<PAGE>   1
                                  SCHEDULE 14A
                                 (RULE 14a-101)
                     INFORMATION REQUIRED IN PROXY STATEMENT
                            SCHEDULE 14A INFORMATION
           PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
                      EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant /X/ 
Filed by a Party other than the Registrant / / 
Check the appropriate box
   
/ / Preliminary Proxy Statement      / / Confidential, For Use of the Commission
                                         Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
    

                              HALSEY DRUG CO., INC.
                (Name of Registrant as Specified in Its Charter)

    (Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

         (1) Title of each class of securities to which transaction applies:

         (2) Aggregate number of securities to which transaction applies:

         (3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):

         (4) Proposed maximum aggregate value of transaction:

         (5) Total fee paid:

         / / Fee paid previously with preliminary materials:

         / /Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
         (1) Amount previously paid:

         (2) Form, Schedule or Registration Statement no.:

         (3) Filing Party:

         (4) Date Filed:

<PAGE>   2
                                                                    
   
    
                                
                              HALSEY DRUG CO., INC.
                            695 NORTH PERRYVILLE ROAD
                             CRIMSON BUILDING NO. 2
                            ROCKFORD, ILLINOIS 61107


                    NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
   
         Notice is hereby given that the 1998 Annual Meeting of Shareholders
(the "Meeting") of Halsey Drug Co., Inc., a New York corporation (the
"Company"), will be held at the LaGuardia Airport Marriott, 102-02 Ditmars
Boulevard, Queens, New York on Tuesday, June 30, 1998 at 10:00 a.m.,
Eastern Time, for the purposes listed below:
    

         1.       To elect seven directors to the Board of Directors who shall
                  serve until the l999 Annual Meeting of Shareholders, or until
                  their successors have been elected and qualified;

         2.       To authorize an amendment to the Company's Certificate of
                  Incorporation (the "Charter") to increase the number of
                  authorized shares of its $.01 par value common stock (the
                  "Common Stock") from 20,000,000 shares to 40,000,000 shares;

         3.       To authorize an amendment to the Charter to entitle the
                  holders of the Company's 5% Convertible Senior Secured
                  Debentures due March 15, 2003 to vote on all matters submitted
                  to a vote of shareholders of the Company, voting together with
                  holders of Common Stock (and any other shares of capital stock
                  of the Company entitled to vote at a meeting of the
                  shareholders) as one class;

         4.       To adopt the Company's 1998 Stock Option Plan;

         5.       To ratify the appointment of Grant Thornton LLP as the
                  Company's independent certified public accountants for the
                  fiscal year ending December 31, 1998; and

         6.       To transact such other business as may properly come before
                  the Meeting or any adjournment thereof.
   
         Only shareholders of record at the close of business on May 26, 1998
are entitled to notice of and to vote at the Meeting or any adjournment thereof.
    

         For a period of 10 days prior to the Meeting, a shareholders list will
be kept at the Company's principal office and shall be available for inspection
by shareholders during normal business hours. A shareholders list shall also be
present and available for inspection at the Meeting.

         Your attention is directed to the accompanying Proxy Statement for the
text of the resolutions to be proposed at the Meeting and further information
regarding each proposal to be made.

         SHAREHOLDERS UNABLE TO ATTEND THE MEETING ARE URGED TO COMPLETE, DATE
AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. IF YOU
ATTEND THE MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON IF YOU WISH.

                                              By Order of the Board of Directors
                                           
                                           
                                              Michael K. Reicher
                                              President and Chief Executive
                                              Officer
   
M
ay 29, 1998                             
Rockford, Illinois
    


<PAGE>   3


   
    

                              HALSEY DRUG CO., INC.
                            695 NORTH PERRYVILLE ROAD
                          CRIMSON RIDGE BUILDING NO. 2
                            ROCKFORD, ILLINOIS 61107



                                 PROXY STATEMENT
                       1998 ANNUAL MEETING OF SHAREHOLDERS


   
         This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of Halsey Drug Co., Inc. (the "Company") of proxies in
the accompanying form, to be voted at the 1998 Annual Meeting of Shareholders of
the Company (the "Meeting") to be held on Tuesday, June 30, 1998, and at any
adjournment(s) thereof, for the purposes set forth in the accompanying Notice of
Annual Meeting of Shareholders. This Proxy Statement and the form of proxy were
first mailed to shareholders on or about May 29, 1998.
    

   
         The close of business on May 26, 1998 has been fixed as the record
date (the "Record Date") for the determination of shareholders entitled to
notice of and to vote at the Meeting. On the Record Date, the Company's
outstanding voting securities (exclusive of 439,603 shares held in treasury)
consisted of 13,760,145 shares of common stock, $.01 par value per share (the
"Common Stock"). Under the New York Business Corporation Law and the Company's
Certificate of Incorporation and Bylaws, each stockholder will be entitled to
one vote for each share of Common Stock held at the Record Date for all matters,
including the election of directors. The required quorum for the transaction of
business at the Meeting is a majority of the votes eligible to be cast by
holders of shares of Common Stock issued and outstanding on the Record Date.
Shares that are voted "FOR," "AGAINST," "WITHHELD" or "ABSTAIN" are treated as
being present at the Meeting for the purposes of establishing a quorum and are
also treated as shares entitled to vote at the Meeting (the "Votes Cast") with
respect to such matter. Abstentions will have the same effect as voting against
a proposal. Broker non-votes will be counted for purposes of determining the
presence or absence of a quorum for the transaction of business, but such
non-votes will not be counted for purposes of determining the number of Votes
Cast with respect to the particular proposal on which a broker has expressly not
voted. Thus a broker non-vote will not effect the outcome of the voting on a
proposal. Holders of Common Stock have no cumulative voting rights in the
election of directors.
    


<PAGE>   4
                                TABLE OF CONTENTS

Item                                                                        Page
- ----                                                                        ----

Voting of Proxies............................................................ 4
The Board of Directors....................................................... 4


Proposal 1 -  Election of Directors.......................................... 5
         - Vote Required..................................................... 7
         - Recommendation of the Board of Directors.......................... 7

P
roposal 2 - Amendment to Certification of Incorporation
   to Increase Authorized Capital Stock...................................... 7
         - Vote Required .................................................... 9
         - Recommendation of the Board of Directors......................... 10

P
roposal 3 - Amendment to Certificate of Incorporation
   Granting Voting Rights to Holders of Convertible Senior Secured
   Debentures............................................................... 11
         - General.......................................................... 11
         - Description of the Debentures and the Purchase Agreement......... 11
         - The Proposed Amendment........................................... 12
         - Vote Required.................................................... 13
         - Recommendation of the Board of Directors......................... 14
         - Dissenting Shareholders' Rights of Appraisal..................... 14
                                                                             
P
roposal 4- Approval of the Company's 1998 Stock Option Plan................ 16
         - Administration................................................... 17
         - Shares Subject to the 1998 Plan.................................. 18
         - Eligibility...................................................... 18
         - Exercise Price of Options........................................ 18
         - Terms............................................................ 18
         - Exercise of Options.............................................. 19
         - Federal Income Tax Consequences Relating to                       
            Incentive Stock Options......................................... 19
         - Federal Income Tax Consequences Relation to                       
            Non-Incentive Stock Options..................................... 20
         - Previously Granted Options....................................... 20
         - Amendments and Discontinuance of the 1998 Plan................... 21
         - Vote Required.................................................... 21
         - Recommendation of the Board of Directors......................... 21
                                                                             
P
roposal 5- Ratification of Appointment of                                  
   Independent Certified Public Accountants................................. 21
         - Recommendation of the Board of Directors......................... 21
                                                                             

Security Ownership of Certain Beneficial Owners                              
   and Management........................................................... 22
                                                                             
Compensation of Executive Officers and Directors............................ 25


                                        2

<PAGE>   5
 
                               TABLE OF CONTENTS

Item                                                                       Page
- ----                                                                       ----


Summary Compensation Table.................................................. 25
         - Employment Agreements............................................ 25
         - Compensation of Directors........................................ 26
         - Stock Option Plans............................................... 27
                                                                            
Aggregate Option Exercises in Last Fiscal Year
   and Fiscal Year End Option Values........................................ 28
                                                                             
Compensation Committee Interlocks and Insider                                
   Participation............................................................ 28
                                                                            
Section 16(a) Beneficial Ownership Reporting Compliance..................... 28
                                                                             
Report of the Compensation Committee on Executive                            
   Compensation............................................................. 29
                                                                            
Performance Graph........................................................... 31
                                                                             
Certain Relationships and Related Transactions.............................. 32
                                                                             
General..................................................................... 32
                                                                             
Shareholder Proposals for 1999 Annual Meeting............................... 34
                                                                             
Annex A - 1998 Stock Option Plan                                            

Annex B - Section 623 of the New York Business Corporation Law relating to
Dissenters' Appraisal Rights


                                        3

<PAGE>   6
                                VOTING OF PROXIES

              Proxies may be revoked by shareholders at any time prior to the 
voting thereof by giving notice of revocation in writing to the Secretary of the
Company or by voting in person at the Meeting.

              If the enclosed proxy is properly signed, dated and returned, the
Common Stock represented thereby will be voted at the Meeting and will be voted
in accordance with the specifications made thereon. IF NO INSTRUCTIONS ARE
INDICATED, THE COMMON STOCK REPRESENTED THEREBY WILL BE VOTED (i) FOR the
election of Directors, (ii) FOR the amendment to the Company's Certificate of
Incorporation (the "Charter") to increase the number of authorized shares of the
Company's Common Stock, (iii) FOR the amendment to the Company's Charter to
entitle the holders of the Company's 5% convertible senior secured debentures
due 2003 to vote on all matters submitted to a vote of shareholders of the
Company, (iv) FOR the adoption of the Company's 1998 Stock Option Plan and (v)
FOR the ratification of the appointment of Grant Thornton LLP as the Company's
independent certified public accountants for the fiscal year ending December 31,
1998.



                             THE BOARD OF DIRECTORS

              During the year ended December 31, 1997, the Board of Directors
held six meetings. None of the Company's Board members attended less than 75%
of the Board meetings held during 1997.

   
              During 1997, the Company had an Audit Committee and a Compensation
Committee of the Board of Directors. The Audit Committee, composed of Messrs.
Alan J. Smith and William Sumner during 1997, is responsible for nominating the
Company's independent auditors, working with independent auditors and internal
auditing staff of the Company and other corporate officials reviewing the
financial statements of the Company and reporting on the results of the audits
to the Board, reviewing the Company's insurance coverage, financial controls and
filings with the Securities and Exchange Commission, and submitting to the Board
its recommendations relating to the Company's financial reporting, accounting
practices and policies and financial accounting and operation controls. The
Audit Committee met once in 1997. Effective April 16, 1998, Mr. Bruce F. Wesson
was added as a member of the Audit Committee.
    

              The Company's Compensation Committee, composed of Messrs. Alan J.
Smith and William Sumner during 1997, is responsible for consulting with and
making recommendations to the Board of Directors about executive compensation
arrangements and the compensation of employees, including the grant of options
under the Company's 1995 Stock Option Plan to individual officers and key
employees. See "Compensation of Executive Officers and Directors - Report of the
Compensation Committee on Executive Compensation." As discussed below, effective
April 16, 1998, responsibility for the grant of stock options under the
Company's Stock Option Plan has been allocated to the Stock Option Committee of
the Board of Directors. The Compensation Committee met once in 1997.

              In April 1998, the Board of Directors established a Stock Option
Committee, composed of William Skelly, William Sumner and Alan Smith, an
Executive Committee, composed of Srini Conjeevaram, Michael Reicher and William
Skelly, and a Technical and Business Development Committee, composed of Srini
Conjeevaram, William Sumner and Alan Smith. The principal functions of the Stock
Option Committee are to review management's recommendation as to employee option
grants and to grant options under the Company's Stock Option Plans to employees,
directors, and consultants. The principal functions of the Executive Committee
are to act on behalf of the Board of Directors in lieu of a full Board meeting
on such matter that are not of the type required to be considered by the full
Board of Directors and to advise the Board as to the issues and matters under
review by the Executive Committee at the meetings of the Board Directors. The
principal functions of the Technology and Business Development Committee are to
address and review regulatory oversight of the Company's operations, including


                                        4

<PAGE>   7
compliance with applicable DEA and FDA regulations, compliance with state agency
and regulatory requirements, compliance with Medicare reimbursement requirements
and to consult with the Board regarding current and future compliance with
applicable Federal and state regulations, including Current Good Manufacturing
Practice Regulations.

              The Company does not have a standing nominating committee.

 
                                  PROPOSAL 1

                              ELECTION OF DIRECTORS

   
               At the Meeting, eight individuals will be elected to serve as
Directors until the next annual meeting, and until their successors are elected
and qualified. During the fiscal year ended December 31, 1997, the Company's
Board of Directors consisted of four persons. On February 19, 1998, as part of
Michael Reicher's appointment as President and Chief Executive Officer, the
Company's Directors appointed Michael Reicher to fill a vacancy that existed on
the Board of Directors. On March 10, 1998, as part of the completion of the
Company's private offering of debentures and and warrants (the "Offering"), the
Company's Directors appointed each of Bruce F. Wesson and Srini Conjeevaram to
fill the remaining two vacancies that existed on the Board of Directors. See
Proposal 3 for more detailed information relating to the Offering. Effective
April 9, 1998, Rosendo Ferran resigned his position as a Director of the
Company.
    

               Unless a shareholder WITHHOLDS AUTHORITY, a properly signed and
dated proxy will be voted FOR the election of the persons named below, unless
the proxy contains contrary instructions. Management has no reason to believe
that any of the nominees will not be a candidate or will be unable to serve as a
Director. However, in the event any nominee is not a candidate or is unable or
unwilling to serve as a Director at the time of the election, unless the
shareholder withholds authority from voting, the proxies will be voted for any
nominee who shall be designated by the present Board of Directors to fill such
vacancy.

   
The name and age of each of the eight nominees, his principal occupation and the
period during which such person has served as a Director are set out below.
    

   

<TABLE>
<CAPTION>
Name of                                         Position With
Nominee                              Age        the Company            Director Since
- -------                              ---        -----------            --------------

<S>                                 <C>        <C>                    <C>
William Skelly (1)(3)(4)(5)           47        Chairman of the             1996
                                                Board of Directors

Michael K. Reicher (3)(4)             51        President, Chief            1998
                                                Executive Officer
                                                and Director

Alan J. Smith, Ph.D. (1)(2)           68        Director and                1995
                                                Consultant

William A. Sumner (1)(2)(5)           60        Director                    1997

Bruce F. Wesson (2)(3)(4)             55        Director                    1998

Srini Conjeevaram (3)(4)(5)           39        Director                    1998

Zubeen Shroff                         33        Nominee for Director        ----

Peter A. Clemens                      45        Vice President, Chief
                                                Financial Officer and
                                                Nominee for Director        ----
</TABLE>

    


                                        5

<PAGE>   8
(1)  Member of Stock Option Committee
(2)  Member of Audit Committee
(3)  Member of Compensation Committee
(4)  Member of Executive Committee
(5)  Member of Technology and Business Development Committee

              WILLIAM SKELLY has been a Director of the Company since May 1996
and Chairman of the Company since October 1996. Since 1990, Mr. Skelly has
served as Chairman, President and Chief Executive Officer of Central Biomedia,
Inc. and its subsidiary SERA, Inc., companies involved in the animal health
industry including veterinary biologicals and custom manufacturing of animal
sera products. From 1985 to 1990, Mr. Skelly served as President of Martec
Pharmaceutical, Inc., a distributor and manufacturer of human generic
prescription pharmaceuticals.

              MICHAEL K. REICHER has been President, Chief Executive Officer and
a Director of the Company since February 19, 1998. In 1980, Mr. Reicher founded
UDL Laboratories, Inc., a manufacturer of human generic pharmaceuticals, and
served as its President through February 1998. In February 1996, UDL
Laboratories, Inc. was purchased by Mylan Laboratories, Inc., and Mr. Reicher
remained in the office of President until joining the Company in February 1998.

              ALAN J. SMITH, PH.D. has been a Director of the Company since 1995
and a consultant to the Company since March 1998. Since 1991, Dr. Smith has been
a management consultant specializing in pharmaceutical quality management,
quality control, quality assurance and auditing, the Food and Drug
Administration's Current Good Manufacturing Practice regulations and technology
training, documentary systems and stability programming. From 1985 to 1991, he
was Corporate Director of Quality Affairs for Whitehall Laboratories, a Division
of American Home Products Corporation. Dr. Smith holds B.Sc. and Ph.D. degrees
from the University of London.

              WILLIAM A. SUMNER has been a director of the Company since August
1997. From 1974 until his retirement in 1995, Mr. Sumner held various positions
within Hoechst-Roussel Pharmaceuticals, Inc., a manufacturer and distributor of
pharmaceutical products, including Vice-President and General Manager,
Dermatology Division from 1991 through 1995, Vice President, Strategic Business
Development, from 1989 to 1991 and Vice President, Marketing from 1985 to 1989.
Since his retirement from Hoechst-Roussel Pharmaceuticals, Inc. in 1995, Mr.
Sumner has acted as a consultant to various entities in the pharmaceutical
field.

              BRUCE F. WESSON has been a director of the Company since March
1998. Mr. Wesson is President of Galen Associates, a health care venture firm,
and a General Partner of Galen Partners III, L.P. Prior to January 1991,
he was Senior Vice President and Managing Director of Smith Barney, Harris
Upham & Co. Inc., an investment banking firm. He currently serves on the Boards
of Witco Corporation, a publicly traded company, and several privately held
companies. Mr. Wesson earned a degree from Colgate University and a Master of
Business Administration from Columbia University.

              SRINI CONJEEVARAM has been a director of the Company since March
1998. Mr. Conjeevaram is Chief Financial Officer of Galen Associates, a health
care venture firm, and a General Partner of Galen Partners III, L.P. Prior to
January 1991, he was an Associate in Corporate Finance at Smith Barney, Harris
Upham & Co. Inc. from 1989 to 1990 and a Senior Project Engineer for General
Motors Corporation from 1982 to 1987. Mr. Conjeevaram serves as a director of
Derma Sciences, Inc., a publicly  traded company. He earned a Bachelor of
Science degree in Mechanical Engineering from Madras University, a Master of
Science degree in Mechanical Engineering from Stanford University, and a Master
of Business Administration from Indiana University.

              ZUBEEN SHROFF is a nominee to become a director of the Company.
Mr. Shroff is a General Partner of Galen Partners III, L.P. He joined Galen
Associates, a health care venture firm, in January 1997 from The Wilkerson
Group, a leading provider of management consulting services to the health care
industry. Prior to The Wilkerson Group he worked for Schering-Plough
International from 1989 to 1993 in a variety of staff and line management
positions and as head of Schering-Plough France's biotech franchise. Mr. Shroff
received a Bachelor of Science in Biological Sciences from Boston University in
1986 and a Masters of Business Administration from The Wharton School in 1988.

   
              PETER A. CLEMENS has been the Vice President and Chief Financial
Officer of the Company since February 1998 and is a nominee to become a
director of the Company. From February, 1988 until joining the Company, Mr.
Clemens was employed by TC Manufacturing Co., Inc. ("TC") which, through its
various subsidiaries and divisions, manufactures generic pharmaceuticals,
industrial coatings and flexible packaging. Mr. Clemens was TC's President from
February, 1996 through February, 1998. Prior to that time, he held the position
of Vice President and Chief Financial Officer.
    

   
Executive Officers
- ------------------

              Michael K. Reicher, President and Chief Executive Officer.

              Peter A. Clemens, Vice President and Chief Executive Officer.

              Stephanie Heitmeyer has been Vice President - Sales since March
1998. Prior to joining the Company, Ms. Heitmeyer served as Senior Manager,
National Accounts of Mylan Laboratories, Inc., a pharmaceutical manufacturer,
and prior to that, served as Corporate Account Manager, Managed Healthcare
Specialist of Amgen Pharmaceuticals. Age: 52.
    

   
              Ash Tankha has been Vice President and General Manager of the
Company's Brooklyn facility since March 1998. Prior to joining the Company,
Mr. Tanhka provided consulting services to a variety of companies in the
pharmaceutical industry with respect to pharmaceutical operations, technology,
FDA and DEA regulatory compliance, intellectual property and quality
management. Mr. Tankha holds graduate degrees in Chemical Engineering from the
University of Denver, and a J.D. from The John Marshall School of Law, Chicago.
Age: 51.
    
   
              Daniel Hill has been Vice President of Managed Care Sales since
March 1998. From 1993 until joining the Company, Mr. Hill served as Director of
Managed Care for Mylan Laboratories, Inc. Mr. Hill has been involved in the
generic drug industry for over 30 years. Age: 62.
    
   
              Carol Whitney has been Vice President of Administration since
April 1998. From 1992 until joining the Company, Ms. Whitney served as Director
of Human Resources for UDL Laboratories, Inc., a generic pharmaceutical
manufacturer located in Rockford, Illinois. Age: 51.
    
   
              Robert Seiser has been Corporate Controller and Treasurer since
March 1998. From 1992 until joining the Company, Mr. Seiser served as Treasurer
and Corporate Controller of TC Manufacturing Co., Inc., a privately held
company based in Evanston, Illinois. Mr. Seiser is a Certified Public
Accountant and earned a B.B.A. degree from Loyola University of Chicago. Age:
34.
    

              The term of office of each person elected as a director will
continue until the next annual meeting of shareholders and until such person's
successor has been elected and qualified. Officers are appointed by the Board of
Directors and served at the discretion of the Board, although the employment of
Michael Reicher, the Company's President and Chief Executive Officer, and Peter
Clemens, the Company's Vice President and Chief Financial Officer are subject to
the provisions of their respective Employment Agreements.

              On March 10, 1998, the Company consummated a private offering of
securities for an aggregate purchase price of $20.8 million (the "Offering").
The securities issued in the Offering consisted of 5% convertible senior secured
debentures (the "Debentures") and common stock purchase warrants (the
"Warrants") exercisable for an aggregate of 4,202,020 shares of the Company's
Common Stock. The Debentures and Warrants were issued by the Company pursuant to
a certain Debenture and Warrant Purchase Agreement dated March 10, 1998 (the
"Purchase Agreement")


                                        6

<PAGE>   9
by and among the Company, Galen Partners III, L.P., Galen Partners International
III, L.P., Galen Employee Fund III, L.P. (collectively "Galen") and each of the
Purchasers listed on the signature page thereto (inclusive of Galen,
collectively, the "Galen Investor Group").

   
              The Purchase Agreement provides that the Galen Investor Group has
the right to designate for nomination two persons to be members of the Company's
Board of Directors as of the Closing Date of the Offering. The Purchase
Agreement provides further that the Galen Investor Group has the right to
designate an additional person to be a member of the Board of Directors
commencing with the first annual meeting of shareholders of the Company to be
held after the Offering, for a total of three of the Company's proposed eight 
Board positions. The Company's by-laws provides that the Board of Directors 
shall consist of not more than 11 members. The Board of Directors appointed 
Bruce F. Wesson and Srini Conjeevaram, each a designee of the Galen Investor 
Group, to the Company's Board of Directors effective at the closing of the 
Offering. In accordance with the terms of the Purchase Agreement, the Board of 
Directors has nominated Zubeen Shroff, also a designee of the Galen Investor 
Group, to become a member of the Board of Directors at the Meeting. The Company
has agreed to nominate and appoint to the Board of Directors, subject to 
shareholder approval, three designees of the Galen Investor Group for so long 
as the Debentures and Warrant remain outstanding.
    

Vote Required

              Directors are elected by a plurality of the votes cast. The eight
candidates receiving the highest number of votes will be elected as directors.

              Pursuant to the terms of the Purchase Agreement executed in
connection with the Offering by and among the Company and the Galen Investor
Group, certain existing shareholders of the Company and members of the Galen
Investor Group, who as of the Company's Record Date owned approximately 25% of
the outstanding Common Stock, have entered into an irrevocable proxy agreement
with Galen pursuant to which they have granted a designee of Galen an
irrevocable proxy to vote the shares of the Company's Common Stock held by them
at the Meeting in connection with this Proposal and Proposals 2 and 3. If
Galen's designee elects to exercise this proxy, he must vote such shares in
favor of the three designees of the Galen Investor Group. Galen's designee has
indicated that he intends to exercise the proxy and vote such shares in favor of
the three designees of the Galen Investor Group.

Recommendation of the Board of Directors

 
             The Board of Directors recommends that the shareholders vote FOR
each of the above nominees for Director.


                                   PROPOSAL 2


                    AMENDMENT TO CERTIFICATE OF INCORPORATION
                      TO INCREASE AUTHORIZED CAPITAL STOCK


              On March 7, 1998, the Board of Directors unanimously approved and
recommend that the Company's shareholders consider and approve an amendment to
Article THREE of the Company's Certificate of Incorporation (the "Charter") that
would increase the number of authorized shares of the Company's Common Stock
from 20,000,000 shares to 40,000,000 shares.

              As of March 31, 1998, the Company had 13,760,145 shares of
Common Stock issued and outstanding and 439,603 shares held in treasury. In
addition, as of the close of business on March 31, 1998, (i) 644,777 shares of
Common Stock were reserved for issuance upon exercise of outstanding stock
option agreements under the company's existing stock option plans, (ii)
2,040,000 shares of Common Stock were reserved for issuance upon exercise of 
outstanding stock option agreements granted outside the Company's existing 
stock option plans, (iii) 719,519 shares of


                                        7

<PAGE>   10
Common Stock reserved for issuance upon exercise of outstanding warrants, and
(iv) 2,835,559 shares of Common Stock were reserved for issuance upon 
conversion of outstanding convertible debentures and the Debentures issued in 
connection with the Offering. Accordingly, as of March 31, 1998, there were no 
shares of the Company's Common Stock unissued, unreserved for issuance and 
otherwise available for issue by the Company. The Company's Charter does not 
authorize the Company to issue preferred stock.

              In addition to the shares reserved for issuance under the
outstanding stock option agreements, warrants and convertible debenture
instruments as described above, in accordance with the terms of the Purchase
Agreement executed in connection with the Offering, the Company has issued the
Debentures and the Warrants which are convertible and exercisable, respectively,
for an aggregate of approximately 18,068,000 shares of the Company's Common
Stock, for which the Company has insufficient authorized shares available to
reserve such shares for issuance. See Proposal 3 for a description of the terms
of the Debentures and Warrants issued in the Offering.

              The proposed increase in the authorized Common Stock has been
recommended by the Board of Directors to (i) provide sufficient authorized,
unissued and unreserved shares to permit the conversion of the Debentures issued
pursuant to the Purchase Agreement in connection with the Offering, (ii) provide
sufficient authorized, unissued and unreserved shares to permit the exercise of
the Warrants issued pursuant to the Purchase Agreement in connection with the
Offering and (iii) assure that an adequate supply of authorized, unissued and
unreserved shares is available for general corporate needs and to provide the
Board the necessary flexibility to issue Common Stock in connection with
acquisitions, merger transactions or financings without the expense and delay
incidental to obtaining shareholder approval of any amendment to the Charter at
the time of such action, except as may be required for a particular issuance by
applicable law or by the rules of any stock exchange on which the Company's
securities may then be listed. While the additional authorized shares of Common
Stock may be used for such purposes as raising additional capital or the
financing of an acquisition or business combination, other than the satisfaction
of the Company's obligations under the Debentures and the Warrants, as described
herein, the Company currently has no plans or arrangements related to any of the
additional shares of Common Stock proposed to be authorized by the amendment to
the Charter. Such shares would, however, be available for issuance without
further action by the shareholders, unless required by applicable law. The
Company's Common Stock is traded on the American Stock Exchange (the "AMEX")
which provides that shareholder approval is required for the issuance of
securities in connection with a transaction other than a public offering,
involving the sale or issuance by a company of common stock or securities
convertible onto common stock equal to 20% or more of a company's common stock
or 20% or more of the voting power outstanding before the issuance, for less
than the greater of book or market value of the company's common stock.

              The additional shares of Common Stock for which authorization is
sought would be identical to the shares of the Common Stock of the Company now
authorized. Holders of Common Stock do not have preemptive rights to subscribe
for additional securities which may be issued by a Company.

              The issuance of additional shares by the Company, whether pursuant
to the conversion of the Debentures or exercise of the Warrants, or otherwise,
could have an effect on the potential realizable value of a shareholder's
investment. In the absence of a proportionate increase in the Company's earnings
and book value, an increase in the aggregate number of outstanding shares of the
Company caused by the issuance of additional shares would dilute the earnings
per share and book value per share of all outstanding shares of the Company's
Common Stock. If such factors were reflected in the price per share of Common
Stock, the potential realizable value of a shareholder's investment could be
adversely affected.

              Although the Board of Directors has no present intention of
issuing additional shares for such purposes, the proposed increase in the number
of authorized shares of Common Stock could enable the Board of Directors to
render more difficult or discourage an attempt by another person or entity to
obtain control of the Company. Such additional shares could be issued by the
Board in a public or private sale, merger or similar transaction, increasing the
number of outstanding shares and thereby diluting the equity interest and voting
power of a party attempting to obtain control of the Company. The increase in
the authorized shares of Common Stock has not, however, been proposed for


                                        8

<PAGE>   11
an antitakeover-related purpose and the Board of Directors and Management have
no knowledge of any current efforts to obtain control of the Company or to
effect large accumulations of its Common Stock.

              The Company's Charter does not provide for cumulative voting. As a
result, in order to be ensured of representation on the Board, a shareholder
must control the votes of a majority of the shares present and voting at a
shareholder's meeting at which a quorum is present. The lack of cumulative
voting requires an entity seeking a takeover to acquire a substantially greater
number of shares to ensure representation on the Board, than would otherwise be
necessary were cumulative voting available.

              Certain provisions of the Company's by-laws could also have the
effect of deterring takeover attempts because of the procedural provisions
contained therein. The by-laws provide that special shareholder meetings may be
called only by the President or Secretary of the Company, or by resolution of
the Board of Directors. The Company's by-laws further provide that the Board of
Directors has the authority to postpone any previously scheduled annual or
special meeting of shareholders upon public notice given in accordance with the
by-laws. In addition, except as otherwise required by law, the by-laws limit the
business that may be transacted at a special meeting of shareholders to the
matters specified in the notice of such special meeting.

              Neither this Proposal nor Proposal 3 is part of any plan by the
Company's Management to adopt a series of amendments to its Charter or by-laws
so as to render the takeover of the Company more difficult. Moreover, the
Company is not submitting this Proposal to enable it to frustrate any efforts by
another party to acquire a controlling interest or to seek Board representation.

              The Company believes that the proposed amendment to Article THREE
of the Charter will provide several long-term advantages to the Company and its
shareholders. The passage of the Proposal will enable the Company to satisfy its
contractual obligations under the Debentures and the Warrants. The Purchase
Agreement pursuant to which the Debentures and the Warrants were issued by the
Company provides that it shall constitute in event of default under the
Debentures if the Company fails to obtain the approval of its shareholders to
increase the authorized capital stock as provided in this Proposal. The approval
of this Proposal also might enable the Company to pursue acquisitions or enter
into transactions which Management believes provide the potential for growth and
profit. If additional authorized shares are available, transactions dependent
upon the issuance of additional shares will be less likely to be undermined by
delays and uncertainties occasioned by the need to obtain shareholder
authorization prior to consummation of such transactions. The ability to issue
shares, as deemed in the Company's best interest by the Board, will also permit
the Company to avoid the expenses which are incurred in holding certain
shareholders meetings.

              If the Proposal is adopted, the Charter will be amended to delete
Article THREE in its entirety and replace same with the following:

              "THREE: The aggregate number of shares which the Corporation shall
have the authority to issue is 40,000,000 at common, $.01 per share par value."

Vote Required

              The affirmative vote of the holders of a majority of the shares of
the Company's Common Stock, present in person or by proxy, and entitled to vote
at the Meeting is required to approve this proposal to authorize an amendment to
the Company's Charter to increase its authorized capital stock from 20,000,000
shares to 40,000,000 shares of Common Stock.

              Pursuant to the terms of the Purchase Agreement executed in
connection with the Offering by and among the Company and the Galen Investor
Group, certain existing shareholders of the Company and members of the Galen
Investor Group, who as of the Company's Record Date owned in the aggregate
approximately 25% of the outstanding Common Stock, have entered into an
irrevocable proxy agreement with Galen pursuant to which they have granted a


                                        9

<PAGE>   12
designee of Galen an irrevocable proxy to vote the shares of the Company's
Common Stock held by them at the Meeting in connection with this Proposal and
Proposals 1 and 3. If Galen's designee elects to exercise this proxy, he must
vote such shares in favor of this Proposal. Galen's designee has indicated that
he intends to exercise the proxy and vote such shares in favor of this Proposal.

Recommendation of the Board of Directors

 
             The Board of Directors recommends that the shareholders vote FOR
the proposed amendment to the Charter to increase the authorized capital stock
of the Company.


                                       10

<PAGE>   13

                                   PROPOSAL 3

            AMENDMENT TO CERTIFICATE OF INCORPORATION GRANTING VOTING
            RIGHTS TO HOLDERS OF CONVERTIBLE SUBORDINATED DEBENTURES

General

              On March 10, 1998, the Company consummated a private offering of
securities for an aggregate purchase price of $20.8 million (the "Offering").
The securities issued in the Offering consisted of 5% convertible senior secured
debentures (the "Debentures") and common stock purchase warrants (the
"Warrants") exercisable for an aggregate of 4,202,020 shares of the Company's
Common Stock. The Debentures and Warrants were issued by the Company pursuant to
a certain Debenture and Warrant Purchase Agreement dated March 10, 1998 (the
"Purchase Agreement") by and among the Company, Galen Partners III, L.P., Galen
Partners International III, L.P., Galen Employee Fund III, L.P. (collectively,
"Galen") and each of the Purchasers listed on the signature page thereto
(inclusive of Galen, collectively, the "Galen Investor Group"). The Debentures,
issued at par, will become due and payable as to principal on March 15, 2003.
Interest on the principal amount of the Debentures, at the rate of 5% per annum,
is payable on a quarterly basis. The Debentures are convertible at any time
after issuance into shares of Common Stock at a price of $1.50 per share, for an
aggregate of 13,866,667 shares of Common Stock. The Warrants are exercisable at
any time following issuance for shares of Common Stock at an exercise price of
$1.50, with respect to Warrants to purchase 2,101,010 shares, and $2.375, with
respect to the remaining Warrants to purchase 2,101,010 shares of Common Stock.

              The Purchase Agreement provides that the holders of the Debentures
shall have the right to vote as part of a single class with all holders of the
Company's Common Stock on all matters to be voted on by such shareholders,
subject to the approval of the Company's shareholders to amend the Company's
Charter pursuant to this Proposal. In addition, the Galen Investor Group has the
right to designate for nomination two persons to be members of the Company's
Board of Directors as of the closing date of the Offering and the right to
designate an additional person to be a member of the Board of Directors
commencing with the first annual meeting of shareholders of the Company to be
held after the Offering. See "Proposal 1-Election of Directors." The terms and
provisions of the Offering, the Purchase Agreement, the Debentures and the
Warrants are more specifically set forth in the Company's Current Report on Form
8-K as filed with the Securities and Exchange Commission (the "Commission") on
March 24, 1998, a copy of which accompanies this Proxy Statement. All
shareholders are encouraged to review carefully the Current Report on Form 8-K
and any summary contained herein is qualified by reference to such Form 8-K
filing.

              As of March 31, 1998, the Company had issued and outstanding
13,760,145 shares of Common Stock. In addition, the Company had reserved the
remaining 5,800,252 shares of its authorized and unissued shares of Common Stock
as well as 439,603 shares held in treasury, for issuance upon exercise of
outstanding stock option agreements and warrants, the conversion of previously
outstanding convertible debentures, and the conversion of a portion of the 
Debentures.

              Section 518 of the New York Business Corporation Law permits a
corporation to confer upon the holders of debentures the power to vote in
respect of the corporate affairs and management of the corporation to the extent
provided in its Certificate of Incorporation. Under the present Charter of the
Company, voting rights are conferred only upon the holders of the Company's
Common Stock. In the event this Proposal is approved, the holders of the
Debentures will have voting rights equivalent to those associated with the
ownership of the Company's Common Stock.

Description of the Debentures and the Purchase Agreement

              Reference is made to the Company's Current Report on Form 8-K as
filed with the Commission on March 24, 1998 for a description of the terms and
provisions of the Debentures and the Purchase Agreement. A copy of the Form 8-K
accompanies this Proxy Statement and is incorporated by reference herein.


                                       11

<PAGE>   14
The Proposed Amendment

              On March 7, 1998, the Company's Board of Directors unanimously
approved, subject to shareholder approval, an amendment to the Company's Charter
which granted voting rights to the holder of the Debentures. The proposed
amendment provides that the holders of the Debentures will be entitled to vote
on all matters submitted to a vote of the shareholders of the Company, voting
together with the holders of the Company's Common Stock (and of any other shares
of capital stock of the Company entitled to vote at a meeting of the
shareholders) as one class. Each holder of a Debenture will be entitled to a
number of votes equal to the number of votes represented by the Common Stock of
the Company that could then be acquired upon conversion of the Debentures into
Common Stock, subject to adjustments as provided in the Debentures. Holders of
the Debentures will be deemed to be shareholders of the Company, and the
Debentures will be deemed to be shares of stock for the purpose of any provision
of a New York Business Corporation Law that requires the vote of shareholders as
a prerequisite for any corporate action.

              Immediately prior to the completion of the Offering, the Company
was attempting to address various actions and proceedings which threatened the
Company's continuing operations, most of which stemmed from the Company's lack
of working capital to satisfy outstanding liabilities. In particular, the
Company's banks had given notice of a forced sale of certain of their security
relating to the Company's outstanding bank indebtedness, which would have
resulted in the loss of the Houba subsidiary Indiana facility. In addition, the
landlord of the Company's Brooklyn facility had served the Company with a notice
of eviction and various creditors had obtained judgments against the Company and
filed restraining notices against its bank accounts. A lack of funding also
resulted in the Company being unable to purchase meaningful quantities of raw
materials and left inventories depleted and sales reduced.

              The net proceeds of the Offering, in large part, have been used to
satisfy a substantial portion of the Company's liabilities and accounts payable.
Such liabilities include the full satisfaction of the Company's bank
indebtedness and related fees, payment to the landlord of the Brooklyn facility
and satisfaction of outstanding judgments and liens. Such payments have allowed
the Company to avoid the threatened foreclosure sale by its banks of the Indiana
facility securing such indebtedness. Additionally, pursuant to agreements
reached with large creditors in anticipation of completing the Offering,
including the Company's landlord and the Department of Justice, the Company has
been able to bring these creditors current and in compliance with installment
payment agreements providing favorable terms to the Company. Satisfaction of the
Company's current obligations to its landlord of the Brooklyn facility for
accrued and unpaid rent, penalties and expenses has allowed the Company to
renegotiate its lease and avoid eviction. The Offering proceeds will also allow
the Company to satisfy its outstanding state and Federal payroll tax liabilities
and meet current payroll tax obligations.

              In approving the Offering and the terms of the Debenture and the
Warrants issued pursuant to the Purchase Agreement, the Board of Directors
determined that the conversion and exercise prices for the Debentures and
Warrants represented fair value and that the completion of the Offering would
permit the Company to satisfy a substantial portion of its current liabilities
and to continue its operations in an effort to enhance shareholder value. The
Board of Directors, including its independent directors, unanimously approved
the terms of the Offering, including the conversion and exercise prices of the
Debentures and Warrants.

              Assuming receipt of shareholder approval of this Proposal, Galen
and the Galen Investor Group would control 45.6% and 50.5%, respectively, of the
Company's Common Stock (51% and 55.8%, respectively, upon issuance of additional
Debentures in the event the $5 million investor option provided in the Purchase
Agreement were exercised, of which there can be no assurance). In addition,
Bruce F. Wesson and Srini Conjeevaram, each designee of the Galen Investor
Group, have been appointed to the Board of Directors effective as of the closing
date of the Offering in accordance with the terms of the Purchase Agreement.
Zubeen Shroff, an additional designee of the Galen Investor Group, is a nominee
to become a member of the Board of Directors at the Meeting. As a result, three
of the Company's seven directors are designees of the Galen Investor Group. The
Company has agreed to nominate and appoint to the Board of Directors, subject to
shareholder approval, three designees of the Galen Investor Group for so long as
the Debentures and Warrants issued in the Offering remain outstanding. In the
event the amendment to the Company's


                                       12

<PAGE>   15
Charter contemplated by this Proposal is approved by shareholders, the Galen
Investor Group would possess sufficient voting rights to control the nomination
and election of the Board of Directors of the Company.

              The structure and the terms of the Offering, including the terms
and provisions of the Debentures, were negotiated at arms length by
representatives of the Company and the Galen Investor Group. The requirement to
provide the holders with voting rights on all matters submitted to a vote of
shareholders of the Company was a necessary component to obtain the investment
from the Galen Investor Group. The terms of the Purchase Agreement provide that
in the event the Company fails to obtain shareholder approval to increase its
authorized capital stock as described in Proposal 2 or to provide the holders of
the Debentures with the right to vote on all matters submitted to a vote of the
shareholders of the Company as provided in this Proposal, the Company will be in
default under the terms of the Debentures permitting the Galen Investor Group,
among other things, to accelerate the indebtedness evidenced by the Debentures.
Failure to comply with the terms of the Purchase Agreement and the Debentures,
including the failure to obtain shareholder approval to this Proposal and
Proposal 2, would materially adversely affect the Company's business, financial
condition and results of operations.

              Prior to the Offering, Galen was unaffiliated with the Company.
See "Certain Relationships and Related Transactions" for a discussion of the
relationship between Messrs. Wesson, Conjeevaram and Shroff, each a nominee for
director, and Galen.

Vote Required

              The affirmative vote of the holders of a majority of the shares of
the Common Stock of the Company, present in person or by proxy, and entitled to
vote at the Meeting is required to approve this Proposal to authorize an
amendment to the Company's Charter to provide voting rights to the holders of
the 5% convertible senior secured debentures due March 15, 2003.

              Pursuant to the terms of the Purchase Agreement executed in
connection with the Offering by and among the Company and the Galen Investor
Group, certain existing shareholders of the Company and members of the Galen
Investor Group, who as of the Company's Record Date owned in the aggregate
approximately 25% of the outstanding Common Stock, have entered into an
irrevocable proxy agreement with Galen pursuant to which they have granted a
designee of Galen an irrevocable proxy to vote the shares of the Company's
Common Stock held by them at the Meeting in connection with this Proposal and
Proposals 1 and 2. If Galen's designee elects to exercise this proxy, he must
vote such shares in favor of this Proposal. Galen's designee has indicated that
he intends to exercise the proxy and vote such shares in favor of this Proposal.

              If this Proposal is adopted, the following will be inserted at the
end of Article THREE of the Company's Certificate of Incorporation:

                  "The holders of the Company's 5% convertible senior secured
                  debentures due March 15, 2003 (the "Debentures") shall be
                  entitled to a vote on all matters submitted to a vote of the
                  shareholders of the Company, together with the holders of the
                  Company's Common Stock (and of any other shares of capital
                  stock of the Company entitled to vote at a meeting of
                  shareholders) as one class. Each Debenture shall be entitled
                  to a number of votes equal to the number of votes represented
                  by the Common Stock of the Company that could then be acquired
                  upon conversion of the Debentures into Common Stock, subject
                  to adjustment as provided in the Debentures. Holders of the
                  Debentures shall be deemed to be shareholders of the Company,
                  and the Debentures shall be deemed to be shares of stock for
                  purposes of any provision of the New York Business Corporation


                                       13

<PAGE>   16
                  Law that requires the vote of shareholders as a prerequisite
                  to any corporate action."

Recommendation of the Board of Directors

 
             The Board of Directors recommend that shareholders vote FOR the
proposed amendment to the Company's Charter to grant holders of the Debentures
with voting rights as provided in this Proposal.

Dissenting Shareholders' Rights of Appraisal

         Pursuant to Section 806 of the New York Business Corporation Law
("NYBCL"), holders of the Company's Common Stock who follow the procedures set
forth in Section 623 of the NYBCL (the "Appraisal Statute") will be entitled to
have their Common Stock appraised by a New York State Court and to receive
payment of the "fair value" of such shares as determined by such court. The
Appraisal Statue is reprinted in its entirety as Annex B to this Proxy
Statement. The following discussion is not a complete description of the law
pertaining to appraisal rights under the NYBCL and is qualified in its entirety
by the full text of the Appraisal Statute. Any shareholder who wishes to
exercise such appraisal rights or to preserve the right to do so, should review
the following discussion and Annex B carefully because failure to timely and
properly comply with the procedures specified will result in the loss of
dissenters' appraisal rights under the NYBCL.

         All references in the Appraisal Statute and in this summary to a
"shareholder" are to the recordholder of the Company's Common Stock on the
Record Date. A person having a beneficial interest in shares of the Company's
Common Stock that are held of record by another person such as a broker or
nominee must act promptly to cause the record holder to follow the steps
summarized below properly and in a timely manner to perfect whatever appraisal
rights the beneficial owner may have.

         A shareholder wishing to exercise appraisal rights must (i) deliver to
the Company, prior to or at the Meeting but before the vote is taken on this
Proposal 3, a written objection to the proposed amendment to the Company's
Charter as provided in this Proposal 3 (the "Notice of Election"), which must
include a notice of his election to dissent, the shareholder's name, residence
address, the number of shares as to which the shareholder dissents and a demand
for payment of the fair value of such shares (which Notice of Election must be
in addition to and separate from any proxy or vote against the amendment to the
Company's Charter contemplated by this Proposal 3 (the "Charter Amendment")) and
(ii) not vote for approval and adoption of the Charter Amendment. BECAUSE A
PROXY WHICH DOES NOT CONTAIN VOTING INSTRUCTIONS WILL, UNLESS REVOKED, BE VOTED
FOR APPROVAL OF THE CHARTER AMENDMENT, A SHAREHOLDER WHO VOTES BY PROXY AND WHO
WISHES TO EXERCISE APPRAISAL RIGHTS MUST (A) VOTE AGAINST APPROVAL AND ADOPTION
OF THE CHARTER AMENDMENT OR (B) ABSTAIN FROM VOTING ON THE CHARTER AMENDMENT.
Neither a vote against the Charter Amendment, in person or by proxy, nor a Proxy
directing such vote for an abstention, will in and of itself constitute a
written objection to the Charter Amendment under the Appraisal Statute
(shareholders who timely file such Notice of Election and who do not vote in
favor of the Charter Amendment are referred to as "Dissenting Shareholders").

         A shareholder may not dissent as to less than all of the shares, as to
which such shareholder has a right to dissent, held by such shareholder of
record and owned beneficially. A nominee or fiduciary may not dissent on behalf
of any beneficial owner as to less than all of the shares held of record by such
nominee or fiduciary on behalf of such owner and as to which such nominee or
fiduciary has a right to dissent. All Notices of Election should be addressed to
Halsey Drug Co., Inc., 695 North Perryville Road, Crimson Building No. 2,
Rockford, Illinois 61107, Attention: Mr. Peter Clemens, Vice President.

         Within 10 days after the date on which shareholders approve and adopt
the Charter Amendment, the Company must send written notice by registered mail
to each Dissenting Shareholder to such effect. At the time of the filing of


                                       14

<PAGE>   17
the amended Charter with the Secretary of State of the State of New York (the
"Effective Time"), each Dissenting Shareholder will cease to have any rights of
a shareholder of the Company except the right to be paid the fair value of his
shares and rights under the Appraisal Statute.

         A Notice of Election may be withdrawn by a Dissenting Shareholder prior
to his acceptance in writing of an offer made by the Company to pay the value of
such Dissenting Shares, except that a Notice of Election may not be withdrawn
later than 60 days following the Effective Time unless the Company fails to make
a timely offer to pay such value, in which case such Dissenting Shareholder
shall have 60 days from the date an offer is made to withdraw his election. In
either event, after such time, a Notice of Election may not be ,withdrawn
without the written consent of the Company. In order to be effective, withdrawal
of a Notice of Election must be accompanied by a return to the Company of any
advance payment made to the Dissenting Shareholder by the Company as described
below.

         Upon filing the Notice of Election, or within one month thereafter,
Dissenting Shareholders must submit the certificates representing their Common
Stock to the Company, attention: Peter Clemens, Vice President, at the address
set forth above or to the Company's transfer agent, Continental Stock Transfer
and Trust Company, 2 Broadway, 19th Floor, New York, New York 10004 and there
will be noted thereon that a Notice of Election has been filed and the
certificates will be returned to the Dissenting Shareholders. Any Dissenting
Shareholders who fail to submit such certificates for such notation will, at the
option of the Company exercised by written notice to such Dissenting
Shareholders within 45 days of the date of filing of such Notice of Election,
lose their appraisal rights unless a court, for good cause shown, shall
otherwise direct.

         Within 15 days after the expiration of the period within which
shareholders may file their Notice of Election, or within 15 days after the
Effective Time, whichever, whichever is later (but in no case later than 90 days
after the shareholders' vote to approve and adopt the Charter Amendment), the
Company must make a written offer to pay for the Company's Common Stock held by
Dissenting Shareholders at a price which the Company considers to be their fair
value. This offer will be accompanied by a statement setting forth the aggregate
number of shares, which will be at the same price for all Dissenting Shares,
with respect to which Notices of Election to dissent have been received and the
aggregate number of holders of such shares.

         If the Effective Time has occurred at the time the offer is made, the
offer will be accompanied by (i) advance payment to each Dissenting Shareholder
who has submitted certificates for notation thereon of the election to dissent
of an amount equal to 80% of such offer or (ii) as to each Dissenting
shareholder who has not yet submitted certificates for notation thereon of the
election to dissent, a statement that advance payment of an amount equal to 80%
of the amount of such offer will be made by the Company promptly upon submission
of certificates. If the Company at the time of the making of such offer, such
advance payment or statement as to advance payment will be sent to each
shareholder entitled thereto upon the effective time. Acceptance of such advance
payment by a Dissenting Shareholder will not constitute a waiver of dissenter's
rights. If the Charter Amendment is not effective within 90 days after approval
of the Charter Amendment by shareholders, such offer way be conditioned upon
consummation of the Charter Amendment.

         If within 30 days after making such offer, the Company and any
Dissenting Shareholder agree on the price to be paid for such shareholder's
Dissenting Shares, the Company will pay the agreed price to such holder within
60 days after the later of the date such offer was made or the Effective Time,
upon surrender of certificates representing such holder's Common Stock.

         If the Company fails to make an offer within the 15-day period
described above, or if it makes an offer and any Dissenting Shareholder fails to
agree within 30 days of the making of such offer, the Company must, within 20
days thereafter institute a special proceeding in an appropriate court to
determine the rights of Dissenting Shareholders and to fix the fair value of
their shares. If the Company does not institute such a proceeding within such
20-day period, any Dissenting Shareholder may, within 30 days after such 20-day
period expires, institute a proceeding for the same purpose. If such proceeding
is not instituted by any Dissenting Shareholder within such 30-day period, all
dissenters'


                                       15

<PAGE>   18
rights will be extinguished unless the New York Supreme Court, for good cause
shown, otherwise directs. All Dissenting shareholders, other than those who
agree with the Company as to the price to be paid for their shares, will be made
parties to such proceeding.

         With respect to Dissenting Shareholders entitled to payment, the court
will proceed to fix the value of the Company's Common Stock which will be the
fair value as of the close of business on the day prior to the Meeting. In
fixing the fair value of the shares of the Company's Common Stock, the court
will consider the nature of the Charter Amendment and the effects on the Company
and its shareholders, the concepts and methods then customary in relevant
securities and financial markets for determining fair value of shares of a
corporation engaging in a similar transaction under comparable circumstances and
all other relevant factors. The court will determine the fair value of such
shares without a jury and without referral to an appraiser or referee. The final
order by the court will include an allowance for interest (unless the court
finds the refusal of any Dissenting Shareholder to accept the offer of the
Company thereof as arbitrary, vexatious, or otherwise not in good faith) of such
rate as the court finds to be equitable, accruing from the Effective Time to the
date of payment.

         Each party in the appraisal proceeding will bear its own costs and
expenses, including the fees of counsel and any experts employed by it. The
court may, however, in its discretion, assess any of the costs, fees and
expenses incurred by the Company against Dissenting Shareholders (including
those who withdraw their Notice of Election) if the court finds that their
refusal to accept the offer of the Company was arbitrary, vexatious or otherwise
not in good faith. Similarly, the costs, fees and expenses incurred by
Dissenting Shareholders may be assessed by the court in its discretion, against
the Company if the fair value of the shares as determined by the court
materially exceeds the amount which the Company offered to pay, the Company
failed to follow certain procedures of the Appraisal Statute or such
corporation's manner of compliance with the Appraisal Statue was arbitrary,
vexatious or not otherwise in good faith.

         Within 60 days after the final determination of the proceeding, the
Company will pay to each Dissenting Shareholder the amount found in such
proceeding to be due such shareholder, upon surrender of certificates of the
Company's Common Stock.

         Any shareholder who duly demands, prior to the Meeting, an appraisal in
compliance with the Appraisal Statute will not, after the Effective Time, be
entitled to vote the shares subject to such demand for any purpose or to the
Payment of dividends or other distributions on those shares, except dividends or
other distributions payable to shareholders of record as of a date prior to the
Effective Time.

         Failure to follow the steps required by the Appraisal Statute for
perfecting appraisal rights may result in the loss of such rights. IN VIEW OF
THE COMPLEXITY OF THE PROVISIONS OF THE APPRAISAL STATUTE, SHAREHOLDERS WHO ARE
CONSIDERING DISSENTING FROM THE CHARTER AMENDMENT SHOULD CONSULT THEIR LEGAL
ADVISORS.



                                   PROPOSAL 4

                APPROVAL OF THE COMPANY'S 1998 STOCK OPTION PLAN

         On April 16, 1998, the Board of Directors of the Company adopted the
1998 Stock Option Plan (the "1998 Plan"), which is set forth in Annex A to this
Proxy Statement. The 1998 Plan will not become effective unless it is approved
by the holders of record of a majority of the shares of the Company's Common
Stock present in person or represented by proxy at the Meeting. The 1998 Plan
provides for the granting of stock options to employees, officers, directors and
consultants of the Company. Approximately 191 employees, officers and directors
were eligible to participate in the 1998 Plan as of April 17, 1998. As of April
17, 1998, no stock options had been granted under the 1998 Plan.


                                       16

<PAGE>   19
         The 1998 Plan is intended to assist the Company in securing and
retaining key employees and directors by allowing them to participate in the
ownership and growth of the Company through the grant of incentive stock
options, as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or non-qualified stock options to which Section 422 of the
Code does not apply (collectively, the "Options). The granting of Options will
serve as partial consideration for and give key employees, directors and
consultants an additional inducement to remain in the service of the Company and
will provide them with an increased incentive to work for the Company's success.

         The Company currently maintains a 1984 Stock Option Plan and a 1995
Stock Option Plan. See "Compensation of Executive Officers and Directors - Stock
Option Plans." The 1984 Stock Option Plan terminated in March 1994 and no
further stock options may be granted under such plan. As of March 31, 1998,
Options to purchase an aggregate of 607,600 shares have been granted under the
Company's 1995 Stock Option Plan, of which options for 124,792 shares had been 
exercised and options for 39,902 shares had been terminated or otherwise 
expired and been returned to the Plan. As of March 31, 1998, no shares remained
available for issuance under the 1995 Stock Option Plan.

         The Board of Directors believes that is would be in the best interests
of the Company for the shareholders to ratify the adoption of the 1998 Plan in
order to provide sufficient authorized shares to permit the granting of stock
options in order to assist the Company in securing and retaining key employees
and directors by allowing them to participate in the ownership and growth of the
Company. Shareholder approval of the Board's adoption of the 1998 Plan is
required within twelve months of the Board's adoption of the Plan on April 16,
1998.

         On February 19, 1998, the Company's Board of Directors granted stock
options to the Company's executive officers and certain management personnel to
purchase up to an aggregate of 2,000,000 shares of the Company's common stock.
Of such option grants, 432,302 were awarded under the Company's 1995 Stock 
Option Plan, with the remaining balance of 1,567,698, awarded outside the 
Company's Stock Option Plans in the form of non-qualified stock options (such 
non-qualified options herein collectively referred to as the "Management 
Option Grants"). See "Previously Granted Options." In order to provide the 
optionees under the Management Option Grants with the favorable tax treatment 
afforded incentive stock options, upon receipt of shareholder approval of this 
Proposal 4, the Management Option Grants will be included in the 1998 Plan. In 
the event the Company's shareholders do not approve the adoption of the 1998 
Plan as described in this Proposal 4, the Management Option Grants will remain 
outstanding and in full force and effect, and will be treated as non-qualified 
stock options. See "Federal Income Tax Consequences Relating to Incentive 
Stock Options" and "Federal Income Tax Consequences Relating to Non-Qualified 
Stock Options" for a discussion of the tax consequences to each of the Company 
and the optionee relating to incentive stock options and non-qualified stock 
options.

         The following discussion of the principle features and effects of the
1998 Plan is qualified in its entirety by reference to the text of the 1998 Plan
set forth in Exhibit A attached hereto.

Administration

         The 1998 Plan is administered by the Stock Option Committee of the
Board of Directors, consisting of not less than two members of the Board of
Directors of the Company appointed by the Board. Each member of the Stock Option
Committee will be a "non-employee director" as defined in Rule 16b-3 of the
Securities Exchange Act of 1934, as amended. The Stock Option Committee will
select the employees, directors and consultants who will be granted Options
under the 1998 Plan and, subject to the provisions of the 1998 Plan, will
determine the terms and conditions and number of shares subject to each Option.
The Stock Option Committee will also make any other determinations necessary or
advisable for the administration of the 1998 Plan and its determinations will be
final and conclusive. The Stock Option Committee is currently comprised of
Messrs. Skelly, Sumner and Smith.


                                       17

<PAGE>   20
Shares Subject to the 1998 Plan

         The 1998 Plan authorizes the granting of either incentive stock options
or non-incentive stock options to purchase in the aggregate up to 2,600,000
shares of the Company's Common Stock. The shares available for issuance will be
increased or decreased according to any reclassification, recapitalization,
stock split, stock dividend or other such subdivision or combination of the
Company's Common Stock. Shares of the Company's Common Stock subject to
unexercised Options that expire or are terminated prior to the end of the period
during which Options may be granted under the 1998 Plan will be restored to the
number of shares available for issuance under the 1998 Plan. Assuming the
receipt of shareholder approval for the adoption of the 1998 Plan, 1,032,302 
shares of common stock will remain available for issuance under the 1998 Plan 
(after giving effect to the inclusion of the Management Option Grants in the 
1998 Plan).

Eligibility

         Any employee of the Company or any subsidiary of the Company shall be
eligible to receive incentive stock options and non-incentive stock options
under the 1998 Plan. Non-incentive stock options may be granted to employees as
well as non-employee directors and consultants of the Company under the 1998
Plan as determined by the Board or the Stock Option Committee. Any person who
has been granted an Option may, if he is otherwise eligible, be granted an
additional Option or Options.

         Each grant of an Option shall be evidenced by an Option Agreement, and
each Option Agreement shall (i) specify whether the Option is an incentive stock
option or a non-incentive stock option and (ii) incorporate such other terms and
conditions as the Board of Directors or the Stock Option Committee acting in its
absolute discretion deems consistent with the terms of the 1998 Plan, including,
without limitation, a restriction on the number of shares of Common Stock
subject to the Option which first become exercisable during any calendar year.

         To the extent that the aggregate fair market value of the Common Stock
of the Company subject to a grant incentive stock options (determined as of the
date such an incentive stock option is granted) which first become exercisable
in any calendar year exceeds $100,000, such Options shall be treated as
non-incentive stock options. This $100,000 limitation shall be administered in
accordance with the rules under Section 422(d) of the Code.

Exercise Price of Options

         Upon the grant of an Option to an employee, director or consultant of
the Company, the Stock Option Committee will fix the number of shares of the
Company's Common Stock that the optionee may purchase upon exercise of the
Option and the price at which the shares may be purchased. The Option price for
incentive stock options shall not be less than the fair market value of the
Common Stock at the time the Option is granted, except that the Option price
shall be at least 110% of the fair market value where the Option is granted to
an employee who owns more than 10% of the voting power of all classes of stock
of the Company or any parent or subsidiary. Under the terms of the 1998 Plan,
the aggregate fair market value of the stock (determined at the time the Option
is granted) with respect to which incentive stock options are exercisable for
the first time by such individual during any calendar year shall not exceed
$100,000. Non-incentive stock options may be granted at less than fair market
value of the Common Stock. "Fair market value" is determined by the Stock Option
Committee based on the closing price of the Common Stock on the American Stock
Exchange ("AMEX"). On April 17, 1998, the closing price of the Company's Common
Stock, as reported by the AMEX, was $2.69.

Terms

         All Options available to be granted under the 1998 Plan must be granted
by April 16, 2008. The Compensation Committee will determine the actual term
of the Options but no Option will be exercisable after the expiration of 10
years from the date granted. No incentive stock option granted to an employee
who owns more than


                                       18

<PAGE>   21
10% of the combined voting power of all the outstanding classes of stock in the
Company may be exercised after five years from the date of grant.

         The Options granted pursuant to the 1998 Plan shall not be transferable
except (i) by will or the laws of descent and distribution and (ii)
non-qualified options may be transferred in limited circumstances to immediate
family members and family limited partnerships, with the consent of the Stock 
Option Committee.

Exercise of Options

         Options granted to employees, directors or consultants under the 1998
Plan may be exercised during the optionee's lifetime only by the optionee during
his employment or service with the Company or for a period not exceeding three
months after voluntary termination, or for a period not exceeding one year if
the optionee ceased employment or service as a director or consultant because of
permanent or total disability within the meaning of Section 22(e)(3) of the
Code. Options may be exercised by the optionee's estate, or by any person who
acquired the right to exercise such Option by bequest or inheritance from the
optionee for a period of twelve months from the date of the optionee's death. If
such Option shall by its terms sooner expire, such Option shall not be extended
as a result of the optionee's death.

         The consideration to be paid to the Company upon exercise of an Option
may consist of any combination of cash, checks, promissory notes, shares of
Common Stock, and/or any other forms of consideration permitted under New York
law and approved by the Stock Option Committee and/or the Board of Directors.
With the exception of the consideration received by the Company upon the
exercise of Options granted under the 1998 Plan, no consideration is received by
the Company for the granting or extension of any Options.

Federal Income Tax Consequences Relating to Incentive Stock Options

         Certain Options granted under the 1998 Plan are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Code. Set
forth below is a general summary of certain of the principal Federal income tax
consequences to participants and the Company of incentive stock options granted
under the 1998 Plan.

         An employee to whom an incentive stock option is granted pursuant to
the 1998 Plan will not recognize any compensation income and the Company will
not recognize any compensation deductions, at the time an incentive stock option
is granted or at the time an incentive stock option is exercised. In the year of
exercise, however, the amount by which the fair market value of the Common Stock
exceeds the Option price will constitute a tax preference item under the
alternative minimum tax. If the employee incurs minimum tax in the year of
exercise, however, he should qualify for the credit for prior year maximum tax
liability in the first future year he has regular tax liability.

         In order to obtain incentive stock option treatment for Federal income
tax purposes upon the subsequent sale (or other disposition) by the optionee of
the shares of Common Stock received upon exercise of the Option, the sale (or
other disposition) must not occur within two years from the date the Option was
granted nor within one year after the issuance of such shares upon exercise of
the Option (the "incentive stock option holding period requirements"). If the
incentive stock option holding period requirements are satisfied, on the
subsequent sale (or other disposition) by the optionee of the shares of Common
Stock received upon the exercise of an Option, the optionee generally will
recognize income from the sale of a capital asset equal to the difference, if
any, between the proceeds realized from the sale (or other disposition) and the
amount paid as the exercise price of the Option. Alternatively, if the incentive
stock option holding period requirements are not satisfied, on the subsequent
sale (or other disposition) by the optionee of the shares of Common Stock
received upon the exercise of the Option, the optionee generally will recognize
income taxable as compensation (and the Company will recognize a compensation
deduction) in an amount equal to the lesser of (a) the difference, if any,
between the fair market value of the shares on the date of exercise and the
amount paid as the exercise price of the Option and (b) the difference, if any,
between the proceeds realized from the sale or other disposition and the amount
paid as the exercise price of the Option. Any additional gain realized on such
sale or disposition (in addition


                                       19

<PAGE>   22
to the compensation income referred to above) would give rise to income from the
sale of a capital asset and taxed accordingly.

Federal Income Tax Consequences Relating to Non-Qualified Stock Options

         The non-qualified stock options which may be granted under the 1998
Plan are not intended to qualify as incentive stock options within the meaning
of Section 422 of the Code. An individual to whom a non-qualified stock option
is granted pursuant to the 1998 Plan will generally not recognize any
compensation income, and the Company will not realize any compensation
deduction, at the time the non-qualified stock option is granted. In the year of
exercise, however, the optionee generally will realize income taxable as
compensation (and the Company will realize a compensation deduction) in an
amount equal to the difference, if any, between the fair market value of the
shares on the date of exercise and the amount paid as the exercise price of the
Option.

         The tax basis of the shares of Common Stock received by the optionee
upon exercise will be equal to the amount paid as the exercise price plus the
amount, if any, includable in his gross income as compensation income. The
holding period for the shares will commence on the date of exercise.

         On the subsequent sale (or other disposition) by the optionee of the
shares of Common Stock received upon the exercise of the Option, any gain
realized on such sale or disposition would give rise to income from the sale of
a capital asset and taxed accordingly.

Previously Granted Options

         As of March 31, 1998, the Company had granted options to purchase an
aggregate of 2,000,000 shares of Common Stock at an exercise price of $2.375
per share. Of such options, 432,302 were granted under the Company's 1995 Stock
Option Plan with the remaining options to purchase 1,567,698 shares (the 
Management Option Grants) granted outside of the Company's stock option plans. 
No option grants were made by the Company during 1997. The following table 
sets forth information as of March 31, 1998 concerning option grants made in 
the three months ended March 31, 1998 which, to the extent of the Management 
Option Grants, would have been granted under the 1998 Plan if such plan had 
been approved by the Company's shareholders prior to the date of the grant 
of such options, with respect to (i) each executive officer; (ii) all current 
executive officers as a group; (iii) each nominee for election as a Director; 
(iv) all current Directors who are not executive officers as a group; (v) each 
person who has received or is to receive 5% of such options or rights; and 
(vi) all employees, including all current officers who are not executive
officers, as a group:


<TABLE>
<CAPTION>
                                  Options Granted
                                   Through March       Exercise
                                      31, 1998           Price
                                      --------           -----

<S>                               <C>               <C>      
Michael K. Reicher                   1,000,000       $    2.38
Peter Clemens                          300,000            2.38
Ash Tankha                             100,000            2.38
Rosendo Ferran                              --              --
Stephanie Heitmeyer                     40,000            2.38
William Skelly                         115,000            2.38
William A. Sumner                       10,000            2.38
Alan J. Smith, Ph.D                     10,000            2.38
Bruce F. Wesson                         10,000           3.125
Srini Conjeevaram                       10,000           3.125
Zubeen Shroff                               --              --
All current executive officers
   as a group ( 4 persons)           1,440,000            2.38
</TABLE>



                                       20

<PAGE>   23

<TABLE>
<S>                                     <C>               <C>  
All current directors who are not
   executive officers as a group
   (5 persons)                            155,000          2.38
All employees, including current
   officers who are not executive
   officers as a group (41 persons)       362,000          2.38
</TABLE>



              As of March 31, 1998, the market value of the Common Stock
underlying the 1998 Plan was $2.94 per share.

Amendments and Discontinuance of the 1998 Plan

              The 1998 Plan can be amended, suspended or terminated at any time
by action of the Company's Board of Directors except that no amendment to the
1998 Plan can be made without prior shareholder approval where such amendment
would result in (i) any material increase in the total number of shares of
Common Stock subject to the 1998 Plan, (ii) any change in the class of eligible
participants for Options under the 1998 Plan, (iii) any material increase in the
benefits accruing to participants under the 1998 Plan, or (iv) shareholder
approval being required for continued compliance with Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended.

Vote required

              The affirmative vote of the holders of a majority of the shares of
Common Stock of the Company present in person or by proxy and entitled to vote
at the Meeting is required for the approval of the 1998 Plan.

Recommendation of the Board of Directors

 
             The Board of Directors recommends a vote FOR the approval of the
1998 Plan.



                                   PROPOSAL 5

                   RATIFICATION OF APPOINTMENT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS

              There will also be submitted for consideration and voting at the
Meeting the ratification of the appointment by the Company's Board of Directors
of Grant Thornton LLP as independent certified public accountants for the
purpose of auditing and reporting upon the financial statements of the Company
for the fiscal year ending December 31, 1998. The Board of Directors of the
Company selected and approved the accounting firm of Grant Thornton LLP as
independent certified public accountants to audit and report upon the Company's
financial statements for the fiscal years ended December 31, 1984 through and
including 1997. Grant Thornton has no direct or indirect financial interest in
the Company.

              Representatives of Grant Thornton LLP are expected to be present
at the Meeting, and they will be afforded an opportunity to make a statement at
the Meeting if they desire to do so. It is also expected that such
representatives will be available at the Meeting to respond to appropriate
questions by shareholders.

Recommendation of the Board of Directors

 
             The Board of Directors recommends a vote FOR the ratification of
the appointment of Grant Thornton LLP as the Company's independent certified
public accountants for the fiscal year ending December 31, 1998.


                                       21

<PAGE>   24

                 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                                 AND MANAGEMENT

              The following table sets forth information regarding the
beneficial ownership of the Common Stock, as of March 31, 1998 for individuals
or entities in the following categories: (i) each of the Company's Directors and
nominees for Directors; (ii) the Chief Executive Officer and other executive
officers of the Company whose total annual compensation for 1997 exceeded
$100,000 (the "named executive officers"); (iii) all Directors and executive
officers as a group; and (iv) each person known by the Company to be a
beneficial owner of more than 5% of the Common Stock. Unless indicated
otherwise, each of the shareholders has sole voting and investment power with
respect to the shares beneficially owned.


<TABLE>
<CAPTION>
 
                                            Amount
Name of                                      Beneficially           Percent of
Beneficial Owner                             Owned(1)                  Class
- ----------------                             --------                  -----

<S>                                          <C>                    <C>  
Galen Partners III, L.P.                     16,618,580(2)             55.0%
610 Fifth Avenue, 5th Floor
New York, New York 10020

Galen Partners International III, L.P.        1,841,637(3)             11.9%
610 Fifth Avenue, 5th Floor
New York, New York 10020

Hemant K. Shah and Varsha H. Shah             1,462,692(4)              9.9%
29 Christy Drive
Warren, New Jersey 07059

Dennis Adams                                  1,260,682(5)              8.4%
c/o Delaware Investment Advisors
One Commerce Square
Philadelphia, Pennsylvania 19103

Harbour Investments, Ltd.                     1,655,431(6)             11.8%
c/o Strong Capital Management, Inc. 
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051

Strong Discovery Fund, Inc.                     903,084(7)              6.5%
c/o Strong Capital Management, Inc. 
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051

Strong Capital Management, Inc.               3,485,739(8)             24.6%
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051

William A. Marquard                             734,900                5.4%
2199 Maysville Road
Carlisle, Kentucky 41311

Michael K. Reicher                              323,106(9)              2.3%
</TABLE>



                                       22

<PAGE>   25
   

<TABLE>
<S>                                            <C>            <C>
William Skelly                                  15,000(10)       *

William A. Sumner                               10,000(11)       *

Alan J. Smith, Ph.D                             23,287(12)       *

Bruce F. Wesson                                 10,000(13)       *

Srini Conjeevaram                               10,000(14)       *

Zubeen Shroff                                       - (15)       *

Peter A Clemens                                111,869(16)       *

Rosendo Ferran                                 185,904(17)     1.3%

Bernard Sandiford                               47,300(18)       *

George Scholes                                  27,000(19)       *

All Directors and executive
 officers as a group (12 persons)              503,262(20)     3.5%
</TABLE>

    


* Represents less than 1% of the outstanding shares of the Company's Common
  Stock.

(1)           The information with respect to Hemant K. Shah and Varsha H. Shah,
              Dennis Adams, Harbour Investments, Ltd., Strong Discovery Fund,
              Inc., Strong Capital Management, Inc. and William A. Marquard is
              based upon filings with the Commission and/or information provided
              to the Company.

(2)           Includes (i) 10,282,130 shares issuable upon conversion of 5%
              convertible senior secured debentures due March 2003 (the
              "Debentures"), (ii) 3,115,796 shares issuable upon exercise of
              common stock purchase warrants issued in connection with the
              Offering (the "Warrants"), and (iii) 3,220,654 shares issuable
              upon conversion of the Debentures and the exercise of the Warrants
              allocable to such security holder under the option (the "Investor
              Option") provided in that certain Debenture and Warrant Purchase
              Agreement dated March 10, 1998 between the Company and the Galen
              Investor Group.

(3)           Includes (i) 1,139,445 shares issuable upon conversion of
              Debentures, (ii) 345,286 shares issuable upon exercise of
              Warrants, and (iii) 356,906 shares issuable upon the conversion of
              the Debentures and exercise of the Warrants allocable to such
              securityholder under the Investor Option.

(4)           Includes (i) 660,000 shares issuable upon conversion of
              Debentures, (ii) 200,000 shares issuable upon exercise of
              Warrants, (iii) 61,539 shares issuable upon conversion of 10%
              convertible subordinated debentures issued by the Company in
              August, 1996 (the "August Debentures"), and (iv) 206,730 shares
              issuable upon the conversion of the Debentures and the exercise of
              the Warrants allocable to such securityholder under the Investor
              Option.

(5)           Includes (i) 780,000 shares issuable upon conversion of
              Debentures, (ii) 236,364 shares issuable upon exercise of
              Warrants, and (iii) 244,318 shares issuable upon the conversion of
              the Debentures and the exercise of the Warrants allocable to such
              securityholder under the Investor Option. The information with
              respect to Mr. Adams is based upon a Schedule 13G dated March 23,
              1998.

(6)           Includes 246,154 shares issuable upon conversion of the August
              Debentures.


                                       23

<PAGE>   26
   
(7)           Includes 184,615 shares issuable upon exercise of the August
              Debentures.

(8)           Strong Capital Management, Inc. ("SCMI") has, and Richard Strong,
              a principal of SCMI, may be deemed to have, either sole voting
              power and/or sole dispositive power over the listed shares.
              Includes all shares beneficially owned by Harbour Investments
              Ltd., of which SCMI is the advisor, and all shares beneficially
              owned by Strong Special Investment Limited Partnership and Strong
              Quest Limited Partnership, entities advised by SCMI. The
              information with respect to Mr. Strong and SCMI is based upon a
              Schedule 13G dated February 16, 1998.

(9)           Includes (i) 200,000 shares issuable upon conversion of
              Debentures, (ii) 60,606 shares issuable upon exercise of Warrants
              and (iii) 62,500 shares subject to currently exercisable common
              stock purchase options.

(10)          Includes 15,000 shares subject to currently exercisable common
              stock purchase options.

(11)          Includes 10,000 shares subject to currently exercisable common
              stock purchase options.

(12)          Includes (i) 10,000 shares subject to currently exercisable common
              stock purchase options, (ii) 6,667 shares issuable upon conversion
              of Debentures, and (iii) 2,020 shares issuable upon exercise of
              Warrants.

(13)          Includes 10,000 shares subject to currently exercisable common
              stock purchase options. Mr. Wesson is President of Galen
              Associates and a General Partner of Galen Partners III, L.P.

(14)          Includes 10,000 shares subject to currently exercisable common
              stock purchase options. Mr. Conjeevaram is Chief Finanical
              Officer of Galen Associates and a General Partner of Galen 
              Partners III, L.P.

(15)          Mr. Shroff is a nominee for Director. Mr. Shroff is a General
              Partner of Galen Partners III, L.P.

(16)          Includes (i) 66,667 shares issuable upon conversion of
              Debentures, (ii) 20,202 shares issuable upon exercise of Warrants
              and (iii) 25,000 shares subject to currently exercisable common 
              stock purchase options

(17)          Includes 162,000 shares subject to currently exercisable common
              stock purchase options.

(18)          Includes 40,000 shares subject to currently exercisable common
              stock purchase options.

(19)          Includes 27,000 shares subject to currently exercisable common
              stock purchase options.

(20)          Includes 498,662 shares which Directors and executive officers 
              have the right to acquire within the next 60 days through the
              conversion of Debentures, exercise of Warrants and the exercise
              of outstanding options.
    

Change of Control

              A change of control of the Company occurred on March 10, 1998
pursuant to the completion of the Offering of Debentures and Warrants. Assuming
the receipt of shareholder approval to Proposal 3 to provide the holders of the
Debentures with voting rights as described therein, Galen would control 45.6% of
the Company's common stock (51% upon issuance of the additional Debentures in
the event the Investor Option were exercised). Assuming further the exercise of
the Warrants issued in the Offering, Galen would control 52.5% of the Company's
common stock (57.6% in the event the Warrants issuable under the Investor Option
were exercised).

              Reference is made to the Company's Current Report on Form 8-K as
filed with the Commission on March 24, 1998 for a description of the terms and
provisions of the Purchase Agreement, the Debentures and the Warrants relating
to the change of control transaction. A copy of the Form 8-K accompanies this
Proxy Statement and is incorporated by reference herein.


                                       24

<PAGE>   27

                COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

Executive Compensation

              The following table sets forth a summary of the compensation paid
by the Company for services rendered in all capacities to the Company during the
fiscal years ended December 31, 1997, 1996 and 1995 to the Company's President
and Chief Executive Officer and each of the Company's executive officers (the
"named executive officers") whose total annual compensation for 1997 exceeded
$100,000:


                           SUMMARY COMPENSATION TABLE




<TABLE>
<CAPTION>
                                 Annual Compensation                    Long Term Compensation
                     ------------------------------------------       ----------------------------

                                                                      Securities
Name and                                                              Underlying
Principal                                          Other Annual       Stock           All Other
Position              Year    Salary     Bonus     Compensation       Options         Compensation
- ---------            ------   ------     -----     ------------       -------         ------------
<S>                 <C>      <C>        <C>       <C>                <C>             <C>
Rosendo Ferran(1)    1997     $241,082       0        $ 7,400              --          $    --
President and        1996     $221,186       0        $ 12,950             --               --                           
Chief Executive      1995     $263,604       0        $ 16,150        150,000               --
Officer                                                                               
==================   ======   ========   =======   ============       =======           ======
Bernard Sandiford    1997     $150,140       0        $ 11,860             --               --
Vice President -     1997     $150,300       0        $ 11,800         30,000               --
Manufacturing        1997     $150,275       0        $ 11,750         30,000               --
==================   ======   ========   =======   ============       =======           ======
George Scholes       1997     $103,700       0        $     --             --               --
Vice President --    1996     $ 87,980       0        $     --         30,000               --
Regulatory Affairs   1995     $ 63,100       0        $     --         17,000               --
==================   ======   ========   =======   ============       =======           ======
</TABLE>
 


(1) Mr. Ferran was named Executive Vice President effective February 19, 1998.
Mr. Michael Reicher was appointed as the Company's President and Chief Executive
Officer as of such date.

   
Other Compensatory Arrangements

           Executive Officers and key employees participate in medical and
disability insurance plans provided to all non-union employees of the Company.
During 1997, the Company maintained term life insurance policies on behalf of
Messrs. Ferran and Sandiford, the benefits of which are payable to
beneficiaries designated by these individuals. Aggregate premiums paid by the
Company during 1997 on all such policies amounted to approximately $12,000. The
value of these payments to the individual officers are reflected where
applicable in the Summary Compensation Table. The Company also provided
automobiles to certain of its executive Officers. Although the Compnay is
unable to assign a precise value to the possible personal benefit derived from
the use of the automobiles, the Company believes that, as to each officer, such
personal benefit amount is less than the lesser of $6,000 or 10% of such
officer's compensation reported above in the Summary Compensation Table.
    

Employment Agreements
   
           Michael K. Reicher is employed pursuant to an Employment Agreement
effective as of March 10, 1998, which provides that Mr. Reicher will serve as
the Company's President and Chief Executive Officer for a term of five years.
The Agreement provides for an annual base salary of $175,000 plus the payment of
an annual bonus in the


                                       25

<PAGE>   28
amount of $93,750 for the 1998 fiscal year, subject to the attainment by the
Company of certain minimum net sales revenue. The amount of the annual bonus
payable to Mr. Reicher for fiscal 1999 and thereafter will be determined in
accordance with such targets, conditions or parameters as may be set from time
to time by the Compensation Committee of the Board of Directors of the Company.
The Employment Agreement also provides for the grant of stock options to
purchase 1,000,000 shares of the Company's Common Stock at an exercise price of
$2.375 per share (representing the closing price for the Company's common stock
as reported by the AMEX on the day preceding the grant of the option), which
option shall vest in an equal amount of 62,500 option shares at the end of each
quarterly period during the term of the Agreement (as such vesting schedule may
be amended by mutual agreement between Mr. Reicher and the Board of Directors).
The Employment Agreement also permits the Company to repurchase the vested
portion of Mr. Reicher's options upon his termination for cause (as defined in
the Agreement) or his resignation, at a purchase price equal to the positive
difference, if any, between the average of the Closing Price of the Company's
common stock as reported by the AMEX for the five trading days prior to the date
of termination or resignation, multiplied by the number of option shares which,
as of the date of termination, are vested under the option. The Employment
Agreement contains standard termination provisions including upon death,
disability, for cause (as defined in the Agreement) and without cause. In the
event the Employment Agreement is terminated without cause, the Company is
required to pay Mr. Reicher an amount equal to $350,000 or twice his then base
salary, whichever is greater, payable in 24 equal monthly installments. The
Employment Agreement permits Mr. Reicher to terminate the Agreement in the event
of a change of control (as defined in the Agreement) and restricts Mr. Reicher
from disclosing, disseminating or using for his personal benefit or for the
benefit of others confidential or proprietary information (as defined in the
Employment Agreement) and, provided the Company has not breached the terms of
the Employment Agreement, from competing with the Company at any time prior to
two years after the earlier to occur of the expiration of the term and the
termination of his employment.

              Peter Clemens is employed pursuant to an Employment Agreement
effective as of March 10, 1998, which provides that Mr. Clemens will serve as
the Company's Vice President and Chief Financial Officer for a term of three
years. The Employment Agreement provides an annual base salary of $140,000 plus
the payment of an annual bonus of $82,500 in fiscal 1998, subject to the
attainment by the Company of certain minimum net sales revenues. Bonus payments
for fiscal 1999 and thereafter are subject to such targets, conditions or
parameters as may be determined from time to time by the Compensation Committee
of the Board of Directors. The Employment Agreement also provides for the grant
of stock options to purchase 300,000 shares of the Company's common stock at an
exercise price of $2.375 per share, which options shall vest and be exercisable
in an amount equal to 25,000 option shares at the end of each quarterly period
during the term of the Employment Agreement (as such vesting schedule may be
amended by mutual agreement of Mr. Clemens and the Board of Directors). The
remaining terms of Mr. Clemen's Employment Agreement with the Company are
substantially identical to that of Mr. Reicher.

              The Employment Agreement dated January 1, 1993 between the Company
and Mr. Rosendo Ferran expired by its terms on January 1, 1998.

Compensation of Directors

              Directors who are employees of the Company receive no additional
or special remuneration for their serviced as Directors. Directors who are not
employees of the Company receive an annual grant of options to purchase 10,000
shares of the Company's common stock (15,000 shares in the case of the Chairman
of the Board) and $500.00 for each meeting attended ($250 in the case of
telephonic meetings). This option-based compensation structure was approved by
the Board for fiscal 1998, replacing the prior compensation structure providing
for an annual retainer of $25,000 and an additional fee of $500.00 per meeting
attended. The Company also reimburses Directors for travel and lodging expenses,
if any, occurred in connection with attendance at Board meetings. Directors who
serve on any of the Committees established by the Board of Directors receive
$250 for each Committee meeting attended unless held on the day of a full Board
meeting.


                                       26

<PAGE>   29
              The Company has retained the services of Alan J. Smith, Ph.D., a
Director of the Company, to provide consulting services in the areas of quality
control and quality assurance, effective as of March 13,1998. The terms of Dr.
Smith's engagement provide that he will provide such consulting services for a
period of 5 months, expiring August 13, 1998, on an average of one day per week
and be compensated at the rate of $1,000 per consulting day.

Stock Option Plans

              The Company currently maintains a stock option plan adopted in
1984 and a stock option plan adopted in 1995. In addition, the Board of
Directors has adopted, subject to shareholder approval pursuant to Proposal 4
described in this Proxy Statement, a 1998 Stock Option Plan. The Company in the
past has used, and will continue to use, stock options to attract and retain key
employees in the belief that employee stock ownership and stock-related
compensation devices encourage a community of interest between employees and
shareholders.

              THE 1984 STOCK OPTION PLAN. In March 1984, the Company's
shareholders approved the adoption of a stock option plan (the "1984 Stock
Option Plan). The 1984 Stock Option Plan, as amended, provided for the grant of
options to purchase up to 1,000,000 shares of the Company's common stock. The
1984 Stock Option Plan terminated by its terms in March 1994.

              Incentive Stock Options ("ISO's") to purchase 821,666 shares and
non-qualified stock options to purchase 120,363 shares have been granted under
the 1984 Stock Option Plan. Stock options granted under the 1984 Stock Option
Plan have a term of ten years. As of March 31, 1998, options to purchase 21,569
shares of the Company's common stock were outstanding under the 1984 Stock
Option Plan and options to purchase 528,431 shares had been exercised. The
average per share exercise price for stock options currently outstanding under
the 1984 Stock Option Plan is approximately $4.73. No exercise price of an
ISO was set at less than 100% of the market value of the underlying Common Stock
on the date of grant, except that in the case of any person who owned stock
possessing more than 10% of the total voting power of the Company, the exercise
price was set at 110% of the market value of the underlying Common Stock. No
further stock options may be granted under the 1984 Stock Option Plan.

              THE 1995 STOCK OPTION PLAN. In September 1995 the Company
established the 1995 Halsey Drug Co., Inc. Stock Option and Restricted Stock
Purchase Plan (the "1995 Stock Option Plan). Under the Plan, the Company may
grant options to purchase up to 1,000,000 shares of the Company's Common Stock.
ISO's may be granted to employees of the Company and its subsidiaries and
non-qualified options may be granted to employees, directors and other persons
employed by, or performing services for, the Company and its subsidiaries.
Subject to the Plan, the Compensation Committee determines the persons to whom
grants are made and the vesting, timing, amounts and other terms of such grants.
An employee may not receive ISO's exercisable in any one calendar year for
shares with a fair market value on the date of grant in excess of $100,000. No
quantity limitations apply to the grant of non-qualified stock options.

              As of March 31, 1998, ISO's to purchase 567,600 shares and
non-qualified options to purchase 40,000 shares have been granted under the 1995
Stock Option Plan. The average per share exercise price for all outstanding
options under the 1995 Stock Option Plan is approximately $3.53. No
exercise price of an ISO was set at less than 100% of the fair market value of
the underlying Common Stock, except for grants made to any person who owned
stock possessing more than 10% of the total voting power of the Company, in
which case the exercise price was set at not less than 110% of the fair market
value of the underlying Common Stock. The 1995 Stock Option Plan will terminate
in September 2005 unless earlier terminated by the Board of Directors.

   
              THE 1998 STOCK OPTION PLAN. The 1998 Stock Option Plan was adopted
by the Board of Directors in April 1998 and, subject to shareholder approval,
permits the Company to grant ISO and non-qualified stock options to purchase an
aggregate of 2,600,000 shares of the Company's common stock. For a description
of the 1998 Stock Option Plan, see "Proposal 4 - Approval of the Company's 1998
Stock Option Plan."
    


                                       27

<PAGE>   30
                 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR END OPTION VALUES


              The following table presents information regarding option
exercises in 1997 and the value of options outstanding at December 31, 1997 for
each of the named executive officers.




<TABLE>
<CAPTION>
                            NUMBER OF SECURITIES         VALUE OF UNEXERCISED IN-THE-
                      UNDERLYING UNEXERCISED OPTIONS          MONEY OPTIONS
                           AT FISCAL YEAR END               AT FISCAL YEAR END(1)
                       -----------------------------    -----------------------------
                 
NAME                   EXERCISABLE    UNEXERCISABLE     EXERCISABLE     UNEXERCISABLE
- ----                   -----------    -------------     -----------     -------------
<S>                    <C>            <C>               <C>             <C>        
Rosendo Ferran            144,000             0            $   --           $   --

Bernard Sandiford          40,000        20,000                --               --

George Scholes             27,000        20,000                --               --

</TABLE>


- ---------------------------------
(1) Value is based upon a fair market value of $1.56 per share at December
31, 1997.


C
OMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

              The Company's Compensation Committee consisted of Messrs. Smith
and Sumner during fiscal 1997. During 1997, there were no Compensation Committee
interlocks or insider participation in compensation decisions.


SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

              Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's Directors and executive officers, and persons who own
beneficially more than ten percent (10%) of the Common Stock of the Company, to
file reports of ownership and changes of ownership with the Commission and the
AMEX. Copies of all filed reports are required to be furnished to the Company
pursuant to Section 16(a). Based solely on the reports received by the Company
and on written representations from reporting persons, the Company believes the
Directors, executive officers and greater than ten percent (10%) beneficial
owners complied with all Section 16(a) filing requirements during the year ended
December 31, 1997 except that (i) the Form 3 Initial Statement of Beneficial
Ownership filing by each of Messrs. Skelly and Sumner required upon their
appointment to the Board were filed late and (ii) Mr. Ferran's Form 4 filings 
for April 1996 and December 1996 was filed late. 

 
             The following report of the Compensation Committee and the
performance graph in the next section shall not be deemed to be "soliciting
material" or to be "filed" with the Commission or subject to regulations 14A or
14C of the Commission or to the liabilities of Section 18 of the Exchange Act
and shall not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Exchange Act, notwithstanding any general
incorporation by reference of this Proxy Statement into any other document.


                                       28

<PAGE>   31
         REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

              This report has been prepared by the Compensation Committee of the
Board of Directors of the Company (the "Committee"). The Committee was formed in
February 1993. Messrs. Smith and Sumner served as members of the Committee
during 1997. The Committee meets at least annually or more frequently as the
Company's Board of Directors may request. The Committee's primary
responsibilities include the review of compensation, consisting of salary,
bonuses, benefits, stock option grants and other annual compensation, of the
Company's executive officers.

Executive Compensation Philosophy

              In 1998, the Company's executive compensation program will reflect
the following executive compensation philosophy, which was developed by the
Compensation Committee of the Board of Directors:

              The Company's mission is to be a significant provider of quality
              generic drugs in the markets it serves. To support this and other
              strategic objectives as approved by the Board of Directors and to
              provide adequate returns to shareholders, the Company must compete
              for, attract, develop, motivate and retain top quality executive
              talent at the corporate office and operating business units of the
              Company during periods of both favorable and unfavorable
              world-wide business conditions.

              The Company's executive compensation program is a critical
management tool in achieving this goal. 'Pay for performance' is the underlying
philosophy for the Company's executive compensation program. Consistent with
this philosophy, the program has been carefully conceived and will be
independently administered by the Compensation Committee (the "Committee") of
the Board of Directors which will meet regularly during the year and is
comprised entirely of independent non-employee directors. The program is
designed to link executive pay to corporate performance, including share price,
recognizing that there is not always a direct and short-term correlation between
executive performance and share price.

              To align shareholder interests and executive rewards, portions of
each of the Company's executive's compensation will represent "at risk" pay
opportunities related to accomplishment of specific business goals.

              The program is designed and administered to:


- -             provide annual and longer term incentives that help focus each
              executive's attention on approved corporate business goals the
              attainment of which, is in the judgment of the Committee, should
              increase long-term shareholder value;


- -             link "at risk" pay with appropriate measurable quantitative and
              qualitative achievements against approved performance parameters;

- -             reward individual and team achievements that contribute to the
              attainment of the Company's business goals; and


- -             provide a balance of total compensation opportunities, including
              salary, bonus, and longer term cash and equity incentives, that
              are competitive with similarly situated companies and reflective
              of the Company's performance.


                                       29

<PAGE>   32
              In seeking to link executive pay to corporate performance, the
Committee believes that the most appropriate measure of corporate performance is
the increase in long-term shareholder value, which involves improving such
quantitative performance measures as revenue, net income, cash flow, operating
margins, earnings per share and return on shareholders' equity. The Committee
may also consider qualitative corporate and individual factors which it believes
bear on increasing the long-term value of the Company to its shareholders. These
include (i) the development of competitive advantages, (ii) the ability to deal
effectively with the complexity and globalization of the Company's businesses,
(iii) success in developing business strategies, managing costs and improving
the quality of the Company's products and services as well as customer
satisfaction, (iv) the general performance of individual job responsibilities,
and (v) the introduction of new generic drug products.

Components of Executive Compensation Program

              The Company's executive compensation program consists of (i) an
annual salary and bonus and (ii) issuance of a long-term incentive represented
by stock options. As explained below, the bonuses and stock options serve to
link executive pay to corporate performance, since the attainment of these
awards depends upon meeting the quantitative and, if applicable, qualitative
performance goals which serve to increase long-term shareholder value.

              Salary and Bonus. The Company's two principal executive officers
are parties to employment contracts with the Company which provides the minimum
annual base salary to be payable to each of Messrs. Reicher and Clemens. In
addition, the employment contracts provide for a bonus for fiscal 1998 of
$93,750 and $82,500 for Messrs. Reicher and Clemens, respectively, subject to
the attainment of minimum net sales of $28,000,000 in fiscal 1998. For those
executive officers not subject to an employment contract, the Committee will set
the annual salary for such executive officer in December of each year and
establish potential bonus compensation (including Messrs. Reicher and Clemens
for fiscal 1999 and thereafter) that such executives may earn based upon
quantitative and, if applicable, qualitative performance goals established by
the Committee. The goals for 1998 will consist of a mix of targets for the
performance measures of corporate earnings per share ("EPS"), net income and
revenue, including qualitative goals relating to each officer's job function.
The Committee intends to set these targets in the first half of the year. No
bonus will be earned with respect to a performance measure unless a performance
"floor" for that measure is exceeded; the bonus opportunity with respect to a
measure will be earned if the target is achieved; achievement between the floor
and the target results in a lower bonus with respect to that performance
measure. An amount larger than the bonus opportunity for each performance
measure can be earned, up to a specified limit, for exceeding the target for
that measure. In setting compensation levels, the Committee compares the Company
to a self-selected group of companies of comparable size, market capitalization,
technological and marketing capabilities, performance and market place in which
the Company competes for executives.

              In ascertaining the achieved level of performance against the
targets, the effects of certain extraordinary events, as determined by the
Committee, such as (i) major acquisitions and divestitures, (ii) significant
one-time charges, and (iii) changes in accounting principles required by the
Financial Accounting Standards Board, are "compensation neutral" for the year in
which they occurred; that is, they are not taken into account in determining the
degree to which the targets are met in that year.

              Stock Options. The longer-term component of the Company's
executive compensation program consists of stock option grants. The options
generally permit the option holder to buy the number of shares of Common Stock
covered by the option (an "option exercise") at a price equal to or greater than
the market price of the stock at the time of grant. Thus, the options generally
gain value only to the extent the stock price exceeds the option exercise price
during the life of option. Generally a portion of the options vest over a period
of time and expire no later than ten years, and in some cases five years after
grant. Executives will generally be subject to limitations in selling the
restricted stock immediately, and therefore will be incentivized to increase
shareholder value.


                                       30

<PAGE>   33
              During fiscal 1997, the Company's principal executive officer was
a party to an employment contract which provided for a certain minimum annual
base salary. There were no bonuses paid in fiscal 1997.

              In conclusion, the Committee believes the compensation policies
and practices of the Company as described are fair and reasonable and are in
keeping with the best interests of the Company, its employees and its
shareholders.

              Submitted April 17, 1998 and signed by the members of the
Compensation Committee.

              Alan J. Smith                   William A. Sumner

                                PERFORMANCE GRAPH

              The following graph provides a comparison on a cumulative basis of
the yearly percentage change over the last five fiscal years in (a) the total
shareholder return on the Company's Common Stock with (b) the total return on
the American Stock Exchange ("AMEX") of all domestic issuers traded on the AMEX
and (c) the total return of domestic issuers having the same Standard Industrial
Classification ("SIC") Industry Group Number as the Company (SIC 2834) and
traded on the AMEX (the "Industry Index"). Such yearly percentage change has
been measured by dividing (i) the sum of (A) the amount of dividends for the
measurement period, assuming dividend reinvestment, and (B) the difference
between the price per share at the end and at the beginning of the measurement
period, by (ii) the price per share at the beginning of the measurement period.
The AMEX Index has been selected as the required broad equity market index. The
Industry Index consists of publicly traded companies in a business similar to
that of the Company. The price of each investment unit has been set at $100 on
December 31, 1992 for purposes of preparing this graph.


<TABLE>
<CAPTION>

                                     1992       1993       1994       1995        1996       1997
<S>                                <C>         <C>        <C>        <C>         <C>        <C>  
        HALSEY DRUG CO.            100.00      45.98      19.54      32.76       56.32      14.37
         MG GROUP INDEX            100.00      90.69      97.57      155.65     189.69      271.08
       AMEX MARKET INDEX           100.00      118.81     104.95     135.28     142.74      171.76
                                                                                           
</TABLE>



                                       31

<PAGE>   34

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


              On March, 10, 1998, the Company completed a private offering of
securities for an aggregate purchase price of $20.8 million (the "Offering").
The securities issued in the Offering consisted of 5% convertible senior secured
debentures (the "Debentures") and common stock purchase warrants (the
"Warrants") exercisable for an aggregate of 4,202,020 shares of the Company's
Common Stock. The Debentures and Warrants were issued by the Company pursuant to
a certain Debenture and Warrant Purchase Agreement dated March 10, 1998 (the
"Purchase Agreement") by and among the Company, Galen and the Galen Investor
Group.

              HKS & Company, Inc., an entity beneficially owned by Hemant K.
Shah, acted as placement agent in connection with the Offering. In consideration
for the services of HKS & Company, Inc., the Company paid $990,000, representing
5% of the gross proceeds of the Offering. Mr. Shah invested the entire amount of
such fee for the purchase of Debentures and Warrants in the Offering. Mr. Shah
is the beneficial owner of approximately 9.9% of the Company's common stock
(inclusive of the shares of Common Stock underlying the Debentures and
Warrants).

              Each of Messrs. Wesson, Conjeevaram and Shroff, nominees to the
Board of Directors, are designees of the Galen Investor Group pursuant to the
terms of the Purchase Agreement which provides, among other things, that the
Company must nominate and appoint to the Board of Directors, subject to
shareholder approval, three designees of the Galen Investor Group for so long as
the Debentures and Warrants remain outstanding. Each of Messrs. Wesson,
Conjeevaram and Shroff is a General Partner of Galen Associates, an affiliate of
each of the Galen entities included in the Galen Investor Group. The approval of
Proposals 2 and 3 described in this Proxy Statement providing for an increase in
the Company's authorized common stock and voting rights for holders of the
Debentures issued in the Offering, will result in Galen controlling a majority
of the Company's Common Stock and provide it with sufficient voting rights to
control the nomination and election of the Board of Directors of the Company.

              Pursuant to the terms of the Purchase Agreement executed in
connection with the Offering, certain existing shareholders of the Company and
members of the Galen Investor Group, who as of the Company's Record Date owned
in the aggregate approximately 25% of the outstanding Common Stock, have entered
into an irrevocable proxy agreement with Galen pursuant to which they have
granted Bruce F. Wesson, a designee of Galen and a nominee to the Board of
Directors of the Company, to vote the shares of the Company's Common Stock held
by them with respect to Proposals 1, 2 and 3 described in this Proxy Statement.
Mr. Wesson has indicated that he intends to exercise the proxy and vote such
shares in favor of each of such Proposals.

              The Purchase Agreement also provides the Galen Investor Group with
an option expiring September 10, 2000 to purchase (on a pro-rata basis)
additional Debentures and Warrants on the same terms as provided in the Offering
for a purchase price of $5,000,000 (the "Investor Option"). The Investor Option
may be exercised by a majority in interest of the principal amount of the
Debentures outstanding, which provides Galen with the discretion as to whether
to exercise the Investor Option.

 
                                    GENERAL


              Management of the Company does not know of any matters other than
those stated in this Proxy Statement that are to be presented for action at the
Meeting. If any other matters should properly come before the Meeting, proxies
will be voted on those other matters in accordance with the judgment of the
persons voting the proxies. Discretionary authority to vote on such matters is
conferred by such proxies upon the persons voting them.

              The Company will bear the cost of preparing, printing, assembling
and mailing all proxy materials that may be sent to shareholders in connection
with this solicitation. Arrangements will also be made with brokerage houses,


                                       32

<PAGE>   35
other custodians, nominees and fiduciaries, to forward soliciting material to
the beneficial owners of the Common Stock of the Company held by such persons.
The Company will reimburse such persons for reasonable out-of-pocket expenses
incurred by them. In addition to the solicitation of proxies by use of the
mails, officers and regular employees of the Company may solicit proxies without
additional compensation, by telephone or facsimile. The Company does not expect
to pay any compensation for the solicitation of proxies.

              Copies of the Company's Annual Report to Shareholders on Form 10-K
for the fiscal year ended December 31, 1997, the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 and the Company's Current Report
on Form 8-K dated March 24, 1998, each as filed with the Commission, accompany
this Proxy Statement. Upon written request, the Company will provide each
shareholder being solicited by this Proxy Statement with a free copy of any
exhibits and schedules thereto. All such requests should be directed to Halsey
Drug Co., Inc., 695 North Perryville Road, Crimson Building No. 2, Rockford,
Illinois 61107, Attention: Mr. Peter Clemens, Vice President and Chief Financial
Officer.

              The Company hereby incorporates by reference into this Proxy
Statement the following documents filed with the Commission pursuant to Section
13 or 15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"):

              (a) The Company's Annual Report on Form 10-K, as amended, for the
fiscal year ended December 31, 1997;

              (b) The Company's Quarterly Report on Form 10-Q, as amended, for
quarter ended March 31, 1998; and

              (c) The Company's Current Report on Form 8-K as filed with the
Commission on March 24, 1998; and

              (d) All other reports and other documents filed by the Company
pursuant to Section 13(e) or 15(d) of the Exchange Act subsequent to March 31,
1998 and prior to the date of the Meeting or such later date or dates to which
the Meeting may be adjourned.

              All properly executed proxies delivered pursuant to this
solicitation by the Company and not revoked, will be voted at the Meeting and
will be voted in accordance with the specifications made thereon. In voting by
proxy in regard to the election of directors, shareholders may vote in favor of
each nominee or withhold votes as to all nominees or votes as to a specific
nominee. With respect to (i) voting on the authorization to amend the Company's
Charter to increase the number of authorized shares of common stock, (ii) voting
on the authorization to amend the Company's Charter to provide voting rights to
the holders of the Debentures, (iii) voting on the approval of the Company's
1998 Stock Option Plan and (iv) the ratification of the Company's independent
public accountants, shareholders may vote in favor of, may vote against or may
abstain from voting on each of such proposals. Shareholders should specify their
choices on the enclosed Proxy. If no specific instructions are given with
respect to the matters to be acted upon, the shares represented by the Proxy
will be voted FOR the election of all directors, FOR the authorization to amend
the Company's Charter to increase the number of authorized shares of common
stock, FOR the authorization to amend the Company's Charter to provide voting
rights to holders of the Debentures, FOR the adoption of the Company's 1998
Stock Option Plan, and FOR the ratification of the appointment of Grant Thornton
LLP as the Company's independent certified public accounts for the fiscal year
ending December 31, 1998.


                                       33

<PAGE>   36
                  SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING

              Any shareholder proposals intended to be presented at the
Company's 1999 Annual Meeting of Shareholders must be received by the Company on
or before January 30, 1999 in order to be considered for inclusion in the
Company's proxy statement and proxy relating to such meeting.

                                           By order of the Board of Directors

                                           Peter Clemens,
                                           Secretary
May 29, 1998


                                       34

<PAGE>   37

                                     ANNEX A

                              HALSEY DRUG CO., INC.

                             1998 STOCK OPTION PLAN

1.       PURPOSES. The Plan described herein, as amended and restated, shall be
known as the "Halsey Drug Co., Inc. 1998 Stock Option Plan" (the "Plan"). The
purposes of the Plan are to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to
Employees, Directors and Consultants of the Company or its Subsidiaries (as
defined in Section 2 below) to whom Option's may be granted under this Plan, and
to promote the success of the Company's business.

         Options granted hereunder may be either "incentive stock options," as
defined in Section 422 of the Internal Revenue Code of 1986, as amended, or
"Non-ISO's," at the discretion of the Board and as reflected in the terms of the
written option agreement.

         The Plan is not intended as an agreement or promise of employment.
Neither the Plan, nor any Option granted pursuant to the Plan, shall confer on
any person any right to continue in the employ of the Company. The right of the
Company to terminate an Employee is not limited by the Plan, nor by any Option
granted pursuant to the Plan, unless such right is specifically described by the
terms of any such Option.

2.       DEFINITIONS.  As used herein, the following definitions shall apply:

         (a) "Board" shall mean the Committee, if one has been appointed, or the
Board of Directors of the Company, if no Committee is appointed.

         (b) "Code" shall mean the Internal Revenue Code of 1986, as amended.

         (c) "Committee" shall mean the Committee appointed under Section 4(a)
hereof.

         (d) "Common Stock" shall mean the Common Stock, $.01 par value, of the
Company.

         (e) "Company" shall mean Halsey Drug Co. Inc., a New York corporation.

         (f) "Continuous Service or Continuous Status as an Employee" shall mean
the absence of any interruption or termination of service as an Employee.
Continuous Status as an Employee shall not be considered interrupted in the case
of sick leave, military leave, or any other leave of absence approved by the
Board.

         (g) "Director" shall mean any person serving on the Board of Directors.


         (h) "Employee" shall mean any person, including officers, employed by
the Company or any Parent or Subsidiary of the Company. The payment of a
Director's fee by the Company shall not be sufficient to constitute "employment"
by the Company.

         (i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.

         (j) "Fair Market Value" shall mean (i) the closing price for a share of
the Common Stock on the exchange or quotation system which reports or quotes the
closing prices for a share of the Common Stock, as accurately reported for any
date (or, if no shares of Common Stock are traded on such date, for the
immediately preceding date on which shares of Common Stock were traded) in The
Wall Street Journal (or if The Wall Street Journal no longer reports such price,
in a newspaper or trade journal selected by the Committee) or (ii) if no such
price quotation is available, the price which the Committee acting in good faith
determines through any reasonable valuation method that a share of Common Stock
might change hands between a willing buyer and a willing seller, neither being
under any compulsion to buy or to sell and both having reasonable knowledge of
the relevant facts.

<PAGE>   38
         (k) "Incentive Stock Option" shall mean an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.

         (l) "Non-ISO" shall mean an Option to purchase stock which is not
intended by the Committee to satisfy the requirements of Section 422 of the
Code.

         (m) "Option" shall mean a stock option granted pursuant to the Plan.

         (n) "Optioned Stock" shall mean the Common Stock subject to an Option.

         (o) "Optionee" shall mean an Employee, Director or Consultant who
receives an Option.

         (p) "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.

         (q) "Plan" shall mean this Halsey Drug Co. Inc. 1998 Stock Option Plan,
as amended from time to time.

         (r) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and
Regulations under the Exchange Act.

         (s) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.

         (t) "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.

         (u) "Ten Percent Shareholder" shall mean a person who owns (after
taking into account the attribution rules of Section 424(d) of the Code) more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company, or a Subsidiary.

3.       STOCK AUTHORIZED.

         Subject to the provisions of Section 11 of the Plan, the maximum
aggregate number of shares which may be Optioned and sold under the Plan is Two
Million Six Hundred Thousand (2,600,000) shares of authorized, but unissued,
or reacquired Common Stock.

         If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
further grant under the Plan.

4.       ADMINISTRATION.

         (a) Procedure. The Company's Board of Directors may appoint a Committee
to administer the Plan which shall be constituted so as to permit the Plan to
continue to comply with Rule 16b-3, as currently in effect or as hereafter
modified or amended. The Committee appointed by the Board of Directors shall
consist of not less than two members of the Board of Directors, to administer
the Plan on behalf of the Board of Directors, subject to such terms and
conditions as the Board of Directors may prescribe. Once appointed, the
Committee shall continue to serve until otherwise directed by the Board of
Directors. From time to time, the Board of Directors may increase the size of
the Committee and appoint additional members thereof, remove members (with or
without cause), and appoint new members in substitution therefor, fill vacancies
however caused, or remove all members of the Committee and thereafter directly
administer the Plan; provided, however, that at no time shall a Committee of
less than two members administer the Plan. Subject to the provisions of the
Plan, the Committee shall be authorized to interpret the Plan, to establish,
amend and rescind any rules and regulations relating to the Plan and to make all
other determinations necessary or advisable for the administration of the Plan.
Notwithstanding anything to the contrary contained herein, no member of the
Committee shall serve as such under this Plan unless such person is a
"Non-Employee Director" within the


                                        2

<PAGE>   39
meaning of Rule 16b-3(b)(3)(i) of the Exchange Act. A majority vote of the
members of the Committee shall be required for all of its actions.

         A majority of the entire Committee shall constitute a quorum, and the
action of the majority of the Committee members present at any meeting at which
a quorum is present shall be the action of the Committee. All decisions,
determinations, and interpretations of the Committee shall be final and
conclusive on all persons affected thereby and shall, as to Incentive Stock
Options, be consistent with Section 422 of the Code. The Committee shall have
all of the powers and duties set forth herein, as well as such additional powers
and duties as the Board of Directors may delegate to it; provided, however, that
the Board of Directors expressly retains the right in its sole discretion (i) to
elect and to replace the members of the Committee, and (ii) to terminate or
amend this Plan in any manner consistent with applicable law.

         (b) Powers of the Committee. Subject to the provisions of the Plan, the
Committee shall have the authority, in its discretion: (i) to grant Incentive
Stock Options, in accordance with Section 422 of the Code, or to grant
Non-ISO's; (ii) to determine the Fair Market Value of the Common Stock; (iii) to
determine the exercise price per share of Options to be granted which exercise
price shall be determined in accordance with Section 8 of the Plan; (iv) to
determine the persons to whom (including, without limitation, members of the
Committee) and the time or times at which, Options shall be granted and the
number of Shares to be represented by each Option; (v) to interpret the Plan;
(vi) to prescribe, amend and rescind rules and regulations relating to the Plan;
(vii) to determine the terms and provisions of each Option granted (which need
not be identical) and, with the consent of the holder thereof, modify or amend
each Option; (viii) to accelerate or defer (with the consent of the Optionee)
the exercise date of any Option; (ix) to authorize any person to execute on
behalf of the Company any instrument required to effectuate the grant of an
Option previously granted by the Board; and (x) to make all other determinations
deemed necessary or advisable for the administration of the Plan.

         (c) Subject to the provisions of this Plan and compliance with Rule
16b-3 of the Exchange Act, the Committee may grant options under this Plan to
members of the Company's Board of Directors, including members of the Committee,
and in such regard may determine:

                  (i)      the time at which any such Option shall be granted;

                  (ii)     the number of Shares covered by any such Option;

                  (iii)    the time or times at which, or the period during
                           which, any such Option may be exercised or whether it
                           may be exercised in whole or in installments;

                  (iv)     the provisions of the agreement relating to any such
                           Option; and

                  (v)      the Option Price of Shares subject to an Option
                           granted such Board member.

         (d) Effect of the Committee's Decision. All decisions, determinations
and interpretations of the Committee shall be final and binding on all Optionees
and any other holders of any Options granted under the Plan.

5.       ELIGIBILITY. Incentive Stock Options may be granted only to Employees.
Non-ISO's may be granted to Employees as well as non-employee Directors and
Consultants of the Company as determined by the Board or any Committee. Any
person who has been granted an Option may, if he is otherwise eligible, be
granted an additional Option or Options.

         Each grant of an Option shall be evidenced by an Option Agreement, and
each Option Agreement shall (1) specify whether the Option is an Incentive Stock
Option or a Non-ISO and (2) incorporate such other terms and conditions as the
Committee acting in its absolute discretion deems consistent with the terms of
this Plan, including, without limitation, a restriction on the number of shares
of stock subject to the Option which first become exercisable during any
calendar year.


                                        3

<PAGE>   40
         To the extent that the aggregate Fair Market Value of the stock of the
Company subject to Incentive Stock Options granted (determined as of the date
such an Incentive Stock Option is granted) which first become exercisable in any
calendar year exceeds $100,000, such Options shall be treated as Non-ISO's. This
$100,000 limitation shall be administered in accordance with the rules under
Section 422(d) of the Code.

6.       EFFECTIVE DATE AND TERM OF PLAN. The effective date of this Plan
("Effective Date") shall be the date it is adopted by the Board, provided the
shareholders of the Company (acting at a duly called meeting of such
shareholders or by the written consent of shareholders) approve this Plan within
twelve (12) months after such Effective Date. The effectiveness of Options
granted under this Plan prior to the date such shareholder approval is obtained
shall be contingent on such shareholder approval.

         Subject to the provisions of Section 13 hereof, no Option shall be
granted under this Plan on or after the earlier of

         (1) the tenth anniversary of the Effective Date of this Plan in which
event the Plan otherwise thereafter shall continue in effect until all
outstanding Options shall have been surrendered or exercised in full or no
longer are exercisable, or

         (2) the date on which all of the Common Stock reserved for issuance
under Section 3 of this Plan has (as a result of the exercise or expiration of
Options granted under this Plan) been issued or no longer is available for use
under this Plan, in which event the Plan also shall terminate on such date.

7.       TERM OF OPTION. An Option shall expire on the date specified in such
Option, which date shall not be later than the tenth anniversary of the date on
which the Option was granted, except that, if any Employee, at any time an
Incentive Stock Option is granted to him or her, owns stock representing more
than ten percent (10%) of the total combined voting power of all classes of
Common Stock (or, under Section 424(d) of the Code is deemed to own stock
representing more than ten percent (10%) of the total combined voting power of
all such classes of Common Stock, by reason of the ownership of such classes of
stock, directly or indirectly, by or for any brother, sister, spouse, ancestor
or lineal descendant of such Employee, or by or for any corporation,
partnership, state or trust of which such Employee is a shareholder, partner or
beneficiary), the Incentive Stock Option granted him or her shall not be
exercisable after the expiration of five years from the date of grant or such
earlier expiration as provided in the particular Option agreement.

8.       EXERCISE PRICE AND CONSIDERATION.

         (a) The per Share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:

                  (i) In the case of an Incentive Stock Option

                           (A) granted to an Employee who, immediately before
the grant of such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.

                           (B) granted to any Employee, the per share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.

                  (ii) In the case of a Non-ISO, the per Share exercise price
shall be determined by the Board on the date of grant.

                  (iii) In the case of an Option granted on or after the
effective date of registration of any class of equity security of the Company
pursuant to Section 12 of the Exchange Act and prior to six months after the
termination of such registration, the per Share exercise price shall be no less
than one hundred percent (100%) of the fair market value per Share on the date
of grant.


                                        4

<PAGE>   41
         (b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Board and may consist entirely of cash, check, promissory note, other Shares
of Common Stock having a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option shall be
exercised, or any combination of such methods of payment, or such other
consideration and method of payment for the issuance of Shares to the extent
permitted under New York law.

If the optionee desires to pay for the optioned shares, in whole or in part, by
conversion of Shares, Optionee shall be entitled upon exercise of the Option to
receive that number of Shares equal to the quotient obtained by dividing
[(A-B)(X)] by (A) where:

                  (A)          =            the Fair Market Value of one Share
                                            of Common Stock on the date of
                                            conversion.


                  (B)          =            the Option Price for one Share of 
                                            Common Stock subject to an Option.

                  (X)          =            the Number of Shares of Common Stock
                                            issuable upon exercise of the Option
                                            if exercised for cash;

provided, if the above calculation results in a negative number, then no Shares
shall be issued or issuable upon conversion of the Option. Any payment made in
Shares of the Company's Common Stock shall be treated as equal to the Fair
Market Value of such Common Stock on the date the properly endorsed certificate
for such Common Stock is delivered to the Committee (or its delegate).

9.       EXERCISE OF OPTION.

         (a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Committee, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of the
Plan.

         An Option may not be exercised for a fraction of a Share.

         An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance, which in no event will be delayed more than thirty (30) days
from the date of the exercise of the Option, (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote or
receive dividends or any other rights as a shareholder shall exist with respect
to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the stock certificate is issued, except as provided in the Plan.

         Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.

         (b) Termination of Status as an Employee, or Director or Consultant
with Respect to Non-ISO's. NonISO's granted pursuant to the Plan may be
exercised notwithstanding the termination of the Optionee's status as an
employee, a non-employee Director or a Consultant, except as provided in the
Plan or as provided by the terms of the Stock Option Agreement.


                                        5

<PAGE>   42
         (c) Termination of Service as an Employee with Respect to Incentive
Stock Options. If the Continuous Service of any Employee terminates, he or she
may, but only within thirty (30) days (or such other period of time not
exceeding three (3) months as is determined by the Committee) after the date he
or she ceases to be an Employee of the Company, exercise his or her Option to
the extent that he or she was entitled to exercise it as of the date of such
termination. To the extent that he or she was not entitled to exercise the
Option at the date of such termination, or if he or she does not exercise such
Option (which he or she was entitled to exercise) within the time specified
herein, the Option shall terminate.

         (d) Disability of Optionee. Notwithstanding the provisions of Section
9(c) above, in the event an Employee is unable to continue his or her Continued
Service with the Company as a result of his or her total and permanent
disability (within the meaning of Section 22(e)(3) of the Code), he or she may,
but only within three (3) months (or such other period of time not exceeding
twelve (12) months as is determined by the Committee) from the date of
disability, exercise his or her Option to the extent he or she was entitled to
exercise it at the date of such disability. To the extent that he or she was not
entitled to exercise the Option at the date of disability, or if he or she does
not exercise such Option (which he or she was entitled to exercise) within the
time specified herein, the Option shall terminate.

         (e) Death of Optionee. In the event of the death of an Optionee:

                  (i)      during the term of the Option who is at the time of
                           his or her death an Employee of the Company and who
                           shall have been in Continuous Status as an Employee,
                           a Director or Consultant since the date of grant of
                           the Option, the Option may be exercised, at any time
                           within twelve (12) months following the date of
                           death, by the Optionee's estate or by a person who
                           acquired the right to exercise the Option by bequest
                           or inheritance, but only to the extent of the right
                           to exercise that would have accrued had the Optionee
                           continued living one (1) month after the date of
                           death; or

                  (ii)     within thirty (30) days (or such other period of time
                           not exceeding three (3) months as is determined by
                           the Committee) after the termination of Continuous
                           Status as an Employee, a Director or Consultant, the
                           Option may be exercised, at any time within three (3)
                           months following the date of death, by the Optionee's
                           estate or by a person who acquired the right to
                           exercise the Option by bequest or inheritance, but
                           only to the extent of the right to exercise that had
                           accrued at the date of termination.

10.      TRANSFERABILITY OF OPTIONS.

         (a) Incentive Stock Options may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or by
the laws of descent or distribution and may be exercised, during the life time
of the Optionee only by the Optionee.

         (b) The Committee may, in its discretion, authorize all or a portion of
the Non-ISOs to be granted to an Optionee to be on terms which permit transfer
by such Optionee to (i) the spouse, children or grandchildren of the Optionee
(the "Immediate Family Members"), (ii) a trust or trusts for the exclusive
benefit of such Immediate Family Members, or (iii) a partnership in which such
Immediate Family Members are the only partners, provided that (x) there may be
no consideration for any such transfer, (y) the Non-ISO Stock Option Agreement
pursuant to which such options are granted must be approved by the Committee,
and must expressly provide for transferability in a manner consistent with this
section, (z) subsequent transfers of transferred Options shall be prohibited
except those made by will or by the laws of descent or distribution, and (zz)
such transfer is approved in advance by the Committee. Following transfer, any
such Options shall continue to be subject to the same terms and conditions as
were applicable immediately prior to transfer, provided that for purposes of
determining the rights of exercise under the Option, the term "Optionee" shall
be deemed to refer to the transferee. The termination of service as an employee,
non-employee director or consultant shall continue to be applied with respect to
the original Optionee, following which the options shall be exercisable by the
transferee only to the extent, and for the periods specified in Section 9 of the
Plan and in the Stock Option Agreement.


                                        6

<PAGE>   43
11.      ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to any
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split or the payment of a stock dividend with
respect to the Common Stock or any other increase or decrease in the number of
issued shares of Common Stock effected without receipt of consideration by the
Company; provided, however, that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
exercise price of shares of Common Stock subject to an Option.

         In the event of the proposed dissolution or liquidation of the Company,
or in the event of a proposed sale of all or substantially all of the assets of
the Company, or the merger of the Company with or into another corporation, the
Option will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. The Board may, in the exercise
of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable.

12.      TIME FOR GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date on which the Board makes the determination granting
such Option. Notice of the determination shall be given to each Employee,
non-employee Director and Consultant to whom an Option is so granted within a
reasonable time after the date of such grant.

13.      AMENDMENT AND TERMINATION OF THE PLAN. (a) The Board may amend or
terminate the Plan from time to time in such respects as the Board may deem
advisable; provided that, the following revisions or amendments shall require
approval of the holders of a majority of the outstanding shares of the Company
entitled to vote:

                  (i)      any increase in the number of Shares subject to the
                           Plan, other than in connection with an adjustment
                           under Section 11 of the Plan;

                  (ii)     any change in the class of Employees which are
                           eligible participants for Options under the Plan; or

                  (iii)    if shareholder approval of such amendment is required
                           for continued compliance with Rule 16b-3.

         (b) Shareholder Approval. Any amendment requiring shareholder approval
under Section 13(a) of the Plan shall be solicited as described in Section 17 of
the Plan.

         (c) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.

14.      CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.


                                        7

<PAGE>   44
         As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.

15.      RESERVATION OF SHARES. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.


         Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.

16.      OPTION AGREEMENT. Options shall be evidenced by written Option
agreements in such form as the Committee shall approve.

17.      SHAREHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve months before or after
the date the Plan is adopted. If such shareholder approval is obtained at a duly
held shareholders' meeting, it may be obtained by the affirmative vote of the
holders of a majority of the outstanding shares of the Company present or
represented and entitled to vote thereon. The approval of such shareholders of
the Company shall be (1) solicited substantially in accordance with Section
14(a) of the Exchange Act and the rules and regulations promulgated thereunder,
or (2) solicited after the Company has furnished in writing to the holders
entitled to vote substantially the same information concerning the Plan as that
which would be required by the rules and regulations in effect under Section
14(a) of the Exchange Act at the time such information is furnished.

18.      MISCELLANEOUS PROVISIONS. An Optionee shall have no rights as a
shareholder with respect to any Shares covered by his Option until the date of
the issuance of a stock certificate to him for such shares.

19.      OTHER PROVISIONS. The stock option agreement authorized under the Plan
shall contain such other provisions, including, without limitation, restrictions
upon the exercise of the Option, as the Committee shall deem advisable. Any such
stock option agreement shall contain such limitations and restrictions upon the
exercise of the Option as shall be necessary in order that such option will be
an Incentive Stock Option as defined in Section 422 of the Code if an Incentive
Stock Option is intended to be granted.

20.      INDEMNIFICATION OF COMMITTEE. In addition to such other rights of
indemnification as they may have as Directors or as members of the Committee,
the members of the Committee shall be indemnified by the Company against the
reasonable expenses, including attorneys' fees actually and necessarily incurred
in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan or any Option granted thereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in such action, suit or proceeding that such Board
member is liable for negligence or misconduct in the performance of his duties;
provided that within 60 days after institution of any such action, suit or
proceeding a Board member shall in writing offer the Company the opportunity, at
its own expense, to handle and defend the same.

21.      APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of Common Stock pursuant to Options will be used for general corporate
purposes.

22.      NO OBLIGATION TO EXERCISE OPTION. The granting of an Option shall
impose no obligation upon the Optionee to exercise such Option.


                                        8

<PAGE>   45
23.      OTHER COMPENSATION PLANS. The adoption of the Plan shall not affect any
other stock option or incentive or other compensation plans in effect for the
Company or any Subsidiary, nor shall the Plan preclude the Company from
establishing any other forms of incentive or other compensation for employees
and Directors of the Company or any Subsidiary.

24.      SINGULAR, PLURAL; GENDER. Whenever used herein, nouns in the singular
shall include the plural, and the masculine pronoun shall include the feminine
gender.

25.      HEADINGS, ETC., NO PART OF PLAN. Headings of Articles and Sections
hereof are inserted for convenience and reference; they constitute no part of
the Plan.

26.      GOVERNING LAW. The Plan shall be governed by and construed in
accordance with the laws of the State of New York, except to the extent
preempted by Federal law. The Plan is intended to comply with Rule 16b-3. Any
provisions inconsistent with Rule 16b-3 shall be inoperative and shall not
affect the validity of the Plan, unless the Board of Directors shall expressly
resolve that the Plan is no longer intended to comply with Rule 16b-3.


Dated: April 16, 1998


                                        9

<PAGE>   46
                                     ANNEX B


                        NEW YORK BUSINESS CORPORATION LAW
                                   SECTION 623

                    PROCEDURE TO ENFORCE SHAREHOLDER'S RIGHT
                          TO RECEIVE PAYMENT FOR SHARES

         (a) A shareholder intending to enforce his right under a section of
this chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.

         (b) Within ten days after the shareholders' authorization date, which
term as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.

         (c) Within twenty days after the giving of notice to him, any
shareholder from whom written objection was not required and who elects to
dissent shall file with the corporation a written notice of such election,
stating his name and residence address, the number and classes of shares as to
which he dissents and a demand for payment of the fair value of his shares. Any
shareholder who elects to dissent from a merger under section 905 (Merger of
subsidiary corporation) or paragraph (c) of section 907 (Merger or consolidation
of domestic and foreign corporations) or from a share exchange under paragraph
(g) of section 913 (Share exchanges) shall file a written notice of such
election to dissent within twenty days after the giving to him of a copy of the
plan of merger or exchange or an outline of the material features thereof under
section 905 or 913.

         (d) A shareholder may not dissent as to less than all of the shares, as
to which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.

         (e) Upon consummation of the corporate action, the shareholder shall
cease to have any of the rights of a shareholder except the right to be paid the
fair value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenter's rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in cash has been completed, in
lieu thereof, at the election of the corporation, the fair value thereof in cash
as determined by the board as of the time of such expiration or completion, but
without prejudice otherwise to any corporate proceedings that may have been
taken in the interim.



<PAGE>   47
         (f) At the time of filing the notice of election to dissent or within
one month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of the transfer.

         (g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of shares with respect to which notices of election to
dissent have been received and the aggregate number of holders of such shares.
If the corporate action has been consummated, such offer shall also be
accompanied by (1) advance payment to each such shareholder who has submitted
the certificates representing his shares to the corporation, as provided in
paragraph (f), of an amount equal to eighty percent of the amount of such offer,
or (2) as to each shareholder who has not yet submitted his certificates a
statement that advance payment to him of an amount equal to eighty percent of
the amount of such offer will be made by the corporation promptly upon
submission of his certificates. If the corporate action has not been consummated
at the time of the making of the offer, such advance payment or statement as to
advance payment shall be sent to each shareholder entitled thereto forthwith
upon consummation of the corporate action. Every advance payment or statement as
to advance payment shall include advice to the shareholder to the effect that
acceptance of such payment does not constitute a waiver of any dissenters'
rights. If the corporate action has not been consummated upon the expiration of
the ninety day period after the shareholders' authorization date, the offer may
be conditioned upon the consummation of such action. Such offer shall be made at
the same price per share to all dissenting shareholders of the same class, or if
divided into series, of the same series and shall be accompanied by a balance
sheet of the corporation whose shares the dissenting shareholder holds as of the
latest available date, which shall not be earlier than twelve months before the
making of such offer, and a profit and loss statement or statements for not less
than a twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.

         (h) The following procedure shall apply if the corporation fails to
make such offer within such period of fifteen days, or if it makes the offer and
any dissenting shareholder or shareholders fail to agree with it within the
period of thirty days thereafter upon the price to be paid for their shares:

                  (1) The corporation shall, within twenty days after the
expiration of whichever is applicable of the two periods last mentioned,
institute a special proceeding in the supreme court in the judicial district in
which the office of the corporation is located to determine the rights of
dissenting shareholders and to fix the fair value of their shares. If, in the
case of merger or consolidation, the surviving or new corporation is a foreign
corporation without an office in this state, such proceeding shall be brought in
the county where the office of the domestic corporation, whose shares are to be
valued, was located.


                                        2

<PAGE>   48
                  (2) If the corporation fails to institute such proceeding
within such period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the expiration
of such twenty day period. If such proceeding is not instituted within such
thirty day period, all dissenter's rights shall be lost unless the supreme
court, for good cause shown, shall otherwise direct.

                  (3) All dissenting shareholders, excepting those who, as
provided in paragraph (g), have agreed with the corporation upon the price to be
paid for their shares, shall be made parties to such proceeding, which shall
have the effect of an action quasi in rem against their shares. The corporation
shall serve a copy of the petition in such proceeding upon each dissenting
shareholder who is a resident of this state in the manner provided by law for
the service of a summons, and upon each nonresident dissenting shareholder
either by registered mail and publication, or in such other manner as is
permitted by law. The jurisdiction of the court shall be plenary and exclusive.

                  (4) The court shall determine whether each dissenting
shareholder, as to whom the corporation requests the court to make such
determination, is entitled to receive payment for his shares. If the corporation
does not request any such determination or if the court finds that any
dissenting shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value as of
the close of business on the day prior to the shareholders' authorization date.
In fixing the fair value of the shares, the court shall consider the nature of
the transaction giving rise to the shareholder's right to receive payment for
shares and its effects on the corporation and its shareholders, the concepts and
methods then customary in the relevant securities and financial markets for
determining fair value of shares of a corporation engaging in a similar
transaction under comparable circumstances and all other relevant factors. The
court shall determine the fair value of the shares without a jury and without
referral to an appraiser or referee. Upon application by the corporation or by
any shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert's reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law and
rules.

                  (5) The final order in the proceeding shall be entered against
the corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so determined.

                  (6) The final order shall include an allowance for interest at
such rate as the court finds to be equitable, from the date the corporate action
was consummated to the date of payment. In determining the rate of interest, the
court shall consider all relevant factors, including the rate of interest which
the corporation would have had to pay to borrow money during the pendency of the
proceeding. If the court finds that the refusal of any shareholder to accept the
corporate offer of payment for his shares was arbitrary, vexatious or otherwise
not in good faith, no interest shall be allowed to him.

                  (7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees incurred by
the corporation against any or all of the dissenting shareholders who are
parties to the proceeding, including any who have withdrawn their notices of
election as provided in paragraph (e), if the court finds that their refusal to
accept the corporate offer was arbitrary, vexatious or otherwise not in good
faith. The court may, in its discretion, apportion and assess all or any part of
the costs, expenses and fees incurred by any or all of the dissenting
shareholders who are parties to the proceeding against the corporation if the
court finds any of the following: (A) that the fair value of the shares as
determined materially exceeds the amount which the corporation offered to pay;
(B) that no offer or required advance payment was made by the corporation; (C)
that the corporation failed to institute the special proceeding within the
period specified there or; or (D) that the action of the corporation in
complying with its obligations as provided in this section was arbitrary,
vexatious or otherwise not in good faith. In making any determination as
provided in clause (A), the court may consider the dollar amount or the
percentage, or both, by which the fair value of the shares as determined exceeds
the corporate offer.

                  (8) Within sixty days after final determination of the
proceeding, the corporation shall pay to each dissenting shareholder the amount
found to be due him, upon surrender of the certificate for any such shares
represented by certificates.


                                        3

<PAGE>   49
         (i) Shares acquired by the corporation upon the payment of the agreed
value therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.

         (j) No payment shall be made to a dissenting shareholder under this
section at a time when the corporation is insolvent or when such payment would
make it insolvent. In such event, the dissenting shareholder shall, at his
option:

                  (1) Withdraw his notice of election, which shall in such event
be deemed withdrawn with the written consent of the corporation; or

                  (2) Retain his status as a claimant against the corporation
and, if it is liquidated, be subordinated to the rights of creditors of the
corporation, but have rights superior to the non-dissenting shareholders, and if
it is not liquidated, retain his right to be paid for his shares, which right
the corporation shall be obliged to satisfy when the restrictions of this
paragraph do not apply.

                  (3) The dissenting shareholder shall exercise such option
under subparagraph (1) or (2) by written notice filed with the corporation
within thirty days after the corporation has given him written notice that
payment for his shares cannot be made because of the restrictions of this
paragraph. If the dissenting shareholder fails to exercise such option as
provided, the corporation shall exercise the option by written notice given to
him within twenty days after the expiration of such period of thirty days.

         (k) The enforcement by a shareholder of his right to receive payment
for his shares in the manner provided herein shall exclude the enforcement by
such shareholder of any other right to which he might otherwise be entitled by
virtue of share ownership, except as provided in paragraph (e), and except that
this section shall not exclude the right of such shareholder to bring or
maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is unlawful or fraudulent as to him.

         (l) Except as otherwise expressly provided in this section, any notice
to be given by a corporation to a shareholder under this section shall be given
in the manner provided in section 605 (Notice of meetings of shareholders).

         (m) This section shall not apply to foreign corporations except as
provided in subparagraph (e)(2) of section 907 (Merger or consolidation of
domestic and foreign corporations). (Last amended by Ch. 117, L. '86, eff. 9-1-
86.)


                                        4


<PAGE>   50
   
    

                              HALSEY DRUG CO., INC.

                                      PROXY
   
         The undersigned hereby appoints MICHAEL REICHER and WILLIAM SKELLY, and
each of them, with full power of substitution as proxies for the undersigned, to
attend the annual meeting of shareholders of Halsey Drug Co., Inc. to be held at
the LaGuardia Airport Marriott, 102-02 Ditmars Boulevard, Queens, New York on
Tuesday, June 30, 1998 at 10:00 a.m., Eastern Time, or any adjournment thereof,
and to vote the number of shares of Common Stock of the Company that the 
undersigned would be entitled to vote, and with all the power the undersigned 
would possess, if personally present, as follows:
    

         1.       [ ] FOR, or [ ] WITHHOLD AUTHORITY to vote for the following 
                  nominees for election as directors:
   
                  William Skelly; Michael K. Reicher; Alan J. Smith, Ph.D.; 
                  William A. Sumner; Bruce F. Wesson; Srini Conjeevaram; 
                  Zubeen Shroff; and Peter A. Clemens
    

         (INSTRUCTION: To withhold authority to vote for any individual nominee
         write that nominee's name on the line provided below.)
         ______________________________________________________________________

         2.       Approval of the proposal to amend the Certificate of
                  Incorporation of the Company to increase the number of
                  authorized shares of Common Stock from 20,000,000 shares to
                  40,000,000 shares;

                         [ ]  FOR, or [ ]  AGAINST, or [ ]  ABSTAIN

         3.       Approval of the proposal to amend the Certificate of
                  Incorporation of the Company to provide the holders of the
                  Company's 5% convertible senior secured debentures with the
                  right to vote on all matters submitted to a vote of
                  shareholders of the Company;

                         [ ]  FOR, or [ ]  AGAINST, or [ ]  ABSTAIN

         4.       Approval of the proposal to adopt the Company's 1998 stock
                  option plan;

                         [ ]  FOR, or [ ]  AGAINST, or [ ]  ABSTAIN

         5.       Ratification of Grant Thornton LLP as the Company's
                  independent accountants for the current fiscal year;

                         [ ]  FOR, or [ ]  AGAINST, or [ ]  ABSTAIN

         6        In their discretion, on such other business as may properly
                  come before the meeting or any adjournment thereof.

                          (CONTINUED ON THE OTHER SIDE)

                           (CONTINUED FROM OTHER SIDE)

         THE PROXIES WILL VOTE AS SPECIFIED ABOVE, OR IF A CHOICE IS NOT
SPECIFIED, THEY WILL VOTE FOR THE NOMINEES LISTED IN ITEM 1 AS WELL AS FOR THE
PROPOSALS LISTED IN ITEMS 2, 3, 4 AND 5.

         THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY.
   
                                                    Receipt of Notice of Annual
                                                    Meeting of Shareholders and
                                                    Proxy Statement dated 
                                                    May 29, 1998 is hereby 
                                                    acknowledged:
    

                                                    Dated ______________ , 1998
                                                    ___________________________
                                                    ___________________________
                                                    ___________________________
                                                           Signature(s)

                                                    (PLEASE SIGN EXACTLY AS
                                                    YOUR NAME OR NAMES APPEAR
                                                    HEREON, INDICATING, WHERE
                                                    PROPER, OFFICIAL POSITION
                                                    OR REPRESENTATIVE
                                                    CAPACITY.)