<PAGE>

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                ----------------

                                    FORM 10-Q

(Mark One)
[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934.

         FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

                                       OR

[ ]      TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         FOR THE TRANSITION PERIOD FROM ___________________TO___________________

                         COMMISSION FILE NUMBER 1-10113

                              HALSEY DRUG CO., INC.
             (Exact name of registrant as specified in its charter)

            NEW YORK                                      11-0853640
(State or other Jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

695 N. PERRYVILLE ROAD, CRIMSON BUILDING NO. 2, UNIT 4
                  ROCKFORD, ILLINOIS                                    61107
       (Address of Principal Executive Offices)                       (Zip Code)

                                 (815) 399-2060
              (Registrant's telephone number, including area code)

   (Former name, former address and former fiscal year, if changed since last
                                    report.)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes [X] No [ ]

         As of August 13, 2003 the registrant had 21,224,398 shares of Common
Stock, $.01 par value, outstanding.

================================================================================


<PAGE>

                      HALSEY DRUG CO., INC. & SUBSIDIARIES

                                      INDEX


<TABLE>
<CAPTION>
                                                                                                            PAGE
                                                                                                            ----
<S>                                                                                                         <C>

PART I. FINANCIAL INFORMATION


Item 1.           Financial Statements
                  Condensed Consolidated Balance Sheets-
                  June 30, 2003 (Unaudited) and December 31, 2002 ........................................     1

                  Condensed Consolidated Statements of
                  Operations (Unaudited) - Three and six months ended June 30, 2003
                  and June 30, 2002 ......................................................................     2

                  Condensed Consolidated Statements of Cash
                  Flows (Unaudited) - Six months ended June 30, 2003
                  and June 30, 2002 ......................................................................     3

                  Consolidated Statement of Stockholders'
                  Deficit (Unaudited) - Six months ended June 30, 2003 ...................................     6

                  Notes to Condensed Consolidated Financial Statements ...................................     7


Item 2.           Management's Discussion and Analysis of Financial
                  Condition and Results of Operations ....................................................    14


Item 4.           Controls and Procedures.................................................................    23


PART II. OTHER INFORMATION


Item 2.           Changes in Securities...................................................................    23


Item 6.           Exhibits and Reports on Form 8-K........................................................    24

SIGNATURES        ........................................................................................    25

CERTIFICATIONS    ........................................................................................    29
</TABLE>



<PAGE>


                          PART I. FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

                     HALSEY DRUG CO., INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                       (UNAUDITED)
                                                                         JUNE 30,    DECEMBER 31,
                                                                          2003          2002
                                                                         -------       -------
                                                                            (IN THOUSANDS)
<S>                                                                    <C>           <C>
CURRENT ASSETS
   Cash .............................................................    $    50       $ 9,211
   Accounts Receivable - trade, net of
      allowances for doubtful accounts of $16 and $14
      at June 30, 2003 and December 31, 2002, respectively ..........        841           610
   Inventories ......................................................      2,537         2,285
   Prepaid expenses and other current assets ........................        686           394
                                                                         -------       -------
        Total current assets ........................................      4,114        12,500
PROPERTY, PLANT & EQUIPMENT, NET ....................................      5,789         5,367

DEFERRED PRIVATE OFFERING COSTS,
       net of accumulated amortization of $306 and $9
       at June 30, 2003 and December 31, 2002, respectively ..........     1,317         1,032

OTHER ASSETS AND DEPOSITS ...........................................        394           465
                                                                         -------       -------
                                                                         $11,614       $19,364
                                                                         =======       =======
</TABLE>


        The accompanying notes are an integral part of these statements.


<PAGE>

                     HALSEY DRUG CO., INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                              (UNAUDITED)
                                                                                JUNE 30,         DECEMBER 31,
                                                                                  2003              2002
                                                                                 ----               -----
                                                                            (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                                                           <C>                <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
   Current maturities of notes payable and capital lease
     obligations ...........................................................   $      52          $      33
   Accounts payable ........................................................       2,517              3,119
   Accrued expenses ........................................................       3,632              3,115
   Department of Justice Settlement ........................................         300                300
                                                                               ---------          ---------
      Total current liabilities ............................................       6,501              6,567

TERM NOTE PAYABLE ..........................................................      21,401             21,401

CONVERTIBLE SUBORDINATED DEBENTURES ........................................      79,042             77,118
  Less: debt discount ......................................................     (62,578)           (73,955)
                                                                               ---------          ---------
                    ........................................................      16,464              3,163

CAPITAL LEASE OBLIGATIONS ..................................................         111                 40

DEPARTMENT OF JUSTICE SETTLEMENT ...........................................         299                461

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT
   Common stock - $.01 par value; authorized 80,000,000 shares; issued and
      outstanding, 21,095,092 shares and 21,035,323
      at June 30, 2003 and December 31, 2002, respectively .................         211                211
   Additional paid-in capital ..............................................     149,319            148,611
   Accumulated deficit .....................................................    (182,692)          (161,090)
                                                                               ---------          ---------
                                                                                 (33,162)           (12,268)
                                                                               ---------          ---------
                                                                               $  11,614          $  19,364
                                                                               =========          =========
</TABLE>


        The accompanying notes are an integral part of these statements.

                                       2


<PAGE>

                     HALSEY DRUG CO., INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                                   (UNAUDITED)
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                      JUNE 30,
                                                       FOR THE SIX MONTHS ENDED                     FOR THE THREE MONTHS ENDED
                                                 -----------------------------------           -----------------------------------
                                                     2003                  2002                    2003                    2002
                                                 ------------           ------------           ------------           ------------
<S>                                              <C>                    <C>                    <C>                    <C>
Net product revenues                             $      2,732           $      4,139           $      1,206           $      2,258

Cost of manufacturing                                   5,138                  6,254                  2,265                  3,353
Research and development                                  616                    757                    287                    385
Selling, general and administrative expenses            3,917                  3,515                  2,206                  1,899
Plant shutdown costs                                       --                   (120)                    --                     --
                                                 ------------           ------------           ------------           ------------

   Loss from operations                                (6,939)                (6,267)                (3,552)                (3,379)

Other income (expense)
Interest expense                                       (2,904)                (2,173)                (1,471)                (1,135)
Interest income                                            21                      7                      4                      3
Amortization of deferred debt discount and
   private offering costs                             (11,683)                (4,375)                (5,916)                (2,840)
Other                                                     (97)                   (11)                   (92)                    11
                                                 ------------           ------------           ------------           ------------
   NET LOSS                                      $    (21,602)          $    (12,819)          $    (11,027)          $     (7,340)
                                                 ============           ============           ============           ============
Basic and diluted loss per share                 $      (1.03)          $      (0.85)          $      (0.52)          $      (0.49)
                                                 ============           ============           ============           ============
Weighted average number of outstanding shares      21,065,373             15,065,240             21,095,092             15,065,240
                                                 ============           ============           ============           ============
</TABLE>


        The accompanying notes are an integral part of these statements.

                                       3

<PAGE>

                     HALSEY DRUG CO., INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                          SIX MONTHS ENDED
                                                                              JUNE 30
                                                                              -------
                                                                      2003               2002
                                                                    --------           --------
                                                                          (IN THOUSANDS,
                                                                         EXCEPT SHARE DATA)
<S>                                                                 <C>                <C>
Cash flows from operating activities
Net loss .......................................................    $(21,602)          $(12,819)
                                                                    --------           --------
Adjustments to reconcile net loss to net cash
    used in operating activities
   Depreciation and amortization ...............................         402                433
   Amortization of deferred debt discount and private
   offering costs ..............................................      11,683              4,375
   Amortization of deferred product acquisition costs ..........          23                 18
   Debentures and stock issued for interest ....................       1,459              1,081
   Loss on disposal of assets ..................................           5                 19
   Increase in fair value of warrants ..........................          92                 --
   Changes in assets and liabilities
      Accounts receivable ......................................      (1,295)            (1,103)
      Inventories ..............................................        (252)               241
      Prepaid expenses and other current assets ................        (292)               (79)
      Other assets and deposits ................................          48                119
      Accounts payable .........................................        (310)               338
      Accrued expenses .........................................       1,279              1,048
                                                                    --------           --------
       Total adjustments .......................................      12,842              6,490
                                                                    --------           --------
    Net cash used in operating activities ......................      (8,760)            (6,329)
                                                                    --------           --------
Cash flows from investing activities
   Capital expenditures ........................................        (719)              (203)
                                                                    --------           --------
      Net cash used in investing activities ....................        (719)              (203)
                                                                    --------           --------
Cash flows from financing activities
   Proceeds from issuance of debentures ........................         500                 --
   Proceeds from issuance of bridge loans ......................          --              6,500
   Payments to Department of Justice ...........................        (162)              (155)
   Payments on notes payable and capital lease obligations .....         (20)               (10)
                                                                    --------           --------
        Net cash provided by financing activities ..............         318              6,335
                                                                    --------           --------
   NET DECREASE IN CASH ........................................      (9,161)              (197)

Cash at beginning of period ....................................       9,211                442
                                                                    --------           --------
Cash at end of period ..........................................    $     50           $    245
                                                                    ========           ========


Cash paid for interest .........................................    $    400           $     21
                                                                    ========           ========
</TABLE>


                                       4

<PAGE>

Supplemental disclosures of noncash investing and financing activities for the
six months ended June 30, 2003:

1.       The Company issued $1,459 of Debentures as payment of like amounts of
         Debenture accrued interest.

2.       The Company has repaid $1,064 of indebtedness in the form of product
         deliveries.

3.       The Company issued 645,000 warrants with an estimated relative fair
         value of $581 for the lending commitment in the form of debentures.

4.       The Company issued 59,769 shares of common stock upon the conversion of
         $35 of Debentures.

5.       Equipment financed through capital leases aggregated approximately
         $111.

        The accompanying notes are an integral part of these statements.

                                       5

<PAGE>

                     HALSEY DRUG CO., INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

                         SIX MONTHS ENDED JUNE 30, 2003

                        (IN THOUSANDS, EXCEPT SHARE DATA)

                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                  COMMON STOCK
                                                 $.01 PAR VALUE             ADDITIONAL
                                                 --------------               PAID-IN       ACCUMULATED
                                             SHARES           AMOUNT          CAPITAL         DEFICIT           TOTAL
                                          -----------      -----------      -----------     -----------      -----------
<S>                                       <C>              <C>              <C>             <C>              <C>
Balance January 1, 2003 ..............     21,035,323      $       211      $   148,611     $  (161,090)     $   (12,268)

Net loss for the six
   months ended June 30, 2003 ........                                                          (21,602)         (21,602)

Conversion of debentures .............         59,769               --               35                               35

Increase in fair value of warrants ...                                               92                               92

Issuance of warrants for commitment ..                                              581                              581
                                          -----------      -----------      -----------     -----------      -----------
Balance at June 30, 2003 .............     21,095,092      $       211      $   149,319     $  (182,692)     $   (33,162)
                                          ===========      ===========      ===========     ===========      ===========
</TABLE>


         The accompanying notes are an integral part of this statement.

                                       6

<PAGE>

                     HALSEY DRUG CO., INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                   (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION AND LIQUIDITY MATTERS

                  The accompanying unaudited condensed consolidated financial
statements of Halsey Drug Co., Inc. and subsidiaries (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles in the United
States for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring accrual adjustments, considered
necessary to present fairly the financial position, results of operations and
changes in cash flows for the three and six months ended June 30, 2003, assuming
that the Company will continue as a going concern, have been made. The results
of operations for the three and six month periods ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the full year
ended December 31, 2003. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto for the year ended December 31, 2002 included
in the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission.

                  At June 30, 2003 the Company had cash and cash equivalents of
$50,000 as compared to $9,211,000 at December 31, 2002. The Company had working
capital deficit at June 30, 2003 of $2,387,000 and an accumulated deficit of
$(182,692,000). The Company incurred a net loss of $21,602,000 during the six
months ended June 30, 2003.

                  On December 20, 2002, the Company consummated a private
offering of securities for an approximate aggregate purchase price of
$26,394,000 (the "2002 Debenture Offering"). The securities issued in the
Offering consisted of 5% convertible senior secured debentures (the "2002
Debentures"). Of the $26,394,000 in 2002 Debentures issued in the 2002 Debenture
Offering, approximately $15,894,000 of the 2002 Debentures were issued in
exchange for the surrender of a like amount of principal and accrued interest
outstanding under Company's 10% convertible promissory notes issued pursuant to
various working capital bridge loan transactions with Galen Partners III, L.P.,
Galen International III, L.P., Galen Employee Fund III, L.P. (collectively,
"Galen") and certain other lenders, during the period from August 15, 2001
through and including December 20, 2002. The 2002 Debentures, issued at par,
will become due and payable as to principal on March 31, 2006. Interest on the
principal amount of the 2002 Debentures, at the rate of 5% per annum, is payable
on a quarterly basis. Interest on the 2002 Debentures will be substantially paid
by the Company's issuance of a debenture instrument substantial identical to the
2002 Debentures issued in the 2002 Debenture Offering, in the principal amount
equal to the accrued interest for each quarterly period.

                  Until such time as the Company successfully develops and
commercializes new finished dosage products and active pharmaceutical
ingredients, of which there can be no assurance, the Company will continue to
incur operating losses and negative cash flow from operations. At the Company's
request, on May 5, 2003, the Company received a letter executed by each of Care
Capital Investments II, L.P., Galen Partners III, L.P. and Essex Woodlands
Health Ventures V, L.P. (the "Majority 2002 Debentureholders") advising that the
Majority 2002 Debentureholders would provide funding to meet the Company's 2003
capital requirements, up to an aggregate amount not to exceed $8.6 million (the
"Letter of Support"). The Letter of Support provides that the amount of any
funding provided by the Majority 2002 Debentureholders would be reduced to the
extent of any funding obtained by the Company from third-party sources during
2003. The Letter of Support further provides that the terms of any funding
provided by the Majority 2002 Debentureholders would be subject to negotiation
between the Company and the Majority 2002 Debentureholders at the time of any
funding. In consideration for the issuance of the Letter of Support, the Company
authorized the issuance of warrants to the Majority 2002 Debentureholders
exercisable for an

                                       7

<PAGE>

aggregate of 645,000 shares of the Company's Common Stock at an exercise
price of $.34 per share (which is equivalent to the conversion price of the 2002
Debentures), subject to downward adjustment to equal the consideration per share
received by the Company for its Common Stock, or the conversion/exercise price
per share of the Company's Common Stock issuable under convertible securities,
in a third part investment if lower than the exercise price of the warrants.

         As of August 13, 2003, the Majority 2002 Debentureholders had advanced
an aggregate of $2,400,000 to the Company under the Letter of Support to fund
the Company's operating losses and capital requirements (the "Letter of Support
Advances"). The Letter of Support Advances were made in accordance with the
terms of 2002 Debenture Purchase Agreement resulting in the Company's issuance
of 2002 Debentures in an aggregate principal amount of $2,400,000 having a
maturity date of March 31, 2006 After giving effect to the Letter of Support
Advances made through August 13, 2003, there remains $6,200,000 available for
advance to the Company by the Majority 2002 Debentureholders under the Letter of
Support. All additional advances to be made by the Majority 2002
Debentureholders under the Letter of Support will be made in accordance with the
2002 Debenture Purchase Agreement.

                  The Company believes that the funding to be provided under the
Letter of Support combined with cash flow from operations, will be sufficient to
satisfy the Company's working capital requirements through January 1, 2004.

                  In the absence of continued support by the Majority 2002
Debentureholders under the Letter of Support or an alternative third-party
investment, or in the event of a material reduction in the Company's cash flow
from operations, the Company will be required to (i) delay or cease the
continued development of its licensed technologies and the completion of planned
capital expenditures, (ii) obtain funds through arrangements with third parties
on terms that may require the Company to relinquish rights to its licensed
technologies, which the Company would otherwise pursue on its own or that would
dilute the Company's stockholders, (iii) significantly scale back or terminate
operations and/or (iv) seek protection under applicable bankruptcy laws. An
extended delay or a cessation of the Company's continuing development efforts
related to its opiate synthesis technologies or delays in obtaining required DEA
approvals, will have a material adverse effect on the Company's financial
condition and results of operations.

NOTE 2 - STOCK-BASED COMPENSATION

         The Company accounts for stock-based compensation using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations ("APB
No. 25") and has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure, an amendment of FASB Statement No. 123." Under APB
No. 25, when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized. Accordingly, no compensation expense has been recognized
in the consolidated financial statements in connection with employee stock
option grants.

The following table illustrates the effect on net income and earnings per share
had the Company applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.

                                       8

<PAGE>


<TABLE>
<CAPTION>
                                                 FOR THE SIX MONTHS ENDED JUNE 30,    FOR THE THREE MONTHS ENDED JUNE 30,
                                                 ---------------------------------    -----------------------------------
                                                    2003                   2002         2003                      2002
                                                  ---------              ---------    ---------               -----------
                                                                       IN THOUSANDS, EXCEPT PER SHARE DATA
<S>                                               <C>                    <C>          <C>                      <C>
Net loss, as reported                             $(21,602)              $(12,819)    $(11,027)                 $ (7,340)
Deduct: Total stock-based employee                
compensation expense determined under the
fair value-based method for all rewards               (382)                  (514)        (188)
                                                  --------               --------     --------                      (258)
                                                                                                                --------

  Pro forma net loss                              $(21,984)              $(13,333)    $(11,215)                 $ (7,598)
                                                  ========               ========     ========                  ========
Loss per share:
Basic and diluted - as reported                   $  (1.03)              $   (.85)    $   (.52)                 $   (.49)
                                                  ========               ========     ========                  ========
Basic and diluted - pro forma                     $  (1.05)              $   (.89)    $   (.53)                 $   (.50)
                                                  ========               ========     ========                  ========
</TABLE>


                  Pro forma compensation expense may not be indicative of future
disclosures because they do not take into effect pro forma compensation expense
related to grants before 1995. For purposes of estimating the fair value of each
option on the date of grant, the Company utilized the Black-Scholes
option-pricing model.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

NOTE 3 - EARNINGS (LOSS) PER SHARE

                  The computation of basic earnings (loss) per share of common
stock is based upon the weighted average number of common shares outstanding
during the period. Diluted earnings per share is based on basic earnings per
share adjusted for the effect of other potentially dilutive securities. Excluded
from the 2003 and 2002 computations are approximately 224,500,000 and
60,720,000, respectively, of outstanding warrants, options and the effect of
convertible debentures and convertible bridge loans outstanding, as such
inclusion which would be antidilutive

NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS

                  In April 2002, the Financial Accounting Standards Board
("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145").
This statement eliminates the requirement to report gains and losses from
extinguishment of debt as extraordinary unless they meet the criteria of APB
Opinion 30. SFAS No. 145 also requires sale-leaseback accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. The changes related to lease accounting are
effective for transactions occurring after May 15, 2002 and the changes related
to debt extinguishment are effective for fiscal years beginning after May 15,
2002. The impact of adopting the provisions related to lease accounting did not
have a material impact on the Company's financial position or results of
operations. The Company early adopted the provisions related to debt
extinguishments during the year ended December 31, 2002. The adoption did not
have a material impact on the Company's financial position or results of
operations.

                  In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No.
146 nullifies Emerging Issues Task Force Issue No. 94-3 and requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. This statement also establishes that fair value
is the objective for initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The impact of the adoption of SFAS No. 146 did not have a material impact
on the Company's financial position or results of operations.

                                       9

<PAGE>

                  In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN No. 45"). FIN No. 45
requires that upon issuance of a guarantee, a guarantor must recognize a
liability for the fair value of an obligation assumed under a guarantee. FIN No.
45 also requires additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with guarantees issued.
The recognition provisions of FIN No. 45 are effective for any guarantees issued
or modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN No. 45 did not have a material impact on the Company's
financial position or results of operations.

                  In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 148") to provide alternative methods of
transition for an entity that voluntarily changes to the fair value-based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in APB Opinion No. 25 and related interpretations as provided
for under SFAS No. 148. Accordingly, compensation expense is only recognized
when the market value of the Company's stock at the date of the grant exceeds
the amount an employee must pay to acquire the stock. The adoption of SFAS No.
148 did not have a material impact on the Company's financial position or
results of operations.

                  In January 2003, the FASB issued FASB Interpretation No. 46
"Consolidation of Variable Interest Entities" ("FIN No. 46") In general, a
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in activities on behalf of another company.
Until now, a company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN No. 46 changes that by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN No. 46's consolidation
requirements apply immediately to variable interest entities created or acquired
after January 31, 2003. The consolidation requirements apply to older entities
in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply to all financial statements issued
after January 31, 2003, regardless of when the variable interest entity was
established. The Company has adopted FIN No. 46 effective January 31, 2003. The
adoption of FIN No. 46 did not have a material impact on the Company's financial
position or results of operations.

                  In April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," ("SFAS No.
149"), which amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 except for
the provisions that were cleared by the FASB in prior pronouncements. The
Company is currently evaluating the effect of the adoption of SFAS No. 149 on
its financial position and results of operations.

                  In May 2003, the FASB issued "SFAS No. 150", "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS No. 150"). This statement establishes standards for how an issuer
classifies and measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. In accordance
with the standard, financial instruments that embody obligations for the issuer
are required to be classified as liabilities. This Statement shall be effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Company is currently evaluating the effect of the
adoption of SFAS No. 150 on its financial position and results of operations.

                                       10

<PAGE>

NOTE 5 - STRATEGIC ALLIANCE WITH WATSON PHARMACEUTICALS

                  On March 29, 2000, the Company completed various strategic
alliance transactions with Watson Pharmaceuticals, Inc. ("Watson"). The
transactions provided for Watson's purchase of a certain pending abbreviated new
drug application ("ANDA") from the Company for $13,500,000, for Watson's rights
to negotiate for Halsey to manufacture and supply certain identified future
products to be developed by Halsey, for Watson's marketing and sale of the
Company's core products and for Watson's extension of a $17,500,000 term loan to
the Company (See Note 8).

                  As part of the strategic alliance transactions, the Company
and Watson completed a manufacturing and supply agreement providing for Watson's
marketing and sale of the Company's existing core products portfolio (the "Core
Products Supply Agreement"). The Core Products Supply Agreement obligated Watson
to purchase a minimum amount of approximately $3,060,000 per quarter (the
"Minimum Purchase Amount") in core products from the Company, through September
30, 2001 (the "Minimum Purchase Period"). At the expiration of the initial
Minimum Purchase Period, if Watson did not continue to satisfy the Minimum
Purchase Amount, the Company would then be able to market and sell the core
products on its own or through a third party. On August 8, 2001, the Company and
Watson executed an amendment to the Core Products Supply Agreement providing (i)
for a reduction of the Minimum Purchase Amount from $3,060,000 to $1,500,000 per
quarter, (ii) for an extension of the Minimum Purchase Period from the quarter
ended September 30, 2001 to the quarter ended September 30, 2002, (iii) for
Watson to recover previous advance payments made under the Core Products Supply
Agreement in the form of the Company's provision of products having a purchase
price of up to $750,000 per quarter (such credit amount to be in excess of
Watson's $1,500,000 minimum quarterly purchase obligation), and (iv) for the
Company's repayment to Watson of any remaining advance payments made by Watson
under the Core Products Supply Agreement (and which amount has not been
recovered by product deliveries by the Company to Watson. As part of the
completion of the 2002 Debenture Offering (See Note 1), on December 20, 2002,
the Company and Watson further amended the Core Products Supply Agreement to
provide for the Company's satisfaction of its outstanding payment obligations to
Watson of $3,901,331 under such Agreement by the capitalization of such payment
obligation as part of the principal under the term loan with Watson (the "Watson
Term Loan") (See Note 8). As a result, the Watson Term Loan was amended to
increase the principal amount of the Watson Term Loan from $17,500,000 to
$21,401,331. In addition, the maturity date of Watson Term Loan was extended
from March 31, 2003 to March 31, 2006.

                  In March 2003, the Company notified Watson that the Company
intended to commence selling the core products independent of, and in addition
to, Watson's efforts as provided for under the Core Products Agreement.

                                       11

<PAGE>

NOTE 6 - INVENTORIES

         Inventories consist of the following:


<TABLE>
<CAPTION>
                                                             JUNE 30, 2003           DECEMBER 31, 2002
                                                             -------------           -----------------
                                                                        (IN THOUSANDS)
<S>                                                          <C>                     <C>
Finished Goods.......................................         $         88              $         --
Work in Process......................................                  680                       831
Raw Materials........................................                1,769                     1,454
                                                              ------------              ------------
                                                              $      2,537              $      2,285
                                                              ============              ============
</TABLE>


NOTE 7 - CONVERTIBLE SUBORDINATED DEBENTURES

         Convertible Subordinated Debentures consist of the following:


<TABLE>
<CAPTION>
                                                             JUNE 30, 2003           DECEMBER 31, 2002
                                                             -------------           -----------------
                                                                        (IN THOUSANDS)
<S>                                                          <C>                     <C>
1998 Debentures......................................         $     30,835              $     30,215
1999 Debentures......................................               20,991                    20,509
2002 Debentures......................................               26,716                    26,394
2003 Debentures......................................                  500                        --
                                                              ------------              ------------
                                                                    79,042                    77,118
Less: Debt discount..................................              (62,578)                  (73,955)
                                                              ------------              ------------
                                                              $     16,464              $      3,163
                                                               ===========              ============
</TABLE>


                  During the six months ended June 30, 2003, the Company issued
$1,959,000 in new debentures of which $1,459,000 was issued as payment of
accrued interest in the same amount of these debentures and $500,000 was issued
under the Letter of Support Advances. Such accrued interest debentures are
convertible into 1,512,000 shares of the Company's common stock at conversion
prices of $1.02 and $.93. The Debentures issued under the Letter of Support
Advances are convertible into 625,000 shares of the Company's common stock at a
conversion price of $.80. As the conversion price of such debentures was equal
to or exceeded the fair market value of the Company's common stock on the date
of issue, no beneficial conversion features were determined to exist. During the
six months ended June 30, 2002, the Company issued $538,000 in new debentures as
payment of accrued interest in the same amount of these debentures. Such
debentures are convertible into 289,247 shares of the Company's common stock at
a conversion price of $1.86.

                  As a result of the issuance of the 2003 Debentures, certain
existing warrants agreements were modified as a result of dilution adjustment
provisions contained within. The Company recorded a charge to earnings of
$92,000 related to the increase in the fair value of the warrants, as calculated
using the Black - Scholes option-pricing model, as a result of the modification
of terms.

                  During the six months ended June 30, 2003, debentures in the
principal amount of $35,000 were converted into 59,769 shares of the Company's
common stock.

Related-Party Transactions

                  Certain of the 1998 Debentures and 1999 Debentures are held by
members of the Company's management and Board of Directors. The aggregate
principal amount of such debentures was approximately $372,000 and $364,000 at
June 30, 2003 and December 31, 2002, respectively. Interest expense on these
debentures was approximately $9,200 and $8,600, for the six months ended June
30, 2003 and 2002, respectively, of which approximately $8,000 for each
six-month period was paid through the issuance of like debentures. Interest
expense on these debentures was approximately $4,600 and $4,300, for the three
months ended June 30, 2003 and 2002, respectively, of which approximately $4,000
for each three month period was paid through the issuance of like debentures.

                                       12

<PAGE>

NOTE 8 - TERM NOTE PAYABLE

                  In connection with various strategic alliance transactions
(See Note 5), Watson advanced $17,500,000 to the Company under the Watson Term
Loan. The loan is secured by a first lien on all of the Company's assets, senior
to the lien securing all other Company indebtedness, and carries a floating rate
of interest equal to prime plus two percent and had an original maturity date of
March 31, 2003. As part of the Company's 2002 Debenture Offering, the Watson
Term Loan was amended to (1) extend the maturity date to March 31, 2006, (2)
increase the interest rate to prime plus four and one half percent and (3)
increase the principal amount to $21,401,331 to reflect the inclusion of the
Company's payment obligations under the Core Products Supply Agreement between
Watson and the Company. The interest rate at June 30, 2003 was 8.5% and at
December 31, 2002 was 8.75%. In consideration of the amendment to the Watson
Term Loan, the Company issued to Watson a common stock purchase warrant ("Watson
Warrant") exercisable for 10,700,665 shares of the Company's common stock at an
exercise price of $.34 per share. The warrant has a term expiring December 31,
2009. The fair value of the Watson Warrant on the date of grant, as calculated
using the Black-Scholes option-pricing model, of $11,985,745 was charged to
earnings on the date of grant as a loss on the extinguishment of debt. As of
June 30, 2003, Watson has advanced $21,401,331 to the Company under the Watson
Term Loan.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

                  Employment contracts

                  In June 2003, an employment agreement of an officer/employee
was terminated. Pursuant to provisions of the employment agreement, the Company
has provided for approximately $500,000 of salary and benefits under this
agreement. The salary benefit is payable in a lump sum cash payment within
thirty (30) days of the date of termination. The Company has not made any salary
or benefit payments to the individual under this agreement. The Company and the
terminated employee are currently negotiating a separation agreement.

                  Legal Proceedings

                  Beginning in 1992, actions were commenced against the Company
and numerous other pharmaceutical manufacturers, in connection with the alleged
exposure to diethylstilbestrol ("DES"). The Company's insurance carrier assumed
the defense of all such matters, and the carrier has settled a substantial
number. Currently, several actions remain pending with the Company as a
defendant in the Pennsylvania Court of Common Pleas, Philadelphia Division, and
the insurance carrier is defending each action. The Company and its legal
counsel do not believe any of such actions will have a material impact on the
Company's financial condition. The ultimate outcome of these lawsuits cannot be
determined at this time, and accordingly, no adjustment has been made to the
condensed consolidated financial statements.

                  In May 2003, the Company was notified that the Company, as
well as numerous other pharmaceutical manufacturers and distributors, was a
named defendant in a lawsuit involving a product liability claim. The claim has
been submitted and accepted by Company's insurance carrier for defense. The
final outcome of this lawsuit cannot be determined at this time, and
accordingly, no adjustment has been made to the condensed consolidated financial
statements.

                  The Company is named as a defendant in an action entitled
Alfred Kohn v. Halsey Drug Co. in the Supreme Court of New York, Bronx County.
The Plaintiff seeks damages of $1 million for breach of an alleged oral contract
to pay a finder's fee for a business transaction involving the Company.
Discovery in this action has been completed. It is the Company's expectation to
file for summary judgment in this action. In the event the Company is
unsuccessful in its motion for summary judgment, a trial on this action will
follow. The Company does not believe this action will

                                       13

<PAGE>

have a material impact on the Company's financial condition. The ultimate
outcome of this lawsuit cannot be determined at this time, and accordingly, no
adjustment has been made to the condensed consolidated financial statements.

                  In addition, the Company is a party to legal matters arising
in the general conduct of business. The ultimate outcome of such matters is not
expected to have a material adverse effect on the Company's results of
operations or financial position.

                  Indemnifications

                  Each of the purchase agreements for the 1998 Debentures, 1999
Debentures and the 2002 Debentures, contain provisions by which the Company is
obligated to indemnify the purchasers of the debentures for any losses, claims,
damages, liabilities, obligations, penalties, awards, judgments, expenses,
disbursements, arising out of or resulting from the breach of any
representation, warranty, or agreement, of the Company related to purchase of
the debentures. These indemnification obligations do not include a limit, or
maximum potential future payments, nor are there any recourse provisions or
collateral that may offset the cost. As of June 30, 2003 the Company has not
recorded a liability for any obligations arising as a result of these
indemnification agreements.


I
TEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCE CONDITION AND RESULTS OF
OPERATIONS

SIX MONTHS ENDED JUNE 30, 2003 VS. SIX MONTHS ENDED JUNE 30, 2002

NET PRODUCT REVENUES

                  The Company's net product revenues for the six months ended
June 30, 2003 of $2,732,000 represents a decrease of $1,407,000 (34%) as
compared to net revenues for the six months ended June 30, 2002 of $4,139,000.
The decrease in net product revenues is a result of a decrease in sales to the
Company's primary customer, Watson Pharmaceuticals, Inc. which is pursuing a
sales strategy that places less emphasis on the products we provide. During the
first quarter 2003, the Company initiated steps to reestablish internal sales
efforts so as to become less dependent upon a single customer. The Company
expects this strategy to materialize in the third and fourth quarters of 2003.

COST OF MANUFACTURING

                  For the six months ended June 30, 2003, cost of manufacturing
decreased $1,116,000 as compared to the six months ended June 30, 2002. As a
percentage of sales, cost of manufacturing was 188% and 151% for the six months
ended June 30, 2003 and 2002, respectively. The decrease was a result of reduced
net product revenues as noted above, as well as decreased reliance on third
party outside testing laboratories of $132,000 offset by increases in quality
control labor costs of $80,000. Additionally, direct labor savings of $157,000
was created from the consolidation of the Company's multi-site packaging
operations which occurred during the second quarter of 2002.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

                  Selling, general and administrative expenses as a percentage
of sales for the six months ended June 30, 2003 and 2002 were 143% and 85%,
respectively. Overall these expenses in the first six months of 2003 increased
$402,000 or 11% from the same period in 2002. The increase is a result of
increases in payroll and payroll related costs of $217,000, payroll severance
costs of $500,000 and Company insurance premiums of $130,000 offset by reduction
in legal expenditures of $245,000 and product marketing expenses of $200,000
during the six month period ended June 30, 2003.

                                       14

<PAGE>

RESEARCH AND DEVELOPMENT EXPENSES

                  The Company currently conducts research and development
activities at each of its Congers, New York and Culver, Indiana facilities. The
Company's research and development activities consist primarily of the
development of the Company's Opiate Synthesis Technologies, including the
development for sale of new chemical products and the development of Active
Pharmaceutical Ingredients ("APIs"), as well as new generic drug product
development efforts and manufacturing process improvements. New drug product
development activities are primarily directed at conducting research studies to
develop generic drug formulations, reviewing and testing such formulations for
therapeutic equivalence to brand name products and additional testing in areas
such as bioavailability, bioequivalence and shelf-life. During 2003, the
Company's research and development efforts will cover finished dosage products
and APIs in a variety of therapeutic applications, with an emphasis on pain
management products. Research and development expenses decreased $141,000 from
the same period in 2002. Research and development expenses as a percentage of
sales for the six months ended June 30, 2003 and 2002 were 23% and 18%,
respectively.

                  The Company is proceeding with the development of products,
apart from those obtained from Barr Laboratories, for submission to the FDA.
During fiscal 2003, the Company anticipates the submission of four ANDA
supplements or amendments to the FDA. The supplements and amendments relate to
the transfer of existing ANDAs from the Company's former Brooklyn facility to
its Congers facility as well as the transfer of certain ANDAs obtained from Barr
Laboratories. Although the Company has been successful in receiving ANDA
approvals since its release from the FDA's Application Integrity Policy list in
December 1996, there can be no assurance that any newly submitted ANDAs, or
supplements or amendments thereto or those contemplated to be submitted, will be
approved by the FDA.

                  The Company is performing the necessary regulatory steps to
effect the transfer of certain of the products obtained from Barr Laboratories
in April 1999 to the Company. The Company initially has identified 8 of the
products for which it will devote substantial effort in seeking approval from
the FDA for manufacture and sale. The Company estimates that certain of these
Barr Products will be available for sale in the fourth quarter of 2003 ,
although no assurance can be given that any of the Barr Products will receive
FDA approval or that if approved, that the Company will be successful in the
manufacture and sale of the such products. It is the Company's intention to
continue to evaluate the remaining Barr Products on an ongoing basis to assess
their prospects for commercialization and likelihood of obtaining regulatory
approval.

                  The Company is continuing development efforts relating to
certain API's. In the last few years, the Company has increased its efforts to
develop and manufacture APIs, also known as bulk chemical products. It is the
Company's expectation that beginning in fiscal 2004, the internally developed
APIs will assist in the expansion of the Company's line of finished dosage
products. The Company currently manufactures two API's and has seven others
under development.

NET LOSS

                  For the six months ended June 30, 2003, the Company had net
loss of $21,602,000 as compared to a net loss of $12,819,000 for the six months
ended June 30, 2002. Included in net loss for the six months ended June 30,
2003, was interest expense of $2,904,000 and amortization of deferred debt
discount and private offering costs of $11,683,000, as compared to $2,173,000
and $4,375,000, respectively, over the same period in 2002. Also included in net
loss for the six months ended June 30, 2003, was a charge to earnings of $92,000
related to the increase in fair value of warrants, as calculated using the
Black-Scholes option-pricing model, as a result of the modification of terms
from the issuance of the 2003 debentures.

THREE MONTHS ENDED JUNE 30, 2003 VS. THREE MONTHS ENDED JUNE 30, 2002

NET PRODUCT REVENUES

                  The Company's net product revenues for the three months ended
June 30, 2003 of $1,206,000 represents a decrease of $1,052,000 (47%) as
compared to net revenues for the three months ended June 30, 2002 of $2,258,000.

                                       15

<PAGE>

The decrease in net product revenues is a result of a decrease in sales to the
Company's primary customer, Watson Pharmaceuticals, Inc. which is pursuing a
sales strategy that places less emphasis on the products we provide. During the
first quarter 2003, the Company initiated steps to reestablish internal sales
efforts so as to become less dependent upon a single customer. The Company
expects this strategy to materialize in the third and fourth quarters of 2003.

COST OF MANUFACTURING

                  For the three months ended June 30, 2003, cost of
manufacturing decreased $1,088,000 as compared to the three months ended June
30, 2002. As a percentage of sales, cost of manufacturing was 188% and 149% for
the three months ended June 30, 2003 and 2002, respectively. The decrease was a
result of reduced net product revenues as noted above, as well as the decreased
reliance on third party outside testing laboratories of $68,000 offset by
increases in quality control payroll and payroll related costs of $99,000.
Additionally, direct labor savings of $64,000 was created from the consolidation
of the Company's multi-site packaging operations, which occurred during the
second quarter of 2002.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

                  Selling, general and administrative expenses as a percentage
of sales for the three months ended June 30, 2003 and 2002 were 183% and 84%,
respectively. Overall, these expenses for the three month period ended June 30,
2003 increased $307,000 or 16% from the same period in 2002. The increase is a
result of increases in payroll severance costs of $500,000 offset by decreases
in product marketing expenses of 193,000 during the three month period ended
June 30, 2003.

RESEARCH AND DEVELOPMENT EXPENSES

                  The Company currently conducts research and development
activities at each of its Congers, New York and Culver, Indiana facilities. The
Company's research and development activities consist primarily of the
development of the Company's Opiate Synthesis Technologies, including the
development for sale of new chemical products and the development of APIs, as
well as new generic drug product development efforts and manufacturing process
improvements. New drug product development activities are primarily directed at
conducting research studies to develop generic drug formulations, reviewing and
testing such formulations for therapeutic equivalence to brand name products and
additional testing in areas such as bioavailability, bioequivalence and
shelf-life. During 2003, the Company's research and development efforts will
cover finished dosage products and APIs in a variety of therapeutic
applications, with an emphasis on pain management products. Research and
development expenses decreased $98,000 from the same period in 2002. Research
and development expenses as a percentage of sales for the three months ended
June 30, 2003 and 2002 was 24% and 17%, respectively.

                  The Company is proceeding with the development of products,
apart from those obtained from Barr Laboratories, for submission to the FDA.
During fiscal 2003, the Company anticipates the submission of four ANDA
supplements or amendments to the FDA. The supplements and amendments relate to
the transfer of existing ANDAs from the Company's former Brooklyn facility to
its Congers facility as well as the transfer of certain ANDAs obtained from Barr
Laboratories. Although the Company has been successful in receiving ANDA
approvals since its release from the FDA's Application Integrity Policy list in
December 1996, there can be no assurance that any newly submitted ANDAs, or
supplements or amendments thereto or those contemplated to be submitted, will be
approved by the FDA.

                  The Company is performing the necessary regulatory steps to
effect the transfer of certain of the products obtained from Barr Laboratories
in April 1999 to the Company. The Company initially has identified 8 of the
products for which it will devote substantial effort in seeking approval from
the FDA for manufacture and sale. The Company estimates that certain of these
Barr Products will be available for sale in the fourth quarter of 2003, although
no assurance can be given that any of the Barr Products will receive FDA
approval or that if approved, that the Company will be successful in the
manufacture and sale of the such products. It is the Company's intention to
continue

                                       16

<PAGE>

to evaluate the remaining Barr Products on an ongoing basis to assess their
prospects for commercialization and likelihood of obtaining regulatory approval.

                  The Company is continuing development efforts relating to
certain API's. In the last few years, the Company has increased its efforts to
develop and manufacture APIs, also known as bulk chemical products. It is the
Company's expectation that beginning in fiscal 2004, the internally developed
APIs will assist in the expansion of the Company's line of finished dosage
products. The Company currently manufactures two API's and has seven others
under development.

NET LOSS

                  For the three months ended June 30, 2003, the Company had net
loss of $11,027,000 as compared to a net loss of $7,340,000 for the three months
ended June 30, 2002. Included in net loss for the three months ended June 30,
2003, was interest expense of $1,471,000 and amortization of deferred debt
discount and private offering costs of $5,916,000, as compared to $1,135,000 and
$2,840,000, respectively, over the same period in 2002. Also included in net
loss for the three months ended June 30, 2003, was a charge to earnings of
$92,000 related to the increase in fair value of warrants, as calculated using
the Black-Scholes option-pricing model, as a result of the modification of terms
from the issuance of the 2003 debentures.

LIQUIDITY AND CAPITAL RESOURCES

         At June 30, 2003 the Company had cash and cash equivalents of $50,000
as compared to $9,211,000 at December 31, 2002. The Company had a working
capital deficit at June 30, 2003 of $2,387,000 and working capital at December
31, 2002 of $5,933,000.

         On December 20, 2002, the Company consummated a private offering of
securities for an approximate aggregate purchase price of $26,394,000 (the "2002
Debenture Offering"). The securities issued in the 2002 Debenture Offering
consisted of 5% convertible senior secured debentures (the "2002 Debentures").
Of the $26,394,000 in 2002 Debentures issued in the 2002 Debenture Offering,
approximately $15,894,000 of the 2002 Debentures were issued in exchange for the
surrender of a like amount of principal and accrued interest outstanding under
Company's 10% convertible promissory notes issued pursuant to various working
capital bridge loan transactions with Galen and certain other lenders, during
the period from August 15, 2001 through and including December 20, 2002. The
2002 Debentures, issued at par, will become due and payable as to principal on
March 31, 2006. The 2002 Debentures were issued pursuant to a certain Debenture
Purchase Agreement dated December 20, 2002 (the "Purchase Agreement") by and
among the Company, Care Capital Investments II, LP ("Care Capital"), Essex
Woodlands Health Ventures V, L.P. ("Essex"), Galen and each of the purchasers
listed on the signature page thereto.

         The Debentures issued to each of Care Capital and Essex are convertible
at any time after issuance into shares of the Company's Common Stock. The 2002
Debentures issued to Galen and the other investors in the 2002 Debenture
Offering (excluding Care Capital and Essex) are convertible at any time after
the approval of the Company's shareholders and debentureholders of an amendment
to the Company's Certificate of Incorporation to increase its authorized shares
of Common Stock from 80,000,000 shares to such number of shares as shall provide
sufficient authorized shares to permit the conversion of the 2002 Debentures and
the Company's other outstanding convertible securities. Subject to the
foregoing, the 2002 Debentures are convertible into shares of Common Stock at a
price per share (the "Conversion Price") of $.34. Until such time as the Company
completes a Subsequent Material Offering (as defined below) the Conversion Price
is subject to adjustment, from time to time, to equal the consideration per
share received by the Company for its Common Stock, or the conversion/exercise
price per share of the Company's Common Stock issuable under rights or option
for the purchase of, or stock or other securities convertible into, Common Stock
("Convertible Securities"), if lower than the then applicable Conversion Price.
Following the Company's completion of a Subsequent Material Offering, the
Conversion Price is subject to adjustment from time to time on a
weighted-average dilution basis. A "Subsequent Material Offering" is the grant
or issuance of Common

                                       17

<PAGE>

Stock or Convertible Securities by the Company during any six (6) month period
for an aggregate gross consideration of at least $10,000,000. Assuming the
conversion of the 2002 Debentures at the initial Conversion Price of $.34 per
share, the 2002 Debentures are convertible into an aggregate of approximately
77,629,000 shares of Common Stock.

         The Interest Debentures are convertible at anytime after issuance into
shares of Common Stock at a price per share equal to the closing bid and asked
prices of the Common Stock for the trading day immediately preceding the
applicable interest payment date under the 2002 Debentures, as reported by the
Over-the-Counter ("OTC") Bulletin Board.

         The Purchase Agreement provides that the holders of the 2002 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 upon by such stockholders.
Each 2002 Debentureholder shall have such number of votes as shall equal the
number of votes he would have had if such holder converted the entire
outstanding principal amount of his 2002 Debenture into shares of Common Stock
immediately prior to the record date relating to such vote; provided, however,
that any Debentures initially held by Care Capital shall, for so long as they
are held by Care Capital, have no voting rights.

         The 2002 Debentures are secured by a lien on all assets of the Company,
tangible and intangible. In addition, each of Houba, Inc. and Axiom
Pharmaceutical Corporation, each a wholly-owned subsidiary of the Company, has
executed in favor of the holders of the 2002 Debentures an unconditional
agreement of guarantee of the Company's obligations under the Purchase
Agreement. Each guarantee is secured by all assets of such subsidiary, and, in
the case of Houba, Inc., by a mortgage lien on its Culver, Indiana real estate.
In addition, the Company has pledged the stock of each such subsidiary to the
holders of the 2002 Debentures to further secured its obligations under the
Purchase Agreement.

         In accordance with the terms of a Subordination Agreement dated
December 20, 2002 between the Company, the holders of the 2002 Debentures, the
holders of the Existing Debentures and Watson Pharmaceuticals, Inc. ("Watson"),
the liens on the Company's and its subsidiaries' assets as well as the payment
priority of the 2002 Debenture are (i) subordinate to the Company's lien and
payment obligations in favor of Watson under the Watson Term Loan (as defined
below), and (ii) senior to the Company's lien and payment obligations in favor
of holders of the Existing Debentures in the aggregate principal amount of
approximately $50,724,000.

         Of the $26,394,000 in Debentures issued in the Offering, approximately
$15,894,000 Debentures were issued in exchange for the surrender of a like
amount of principal and accrued interest on the Company's outstanding 10%
convertible promissory notes issued pursuant to various working capital bridge
loan transactions with Galen and the certain other lenders during the period
from August 15, 2001 through and including December 20, 2002.

         In connection with various strategic alliance transactions with Watson,
$17,500,000 was advanced to the Company under a term loan (the "Watson Term
Loan"). The loan is secured by a first lien on all of the Company's assets,
senior to the lien securing all other Company indebtedness, and carried a
floating rate of interest equal to prime plus two percent and had an original
maturity date of March 31, 2003. As part of the Company's 2002 Debenture
Offering, the Watson Term Loan was amended to (1) extend the maturity date to
March 31, 2006, (2) increase the interest rate to prime plus four and one half
percent and (3) increase the principal amount to $21,401,331 to reflect the
inclusion of the Core Products Supply Agreement advance payments. The interest
rate at June 30, 2003 and December 31, 2002 was 8.50% and 8.75%, respectively.
In consideration of the amendment to the Watson Term Loan, the Company issued to
Watson a common stock purchase warrant ("Watson Warrant") exercisable for
10,700,665 shares of the Company's common stock at an exercise price of $.34 per
share. The warrant has a term expiring December 31, 2009. The fair value of the
Watson Warrant on the date of grant, as calculated using the Black-Scholes
option-pricing model, of $11,985,745 was charged to earnings on the date of
grant as a loss on the extinguishment of debt. As of June 30, 2003, Watson has
advanced $21,401,331 to the Company under the Watson Term Loan.

                                       18

<PAGE>

         The development and commercialization of APIs and finished dosage
products incorporating the Opiate Synthesis Technologies are subject to various
factors, many of which are outside the Company's control. Specifically, the
Opiate Synthesis Technologies have been tested only in laboratory settings and
will need to be successfully "scaled up" in order to be commercially viable, of
which no assurance can be given. Additionally, the Company must satisfy, and
continue to maintain compliance with, the DEA's requirements for the maintenance
of its Manufacturing Registration and the issuance and maintenance of the Import
Registration. The process of seeking the Import Registration and contesting
opposition proceedings, as well as the continuing development of the Opiate
Synthesis Technologies, will likely continue through 2004. The Company is
currently unable to provide any assurance that the Opiate Synthesis Technologies
will be commercially viable or that the Company will succeed in obtaining the
Import Registration. The Company is committing the substantial majority of its
resources, available capital and cash flow from operations to the development of
the Opiate Synthesis Technologies and to the receipt of the Import Registration.
The failure of the Company to successfully develop the Opiate Synthesis
Technologies or to obtain the Import Registration will have a material adverse
effect on the Company's operations and financial condition. The Company's cash
flow and limited sources of available financing make it uncertain that the
Company will have sufficient capital to continue to fund operations or to
otherwise complete the development of the Opiate Synthesis Technologies, to
obtain required DEA approvals and to fund the capital improvements necessary for
the manufacture of APIs and finished dosage products incorporating the Opiate
Synthesis Technologies.

         The Company has budgeted approximately $2,500,000 in 2003 for the
continued development and commercialization of the Opiate Synthesis
Technologies. Of such amount, approximately $2,000,000 relates to capital
expenditures for facility improvements and the purchase of equipment at the
Company's Culver, Indiana facility, approximately $300,000 relates to capital
expenditures for environmental compliance waste discharge storage tanks at the
Culver facility, and approximately $200,000 relates to the legal fees and
related expenses for the OALJ hearing and third party opposition proceedings in
connection with the Company's application for the Import Registration. Until
such time as the Company successfully develops and commercializes new finished
dosage products and APIs, of which there can be no assurance, the majority of
the Company's revenues are expected to be derived from the Core Products Supply
Agreement with Watson, with the balance of the Company's revenues derived from a
combination of the Company's own selling efforts for the Company's core
products, which sales efforts commenced in the second quarter of 2003, and the
Company's manufacture of non-core products for third parties. The Company
estimates that during 2003 and 2004, the Company will continue to incur
operating losses and negative cash flow.

         At the Company's request, on May 5, 2003, the Company received a letter
executed by each of Care Capital, Galen and Essex (the "Majority 2002
Debentureholders") advising that the Majority 2002 Debentureholders would
provide funding to meet the Company's 2003 capital requirements, up to an
aggregate amount not to exceed $8.6 million (the "Letter of Support"). The
Letter of Support provides that the amount of any funding provided by the
Majority 2002 Debentureholders would be reduced to the extent of any funding
obtained by the Company from third-party sources during 2003. The Letter of
Support further provides that the terms of any funding provided by the Majority
2002 Debentureholders would be subject to negotiation between the Company and
the Majority 2002 Debentureholders at the time of any funding. In consideration
for the issuance of the Letter of Support, the Company authorized the issuance
of warrants to the Majority 2002 Debentureholders exercisable for an aggregate
of 645,000 shares of the Company's Common Stock at an exercise price of $.34 per
share (which is equivalent to the conversion price of the 2002 Debentures),
subject to downward adjustment to equal the consideration per share received by
the Company for its Common Stock, or the conversion/exercise price per share of
the Company's Common Stock issuable under convertible securities, in a third
part investment if lower than the exercise price of the warrants.

         As of August 13, 2003, the Majority 2002 Debentureholders had advanced
an aggregate of $2,400,000 to the Company under the Letter of Support to fund
the Company's operating losses and capital requirements (the "Letter of Support
Advances"). The Letter of Support Advances were made in accordance with the
terms of 2002 Debenture Purchase Agreement resulting in the Company's issuance
of 2002 Debentures in an aggregate principal amount of $2,400,000 having a
maturity date of March 31, 2006. After giving effect to the Letter of Support
Advances made through August 13, 2003, there remains $6,200,000 available for
advance to the Company by the Majority 2002

                                       19

<PAGE>

Debentureholders under the Letter of Support. All additional advances to be made
by the Majority 2002 Debentureholders under the Letter of Support will be made
in accordance with the 2002 Debenture Purchase Agreement.

         The Company believes that the funding to be provided under the Letter
of Support combined with cash flow from operations, will be sufficient to
satisfy the Company's working capital requirements through January 1, 2004.

         In the absence of continued funding by the Majority 2002
Debentureholders under the Letter of Support or an alternative third-party
investment, or in the event of a material reduction in the Company's cash flow
from operations, the Company will be required to (i) significantly curtail
product commercialization efforts, including the development and
commercialization of the Opiate Synthesis Technologies, (ii) if available,
obtain funding through arrangements with collaborative partners or others on
terms that may require the Company to relinquish certain rights to its Opiate
Synthesis Technologies, which the Company would otherwise pursue on its own or
that would dilute the Company's stockholders, (iii) significantly scale back or
terminate operations and/or (iv) seek protection under applicable bankruptcy
laws. An extended delay in obtaining necessary financing will result in the
cessation of the Company's continuing development efforts related to its Opiate
Synthesis Technologies and will have a material adverse effect on the Company's
financial condition and results of operations.

CRITICAL ACCOUNTING POLICIES

                  Financial Reporting Release No. 60, which was released by the
Securities and Exchange Commission ("SEC") in December 2001, requires all
companies to include a discussion of critical accounting policies or methods
used in the preparation of financial statements. Note A of the Notes to
Consolidated Financial Statements, as contained in the Company's Annual Report
on Form 10-K, includes a summary of the Company's significant accounting
policies and methods used in the preparation of the financial statements. In
preparing these financial statements, the Company has made its best estimates
and judgments of certain amounts included in the financial statements, giving
due consideration to materiality. The application of these accounting policies
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates. The Company does not believe there is a great likelihood that
materially different amounts would be reported under different conditions or
using different assumptions. The Company's critical accounting policies are as
follows:

                  Revenue Recognition

                  The Company recognizes revenue at the time a product is
shipped to customers. The Company established sales provisions for estimated
chargebacks, discounts, rebates, returns, pricing adjustments and other sales
allowances concurrently with the recognition of revenue. The sales provisions
are established based upon consideration of a variety of factors, including but
not limited to, actual return and historical experience by product type, the
number and timing of competitive products approved for sale, the expected market
for the product, estimated customer inventory levels by product, price declines
and current and projected economic conditions and levels of competition. Actual
product return, chargebacks and other sales allowances incurred are, however,
dependent upon future events. Management continually monitors the factors that
influence sales allowance estimates and make adjustments to these provisions
when allowances may differ from established allowances.

                  Allowance For Doubtful Accounts

                  Estimates are used in determining the allowance for doubtful
accounts based on the Company's historical collections experience, current
trends, credit policy and a percentage of its accounts receivable by aging
category. In determining these percentages, the Company looks at historical
write-offs of its receivables. The Company also looks at the credit quality of
its customer base as well as changes in its credit policies. The Company
continuously monitors collections and payments from its customers. While credit
losses have historically been within expectations and the provisions
established, the Company cannot guarantee that it will continue to experience
the same credit loss

                                       20

<PAGE>

rates that it has in the past.

                  Inventories

                  The Company's inventories are stated at the lower of cost or
market, with cost determined on the first-in, first-out basis. In evaluating
whether inventory is stated at the lower of cost or market, management considers
such factors as the amount of inventory on hand, remaining shelf life and
current and expected market conditions, including levels of competition. As
appropriate, the Company records provisions to reduce inventories to their net
realizable value.

                  Income Taxes

                  Deferred income taxes are recognized for temporary differences
between financial statement and income tax bases of assets and liabilities and
loss carry-forwards for which income tax benefits are expected to be realized in
future years. A valuation allowance is established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. In estimating future
tax consequences, the Company generally considers all expected future events
other than an enactment of changes in the tax laws or rates. The Company has
recorded a full valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. While the Company has
considered future taxable income in assessing the need for the valuation
allowance, in the event the Company were to determine that it would be able to
realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made.

                  Stock Compensation

                  The Company accounts for stock-based employee compensation
arrangements in accordance with provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25") and comply with the disclosure
provision of SFAS No. 148, "Accounting for Stock-based Compensation - Transition
and Disclosure, an amendment of FASB Statement No. 123" ("SFAS No. 148"). If the
Company were to include the cost of stock-based employee compensation in the
financial statements, the Company's operating results would decline based on the
fair value of the stock-based employee compensation.

                  Deferred Debt Discount

                  Deferred debt discount results from the issuance of stock
warrants and beneficial conversion features in connection with the issuance of
subordinated debt and other notes payable. The amount of the discount is
recorded as a reduction of the related obligation and is amortized over the
remaining life of the related obligations. Management determines the amount of
the discount, based, in part, by the relative fair values ascribed to the
warrants determined by an independent valuation or through the use of the
Black-Scholes valuation model. Inherent in the Black-Scholes valuation model are
assumptions made by management regarding the estimated life of the warrant, the
estimated volatility of the Company's common stock and the expected dividend
yield.

NEW ACCOUNTING PRONOUNCEMENTS

                  In April 2002, the Financial Accounting Standards Board
("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145").
This statement eliminates the requirement to report gains and losses from
extinguishment of debt as extraordinary unless they meet the criteria of APB
Opinion 30. SFAS No. 145 also requires sale-leaseback accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. The changes related to lease accounting are
effective for transactions occurring after May 15, 2002 and the changes related
to debt

                                       21

<PAGE>

extinguishment are effective for fiscal years beginning after May 15, 2002. The
impact of adopting the provisions related to lease accounting did not have a
material impact on the Company's financial position or results of operations.
The Company early adopted the provisions related to debt extinguishments during
the year ended December 31, 2002. The adoption did not have a material impact on
the Company's financial position or results of operations.

                  In June 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No.
146 nullifies Emerging Issues Task Force Issue No. 94-3 and requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. This statement also establishes that fair value
is the objective for initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The impact of the adoption of SFAS No. 146 did not have a material impact
on the Company's financial position or results of operations.

                  In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN No. 45"). FIN No. 45
requires that upon issuance of a guarantee, a guarantor must recognize a
liability for the fair value of an obligation assumed under a guarantee. FIN No.
45 also requires additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with guarantees issued.
The recognition provisions of FIN No. 45 are effective for any guarantees issued
or modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN No. 45 did not have a material impact on the Company's
financial position or results of operations.

                  In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 148"), to provide alternative methods of
transition for an entity that voluntarily changes to the fair value-based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that Statement to require prominent disclosure about
the effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in APB Opinion No. 25 and related interpretations as provided
for under SFAS No. 148. Accordingly, compensation expense is only recognized
when the market value of the Company's stock at the date of the grant exceeds
the amount an employee must pay to acquire the stock. The adoption of SFAS No.
148 did not have a material impact on the Company's financial position or
results of operations.

                  In January 2003, the FASB issued FASB Interpretation No. 46
"Consolidation of Variable Interest Entities" ("Fin No. 46"). In general, a
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in activities on behalf of another company.
Until now, a company generally has included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN No. 46 changes that by requiring a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. FIN No. 46's consolidation
requirements apply immediately to variable interest entities created or acquired
after January 31, 2003. The consolidation requirements apply to older entities
in the first fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply to all financial statements issued
after January 31, 2003, regardless of when the variable interest entity was
established. The Company has adopted FIN No. 46 effective January 31, 2003. The
adoption of FIN No. 46 did not have a material impact on the Company's financial
position or results of operations.

                  In April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No.
149"), which amends and clarifies financial accounting and reporting for

                                       22

<PAGE>

derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 except for
the provisions that were cleared by the FASB in prior pronouncements. The
Company is currently evaluating the effect of the adoption of SFAS No. 149 on
its financial position and results of operations.

                  In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS No. 150"). This statement establishes standards for how an issuer
classifies and measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity. In accordance
with the standard, financial instruments that embody obligations for the issuer
are required to be classified as liabilities. This Statement shall be effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first period beginning after June
15, 2003. The Company is currently evaluating the effect of the adoption of SFAS
No. 150 on its financial position and results of operations.


I
TEM 4.  CONTROLS AND PROCEDURES

                  As of June 30, 2003, Peter A. Clemens, as the acting principal
executive officer and the principal financial officer of the Company has
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934, as amended (Exchange Act)). Based upon
that evaluation, the acting principal executive officer and the principal
financial officer of the Company has concluded that such disclosure controls
and procedures are effective in timely alerting them to any material information
relating to the Company and its consolidated subsidiaries required to be
included in the Company's reports filed or submitted with the Securities and
Exchange Commission under the Exchange Act.


                                     PART II


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

                  During the quarter ended June 30, 2003, the Company issued (i)
5% Convertible Senior Secured Debentures in the principal amount of
approximately $860,000 in satisfaction of accrued interest on Company's
outstanding 5% Convertible Senior Secured Debentures issued in 1998, 1999 and
2002 (the "Convertible Debentures") and (ii) 645,000 common stock purchase
warrants to the 2002 Majority Debentureholders pursuant to the May 5, 2003
Letter of Support ( the "Commitment Warrants").

                  During the quarter ended June 30, 2003, Debentures of $35,000
were converted into 59,769 shares of the Company's common stock.

                  Each of the holders of the Convertible Debentures for which
interest payments were made in 5% Convertible Senior Secured Debentures and the
2002 Majority Debentureholders receiving the Commitment Warrants are accredited
investors as defined in Rule 501(a) of Regulation D promulgated under the
Securities Act of 1933, as amended (the "Act"). The 5% Convertible Senior
Secured Debentures issued in satisfaction of the interest payments under the
Convertible Debentures were issued without registration under the Act in
reliance upon Section 4(2) of the Act and Regulation D promulgated thereunder.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

                  (a)      Exhibits

                           The exhibits required to be filed as part of this
                           Report on form 10-Q are listed in the attached
                           Exhibit Index.

                  (b)      Reports on Form 8-K.

                                       23

<PAGE>

                           The Company filed a Current Report on Form 8-K dated
                           May 9, 2003 related to its financial results for the
                           year ended December 31, 2002.

                           The Company filed a Current Report on Form 8-K dated
                           May 22, 2003 related to the appointment of Jerry
                           Karabelas as Chairman of the Board of Directors of
                           the Company and the retirement of Michael Reicher as
                           Chairman and Chief Executive Officer.

                           The Company did not file any other Reports on Form
                           8-K during the quarter ended June 30, 2003.

                                       24

<PAGE>


                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: August 13, 2003                      HALSEY DRUG CO., INC.

                                           By/s/ Peter A. Clemens
                                             ----------------------------------
                                                  Peter A. Clemens
                                                  Acting Chief Executive Officer

                                           By: /s/ Peter A. Clemens
                                               --------------------------------
                                                  Peter A. Clemens
                                                  VP & Chief Financial Officer

                                       25

<PAGE>


                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
Exhibit           Document
------            --------
<S>               <C>
31.1              Certification of Periodic Report by Acting Chief Executive Officer pursuant to Rule 13a-14 and 15d-14 of the
                  Securities Exchange Act of 1934.

31.2              Certification of Periodic Report by Chief Financial Officer pursuant to Rule 13a-14 and 15d-14 of the Securities
                  Exchange Act of 1934.

32.1              Certification of Periodic Report by Acting Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2              Certification of Periodic Report by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</TABLE>


                                                                 26




<PAGE>

                                                                    EXHIBIT 31.1

      CERTIFICATION OF PERIODIC REPORT PURSUANT TO RULES 13a-14 AND 15d-14
                     OF THE SECURITIES EXCHANGE ACT OF 1934

         I, Peter A. Clemens, the Acting Chief Executive Officer of Halsey Drug
         Co., Inc., certify that:

         1.       I have reviewed this quarterly report on Form 10-Q of Halsey
                  Drug Co., Inc.;

         2.       Based on my knowledge, this quarterly report does not contain
                  any untrue statement of a material fact or omit to state a
                  material fact necessary to make the statements made, in light
                  of the circumstances under which such statements were made,
                  not misleading with respect to the period covered by this
                  quarterly report;

         3.       Based on my knowledge, the financial statements, and other
                  financial information included in this quarterly report,
                  fairly present in all material respects the financial
                  condition, results of operations and cash flows of the
                  registrant as of, and for, the periods presented in this
                  quarterly report;

         4.       The registrant's other certifying officers and I are
                  responsible for establishing and maintaining disclosure
                  controls and procedures (as defined in Exchange Act Rules
                  13a-15(e) and 15d-15(e) for the registrant and have:

                  a)       designed such disclosure controls and procedures, or
                           caused such disclosure controls
 and procedures to be
                           designed under our supervision, to ensure that
                           material information relating to the registrant,
                           including its consolidated subsidiaries, is made
                           known to us by others within those entities,
                           particularly during the period in which this
                           quarterly report is being prepared;

                  b)       evaluated the effectiveness of the registrant's
                           disclosure controls and procedures and presented in
                           this quarterly our conclusions about the
                           effectiveness of the disclosure controls and
                           procedures, as of the end of the period covered by
                           this quarterly report based on such evaluation; and

                  c)       disclosed in this quarterly report any change in the
                           registrant's internal control over financial
                           reporting that occurred during the registrant's most
                           recent fiscal quarter that has materially affected,
                           or is reasonably likely to materially affect, the
                           registrant's internal control over financial
                           reporting.

         5.       The registrant's other certifying officer and I have
                  disclosed, based on our most recent evaluation of internal
                  control over financial reporting, to the registrant's auditors
                  and the audit committee of the registrant's board of directors
                  (or persons performing the equivalent functions):

                  a)       all significant deficiencies and material weaknesses
                           in the design or operation of internal control over
                           financial reporting which are reasonably likely to
                           adversely affect the registrant's ability to record,
                           process, summarize and report financial information;
                           and

                  b)       any fraud, whether or not material, that involves
                           management or other employees who have a significant
                           role in the registrant's internal control over
                           financial reporting.

Date: August 13, 2003
                                                  s/ Peter A. Clemens
                                                  ------------------------------
                                                  Peter A. Clemens
                                                  Acting Chief Executive Officer



<PAGE>

                                                                    EXHIBIT 31.2

      CERTIFICATION OF PERIODIC REPORT PURSUANT TO RULES 13a-14 AND 15d-14
                     OF THE SECURITIES EXCHANGE ACT OF 1934

         I, Peter A. Clemens, the Chief Financial Officer of Halsey Drug Co.,
         Inc., certify that:

         1.       I have reviewed this quarterly report on Form 10-Q of Halsey
                  Drug Co., Inc.;

         2.       Based on my knowledge, this quarterly report does not contain
                  any untrue statement of a material fact or omit to state a
                  material fact necessary to make the statements made, in light
                  of the circumstances under which such statements were made,
                  not misleading with respect to the period covered by this
                  quarterly report;

         3.       Based on my knowledge, the financial statements, and other
                  financial information included in this quarterly report,
                  fairly present in all material respects the financial
                  condition, results of operations and cash flows of the
                  registrant as of, and for, the periods presented in this
                  quarterly report;

         4.       The registrant's other certifying officers and I are
                  responsible for establishing and maintaining disclosure
                  controls and procedures (as defined in Exchange Act Rules
                  13a-15(e) and 15d-15(e) for the registrant and have:

                  (a)      designed such disclosure controls and procedures, or
                           caused such disclosure controls and procedures
 to be
                           designed under our supervision, to ensure that
                           material information relating to the registrant,
                           including its consolidated subsidiaries, is made
                           known to us by others within those entities,
                           particularly during the period in which this
                           quarterly is being prepared;

                  (b)      evaluated the effectiveness of the registrant's
                           disclosure controls and procedures and presented in
                           this quarterly our conclusions about the
                           effectiveness of the disclosure controls and
                           procedures, as of the end of the period covered by
                           this quarterly report based on such evaluation; and

                  (c)      disclosed in this quarterly report any change in the
                           registrant's internal control over financial
                           reporting that occurred during the registrant's most
                           recent fiscal quarter that has materially affected,
                           or is reasonably likely to materially affect, the
                           registrant's internal control over financial
                           reporting.

         5.       The registrant's other certifying officer and I have
                  disclosed, based on our most recent evaluation of internal
                  control over financial reporting, to the registrant's auditors
                  and the audit committee of the registrant's board of directors
                  (or persons performing the equivalent functions):

                  (a)      all significant deficiencies and material weaknesses
                           in the design or operation of internal control over
                           financial reporting which are reasonably likely to
                           adversely affect the registrant's ability to record,
                           process, summarize and report financial information;
                           and

                  (b)      any fraud, whether or not material, that involves
                           management or other employees who have a significant
                           role in the registrant's internal control over
                           financial reporting.

Date: August 13, 2003

                                                /s/ Peter A. Clemens
                                                --------------------------------
                                                Peter A. Clemens
                                                Chief Financial Officer


<PAGE>

                                                                    EXHIBIT 32.1


 CERTIFICATION OF PERIODIC REPORT PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
           PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Quarterly Report of Halsey Drug Co., Inc. (the
"Company") on Form 10-Q for the period ending June 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Peter
A. Clemens, the Acting Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:

         (1)      The Report fully complies with the requirements of Section
                  13(a) or 15(d) of the Securities Exchange Act of 1934; and

         (2)      The information contained in the Report fairly presents, in
                  all material respects, the financial condition and results of
                  operations of the Company.

Dated: August 13, 2003


                                                  s/ Peter A. Clemens
                                                  ------------------------------
                                                  Peter A. Clemens
                                                  Acting Chief Executive Officer





<PAGE>

                                                                    EXHIBIT 32.2


 CERTIFICATION OF PERIODIC REPORT PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
           PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Quarterly Report of Halsey Drug Co., Inc. (the
"Company") on Form 10-Q for the period ending June 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Peter
A. Clemens, the Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:

         (3)      The Report fully complies with the requirements of Section
                  13(a) or 15(d) of the Securities Exchange Act of 1934; and

         (4)      The information contained in the Report fairly presents, in
                  all material respects, the financial condition and results of
                  operations of the Company.

Dated: August 13, 2003

                                                         /s/ Peter A. Clemens
                                                         -----------------------
                                                         Peter A. Clemens
                                                         Chief Financial Officer
                                                         and Vice President