agrees, and the Payee and each successive
Holder by acceptance of this Debenture,  likewise  covenants and agrees that the
payment of the principal of and interest on this  Debenture is  subordinated  in
right of  payment to the  payment of all  existing  and future  Senior  Debt (as
hereinafter  defined) of the  Company.  "Senior  Debt" means the  principal  of,
premium,  if any,  and accrued and unpaid  interest on  Indebtedness  (as herein
after  defined) of the Company,  whether  outstanding on the date of issuance of
this  Debenture  or  thereafter  created,  incurred or assumed,  unless,  in the
agreement or instrument creating or evidencing the same or pursuant to which the
same is  outstanding,  it is provided that such  Indebtedness is not superior in
right of payment to this Debenture. Notwithstanding the foregoing, "Senior Debt"
with  respect to the  Company  shall not  include  (i) any  Indebtedness  of the
Company to any  subsidiary  or affiliate  (as such terms are defined in Rule 405
under the Act) or money  borrowed or advanced from such  subsidiary or affiliate
and



                                       2

<PAGE>3




(ii) any Indebtedness representing the redemption price of any preferred stock.

           2.2  Indebtedness.  "Indebtedness"  means  (a) any  liability  of the
Company to banks and other institutional lenders (i) for borrowed money, or (ii)
evidenced  by a  note,  debenture,  bond or  other  instrument  of  indebtedness
(including,   without  limitation,  a  purchase  money  obligation),   given  in
connection  with the acquisition of property,  assets or services,  or (iii) for
the payment of rent or other amounts relating to capitalized lease  obligations,
(b) any purchase money liability of the Company in connection with  acquisitions
in the ordinary course of the Company's business provided it is not in excess of
the  purchase  price of the  asset(s)  purchased,  (c) any  liability  of others
described in the preceding  clause (a) which the Company has guaranteed or which
is otherwise its legal liability; and (d) any modification,  renewal, extension,
replacement  or  refunding  of any such  liability  described  in the  preceding
clauses (a) and (c);  provided,  however,  that  notwithstanding  the foregoing,
"Indebtedness" does not include unsecured trade debt.

           2.3  Default.  The Company may not pay  principal  or interest on the
Debentures  and may not  acquire,  redeem or retire any  Debentures  for cash or
property other than capital stock of the Company if (i) a default on Senior Debt
occurs and is continuing  that permits  holders of Senior Debt to accelerate its
maturity,  and (ii) the default is the subject of  judicial  proceedings  or the
Company  receives  notice of a default  from a holder of the  Senior  Debt.  The
Company may resume payments on the Debentures and may acquire,  redeem or retire
them when (A) the default is cured or waived,  or (B) 120 days have passed after
the notice of default is given by the holder of the Senior  Debt if the  default
is not the subject of judicial proceedings.

           2.4 Liquidation;  Dissolution;  Bankruptcy.  Upon any distribution to
creditors of the Company in a liquidation  or dissolution of the Company or in a
bankruptcy,  reorganization,  insolvency,  receivership  or  similar  proceeding
relating  to the  Company or its  property  (i)  holders of Senior Debt shall be
entitled to receive  payment in full in cash of the principal of and interest to
the date of payment on the Senior  Debt  before  Holders  shall be  entitled  to
receive any payment of  principal  of or  interest on the  Debentures;  and (ii)
until the Senior  Debt is paid in full in cash,  any  distribution  to which the
Holder  would be  entitled  but for this  Article 2 shall be made to  Holders of
Senior  Debt as their  interests  may appear,  except  that  Holders may receive
securities  that are  subordinated to Senior Debt to at least the same extent as
the Debentures.

           2.5  Acceleration  of  Debentures.  If payment of the  Debentures  is
accelerated  because of an Event of Default as defined in Article 7 hereof,  the
Company shall promptly  notify holders of Senior Debt of the  acceleration.  The
Company may pay the




                                       3

<PAGE>4




Debentures  when 120 days  have  passed  after the  acceleration  occurs if this
Article 2 permits the payment at such time.

           2.6 Subrogation.  After all Senior Debt is paid in full and until the
Debentures  are paid in full,  Holders  shall be subrogated to the rights of the
holders of the Senior Debt to receive distributions applicable to Senior Debt. A
distribution  made under this  Article 2 to holders of Senior  Debt which  would
otherwise  have been made to Holders  is not,  as between  the  Company  and the
Holders, a payment by the Company on this Debenture

           2.7 Relative  Rights.  This Article 2 defines the relative  rights of
the Holder and the holders of Senior Debt.  Nothing in this Debenture  shall (i)
impair,  as between the Company and the Holder,  the  obligation of the Company,
which is absolute  and  unconditional,  to pay  principal  and  interest on this
Debenture in accordance  with its terms;  (ii) affect the relative rights of the
Holder and  creditors of the Company  other than the holders of Senior Debt;  or
(iii) prevent any Holder from exercising its available remedies upon an Event of
Default,   subject  to  the  rights  of  holders  of  Senior   Debt  to  receive
distributions otherwise payable to the Holders.

           2.8  Article  2  Subordination  Not  Designed  to  Prevent  Events of
Default.  The failure of the  Company to make a payment on account of  principal
and  interest on this  Debenture  by reason of any  provision  of this Article 2
shall not be construed as preventing the occurrence of an Event of Default under
Article 7 hereof.

                                    ARTICLE 3

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

           3.1  The Company  represents  and warrants to the Holder
that the Company:

                (a) is a corporation  duly  organized,  validly  existing and in
good standing under the laws of the State of New York;

                (b) has all  requisite  power and  authority  and all  necessary
licenses  and  permits to own and  operate  its  properties  and to carry on its
business as now conducted and as presently proposed to be conducted;

                (c) is duly  licensed or qualified  and is in good standing as a
foreign  corporation  in each  jurisdiction  wherein the nature of the  business
transacted by it or any of its  subsidiaries or the nature of the property owned
or  leased  by  it  or  any  of  its  subsidiaries,   makes  such  licensing  or
qualification  necessary,  except for those jurisdiction in which the failure so
to qualify can be cured without having a material  adverse effect on the Company
taken as a whole;





                                       4

<PAGE>5


                (d) the  Company  has  all  requisite  power  and  authority  to
execute,  deliver  and  perform  its  obligations  under  this  Debenture.  This
Debenture  has been duly and validly  authorized,  executed and delivered by the
Company  and is a valid  and  binding  obligation  of the  Company,  enforceable
against the Company in accordance with its terms,  except as the  enforceability
thereof may be limited by bankruptcy,  insolvency,  reorganization or other laws
relating to or affecting the rights of creditors generally;

                (e)  except as  otherwise  described  in the  Private  Placement
Memorandum,  the  Company  is not,  and will not be at the time of the  original
issuance of this  Debenture  by the Company,  in default  under the terms of any
Senior Debt or other  indebtedness and the Company is not aware, nor has it been
notified by the holder of any Senior Debt or other  indebtedness,  that  grounds
for default exist with respect to any Senior Debt or other indebtedness;

                (f) the execution and delivery of the  Debentures by the Company
and the consummation by the Company of the transactions contemplated pursuant to
the Private  Placement  Memorandum (a) are not in violation or breach of, do not
conflict  with or  constitute  a default  under any of the terms of the  charter
documents  or by-laws of the Company;  (b) will not result in a violation  under
any law, judgment, decree, order, rule, regulation or other legal requirement or
of any governmental  authority,  court or arbitration  tribunal whether federal,
state,  municipal or local at law or in equity,  and  applicable to the Company;
and (c) will not violate or constitute a breach of or constitute a default under
any Senior Debt of the Company or any  subsidiary  or  affiliate of the Company;
and

                (g) the Private  Placement  Memorandum does not, and will not at
the time of the original  issuance of this Debenture by the Company,  contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements  therein,  in light of the
circumstances under which they were made, not misleading.

                                    ARTICLE 4

                                   REDEMPTION

           4.1 Optional.  The Debentures may be redeemed by the Company in whole
or from time to time in part,  at the option of the  Company,  at any time on or
after  November  29, 1996 at a redemption  price equal to 105% of the  principal
amount  thereof,  in each case together with accrued  interest to the Redemption
Date.

           4.2  Notice of  Redemption.  Notice of  Redemption  will
be  mailed at least 30 days but not more  than 60 days  before  the
Redemption  Date to each  Holder of  Debentures  to be  redeemed at
his registered  address.  Debentures in  denominations  larger than
$1,000  may be  redeemed  in part but only in  whole  multiples  of
$1,000.  In



                                       5

<PAGE>6




the event of a redemption  of less than all of the  Debentures,  the  Debentures
will be chosen for redemption by the Company,  generally pro rata or by lot. The
Notice of  Redemption  shall  identify the  Debentures  to be redeemed and shall
state (i) the redemption date and redemption  price;  (ii) the conversion price,
as determined  pursuant to Article 8 hereof;  (iii) that  Debentures  called for
redemption  may be  converted  at any time  before the close of  business on the
redemption  date;  (iv) that Holders of the  Debentures  who want to convert the
Debentures  must  satisfy  the  requirements  of  Article  8  hereof;  (v)  that
Debentures  called  for  redemption  must be  surrendered  to the  Company  or a
designated  paying  agent  specified  in the  Redemption  Notice to collect  the
redemption  price;  and (vi) that,  unless the  Company  defaults  in making the
redemption payment, interest on the Debentures ceases to accrue on and after the
redemption date.

           4.3  Effective  Notice  of  Redemption.  Once  Notice of
Redemption is mailed,  Debentures  called for redemption become due
and payable on the redemption date at the redemption price.

           4.4 Deposit of Redemption  Price.  On or before the Redemption  Date,
the Company shall deposit in a bank account  solely  dedicated for this purpose,
or  deposit  with a  designated  paying  agent,  money  sufficient  to  pay  the
redemption  price of and accrued  interest on all  Debentures  to be redeemed on
that date.

           4.5 Debentures  Redeemed in Part.  Upon surrender of a Debenture that
is  redeemed in part,  the Company  shall issue for the Holder at the expense of
the Company a new Debenture equal in principal amount to the unredeemed  portion
of the Debenture surrendered.

                                    ARTICLE 5

                                    COVENANTS

           5.1 Payment of Debentures. The Company shall pay the principal of and
interest on this  Debenture in the time and in the manner  provided in Article 1
hereof.  The  Company  shall pay  interest  quarterly  (including  post-petition
interest in any proceeding  under any bankruptcy law) on (i) overdue  principal,
at the rate required by this Debenture and (ii) overdue installments of interest
(including  interest  contemplated  by  clause  (i) and  without  regard  to any
applicable grace period) at the same rate.

           5.2  Reporting  Requirements.  The  Company  shall  comply  with  its
reporting  and  filing  obligations  pursuant  to  Section  13 or  15(d)  of the
Securities  Exchange Act of 1934, as amended (the "Exchange  Act").  The Company
shall make such reports,  including,  without limitation,  reports on Form 10-K,
10-Q, 8-K and Schedule 14A promulgated  under the Exchange Act, or substantially
the same information  required to be contained in any successor form,  available
to the Holder.




                                       6

<PAGE>7



           5.3  Limitation on Dividends;  Stock  Purchase.  The Company will not
declare or pay any cash  dividends on, or make any  distribution  to the holders
of,  any  shares of  capital  stock of the  Company,  other  than  dividends  or
distributions  payable in such  capital  stock,  and neither the Company nor any
subsidiary  will purchase,  redeem or otherwise  acquire or retire for value any
shares of capital  stock of the Company or  warrants  or rights to acquire  such
capital  stock  except for the shares of the  Company's  Common  Stock  owned by
Ranbaxy  Pharmaceuticals,  Inc. to be repurchased by the Company as described in
the Private Placement Memorandum.

           5.4 Stay,  Extension and Usury Laws.  The Company  covenants  that it
will not at any time insist upon,  plead, or in any manner  whatsoever  claim or
take the benefit or  advantage  of, any stay,  extension  or usury law  wherever
enacted, now or at any time hereinafter in force, which may affect the covenants
or the performance of this Debenture;  and the Company hereby  expressly  waives
all benefit or  advantage of any such law,  and  covenants  that it will not, by
resort  to any such law,  hinder,  delay or impede  the  execution  of any power
herein  granted to the Holder but will suffer and permit the  execution of every
such power as though no such law had been enacted.

           5.5  Corporate  Existence.  Subject to Article 6 hereof,  the Company
will do or cause to be done all things  necessary  to preserve  and keep in full
force and effect its  corporate  existence and that of each  subsidiary  and the
rights   (charter  and   statutory)  and  franchises  of  the  Company  and  its
subsidiaries;  provided,  however,  that the  Company  shall not be  required to
preserve  any such  right  or  franchise  if the  Company  shall  in good  faith
determine that the preservation thereof is no longer desirable in the conduct of
the business of the Company and its subsidiaries  considered as a whole and that
the loss thereof is not disadvantageous in any material respect to the Holder.

           5.6  Maintenance of  Properties.  The Company will cause all property
used or useful in the conduct of its business or the business of any  subsidiary
to be  maintained  and kept in good  condition,  repair  and  working  order and
supplied  with all  necessary  equipment and will cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as in
the judgment of the Company may be necessary so that the business  carried on in
connection therewith may be properly and advantageously  conducted at all times;
provided,  however,  that nothing in this section shall prevent the Company from
discontinuing the operation and maintenance of any such properties, or disposing
of any of  them,  if such  discontinuance  or  disposal  is,  in the  reasonable
judgment of the Company or any subsidiary concerned, desirable in the conduct of
its  business or  business  of any  subsidiary  and not  disadvantageous  in any
material respect to the Holder.





                                       7

<PAGE>8


           5.7 Liquidation.  The Company shall not adopt any plan of liquidation
which provides for, contemplates or the effectuation of which is preceded by (A)
the sale, lease,  conveyance or other disposition of all or substantially all of
the assets of the Company or any subsidiary  otherwise than  substantially as an
entirety in accordance with Article 6 hereof and (B) the  distribution of all or
substantially  all the  proceeds  of  such  sale,  lease,  conveyance  or  other
disposition  and the  remaining  assets of the  Company to the holders of common
stock of the Company,  unless the Company shall in connection  with the adoption
of such plan make provision  for, or agree that prior to making any  liquidating
distributions  it will make  provision  for, the  satisfaction  of the Company's
obligations under this Debenture as to the payment of principal and interest.

           5.8  Limitation  on   Indebtedness.   Neither  the  Company  nor  any
subsidiary will incur, create or assume any indebtedness except: (i) Senior Debt
in  existence  as of the date of this  Debenture  aggregating  $3,278,000;  (ii)
indebtedness to any banks or other financial  institutions with whom the Company
may  contract to replace or  refinance  its current  Senior Debt  provided  such
replacement  or  refinancing  does not  increase  the  principal  amount  of the
Company's Senior Debt to an amount in excess of $6,722,000 (inclusive of secured
indebtedness to an existing  creditor of the Company in the principal  amount of
approximately $1,200,000);  and (iii) purchase money obligations incurred in the
ordinary  course  of  business;  and (iv)  trade  indebtedness  incurred  in the
ordinary course of business.

           5.9 Liens.  Neither  the Company nor any  subsidiary  will  mortgage,
pledge,  grant or permit to exist any lien or other security  interest in any of
its assets,  of any kind, now owned or hereafter  acquired,  nor  hypothecate or
grant a lien or security interest in its capital,  net worth, equity accounts or
any capital  stock,  as the case may be,  except for (i) the security  interests
granted by the  Company as of the date  hereof to the holders of its Senior Debt
and to Mallinckrodt Chemical, Inc.; (ii) the security interest held by any banks
or other financial institutions with whom the Company may contract to replace or
refinance its current Senior Debt, provided such replacement or refinancing does
not increase the  principal  amount of its Senior Debt to an amount in excess of
$5,522,000;  (iii) a lien or security  interest created with respect to purchase
money  obligations  incurred by the Company or its  subsidiaries in the ordinary
course of  business  and  provided  the  indebtedness  related to such  security
interest does not exceed the purchase price of the subject asset(s).

           5.10  Authorization  of  Shares of Common  Stock  for  Issuance  Upon
Conversion.  The  Company  will at all times cause  there to be  authorized  and
reserved for issuance upon conversion of this Debenture,  or otherwise available
from treasury shares, such number of shares of common stock as would be issuable
upon conversion of this Debenture.



                                       8

<PAGE>9


           5.11  Payment  of Taxes and Other  Claims.  The  Company  will pay or
discharge  or cause to be paid or  discharged,  before  the  same  shall  become
delinquent (i) all taxes, assessments and governmental charges levied or imposed
upon the Company or any subsidiary  upon the income,  profits or property of the
Company or any subsidiary,  and (ii) all lawful claims for labor,  materials and
supplies which,  if unpaid,  might by law become a lien upon the property of the
Company or any  subsidiary;  provided,  however,  that the Company  shall not be
required to pay or  discharge  or cause to be paid or  discharged  any such tax,
assessment,  charge or claim which  amount,  applicability  or validity is being
contested  in good  faith by  appropriate  proceedings  and for  which  adequate
reserves have been maintained by the Company.

           5.12 Transactions  with Affiliates.  The Company shall not, and shall
not permit any  subsidiary to,  directly or indirectly,  pay any funds to or for
the  account  or benefit  of, or enter into or permit to exist any  transaction,
including,  without  limitation,  the purchase,  sale,  lease or exchange of any
property or assets or securities or any loan transaction or the rendering of any
service,  with any Affiliate  unless such  transaction  is for fair value to the
Company or its  subsidiary and on terms and conditions not less favorable to the
Company or such subsidiary  than could be obtained on an arms-length  basis from
unrelated third parties, as determined in each case by the Board of Directors of
the Company (as evidenced by resolutions  duly adopted by the Board);  provided,
however,  that the  provisions  of this  Section  5.10  shall  not  apply to (a)
reasonable  compensation  for services in connection with employment or services
as a  director,  or (b)  payments  to  Affiliates  of the  Company in respect of
contracts or transactions in existence on the date hereof which are described or
referred to in the Private Placement Memorandum pursuant to which this Debenture
was originally sold. For purposes of this Section 5.10 the terms "Affiliate" and
"Control" shall have the meanings ascribed thereto in Rule 405 under the Act.

           5.13 Listing of Common Stock.  As promptly as  practicable  after the
execution of this Debenture, the Company shall file the appropriate applications
for listing on the American Stock Exchange and any other applicable  exchange or
national  security system with respect to the Shares.  The Company shall use its
best  efforts and work  diligently  to  accomplish  such  listing as promptly as
practicable after the execution of this Debenture.

           5.14  Election of Directors.  (a) The Company  agrees to use its best
efforts  (x) at any annual or special  meeting of  stockholders  of the  Company
called for the purpose of voting on the  election or removal of Directors or (i)
by consensual  action of stockholder  with respect to the election or removal of
Directors, as may be necessary to cause the following:

                      (i) The Board of Directors shall consist of no more than 7
persons;



                                       9

<PAGE>10


                      (ii)Two  (2)   Directors   shall  be  persons   reasonably
acceptable to a majority in interest in the principal amount of the Debentures;

                      (iii) To effect the  removal,  with or without  cause,  of
either of the  Directors  selected by a majority  in  interest of the  principal
amount  of  Debentures  upon  request  and for the  election  to the  board of a
substitute  designated by a majority in interest in the principal  amount of the
Debentures; and

                      (iv)One  (1) of the  Directors  selected  by a majority in
interest in the principal  amount of the  Debentures  shall serve as a member of
the Executive  Committee,  Compensation  Committee,  Audit Committee  and/or any
other  committee  of the Board of  Directors  in the  event any such  committees
currently exists or is established in the future.

                 (b) If at  any  time a  vacancy  is  created  on the  Board  of
Directors by reason of death,  removal or resignation of any Director  appointed
pursuant to Section 5.14(a) above, the Company agrees to use its best efforts to
take  immediate  action to  nominate  and  elect a person  for such  vacancy  in
accordance to the provisions Section 5.14(a) hereof.

           5.15  Appointment of Chief Financial  Officer.  The Company agrees to
use its best  efforts  to (i)  appoint a person to serve as the Chief  Financial
Officer  of the  Company,  which  person  shall be  reasonably  acceptable  to a
majority in interest in the principal amount of the Debentures and (ii) to cause
such position to be filled during the term of the Debentures. Any replacement or
successor  Chief Financial  Officer  appointed by the Company during the term of
the Debentures  shall be reasonably  acceptable to a majority in interest in the
principal amount of the Debentures.




                                       10

<PAGE>11






                                    ARTICLE 6

                                   SUCCESSORS

           6.1 When Company May Merge, etc. The Company shall not consolidate or
merge  with or into,  or sell,  lease,  convey or  otherwise  dispose  of all or
substantially all of its assets to, any person unless:

                 1. The person formed by or surviving any such  consolidation or
merger (if other than the Company), or to which such sale, lease,  conveyance or
other  disposition  shall have been made,  is (x) a  corporation  organized  and
existing under the laws of the United States,  any state thereof or the District
of Columbia or (y) a corporation or a comparable  legal entity  organized  under
the laws of a foreign  jurisdiction  whose  equity  securities  are  listed on a
national securities exchange in the United States or authorized for quotation on
the  National  Market  System of  National  Association  of  Securities  Dealers
Automated  Quotation System ("NASDAQ"),  and in each case, the net worth of such
person  formed by or surviving any such  consolidation  or merger is equal to or
greater than the  consolidated  net worth of the Company  immediately  preceding
such consolidation or merger;

                 2.  The   corporation   formed   by  or   surviving   any  such
consolidation  or merger  (if other  than the  Company)  or to which  such sale,
lease,  conveyance  or other  disposition  shall  have  been  made,  assumes  by
supplemental agreement,  all the obligations of the Company under the Debentures
and this  Debenture,  except  that it need not  assume  the  obligations  of the
Company as to the conversion of this Debenture if, pursuant to a  reorganization
of the Company as provided in Section 8.8, the Company or another  person enters
into a separate  agreement,  obligating it to deliver the  securities,  cash and
other assets deliverable upon conversion of the Debentures;

                 3. Immediately  after the  transaction,  no Event of Default as
defined in Article 7 hereof exists; and

                 4. Such  transaction  does not adversely affect the validity or
enforceability of the Debentures.

           6.2 Successor  Corporations  Substituted.  Upon any  consolidation or
merger,  or  any  sale,  lease,  conveyance  or  other  disposition  of  all  or
substantially  all of the assets of the Company in  accordance  with Section 6.1
hereof,  the successor  corporation formed by such consolidation or into or with
which the Company is merger or to which such sale,  lease,  conveyance  or other
disposition is made shall succeed to, and be  substituted  for, and may exercise
every right and power of, the Company under this  Debenture with the same effect
as if such  successor  person had been named as the  Company  herein;  provided,
however,  that the predecessor Company in the case of a sale, lease,  conveyance
or



                                       11

<PAGE>12




other disposition shall not be released from the obligation to pay the principal
of and interest on this Debenture.

                                    ARTICLE 7

                                EVENTS OF DEFAULT

           7.1 A. An Event of Default occurs if (i) the Company  defaults in the
payment of interest on this  Debenture  when the same become due and payable and
such default  continues for a period of 10 days,  whether or not such payment is
prohibited by the provisions of Article 2 hereof;  (ii) the Company  defaults in
the payment of principal on this Debenture when the same becomes due and payable
upon  maturity,  upon  redemption  or  otherwise;  (iii) any  representation  or
warranty  made or furnished  by the Company in this  Debenture or in the Private
Placement  Memorandum,  shall be false,  incorrect or incomplete when made as to
any  material  fact or facts;  (iv) the Company  fails to comply with any of its
other covenants or other agreements in this Debenture and solely with respect to
the  covenants  set forth in Sections  5.2,  5.11 and 5.12 hereof,  such failure
continues for a period of 30 days following written notice from the Holder;  (v)
the  Company  shall  have  failed  to  use  its  best  efforts  to  satisfy  the
requirements of Section 5.14 hereof; (vi) the Company or any of its subsidiaries
fail to pay when due or within any  applicable  grace  period any  principal  or
interest on any  Indebtedness  or shall be in breach or default  with respect to
any Indebtedness,  if the effect of such failure to pay, default or breach is to
cause the holder or holders  (or a trustee on behalf of such  holder or holders)
to accelerate such Indebtedness; (vii) the Company or any subsidiary pursuant to
or within the meaning of any Bankruptcy Law (A) commences a voluntary  case, (B)
consents to the entry of an order for relief against it in an involuntary  case,
(C) consents to the  appointment  of a custodian of it for all or  substantially
all of its property,  or (D) makes a general  assignment  for the benefit of its
creditors;  (viii) a court of competent  jurisdiction  enters an order or decree
under  any  Bankruptcy  Law that (A) is for  relief  against  the  Company  or a
subsidiary in an involuntary  case, (B) appoints a custodian of the Company or a
subsidiary  for all or  substantially  all of its  property,  or (C)  orders the
liquidation  of the Company or any  subsidiary,  and the order or decree remains
unstayed  and in effect for 60 days of the entry  thereof;  (ix)  trading in any
securities  of the Company or any of its  subsidiaries  shall be suspended for a
period  exceeding five (5) days by the Securities and Exchange  Commission,  any
stock exchange or in the  over-the-counter  market or a minimum or maximum price
for trading in such securities shall be established; (x) a judgment in an amount
exceeding $250,000 is entered against the Company or any of its subsidiaries and
such  judgment is not  satisfied or stayed  within sixty (60) days;  or (xi) the
holder of any  Indebtedness  or other debt of the Company  aggregating  at least
$250,000  shall commence any  proceeding,  or take any action to collect on such
Indebtedness  or debt,  or seize,  dispose of or apply in  satisfaction  of such
Indebtedness or debt,



                                       12

<PAGE>13



any  assets of the  Company  having a fair  market  value in excess of  $250,000
individually or in the aggregate.

           B. The term "Bankruptcy Law" means Title 11, U.S. Code or any similar
Federal or State law for the relief of debtors.  The term "Custodian"  means any
receiver, trustee, assignee, liquidator or similar official under any Bankruptcy
Law.




                                       13

<PAGE>14



           C. A Default  under  Section  7.1A(iv)  (other  than  Defaults  under
Sections 5.7, 6.1, 8.1 or 9.1 which Defaults shall be Events of Default with the
Notice but without the passage of time  specified in this  paragraph) or Section
7.1A(vi)  is not an Event of  Default  until the  Holders of at least 25% in the
principal  amount of the then outstanding  Debentures  notify the Company of the
Default  and the  Company  does not cure the  Default  within 30 days after such
Notice. The Notice must specify the Default and demand that it be remedied.

           7.2  Acceleration.  If an Event of Default  occurs and is continuing,
subject to the  provisions  of Section 7.1C  hereof,  the Holder may declare the
principal  of and accrued  interest on this  Debenture  to be due and payable by
written  notice to the Company in the manner  provided in Section  11.2  hereof.
Upon such declaration, the principal and interest on this Debenture shall be due
and  payable  immediately.  The  Holder  may  rescind  an  acceleration  and its
consequences  if the  rescission  would not conflict with any judgment or decree
and if all  existing  Events  of  Default  have  been  cured  or  waived  except
nonpayment  of  principal  or  interest  that has become  due solely  because of
acceleration. No such rescission shall affect any subsequent Event of Default or
impair any right consequent thereto.

           7.3 Other Remedies.  If an Event of Default occurs and is continuing,
the Holder may pursue any  available  remedy to collect the payment of principal
of and interest on this Debenture or to enforce the performance of any provision
of this Debenture.  A delay or omission by the Holder in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.

                                    ARTICLE 8

                                   CONVERSION

           8.1 Exercise of  Conversion  Privilege.  At any time and from time to
time commencing from the date hereof (the "Initial  Conversion  Date") until the
earlier of (i) the Maturity Date, (ii) receipt by the Holder from the Company of
Notice of  Redemption  and (iii) the  automatic  conversion  of the Debenture in
accordance with Section 8.2 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 form reasonably satisfactory to the Company duly
executed  by the  registered  Holder or its duly  authorized  attorney.  "Common
Stock" of the Company means common stock of the Company as it exists on the date
this Debenture is originally  signed.  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 $2.50



                                       14

<PAGE>15



per share (the "Conversion  Price").  Interest shall accrue to and including the
business 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 8.5 and Section 8.7 hereof. As soon as practicable following
conversion  and upon the  Holder's  compliance  with  the  conversion  procedure
described in Section 8.3 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 in the principal  amount equal to the remaining  principal  balance of
this Debenture after giving effect to such partial conversion.

           8.2 Automatic  Conversion.  Notwithstanding  anything to the contrary
contained in this Debenture,  the Debentures  shall be  automatically  converted
into Common Stock in the event that following the first  anniversary of the date
hereof the closing price per share of the  Company's  Common Stock as listed and
reported on the  American  Stock  Exchange or in the NASDAQ  National  Market or
Small-Cap System exceeds two and 50/100 dollars $2.50) per share for each of the
twenty (20)  consecutive  trading days following such one year  anniversary  and
prior to conversion.  In such event,  the Company shall notify the Holder of the
effective date of the automatic conversion.

           8.3 Registration of Transfer; Conversion Procedure. The Company shall
maintain books for the transfer and  registration  of the  Debentures.  Upon the
transfer of any Debenture in accordance  with the  provisions of Section 10.1 or
Section 10.2 hereof,  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 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 (the  "Shares").  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;  provided, however, that if, at the
date of



                                       15

<PAGE>16




surrender  the  transfer  books  of  the  Common  Stock  shall  be  closed,  the
certificates for the Shares shall be issuable as of the date on which such books
shall be  opened  and  until  such  date the  Company  shall be under no duty to
deliver any certificate for such Shares; provided,  further,  however, that such
transfer books,  unless  otherwise  required by law or by applicable rule of any
national securities  exchange,  shall not be closed at any one time for a period
longer than twenty (20) days.

           8.4 Company to Provide  Common  Stock.  The Company has  reserved and
shall continue to reserve out of its authorized but unissued Common Stock or its
Common  Stock  held in  treasury  enough  shares of Common  Stock 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  endeavor to
comply with all securities  laws regulating the offer and delivery of the shares
of  Common  Stock  upon  conversion  of  the  Debentures,   including,   without
limitation, compliance with provisions of Article 9 hereof, and will endeavor to
list such  shares on each  national  securities  exchange  upon which the Common
Stock is listed.

           8.5 Dividends; Reclassifications, etc.. In the event that the Company
shall,  at any time prior to the exercise of conversion  rights  hereunder:  (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.

           8.6  Notice  to  Holder.  If, at any time  while  this  Debenture  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,



                                       16

<PAGE>17




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.

           8.7 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  8.7.  Upon each
adjustment of the  Conversion  Price pursuant to this Section 8.7, the Holder of
this Debenture shall thereafter be entitled to acquire upon  conversion,  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 Sections 8.1 and 8.2 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 8.7; or

                      (ii)shares issued,  subdivided or combined in transactions
described  in  Section  8.5 if and to the  extent  that the  number of shares of
Common  Stock  received  upon  conversion  of this  Debenture  shall  have  been
previously  adjusted  pursuant  to  Section  8.5 as a result  of such  issuance,
subdivision or combination of such  securities;  for a  consideration  per share
which is less than the lower of (i) the Conversion Price or (ii) 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 lower of (i) the  Applicable  Conversion  Price or
(ii) the Fair Market Value of the Common Stock, the Applicable  Conversion Price
shall, simultaneously with such issuance or sale, be adjusted, so that



                                       17

<PAGE>18




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 8.7(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  8.7(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  8.7(a)) at the higher of (i) the  Applicable  Conversion  Price or
(ii) 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  8.7(d) hereof)  immediately
after the issuance or sale of such additional shares.

           For purposes of this Section 8.7,  "Fair Market Value" shall mean the
average of the closing  price of the Common  Stock as listed and reported on the
American Stock Exchange or in the NASDAQ  National  Market or System for each of
the twenty (20) consecutive trading days prior to such issuance or sale.

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 8.1 or 8.2, as appropriate,
the Applicable Conversion Price shall be such initial Conversion Price.

           The provision of this  subparagraph  (a) can be illustrated  with the
following examples:

           1.  Company  sells  100,000  shares  of stock at a price of $2.75 per
share

           - Applicable Conversion Price for the Debentures = $2.50

           - Fair  Market  Value  of the  Common  Stock -  $3.00 - Total  shares
outstanding prior to issuance - 1,000,000

           - Number of shares of stock that would be purchased with the proceeds
received by the Company  from the sale of the 100,000  shares at the  Applicable
Conversion Price or the Fair Market Value - 91,666 shares




                                       18

<PAGE>19



           Dilution Adjustment Calculation:

           2.5 x [1,000,000 + 91,666]= 2.5 x .99242 = 2.4810
           1,000,000 + 100,000


           2.   Thereafter,  the Company issues  warrants to Senior
Creditor to purchase  100,000  shares at an exercise price of $2.25
per share

           - Applicable  Conversion  Price = $2.48
           - Fair Market Value of Common Stock - $2.00
           - Total shares outstanding prior to warrant issuance - 1,100,000
           - Number of shares of stock that would be purchased with the proceeds
received  by the  Company  upon  exercise  of the  Warrants at the higher of the
Conversion Price or the Fair Market Value = 90,725

           Dilution Adjustment Calculation:

           2.48 x [1,100,000 + 90,725= 2.48 x .99227 = 2.46
                1,100,000 + 100,000

           Upon  each  adjustment  of the  Conversion  Price  pursuant  to  this
subsection  (a),  the 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   8.7   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  and
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 annual  grant of options to Joseph F.  Limongelli
to purchase up to 10,000  shares of the  Company's  Common  Stock at an exercise
price equal to closing  price of the  Company's  Common Stock as reported on the
American Stock Exchange,  or successor  exchange or  over-the-counter  market on
which the Common Stock is then traded, on the date of grant; or





                                       19

<PAGE>20




                      (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)  including,  without
limitation,  the  conversion  of any Debenture  issued in the same  placement of
securities  pursuant to which this Debenture was issued by the Company,  whether
or not outstanding on the issuance date hereof.

                (c)  For  the  purpose  of  subsection   8.7(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,  compensations  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, accreted 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



                                       20

<PAGE>21




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
8.7(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.

                (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, cancelled 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 8.7(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   8.7   to   the   contrary
notwithstanding,  no adjustment in the Conversion Price shall be required unless
such adjustment would require an increase or



                                       21

<PAGE>22




decrease of at least 1% in such Conversion Price;  provided,  however,  that any
adjustments  which by reason of this  subsection  8.7(f) are not  required to be
made  shall be carried  forward  and taken  into  account  in making  subsequent
adjustments.  All  calculations  under  this  Section  8.7  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.

           8.8  Reorganization  of the  Company.  If the Company is a party to a
transaction  subject to Article 6 or a merger  which  classifies  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 the consolidation, merger, transfer or lease 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 8. 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 the formed,  surviving,  transferee or lessee corporation,  that issuer shall
join in the  supplemental  debenture  which  shall so provide.  If this  section
applies, Section 8.5 does not apply.


                                   ARTICLE 8A

                             RIGHT OF FIRST REFUSAL


           8A.1 Right of First  Refusal.  Each Holder of the  Debentures and the
holders of Common Stock upon conversion of the Debentures (the "Common Holders")
shall be entitled to the following right of first refusal:

                (a) Except in the case of Excluded  Securities  (as  hereinafter
defined), the Company shall not issue, sell or exchange, agree to issue, sell or
exchange, or reserve or set aside



                                       22

<PAGE>23




for issuance,  sale or exchange (i) any shares of Common  Stock,  (ii) any other
equity security of the Company,  (iii) any debt security of the Company which by
its  terms  is   convertible   into  or   exchangeable   for,  with  or  without
consideration,  any equity  security of the  Company,  (iv) any  security of the
Company that is a combination  of debt and equity or (v) any option,  warrant or
other right to subscribe for,  purchase or otherwise acquire any equity security
or  any  such  debt   security  of  the  Company   (collectively,   the  "Equity
Securities"),  unless in each case the Company  shall have first offered to sell
to the Holders and the Common Holders the Equity  Securities,  at a price and on
such  other  terms as shall  have  been  specified  by the  Company  in  writing
delivered  to each of the Holders and the Common  Holders (the  "Offer"),  which
Offer by its terms shall remain open and irrevocable for a period of thirty (30)
days from the date it is  delivered by the Company to the Holders and the Common
Holders;  provided,  however,  that such  issuance,  sale or  exchange of equity
securities shall result in gross proceeds to the Company (whether at the time of
issuance or upon  conversion,  exercise,  or  exchange  thereof) of an amount in
excess of $200,000 (the "Minimum Offering Threshold"). For purposes of computing
the Minimum  Offering  Threshold,  any offering,  issuance,  sale or exchange of
Equity Securities during any rolling 12-month period shall be aggregated.

                (b) Each of the  Holders and the Common  Holders  shall have the
right to purchase up to its pro rata share of the Equity Securities. Each of the
Holders'  and the Common  Holders'  "pro rata share" shall be that amount of the
Equity  Securities  which  would  result in each of the  Holders  and the Common
Holders  owning the same  percentage  of the  Company's  issued and  outstanding
Common Stock after the issuance of Equity  Securities  as such Holder and Common
Holder  owned  immediately  prior to the  issuance  (assuming  in each  case the
issuance of all shares issuable upon the conversion of (i) the Debenture held by
the Holder and Common Holder, if any, and (ii) the Equity Securities).

                (c)  Notice  of each of the  Holder's  and the  Common  Holder's
intention  to accept,  in whole or in part,  an offer  shall be  evidenced  by a
writing  signed by the  Holder or the  Common  Holder,  as the case may be,  and
delivered to the Company prior to the end of the 30-day period  commencing  with
the date of such  Offer  (or,  if later,  within 10 days after the giving of any
written notice of a material  change in such Offer),  setting forth such portion
(specifying  number of  shares,  principal  amount  or the  like) of the  Equity
Securities  as the Holder or the Common  Holder,  as the case may be,  elects to
purchase (the "Notice of Acceptance").

                (d) In the event that the  Holder and the Common  Holders do not
elect to purchase all of the Equity  Securities,  the Company shall have 90 days
from the  expiration of the  foregoing  30-day period to sell all or any part of
such Equity  Securities as to which a Notice of Acceptance has not been given by
the Holder and the Common Holders (the "Refused Securities") to any other Person



                                       23

<PAGE>24




or  Persons,  but only  upon  terms and  conditions  in all  material  respects,
including  without  limitation,  unit price and  interest  rates (but  excluding
payment of legal fees of counsel of the purchaser), which are no more favorable,
in the  aggregate,  to such other  Person or Persons  or less  favorable  to the
Company than those set forth in the Offer.  Upon the closing of the sale to such
other  Person or Persons of all the  Refused  Securities,  which  shall  include
payment of the purchase price to the Company in accordance with the terms of the
Offer,  if the Holders and/or the Common Holders have timely  submitted a Notice
of Acceptance,  it and/or they shall purchase from the Company,  and the Company
shall sell to the Holders and/or Common Holders,  as the case may be, the Equity
Securities  in  respect of which a Notice of  Acceptance  was  delivered  to the
Company by the  Holders  and/or the Common  Holders,  as the case may be, at the
terms  specified  in the Offer.  The  purchase by the Holders  and/or the Common
Holders of any  Equity  Securities  is subject in all cases to the  preparation,
execution and delivery by the Company and the Holders  and/or the Common Holders
of a purchase  agreement  and other  customary  documentation  relating  to such
Equity  Securities as is satisfactory in form and substance to the Holders,  the
Common Holders and each of their respective counsel.

                (e) In each case,  any Equity  Securities  not  purchased by the
Holders, the Common Holders or by a Person or Persons in accordance with Section
8A.1(d)  hereof may not be sold or  otherwise  disposed  of until they are again
offered to the Holders and the Common Holders under the procedures  specified in
Section 8A.1(a), (c) and (d) hereof.

                (f) The rights of the Holders and the Common  Holders under this
Section  8A.1  shall  not  apply  to the  following  securities  (the  "Excluded
Securities"):

                      (i) Common Stock or options to purchase such Common Stock,
issued to officers,  employees or directors of, or consultants  to, the Company,
pursuant  to any  agreement,  plan  or  arrangement  approved  by the  Board  of
Directors  of  the  Company  and  approved  or  ratified  by  its  stockholders;

                      (ii)Common  Stock  issued as a stock  dividend or upon any
stock split or other subdivision or combination of shares of Common Stock;

                      (iii)  Common  Stock   issued  upon   conversion   of  the
Debentures; and

                      (iv)any  securities  issued for  consideration  other than
cash  pursuant  to a merger,  consolidation,  acquisition  or  similar  business
combination.





                                       24

<PAGE>25



                                    ARTICLE 9

              REGISTRATION RIGHTS UNDER THE SECURITIES ACT OF 1933

           9.1(a) Issuance of Stock Registered under the Act by the Company upon
Conversion. Not later than 120 days from the date of this Debenture, the Company
will file a registration  statement  under the Act with respect to the number of
shares  of  Common  Stock  issuable  upon  conversion  of  the  Debentures  (the
"Registrable Securities") in order to provide for the issuance by the Company of
Common Stock upon conversion of the Debentures  which has been registered  under
the Act, and shall use its best effort to cause such  registration  statement to
become and remain  effective until such time as all of the Debentures shall have
been converted in accordance with the provisions of section 8.1 or 8.2 hereof.

                (b) Supplemental  Registration  Rights. In the event the Company
is precluded by the U.S.  Securities and Exchange  Commission (the "Commission")
from  registering  under the Act the  Registrable  Securities  for issuance upon
conversion  of  this  Debenture  or if the  Holder  shall  have  converted  this
Debenture prior to the effectiveness of the registration  statement described in
subparagraph (a) above, the Holder shall have the following registration rights:

                      (i)  Piggyback  Registration  Rights.  The  Company  shall
advise the Holder or its transferee,  whether the Holder holds the Debentures or
has  converted  the  Debentures  and  holds  the  Common  Stock  underlying  the
Debentures,  by written  notice at least  four weeks  prior to the filing of any
registration statement under the Act covering any securities of the Company, for
its own account or for the account of others, and will, until the Maturity Date,
upon the request of the Holder, register under the Act all or any portion of the
Registrable  Securities  and cause  such  registration  statement  to become and
remain effective as provided in paragraph 9(c) hereof.

                      (ii)Demand  Registration  Rights.  If any 51%  Holder  (as
defined in Section  9.1(f)  hereof) shall give notice to the Company at any time
to the effect that such holder  desires to have the Company  register  under the
Act any  Registrable  Securities,  the Company will promptly,  but no later than
four weeks after receipt of such notice, file a registration statement under the
Act with respect to such number of Registrable  Securities as shall be indicated
in the notice to the  Company by the  Holder and the  Company  will use its best
efforts  to cause such  registration  statement  to become and remain  effective
(including  the taking of such steps as are  necessary  to obtain the removal of
any stop  order);  provided,  that the Holder  shall  furnish the  Company  with
appropriate  information  in connection  therewith as the Company may reasonably
request in  writing.  The Holder  may,  at its  option,  request the filing of a
registration  statement  under the Act on one occasion  until the Maturity Date.
Within ten days after  receiving  any such notice  pursuant  to this  subsection
(b)(ii) of this Article 9, the Company shall give notice to the other Holders of
the Debentures and any Common Stock issued upon the conversion of any



                                       25

<PAGE>26




Debentures  advising  that the  Company  is  proceeding  with such  registration
statement  and  offer  to  include  therein  the  Common  Stock  underlying  the
Debentures  of the other  Holders,  provided that they shall furnish the Company
with such appropriate  information  (relating to the intentions of such holders)
in connection therewith as the Company shall reasonably request in writing.

           If the Company  elects to include  securities to be sold by it in any
registration  statement  pursuant to this Section  9(b)(ii),  such  registration
shall be deemed to have been a registration under Section 9(b)(i).

                (c) Registration  Covenants of the Company. A. In the event that
any  Registrable  Securities  are to be registered  pursuant to Sections 9(a) or
9(b) of this Debenture,  the Company  covenants and agrees that the Company will
use its best efforts to effect the registration and cooperate in the sale of the
Registrable Securities to be registered and will as expeditiously as possible:

                      (i) prepare and file with the  Commission  a  registration
statement with respect to the  Registrable  Securities (as well as any necessary
amendments   or   supplements   thereto)(a   "Registration   Statement")   which
Registration Statement (A) will state that the holders of Registrable Securities
covered thereby may sell such  Registrable  Securities  under such  Registration
Statement or pursuant to Rule 144 (or any similar rule then in effect), (B) when
it  becomes  effective,  and  when  any  post-effective  amendment  thereof  and
supplement  thereto is filed,  the  Registration  Statement,  as then amended or
supplemented,   will  comply  in  all  material  respects  with  the  applicable
provisions of the Act and the rules and  regulations  thereunder and, except for
information  provided in writing by the Holder for inclusion in the Registration
Statement  for  which  the  Company  does not  represent  or  warrant  as to its
accuracy,  will not contain an untrue  statement  or a material  fact or omit to
state a material  fact  required to be stated  therein or  necessary to make the
statements therein, in light of the circumstances under which they are made, not
misleading;

                      (ii)furnish  to the  Holders  copies of such  Registration
Statement and any amendments or supplements thereto and any prospectus forming a
part thereof prior to filing,  which  documents will be subject to the review of
counsel for the Holders;

                      (iii)  use its best  efforts  to cause  such  Registration
Statement to become effective;

                      (iv)notify  the Holders,  promptly after the Company shall
receive notice thereof,  of the time when said  Registration  Statement  becomes
effective or when any amendment or supplement to any  prospectus  forming a part
of said Registration Statement has been filed;





                                       26

<PAGE>27




                      (v)  notify the  Holders  promptly  of any  request by the
Commission for the amending or supplementing of such  Registration  Statement or
prospectus or for additional information;

                      (vi)advise  the Holders  after the Company  shall  receive
notice  or  obtain  knowledge  thereof  of  the  issuance  of any  order  by the
Commission  suspending the effectiveness of any such  Registration  Statement or
amendment thereto or of the initiation or threatening of any proceeding for that
purpose, and promptly use its reasonable best efforts to prevent the issuance of
any stop order or to obtain its withdrawal promptly if such stop order should be
issued;

                      (vii) prepare and file with the Commission such amendments
and supplements to such Registration Statement and the prospectus forming a part
thereof as may be necessary to keep such Registration Statement effective (a) in
the case of a Registration  Statement filed and declared  effective  pursuant to
Section 9(a) hereof, until such time as all Holders of the Debentures shall have
converted the Debentures into Common Stock, or (b) in the case of a Registration
Statement filed and declared  effective  pursuant to Section 9(b) hereof,  until
such time as the Holders pursuant to such  Registration  Statement have disposed
of all such Registrable Securities but in no event exceeding five (5) years from
the date of effectiveness;

                      (viii)  furnish to each  Holder  such  number of copies of
such  Registration  Statement,   each  amendment  and  supplement  thereto,  the
prospectus included in such Registration  Statement  (including each preliminary
prospectus)  and such other  documents as that Holder may reasonably  request in
order to facilitate the disposition of the Registrable  Securities owned by such
Holder.

                      (ix)use its reasonable best efforts to register or qualify
such Registrable Securities under such other securities or blue sky laws of such
jurisdictions  as  determined  by the  Holders and do any and all other acts and
things which may be  reasonably  necessary or advisable to enable the Holders to
consummate the disposition in such  jurisdictions of the Registrable  Securities
(provided that the Company will not be required to: (A) qualify  generally to do
business  in any  jurisdiction  where it would  not  otherwise  be  required  to
qualify; (B) subject itself to taxation in any such jurisdiction; or (C) consent
to general service of process in any such jurisdiction);

                      (x)  notify  the  Holders  at any time  when a  prospectus
relating  thereto is required to be delivered under the Act, of the happening of
any event as a result of which such  Registration  Statement  contains an untrue
statement of a material  fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading,  and,
at the  request  of the  Holder,  prepare  a  supplement  or  amendment  to such
Registration Statement so that such Registration



                                       27

<PAGE>28




Statement will not contain, to the Company's knowledge, an untrue statement of a
material fact or omit to state any material  fact required to be stated  therein
or necessary to make the statements therein not misleading;

                      (xi)cause all Registrable  Securities to be listed on each
securities  exchange on which similar  securities issued by the Company are then
listed;

                      (xii)  provide a transfer  agent for all such  Registrable
Securities not later than the effective date of such Registration Statement;

                      (xiii) enter into such customary agreements  (including an
underwriting agreement in customary form) and take all such other actions as the
participating  Holders or the underwriters,  if any, reasonably request in order
to expedite or facilitate the disposition of the Registrable Securities;

                      (xiv) make  available for inspection by the Holder of such
Registrable  Securities,   any  underwriter  participating  in  any  disposition
pursuant to such  Registration  Statement and any attorney,  accountant or other
professional  retained  by any such  Holder or  underwriter  (collectively,  the
"Inspectors"),  all financial and other records,  pertinent  corporate documents
and properties of the Company as shall be reasonably necessary to enable them to
exercise their due diligence  responsibility,  and cause the Company's officers,
directors and employees to supply all  information  reasonably  requested by any
Inspectors in connection with such Registration Statement; and

                      (xv)use  its   reasonable   best   efforts  to  cause  the
Registrable  Securities covered by such Registration  Statement to be registered
with or approved by such other  governmental  agencies or  authorities as may be
necessary  to  enable  the  Holders  to  consummate  the   disposition  of  such
Registrable Securities.

           B. The Holder  covenants  and agrees to  reasonably  cooperate in the
preparation of the  Registration  Statement by providing such information as the
Company  shall  reasonably  need from the  Holder  to  include  the  Registrable
Securities in the Registration Statement.

                (d)  Expenses.  All expenses in  connection  with  preparing and
filing  any  Registration  Statement  including,  without  limitation,  costs of
complying with federal and state securities laws and regulations, attorney's and
accounting fees of the Company,  printing  expenses and federal and state filing
fees  shall be  borne  in full by the  Company,  except  that  the  underwriting
commissions  and  expenses   attributable  to  the  Registrable   Securities  so
registered and the fees and disbursements of counsel,  if any, to the Holders of
the Registrable Securities shall be borne by such Holders.




                                       28

<PAGE>29


                (e)  Indemnification.  Each  Holder  of  Registrable  Securities
exercising  the rights under  paragraphs  9(a) or 9(b) hereof will indemnify the
Company,  and each person who controls the Company within the meaning of Section
15 of the Act, from and against any and all losses,  claims,  damages,  expenses
and  liabilities  caused by any untrue  statement or statement  contained in any
registration  statement or statement  contained in a prospectus  furnished under
the Act or caused by omission to state a material fact therein necessary to make
the statements therein not misleading,  insofar as such losses, claims, damages,
expenses and liabilities  are caused by such untrue  statement or omission based
upon  information  furnished  in  writing  to the  Company  by any  such  Holder
expressly for use in any registration statement or prospectus and will reimburse
each such  indemnified  person,  as  incurred,  for any legal or other  expenses
reasonably  incurred by them in investigating,  defending or preparing to defend
any such loss, claim, damage, liability, action or proceeding. In addition, each
Holder  will  execute and deliver all such  documents  and  undertakings  as the
Company may  reasonably  deem  necessary or desirable for purposes of compliance
with applicable  federal and state securities laws. This indemnity  agreement is
in addition to any liability  which the Holder may otherwise have. The Company's
obligations  as set forth in  paragraph  9(a),  (b) and (c) with respect to each
Holder are contingent on such Holder's  satisfaction  of his or its  obligations
set forth in this paragraph 9(e).

                The Company  agrees to indemnify  and hold  harmless the Holders
(and each person,  if any,  who  controls the Holders  within the meaning of the
Act) from and against any loss, claim, damage or liability, joint or several, to
which they may become subject (under the Act or otherwise) insofar as such loss,
claim,  damage or liability (or action or proceeding in respect  thereof) arises
out of, or is based upon, (A) any untrue  statement or alleged untrue  statement
of a material fact contained (x) in the Registration Statement,  any preliminary
prospectus,  if used prior to the effective date of the Registration  Statement,
or any final prospectus,  or any amendment thereof or supplement thereto, or (y)
in any blue sky application or other document executed by the Company,  or based
upon written information  furnished by the Company,  filed in any state or other
jurisdiction in order to qualify any or all of the Registrable  Securities under
the securities laws thereof (as such application,  document or information being
hereinafter  called a "Blue Sky  Application"),  or (B) the  omission or alleged
omission to state in the Registration Statement, any preliminary prospectus,  if
used prior to the effective  date of the  Registration  Statement,  or any final
prospectus,  or any amendment thereof or supplement  thereto, or in any Blue Sky
Application,  of a material fact  required to be stated  therein or necessary to
make the statements therein, in light of the circumstances under which they were
made,  not  misleading;  and will  reimburse each such  indemnified  person,  as
incurred, for any legal or other expenses reasonably incurred by them in



                                       29

<PAGE>30




investigating,  defending or preparing to defend any such loss,  claim,  damage,
liability,  action or proceeding;  provided, however, that the Company shall not
be liable  in any such case to the  extent,  but only to the  extent,  that such
loss,  claim,  damage  or  liability  arises  out of or is based  upon an untrue
statement or an alleged untrue statement or omission or alleged omission made in
such Registration  Statement or in any Blue Sky Application in reliance upon and
in conformity with written information  furnished to the Company by or on behalf
of such Holder specifically for use in preparation of the Registration Statement
or any such preliminary prospectus or the final prospectus or any such amendment
thereof  or  supplement  thereto,   or  any  Blue  Sky  Application   (including
information concerning the manner in which the Holders intend to effect sales of
the  Registrable  Securities).  This  indemnity  agreement is in addition to any
liability which the Company may otherwise have.

                (f) The term "51% Holder" as used in this Section 9.1 shall mean
the  holders  of at least  51% of the  shares  of common  stock  into  which the
Debentures are  convertible  (considered in the aggregate) and shall include any
owner or combination of owners of Debentures in any  combination if the holdings
of the aggregate  amount of: (i) the common stock held by him or among them as a
result of the conversion of the Debentures,  plus (ii) the common stock which he
or they  would be  holding  if the  Debentures  owned by him or among  them were
converted,  would  constitute  51% or more of the  common  stock  into which the
Debentures were originally convertible.  The Company's agreement with respect to
the  registration  of the Common  Stock in this  Section  9.1 shall  survive the
conversion  and surrender of the  Debentures  and upon  conversion in full,  the
Company  shall  deliver  to the Holder an  agreement  evidencing  the  Company's
obligation under this Section 9.1.


                                   ARTICLE 10

               TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933

           10.1 The Holder of this  Debenture,  each  transferee  hereof and any
Holder and transferee of any Shares, by his acceptance  thereof,  agrees that no
public distribution of Debentures or Shares will be made in violation of the Act
or  applicable  state  securities  laws.  The Holder of this  Debenture and each
transferee  hereof  further  agrees  that if any  distribution  of any Shares is
proposed to be made by them otherwise  than by delivery of a prospectus  meeting
the requirements of Section 10 of the Act, such action shall be taken only after
submission to the Company of an opinion of counsel,  reasonably  satisfactory in
form and  substance to the  Company's  counsel,  to the effect that the proposed
distribution  will not be in  violation of the Act or of  applicable  state law.
Furthermore,  it shall be a condition to the transfer of this Debenture that any
transferee thereof deliver to



                                       30

<PAGE>31



the Company his written agreement to accept and be bound by all of the terms and
conditions contained in this Debenture.

           10.2 This  Debenture  or the shares of the Common  Stock or any other
security issued or issuable upon conversion of this Debenture may not be sold or
otherwise disposed of except as follows:

                (1) To a person  who,  in the  opinion of counsel for the Holder
reasonably  acceptable  to the  Company,  is a person to whom this  Debenture or
shares of Common Stock may legally be transferred without registration under the
Act and then only against  receipt of an agreement of such person to comply with
the  provisions  of this  Section  10.2  with  respect  to any  resale  or other
disposition of such securities which agreement shall be satisfactory in form and
substance to the Company and its counsel;  provided that the foregoing shall not
apply to any such  Debenture,  shares of Common  Stock or other  security  as to
which such  Holder  shall have  received an opinion  letter from  counsel to the
Company  or  other  counsel  reasonably  acceptable  to the  Company,  as to the
exemption thereof from the registration under the Act pursuant to Rule 144 under
the Act; or

                (2) to any person upon delivery of a prospectus then meeting the
requirements of the Act relating to such securities and the offering thereof for
such sale or disposition.

           10.3 STATE LEGENDS.

           Notice to  Wisconsin  Purchasers.  IN MAKING AN  INVESTMENT  DECISION
INVESTORS MUST RELY ON THEIR OWN  EXAMINATION OF THE ISSUER AND THE TERMS OF THE
OFFERING,  INCLUDING THE MERITS AND RISKS  INVOLVED.  THESE  SECURITIES HAVE NOT
BEEN  RECOMMENDED  BY ANY FEDERAL OR STATE  SECURITIES  COMMISSION OR REGULATORY
AUTHORITY.  FURTHERMORE,  THE  FOREGOING  AUTHORITIES  HAVE  NOT  CONFIRMED  THE
ACCURACY OF THIS  DOCUMENT.  ANY  REPRESENTATION  TO THE  CONTRARY IS A CRIMINAL
OFFENSE.

THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON  TRANSFERABILITY  AND RESALE AND
MAY NOT BE  TRANSFERRED  OR  RESOLD  EXCEPT AS  PERMITTED  UNDER THE ACT AND THE
APPLICABLE  STATE  SECURITIES  LAWS,   PURSUANT  TO  REGISTRATION  OR  EXEMPTION
THEREFROM.  INVESTORS  SHOULD  BE AWARE  THAT THEY MAY BE  REQUIRED  TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.

           10.4 Each  certificate for Shares shall bear a legend relating to the
non-registered  status  of such  shares  under  the Act,  unless  at the time of
conversion of this  Debenture  such shares of Common Stock have been  registered
under the Act or are in the  opinion of  counsel  reasonably  acceptable  to the
Company transferable without registration under the Act.







                                       31

<PAGE>32


                                   ARTICLE 11

                                  MISCELLANEOUS

           11.1 No Recourse. No recourse, whatsoever, either directly or through
the Company or any trustee,  receiver of assignee,  shall be had in any event or
in any manner  against  any past,  present or future  stockholder,  director  or
officer of the Company for the payment of the redemption price,  principal of or
interest  on this  Debenture  or any of them or for any claim  based  thereon or
otherwise in respect this Debenture, this Debenture being a corporate obligation
only.

           11.2  Notices.  All  communications  provided  hereunder  shall be in
writing and, if to the Company,  delivered or mailed by  registered or certified
mail addressed to Halsey Drug Co., Inc., 1827 Pacific Street, Brooklyn, New York
11233,  Attention:  President,  with a copy to Kenneth Goodwin,  Esq., Coleman &
Rhine,  LLP,  1120 Avenue of the  Americas,  New York,  New York,  or, if to the
Holder at the address shown for the Holder in the registration  books maintained
by the Company.

           11.3 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 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.

           11.4 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
satisfactory to the Company of such loss, theft or destruction and an indemnity,
if requested, also satisfactory to it.

           11.5 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.

           11.6 Governing  Law. This Debenture  shall be construed in accordance
with and governed by the laws of the State of New York, without giving effect to
conflict of laws principles.





                                       32

<PAGE>33




           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.

/s/ Authorized Signatory            By: /s/ Rosendo Ferran
                                    Name: Rosendo Ferran
                                    Title:   President



<PAGE>34
                                  ATTACHMENT I

                                   Assignment


           For value  received,  I hereby  assign  subject to the  provisions of
Section 10, to ________  $_________________  principal amount of the Convertible
Subordinated Debenture due
                            ,  2000  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>35

                                  ATTACHMENT II

                                CONVERSION NOTICE

                TO:  HALSEY DRUG CO., INC.


           The undersigned holder of this Debenture hereby irrevocable 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 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

VOID AFTER 5:00 P.M., EASTERN STANDARD TIME ON NOVEMBER 28, 2000.

THIS  WARRANT  AND THE SHARES OF COMMON  STOCK  ISSUABLE  UPON  EXERCISE  HEREOF
(COLLECTIVELY THE "SECURITIES")  HAVE BEEN ACQUIRED FOR INVESTMENT ONLY AND HAVE
NOT BEEN REGISTERED  UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR
ANY  STATE  SECURITIES  LAW,  AND MAY NOT BE  SOLD,  PLEDGED,  HYPOTHECATED,  OR
OTHERWISE  TRANSFERRED  IN THE ABSENCE OF AN  EFFECTIVE  REGISTRATION  STATEMENT
UNDER THE ACT OR AN OPINION OF COUNSEL  REASONABLY  SATISFACTORY  TO HALSEY DRUG
CO., INC. THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.


                              HALSEY DRUG CO., INC.

              REDEEMABLE COMMON STOCK PURCHASE WARRANT CERTIFICATE
                               TO PURCHASE 33,000
                             SHARES OF COMMON STOCK



Certificate  No. W-5

         This   Warrant   Certificate   certifies   that   William  W.   Priest,
SS#289-38-2455  residing  at 2 E. 70th  Street,  New York,  New York  10021,  or
registered assigns, is the registered Holder (the "Holder") of 33,000 Redeemable
Common Stock Purchase Warrants (the "Warrants") to purchase shares of the common
stock,  $.01 par value (the "Common Stock") of Halsey Drug Co., Inc., a New York
corporation (the "Company").

         The Warrants  represented by this Warrant  Certificate were issued as a
component  of a Unit  offered  by the  Company  pursuant
  to a  certain  Private
Placement   Memorandum   dated   November  20,  1995  (the  "Private   Placement
Memorandum").  In addition to Warrants to purchase  600 shares of Common  Stock,
each Unit consists of a Convertible Subordinated Debenture of the Company in the
principal amount of $10,000 (the "Debentures").

         THIS WARRANT IS  REDEEMABLE  AT THE OPTION OF THE COMPANY UNDER CERTAIN
CIRCUMSTANCES. SEE SECTION 11.

         1.       EXERCISE OF WARRANT.

                  (A) Each Warrant enables the Holder, subject to the provisions
of this Warrant  Certificate  to purchase  from the Company at any time and from
time to time commencing on the









<PAGE>2





date of issuance (the "Initial  Exercise Date") through and including 5:00 p.m.,
Eastern Standard Time on November 28, 2000 (the "Expiration Date") one (1) fully
paid and  non-assessable  share of Common Stock ("Shares") upon due presentation
and surrender of this Warrant Certificate accompanied by payment of the purchase
price of $2.50 per Share (the "Exercise Price"). Payment shall be made in lawful
money of the United States of America by certified  check payable to the Company
at its principal  office at 1827 Pacific  Street,  Brooklyn,  New York 11233. As
hereinafter  provided,  the Exercise Price and number of Shares purchasable upon
the exercise of the Warrants are subject to  modification or adjustment upon the
happening of certain events.

                  (B) This Warrant  Certificate is exercisable at any time on or
after the Initial  Exercise  Date in whole or in part by the Holder in person or
by attorney duly authorized in writing at the principal office of the Company.

         2.       EXCHANGE, FRACTIONAL SHARES, TRANSFER.

                  (A) Upon  surrender to the Company,  this Warrant  Certificate
may be  exchanged  for  another  Warrant  Certificate  or  Warrant  Certificates
evidencing  a like  aggregate  number of Warrants.  If this Warrant  Certificate
shall be  exercised  in part,  the Holder  shall be  entitled  to  receive  upon
surrender hereof another Warrant Certificate or Warrant Certificates  evidencing
the number of Warrants not exercised;

                  (B)  Anything  herein to the contrary  notwithstanding,  in no
event shall the Company be obligated to issue  Warrant  Certificates  evidencing
other than a whole  number of Warrants or issue  certificates  evidencing  other
than a whole  number of Shares upon the  exercise of this  Warrant  Certificate;
provided,  however, that the Company shall pay with respect to any such fraction
of a Share an amount of cash based upon the current public market value (or book
value,  if there shall be no public  market value) for Shares  purchasable  upon
exercise hereof, as determined in accordance with subparagraph (A) of Section 11
hereof;

                  (C) The  Company  may deem and treat the  person in whose name
this Warrant  Certificate  is  registered  as the absolute true and lawful owner
hereof for all purposes whatsoever; and

                  (D) This Warrant  Certificate may not be transferred except in
compliance  with the provisions of the Act or applicable  state  securities laws
and in accordance with the provisions of Section 12 hereof.






                                       2

<PAGE>3




         3.  RIGHTS OF A HOLDER.  No Holder  shall be deemed to be the Holder of
Common  Stock or any other  securities  of the  Company  that may at any time be
issuable on the  exercise  hereof for any purpose nor shall  anything  contained
herein be construed to confer upon the Holder any of the rights of a shareholder
of the Company or any right to vote for the  election of  directors  or upon any
matter  submitted to  shareholders at any meeting thereof or to give or withhold
consent to any corporate  action (whether upon any  reorganization,  issuance of
stock,   reclassification   or  conversion  of  stock,   change  of  par  value,
consolidation,  merger,  conveyance,  or  otherwise)  or to  receive  notice  of
meetings or to receive  dividends or  subscription  rights or otherwise  until a
Warrant  shall have been  exercised  and the Common Stock  purchasable  upon the
exercise thereof shall have become issuable.

         4.  REGISTRATION OF TRANSFER.  The Company shall maintain books for the
transfer  and  registration  of  Warrants.  Upon the transfer of any Warrants in
accordance with the provisions of Section 2(D) hereof (a "Permitted  Transfer"),
the  Company  shall  issue and  register  the  Warrants  in the names of the new
Holder.  The Warrants 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  transfer,  from time to time,  any
outstanding  Warrants  upon the books to be  maintained  by the Company for such
purpose upon surrender  thereof for transfer properly endorsed or accompanied by
appropriate  instructions  for  transfer.  Upon any  Permitted  Transfer,  a new
Warrant  Certificate  shall be  issued  to the  transferee  and the  surrendered
Warrants  shall be cancelled  by the  Company.  Warrants may be exchanged at the
option of the Holder, when surrendered at the office of the Company, for another
Warrant,  or other  Warrants  of  different  denominations,  of like  tenor  and
representing  in the  aggregate  the right to  purchase a like number of Shares.
Subject  to the  terms of this  Warrant  Certificate,  upon such  surrender  and
payment of the purchase  price at any time after the Initial  Exercise Date, the
Company  shall issue and  deliver  with all  reasonable  dispatch to or upon the
written  order of the Holder of such  Warrants and in such name or names as such
Holder may  designate,  a  certificate  or  certificates  for the number of full
Shares so purchased  upon the exercise of such  Warrants.  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 such  Warrants  and  payment  of the
purchase  price;  provided,  however,  that  if,  at the date of  surrender  and
payment, the transfer books of the Company shall be closed, the certificates for
the Shares  shall be issuable as of the date on which such books shall be opened
and  until  such  date  the  Company  shall  be  under  no duty to  deliver  any
certificate  for such Shares;  provided,  further,  however,  that such transfer
books,  unless  otherwise  required by law or by applicable rule of any national
securities exchange or interdealer  quotation system, shall not be closed at any
one time for a period longer than 20 days. The rights of purchase represented by
the Warrants shall be exercisable,  at the election of the Holders, either as an
entirety  or from  time to time for only  part of the  Shares  at any time on or
after the Initial Exercise Date.





                                       3

<PAGE>4




         5.  STAMP  TAX.  The  Company  will  pay any  documentary  stamp  taxes
attributable to the initial issuance of the Shares issuable upon the exercise of
the Warrants;  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 Shares in a name other than that of
the  Holder in respect of which  such  Shares are  issued,  and in such case the
Company shall not be required to issue or deliver any  certificate for Shares or
any  Warrant  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.

         6.  DESTROYED,  LOST,  STOLEN OR MUTILATED  CERTIFICATES.  In case this
Warrant Certificate shall be destroyed,  lost, stolen or mutilated,  the Company
may, in its discretion,  issue and deliver in exchange and  substitution for and
upon  cancellation  of the  mutilated  Warrant  Certificate,  or in  lieu of and
substitution  for the  lost,  stolen or  destroyed  Warrant  Certificate,  a new
Warrant  Certificate of like tenor representing an equivalent right or interest,
but  only  upon  receipt  of  evidence  satisfactory  to  the  Company  of  such
destruction,  loss,  theft or mutilation  and an indemnity,  if requested,  also
satisfactory to it.

         7. RESERVED SHARES. The Company warrants that there have been reserved,
and covenants that at all times in the future it shall keep reserved, out of the
authorized and unissued  Common Stock, a number of Shares  sufficient to provide
for  the  exercise  of the  rights  of  purchase  represented  by  this  Warrant
Certificate.  The Company  agrees that all Shares  issuable upon exercise of the
Warrants shall be, at the time of delivery of the  certificates for such Shares,
validly  issued  and  outstanding,  fully paid and  non-assessable  and that the
issuance  of such  Shares  will not give rise to  preemptive  rights in favor of
existing stockholders.

         8.       ANTI-DILUTION PROVISIONS.

                  (A) Dividends;  Reclassifications,  etc. In the event that the
Company shall, at any time prior to the exercise of this Warrant: (i) declare or
pay to the holders of the Common Stock a dividend  payable in any kind of shares
of 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 (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 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 such transfer,  or such
assets of the  Company,  which it would have been  entitled  to  receive  had it
exercised this Warrant prior to the happening of any of the foregoing events.





                                       5

<PAGE>5




                  (B) Notice of Certain Transactions. 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,  or shall
enter into an agreement to merge or consolidate  with another  corporation,  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 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 30 days  prior  to the  effective  date of the  merger  or  consolidation.
Failure to give notice as required by this Section, or any defect therein, shall
not  affect  the  legality  or  validity  of  any  dividend,   distribution   or
subscription or other right.

                  (C)  Adjustments to Exercise  Price.  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
subparagraph (D) of this Paragraph 8; or

                       (ii)   shares   issued,   subdivided   or   combined   in
transactions  described in  subparagraph  (A) of this  Paragraph 8 if and to the
extent that an adjustment to the Exercise Price shall have been  previously made
pursuant to  subparagraph  (A) of this Paragraph 8 as a result of such issuance,
subdivision or combination of such securities;

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

                   (a) the sum of (x) the total number of shares of Common Stock
outstanding  immediately prior to such issuance plus (y) the number of shares of
Common  Stock which the  aggregate  consideration  received,  as  determined  in
accordance  with  subparagraph  (E)  below  for  the  issuance  or  sale of such
additional  Common Stock or Convertible  Securities  deemed to be an issuance of
Common Stock as provided in subparagraph  (F) below,  would purchase  (including
any  consideration  received by the Company  upon the  issuance of any shares of
Common Stock or Convertible  Securities  since the date the Applicable  Exercise
Price became effective not previously  included in any computation  resulting in
an adjustment pursuant to this subparagraph (C)) at the



                                       6

<PAGE>6




higher of (i) the Applicable Exercise Price or (ii) 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 subparagraph  (E)) immediately after
the issuance or sale of such additional shares.

           For purposes of this Section 8(c), "Fair Market Value" shall mean the
average of the closing  price of the Common  Stock as listed and reported on the
American Stock  Exchange or in the NASDAQ  National  Market or Small-Cap  Market
System  for each of the  twenty  (20)  consecutive  trading  days  prior to such
issuance or sale.

If,  however,  the  Applicable  Exercise Price thus obtained would result in the
issuance of a lesser  number of shares upon  conversion  than would be issued at
the initial  Exercise Price  specified in Paragraph 1, the  Applicable  Exercise
Price shall be such initial Exercise Price.

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

                  (D)  Exclusions.  Anything  in this  Paragraph  8 to  contrary
notwithstanding, no adjustment in the Exercise 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 by the Company's Board of Directors,  as may be amended from
time to time;

                       (ii) The annual grant of options to Joseph F.  Limongelli
to purchase up to 10,000  shares of the  Company's  Common  Stock at an exercise
price equal to the closing  price of the  Company's  Common Stock as reported on
the American Stock Exchange, or successor Exchange or over-the-counter market on
which the Common Stock is then traded, on the date of grant; 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 including, without limitation,



                                       7

<PAGE>7




the exercise of any Warrant  issued in the same placement of securities in which
this  Warrant  was  issued by the  Company,  whether or not  outstanding  on the
issuance date hereof.

                  (E)   Calculation  of   Consideration.   For  the  purpose  of
subparagraph (C) above, 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,  compensations  or other
expenses paid or incurred by the Company for any  underwriting  or placement of,
or otherwise in connection with the issuance or sale of such shares.

                       (ii) In 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 Convertible  Securities,  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 on  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 the 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,  accredited  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   compensations   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 exchanged shall be



                                       8

<PAGE>8




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  subparagraphs  (E)(i) and  (E)(iii)  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  Exercise Price shall be required by reason of the
fixing of such record date.


                  (F) Deemed  Issuances  of Common  Stock.  For  purposes of the
adjustments  provided for in subparagraph (C) 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.

                  (G)  Readjustments  of  Exercise  Price.  On  the  expiration,
cancellation  or redemption of any  Convertible  Securities,  the Exercise Price
then in effect hereunder shall forthwith be readjusted to such Exercise Price as
would have been obtained (a) had the adjustments  made upon the issuance or sale
of such expired, cancelled 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 only on the  basis of the  Exercise  Price as
readjusted under this  subparagraph  (G) for all transactions  (which would have
affected such adjusted  Exercise  Price) made after the issuance or sale of such
Convertible Securities.

                  (H)  Carry  Forwards.  Anything  in  this  Paragraph  8 to the
contrary notwithstanding,  no adjustment in the Exercise Price shall be required
unless such  adjustment  would require an increase or decrease of at least 1% in
such Exercise Price; provided,  however, that any adjustments which by reason of
this  subparagraph  (H) are not required to be made shall be carried forward and
taken into account in making subsequent adjustments. All calculations under this
Paragraph  8 shall  be made to the  nearest  cent or to the  nearest  tenth of a
share, as the case may be.





                                       9

<PAGE>9




                  (I) Notice of Adjustments. Upon any adjustment of the Exercise
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 Exercise
Price  resulting from such  adjustment and the increase or decrease,  if any, in
the number of Shares purchasable at such price upon the exercise hereof, setting
forth in reasonable  detail the method of  calculation  and the facts upon which
such calculation is based.

         9.  CONSOLIDATION OR MERGER.  The Company  covenants and agrees that it
will not merge or consolidate with or into or sell or otherwise  transfer all or
substantially all of its assets to any other corporation or entity unless at the
time of or prior to such  transaction  such other  corporation  or other  entity
shall  expressly  assume all of the  liabilities  and obligations of the Company
under this Warrant and (without  limiting the generality of the foregoing) shall
expressly agree that the Holder of this Warrant shall  thereafter have the right
(subject to subsequent  adjustment as nearly  equivalent as  practicable  to the
adjustments  provided  for in  Paragraph 8 of this  Warrant) to receive upon the
exercise  of this  Warrant  the  number  and kind of  shares  of stock and other
securities  and property  receivable  upon such  transaction  by a Holder of the
number and kind of shares which would have been  receivable upon the exercise of
this Warrant immediately prior to such transaction.

         10.      REGISTRATION RIGHTS UNDER THE SECURITIES ACT OF 1933.

                  A. Issuance of Stock  Registered  under the Act by the Company
upon  Exercise.  Not  later  than 120 days  from the date of this  Warrant,  the
Company  will file a  registration  statement  under the Act with respect to the
number of shares of Common Stock issuable upon the exercise of this Warrant (the
"Registrable Securities") in order to provide for the issuance by the Company of
Common Stock upon exercise of this Warrant which has been  registered  under the
Act,  and shall use its best  efforts to cause such  registration  statement  to
become and remain  effective  until such time as all of the Warrants  shall have
been exercised and the Common Stock  issuable  thereunder has been issued by the
Company.

                  B. Supplemental  Registration Rights. In the event the Company
is precluded by the U.S.  Securities and Exchange  Commission (the "Commission")
from  registering  under the Act the  Registrable  Securities  for issuance upon
exercise of this  Warrant or if the Holder  shall have  exercised  this  Warrant
prior to the effectiveness of the registration statement described in Subsection
A above, the Holder shall have the following registration rights:

                     Piggyback  Registration  Rights.  If (i) any 51% Holder (as
defined in Section 10.F hereof)  shall give notice to the Company at any time to
the effect that such holder desires to have the Company registered under the Act
any common stock issuable upon conversion of the Debentures, or (ii) the Company
proposes  to  file a  registration  statement  covering  any  securities  of the
Company,  for its own  account or for the account of others,  the Company  shall
advise the



                                       10

<PAGE>10




Holder or its transferee,  whether the Holder holds the Warrant or has converted
the Warrant and holds the Common Stock underlying the Warrant, by written notice
at least four weeks prior to the filing of any registration  statement under the
Act,  and will,  until the  Expiration  Date,  upon the  request of the  Holder,
register  under the Act all or any  portion of the  Registrable  Securities  and
cause such registration  statement to become and remain effective as provided in
Subsection C hereof.

                  C.  Registration  Covenants of the  Company.  (a) In the event
that any Registrable  Securities are to be registered  pursuant to Subsections A
or B of this Warrant, the Company covenants and agrees that the Company will use
its best  efforts to effect the  registration  and  cooperate in the sale of the
Registrable Securities to be registered and will as expeditiously as possible:

                      (i) prepare and file with the  Commission  a  registration
statement with respect to the  Registrable  Securities (as well as any necessary
amendments   or   supplements   thereto)(a   "Registration   Statement")   which
Registration Statement (A) will state that the holders of Registrable Securities
covered thereby may sell such  Registrable  Securities  under such  Registration
Statement or pursuant to Rule 144 (or any similar rule then in effect), (B) when
it  becomes  effective,  and  when  any  post-effective  amendment  thereof  and
supplement  thereto is filed,  the  Registration  Statement,  as then amended or
supplemented,   will  comply  in  all  material  respects  with  the  applicable
provisions of the Act and the rules and  regulations  thereunder and, except for
information  provided in writing by the Holder for inclusion in the Registration
Statement  for  which  the  Company  does not  represent  or  warrant  as to its
accuracy,  will not contain an untrue  statement  or a material  fact or omit to
state a material  fact  required to be stated  therein or  necessary to make the
statements therein, in light of the circumstances under which they are made, not
misleading;

                      (ii)  furnish to the Holders  copies of such  Registration
Statement and any amendments or supplements thereto and any prospectus forming a
part thereof prior to filing,  which  documents will be subject to the review of
counsel for the Holders;

                      (iii)  use its best  efforts  to cause  such  Registration
Statement to become effective;

                      (iv) notify the Holders,  promptly after the Company shall
receive notice thereof,  of the time when said  Registration  Statement  becomes
effective or when any amendment or supplement to any  prospectus  forming a part
of said Registration Statement has been filed;

                      (v)  notify the  Holders  promptly  of any  request by the
Commission for the amending or supplementing of such  Registration  Statement or
prospectus or for additional information;




                                       11

<PAGE>11



                      (vi) advise the Holders  after the Company  shall  receive
notice  or  obtain  knowledge  thereof  of  the  issuance  of any  order  by the
Commission  suspending the effectiveness of any such  Registration  Statement or
amendment thereto or of the initiation or threatening of any proceeding for that
purpose, and promptly use its reasonable best efforts to prevent the issuance of
any stop order or to obtain its withdrawal promptly if such stop order should be
issued;

                      (vii) prepare and file with the Commission such amendments
and supplements to such Registration Statement and the prospectus forming a part
thereof as may be necessary to keep such Registration Statement effective (a) in
the case of a Registration  Statement filed and declared  effective  pursuant to
Subsection A hereof,  until such time as all Holders of the Warrants  shall have
exercised the Warrants, or (b) in the case of a Registration Statement filed and
declared  effective  pursuant  to  Subsection  B hereof,  until such time as the
Holders  pursuant  to such  Registration  Statement  have  disposed  of all such
Registrable Securities but in no event exceeding five (5) years from the date of
effectiveness;

                      (viii)  furnish to each  Holder  such  number of copies of
such  Registration  Statement,   each  amendment  and  supplement  thereto,  the
prospectus included in such Registration  Statement  (including each preliminary
prospectus)  and such other  documents as that Holder may reasonably  request in
order to facilitate the disposition of the Registrable  Securities owned by such
Holder;

                      (ix)  use its  reasonable  best  efforts  to  register  or
qualify such Registrable Securities under such other securities or blue sky laws
of such jurisdictions as determined by the Holders and do any and all other acts
and things which may be reasonably  necessary or advisable to enable the Holders
to  consummate  the  disposition  in  such   jurisdictions  of  the  Registrable
Securities  (provided  that the  Company  will not be  required  to: (A) qualify
generally  to do business in any  jurisdiction  where it would not  otherwise be
required to qualify; (B) subject itself to taxation in any such jurisdiction; or
(C) consent to general service of process in any such jurisdiction);

                      (x)  notify  the  Holders  at any time  when a  prospectus
relating  thereto is required to be delivered under the Act, of the happening of
any event as a result of which such  Registration  Statement  contains an untrue
statement of a material  fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading,  and,
at the  request  of the  Holder,  prepare  a  supplement  or  amendment  to such
Registration  Statement so that such Registration Statement will not contain, to
the Company's knowledge, an untrue statement of a material fact or omit to state
any  material  fact  required  to be stated  therein  or  necessary  to make the
statements therein not misleading;





                                       12

<PAGE>12




                      (xi) cause all Registrable Securities to be listed on each
securities  exchange on which similar  securities issued by the Company are then
listed;

                      (xii)  provide a transfer  agent for all such  Registrable
Securities not later than the effective date of such Registration Statement;

                      (xiii) enter into such customary agreements  (including an
underwriting agreement in customary form) and take all such other actions as the
participating  Holders or the underwriters,  if any, reasonably request in order
to expedite or facilitate the disposition of the Registrable Securities;

                      (xiv) make  available for inspection by the Holder of such
Registrable  Securities,   any  underwriter  participating  in  any  disposition
pursuant to such  Registration  Statement and any attorney,  accountant or other
professional  retained  by any such  Holder or  underwriter  (collectively,  the
"Inspectors"),  all financial and other records,  pertinent  corporate documents
and properties of the Company as shall be reasonably necessary to enable them to
exercise their due diligence  responsibility,  and cause the Company's officers,
directors and employees to supply all  information  reasonably  requested by any
Inspectors in connection with such Registration Statement; and

                      (xv)  use  its  reasonable   best  efforts  to  cause  the
Registrable  Securities covered by such Registration  Statement to be registered
with or approved by such other  governmental  agencies or  authorities as may be
necessary  to  enable  the  Holders  to  consummate  the   disposition  of  such
Registrable Securities.

                   (b) The Holder  covenants and agrees to reasonably  cooperate
in the preparation of the  Registration  Statement by providing such information
as the Company shall  reasonably need from the Holder to include the Registrable
Securities in the Registration Statement.

                  D.  Expenses.  All expenses in connection  with  preparing and
filing  any  Registration  Statement  including,  without  limitation,  costs of
complying with federal and state securities laws and regulations, attorney's and
accounting fees of the Company,  printing  expenses and federal and state filing
fees  shall be  borne  in full by the  Company,  except  that  the  underwriting
commissions  and  expenses   attributable  to  the  Registrable   Securities  so
registered and the fees and disbursements of counsel,  if any, to the Holders of
the Registrable Securities shall be borne by such Holders.

                  E.  Indemnification.  Each  Holder of  Registrable  Securities
exercising  the  rights  under  Subsections  A or B hereof  will  indemnify  the
Company,  and each person who controls the Company within the meaning of Section
15 of the Act, from and against any and all losses,  claims,  damages,  expenses
and liabilities caused by any untrue statement or statement contained in



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any  registration  statement  or statement  contained in a prospectus  furnished
under the Act or caused by omission to state a material  fact therein  necessary
to make the statements therein not misleading,  insofar as such losses,  claims,
damages,  expenses  and  liabilities  are  caused by such  untrue  statement  or
omission based upon information  furnished in writing to the Company by any such
Holder  expressly for use in any  registration  statement or prospectus and will
reimburse  each such  indemnified  person,  as incurred,  for any legal or other
expenses reasonably incurred by them in investigating, defending or preparing to
defend  any such  loss,  claim,  damage,  liability,  action or  proceeding.  In
addition,   each  Holder  will  execute  and  deliver  all  such  documents  and
undertakings  as the Company may  reasonably  deem  necessary or  desirable  for
purposes of compliance with applicable  federal and state  securities laws. This
indemnity  agreement  is in  addition  to any  liability  which the  Holder  may
otherwise have. The Company's obligations as set forth in Subsections A, B and C
with respect to each Holder are contingent on such Holder's  satisfaction of his
or its obligations set forth in this Subsection E.

                  The Company  agrees to indemnify and hold harmless the Holders
(and each person,  if any,  who  controls the Holders  within the meaning of the
Act) from and against any loss, claim, damage or liability, joint or several, to
which they may become subject (under the Act or otherwise) insofar as such loss,
claim,  damage or liability (or action or proceeding in respect  thereof) arises
out of, or is based upon, (A) any untrue  statement or alleged untrue  statement
of a material fact contained (x) in the Registration Statement,  any preliminary
prospectus,  if used prior to the effective date of the Registration  Statement,
or any final prospectus,  or any amendment thereof or supplement thereto, or (y)
in any blue sky application or other document executed by the Company,  or based
upon written information  furnished by the Company,  filed in any state or other
jurisdiction in order to qualify any or all of the Registrable  Securities under
the securities laws thereof (as such application,  document or information being
hereinafter  called a "Blue Sky  Application"),  or (B) the  omission or alleged
omission to state in the Registration Statement, any preliminary prospectus,  if
used prior to the effective  date of the  Registration  Statement,  or any final
prospectus,  or any amendment thereof or supplement  thereto, or in any Blue Sky
Application,  of a material fact  required to be stated  therein or necessary to
make the statements therein, in light of the circumstances under which they were
made,  not  misleading;  and will  reimburse each such  indemnified  person,  as
incurred,  for any  legal  or  other  expenses  reasonably  incurred  by them in
investigating,  defending or preparing to defend any such loss,  claim,  damage,
liability,  action or proceeding;  provided, however, that the Company shall not
be liable  in any such case to the  extent,  but only to the  extent,  that such
loss,  claim,  damage  or  liability  arises  out of or is based  upon an untrue
statement or an alleged untrue statement or omission or alleged omission made in
such Registration  Statement or in any Blue Sky Application in reliance upon and
in conformity with written information  furnished to the Company by or on behalf
of such Holder specifically for use in preparation of the Registration Statement
or any such preliminary prospectus or the final prospectus or any such amendment
thereof  or  supplement  thereto,   or  any  Blue  Sky  Application   (including
information concerning the manner in which the Holders intend to effect sales of
the Registrable



                                       14

<PAGE>14




Securities).  This indemnity agreement is in addition to any liability which the
Company may otherwise have.

                  F. The term "51% Holder" as used in this Section 10 shall mean
the  Holders  of at least  51% of the  shares  of common  stock  into  which the
Debentures  comprising  a portion of the Units  offered  pursuant to the Private
Placement  Memorandum  are  convertible  (considered in the aggregate) and shall
included any owner or combination of owners of Debentures in any  combination if
the  holdings of the  aggregate  amount of: (i) the common  stock held by him or
among them as a result of the conversion of the Debentures, plus (ii) the common
stock which he or they would be holding if the Debentures  owned by him or among
them were converted, would constitute 51% or more of the common stock into which
the Debentures were originally convertible. The Company's agreement with respect
to the  registration  of the common stock in this  Section 10 shall  survive the
exercise and  surrender of this Warrant and upon  exercise in full,  the Company
shall deliver to the Holder an agreement  evidencing  the Company's  obligations
under this Section 10.

         11.      REDEMPTION.

                  (A) This Warrant  Certificate may be redeemed on not less than
thirty (30) days' notice,  at a redemption  price of $.01 per Warrant,  provided
the market price of the Common Stock  receivable  upon  exercise of such Warrant
shall exceed $2.50 per share (the "Target Price"),  subject to adjustment as set
forth in Subsection  (D) below.  Market price for the purpose of this Section 11
shall mean as applicable (i) the closing sale price, for twenty (20) consecutive
trading days (during which the Shares are registered  pursuant to the Securities
Act), of the Common Stock as reported by the National  Association of Securities
Dealers,  Inc. Automated Quotation System; or (ii) the last reported sale price,
for twenty (20) consecutive trading days (during which the Shares are registered
pursuant to the  Securities  Act,  on the  primary  exchange on which the Common
Stock  is  traded,  if the  Common  Stock is  traded  on a  national  securities
exchange;  or (iii) the closing bid price, for twenty (20)  consecutive  trading
days  (during  which  the  Shares  are  registered  pursuant  to the Act) in the
over-the-counter  market as reported by the National Quotation Bureau or similar
information provider.

                  (B) The notice of redemption  shall specify (i) the redemption
price,  (ii) the date fixed for  redemption,  (iii) the place  where the Warrant
Certificates  shall be delivered and the redemption price paid and (iv) that the
right to exercise the Warrant  shall  terminate at 5:00 P.M.  (Eastern  Standard
Time) on the business day  immediately  preceding the date fixed for redemption.
The date  fixed for the  redemption  of the  Warrants  shall be the  "Redemption
Date." No failure to mail such  notice nor any defect  therein or in the mailing
thereof shall affect the validity of the proceedings for such redemption  except
as to a Holder  (a) to whom  notice  was not  mailed  or (b)  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 redemption  has been
mailed postage



                                       15

<PAGE>15




prepaid to the last address of the Holder  appearing on the Warrant  Certificate
registry  books kept by the Company  shall,  in the  absence of fraud,  be prima
facie  evidence  of the facts  stated  therein.  Any right to exercise a Warrant
shall  terminate  at 5:00  P.M.  (Eastern  Standard  Time) on the  business  day
immediately  preceding the Redemption  Date. On and after the  Redemption  Date,
Holders of the Warrants  shall have no further  rights  except to receive,  upon
surrender of the Warrant, the redemption price.

                  (C) From and  after the date  specified  for  redemption,  the
Company  shall,  at the  place  specified  in the  notice  of  redemption,  upon
presentation  and surrender to the Company by or on behalf of the Holder thereof
of one or more  Warrants to be redeemed,  deliver or cause to be delivered to or
upon the  written  order of such  Holder a sum in cash  equal to the  redemption
price of each such  Warrant.  From and after the date fixed for  redemption  and
upon the deposit or setting  aside by the Company of a sum  sufficient to redeem
all the Warrants  called for  redemption,  such Warrants shall expire and become
void and all  rights  hereunder,  except  the right to  receive  payment  of the
redemption price, shall cease.

                  (D) If the shares of the Company's Common Stock are subdivided
or  combined  into a greater or smaller  number of shares of Common  Stock,  the
Target  Price  shall be  proportionally  adjusted  by the ratio  which the total
number of shares of Common  Stock  outstanding  immediately  prior to such event
bears  to  the  total  number  of  shares  of  Common  Stock  to be  outstanding
immediately after such event.

                  (E) If less than all of the Warrants are called for redemption
by the  Company,  the  particular  Warrants  to be  redeemed  shall be  redeemed
pro-rata in  accordance  with the Warrants then  outstanding.  If there shall be
drawn for redemption  less than all of the Warrants  represented by this Warrant
Certificate,  the Company  shall  execute and  deliver,  upon  surrender of this
Warrant  Certificate,  without charge to the Holder,  a new Warrant  Certificate
representing the unredeemed  balance of the Warrant  represented by this Warrant
Certificate.

         12.      TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933.

                  (A) The Holder of this Warrant  Certificate,  each  transferee
hereof and any Holder and transferee of any Shares,  by his acceptance  thereof,
agrees  that (a) no public  distribution  of  Warrants or Shares will be made in
violation of the Act, and (b) during such period as the delivery of a prospectus
with  respect  to  Warrants  or Shares  may be  required  by the Act,  no public
distribution  of  Warrants  or  Shares  will  be made in a  manner  or on  terms
different  from those set forth in, or without  delivery of, a  prospectus  then
meeting  the  requirements  of  Section  10 of the  Act and in  compliance  with
applicable  state  securities  laws. The Holder of this Warrant  Certificate and
each  transferee  hereof further agrees that if any  distribution  of any of the
Warrants or Shares is proposed to be made by them  otherwise than by delivery of
a  prospectus  meeting the  requirements  of Section 10 of the Act,  such action
shall be taken only after submission to the



                                       16

<PAGE>16




Company of an opinion of counsel,  reasonably satisfactory in form and substance
to the Company's counsel, to the effect that the proposed  distribution will not
be in violation of the Act or of applicable state law. Furthermore,  it shall be
a condition to the transfer of the Warrants that any transferee  thereof deliver
to the Company his written  agreement to accept and be bound by all of the terms
and conditions contained in this Warrant Certificate.

                  (B) This Warrant or the Shares or any other security issued or
issuable upon exercise of this Warrant may not be sold or otherwise  disposed of
except as follows:

                      (1) To a person  who,  in the  opinion of counsel  for the
Holder reasonably acceptable to the Company, is a person to whom this Warrant or
Shares may legally be transferred without  registration and without the delivery
of a current prospectus under the Act with respect thereto and then only against
receipt of an  agreement  of such person to comply with the  provisions  of this
subsection  (B)(1)  with  respect  to any  resale or other  disposition  of such
securities  which  agreement  shall be satisfactory in form and substance to the
Company and its counsel; provided that the foregoing shall not apply to any such
Warrant, Shares or other security as to which such Holder shall have received an
opinion letter from counsel to the Company as to the exemption  thereof from the
registration under the Act pursuant to Rule 144 under the Act; or

                      (2) To any  person  upon  delivery  of a  prospectus  then
meeting the requirements of the Act relating to such securities and the offering
thereof for such sale or disposition.

                  (C) Each  certificate  for Shares issued upon exercise of this
Warrant shall bear a legend relating to the non-registered status of such Shares
under the Act,  unless at the time of exercise of this  Warrant  such Shares are
subject to a currently effective registration statement under the Act.

         13.      MISCELLANEOUS.

                  (A) LAW TO  GOVERN.  This  Warrant  shall be  governed  by and
construed  in  accordance  with the  substantive  laws of the State of New York,
without giving effect to conflict of laws principles.

                  (B) ENTIRE AGREEMENT. This Warrant Certificate constitutes and
expresses the entire  understanding  between the parties  hereto with respect to
the  subject  matter  hereof,  and  supersedes  all  prior  and  contemporaneous
agreements  and  understandings,  inducements or conditions  whether  express or
implied,  oral or written.  Neither this Warrant  Certificate nor any portion or
provision hereof may be changed, waived or amended orally or in any manner other
than by an agreement in writing signed by the Holder and the Company.





                                       17

<PAGE>17




                  (C)  NOTICES.  Except as  otherwise  provided in this  Warrant
Certificate, all notices, requests, demands and other communications required or
permitted under this Warrant Certificate or by law shall be in writing and shall
be deemed to have been duly given, made and received only when delivered against
receipt or when  deposited in the United States  mails,  certified or registered
mail, return receipt requested, postage prepaid, addressed as follows:

Company: Halsey Drug Co., Inc.
         1827 Pacific Street
         Brooklyn, New York  11233
         Attn:  President

Holder:  At the address shown for the
         Holder in the registration
         book maintained by the
         Company.

                  (D) SEVERABILITY. If any provision of this Warrant Certificate
is prohibited by or is unlawful or unenforceable under any applicable law of any
jurisdiction,  such provision shall, as to such jurisdiction be in effect to the
extent of such prohibition without invalidating the remaining provisions hereof;
provided,  however,  that any such  prohibition  in any  jurisdiction  shall not
invalidate such provision in any other jurisdiction;  and provided, further that
where the provisions of any such applicable law may be waived,  that they hereby
are waived by the Company and the Holder to the full extent permitted by law and
to the end that  this  Warrant  instrument  shall be  deemed  to be a valid  and
binding agreement in accordance with its terms.

         IN WITNESS  WHEREOF,  Halsey Drug Co.,  Inc.  has caused  this  Warrant
Certificate to be signed by its duly  authorized  officers as of the 29th day of
November, 1995.



                                         HALSEY DRUG CO., INC.



                                         By: /s/ Rosendo Ferran
                                            Rosendo Ferran, President

Attest:

/s/ Authorized Signatory






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<PAGE>18







[CORPORATE SEAL]




                                       19

<PAGE>19






                                  PURCHASE FORM





To:  Halsey Drug Co., Inc.
                   , 19



         The  undersigned  hereby  irrevocably  elects to exercise  the attached
Warrant  Certificate,  Certificate  No.  W- , to the  extent of Shares of Common
Stock,  $.01 par value per share of Halsey  Drug Co.,  Inc.,  and  hereby  makes
payment of $ in payment of the aggregate exercise price thereof.


                   INSTRUCTIONS FOR REGISTRATION OF SECURITIES



Name:
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