<PAGE>

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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                  FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
           SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

      (MARK ONE)

         [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
         [ ]      TRANSITION 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
     Incorporation or organization)                      Identification No.)

     616 N. NORTH COURT, SUITE 120,                            60067
           PALATINE, ILLINOIS                               (Zip Code)
(Address of principal executive offices)

               REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                 (847) 705-7709

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                (TITLE OF CLASS)
                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                (TITLE OF CLASS)
                          COMMON STOCK, PAR VALUE $0.01

         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 [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

         Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]

         As of March 31, 2004, the registrant had 21,601,704 shares of Common
Stock, par value $0.01, outstanding. Based on the average closing bid and asked
prices of the Common Stock on June 30, 2003 ($0.78) (the last business day of
the registrant's most recently completed second fiscal quarter), the aggregate
market value of the voting stock held by non-affiliates of the registrant was
approximately $11,106,350.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      NONE

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


<PAGE>

                                    CONTENTS


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

                                                 PART I

Item 1.  Business                                                                                            1

Item 2.  Properties                                                                                         13

Item 3.  Legal Proceedings                                                                                  13

Item 4.  Submission of Matters to a Vote of Security Holders                                                14

                                                PART II

Item 5.  Market for Registrant's Common Equity, Related                                                     14
         Stockholder Matters and Issuer Purchases of Equity Securities

Item 6.  Selected Financial Data                                                                            15

Item 7.  Management's Discussion and Analysis of Financial Condition                                        15
         and Results of Operations

Item 8.  Financial Statements and Supplementary Data                                                        26

Item 9.  Changes in and Disagreement with Accountants on Accounting and Financial Disclosure                26

Item 9A. Controls and Procedures                                                                            26

                                               PART III

Item 10. Directors and Executive Officers of the Registrant                                                 26

Item 11. Executive Compensation                                                                             30

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     34

Item 13. Certain Relationships and Related Transactions                                                     36

Item 14. Principal Accountant Fees and Services                                                             39

                                               PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8K                                     40
Signatures                                                                                                  50
Index to Consolidated Financial Statements                                                                 F-1
</TABLE>


                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         Certain statements in this Report under the captions Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," Item 1, "Business", Item 3, "Legal Proceedings" and elsewhere in
this Report constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
Halsey Drug Co., Inc. ("Halsey" or the "Company"), or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: changes in general economic and business
conditions; loss of market share through competition; introduction of competing
products by other companies; the timing of regulatory approval and the
introduction of new products by the Company; changes in industry capacity;
pressure on prices from competition or from purchasers of the Company's
products; regulatory changes in the generic pharmaceutical manufacturing
industry; difficulties encountered in the development of novel product synthesis
and manufacturing techniques; regulatory obstacles to the introduction of new
technologies or products that are important to the Company's growth;
availability of qualified personnel; the loss of any significant customers; and
other factors both referenced and not referenced in this Report. When used in
this Report, the words "estimate," "project," "anticipate," "expect," "intend,"
"believe," and similar expressions are intended to identify forward-looking
statements.


<PAGE>


                                     PART I


ITEM 1. BUSINESS

GENERAL

         The Company, a New York corporation established in 1935, and its
subsidiaries, have been engaged in the development, manufacture, sale and
distribution of a variety of generic finished dosage pharmaceutical products and
active pharmaceutical ingredients ("APIs"). Prior to the restructuring of the
Company's operations largely completed on January 30, 2004, the generic drug
products manufactured and sold by the Company generally consisted of an
analgesic product, anti-infectives, antitussives, cough and cold preparations,
and a steroid product.  Since March 1999, the Company has manufactured APIs at
its Culver, Indiana facility and manufactured, packaged and sold its generic
finished dosage products at two leased locations in Congers, New York. 

         On November 6, 2003, the Company announced its plan to restructure the
Company's operations to focus on research and development related to certain
proprietary opioid synthesis and finished dosage formulation technologies.  The
Board of Directors determined, among other factors, that the Company's ability
to generate positive cash flow from the operation of the Company's finished
dosage manufacturing, packaging, labeling and distribution facilities located in
Congers, New York (collectively, the "Congers Facilities") in the manufacture
and distribution of finished dosage generic products pursuant to abbreviated new
drug applications ("ANDAs") was compromised by the highly competitive market
environment, low market pricing and declining market size for its existing
generic products and the lack of new generic products in development. The Board
determined that near term sales of the Company's finished dosage generic
products would likely result in negative gross margins in view of the market
environment.  Based on this analysis and other factors, the Board concluded that
the Company's manufacture and sale of finished dosage products licensed to be
produced at the Congers Facilities would result in continuing negative cash flow
in the foreseeable future.  After due consideration of alternative strategies
and considering the optimal use of available funding, the Board adopted a
strategy to substantially restructure the Company's business. Manufacturing of
the Company's generic finished dosage products at the Congers Facilities
substantially ceased on January 30, 2004.  Such date also marks the completion,
in large part, of the reduction in work force associated with the restructuring
of the Company's operations by approximately 100 employees, 70 of whom were
employed by the Company at the Congers Facilities.  See "Restructure of
Operations" below.

         As restructured, the Company is a specialty pharmaceutical company
presently engaged in research, development and manufacture of innovative abuse
deterrent formulations (the "ADF Technology") intended for use in orally
administered opioid-containing pharmaceutical products. In addition, the Company
is engaged in research, development and manufacture of proprietary, high yield,
short cycle time, environmentally sensitive opioid synthetic processes (the
"Opioid Synthesis Technologies") intended for use in the commercial production
of certain bulk opioid active pharmaceutical ingredients ("APIs"). To date, the
Company has filed four patent applications with the U.S. Patent and Trademark
office (the "PTO") relating to the ADF Technology and the Opioid Synthesis
Technology and has received one notice of allowance from the PTO relating to one
of those applications concerning the Opioid Synthesis Technologies.

         The Company conducts research, development, laboratory, manufacturing
and warehousing activities relating to the ADF Technology and the Opioid
Synthesis Technologies (collectively the "Proprietary Technologies") at its
Culver, Indiana facility (the "Culver Facility"). The Culver Facility is
registered by the U.S. Drug Enforcement Administration (the "DEA") to perform
research, development and manufacture of Schedule II - V controlled substances
in bulk and finished dosage forms. On January 31, 2001, the Company filed with
the DEA an application for registration to import narcotic raw materials
("NRMs") including raw opium, opium poppy, and concentrate of poppy straw from
foreign countries. These NRMs are commonly used as the initial starting
materials in the synthesis of certain opioid APIs. The Company's application for
an importer registration (the "Import Registration") was published in the
Federal Register on September 6, 2001. The progress and status of the
application for the Import Registration is described below under the caption
"Import License Registration." The Company is also engaged in collaborative
research and development with a contract research organization and an academic
institution in preparation for clinical evaluation and testing of its
proprietary ADF Technology.

         The Company plans to enter into development and commercialization
agreements with strategically focused pharmaceutical company partners (the
"Partners") providing that such Partners license the Company's Proprietary
Technologies and further develop, register and commercialize multiple
formulations and strengths of orally administered opioid-containing finished
dosage products utilizing such Proprietary Technologies. The Company expects to
receive a share of profits and/or royalty payments derived from the Partners'
sale of products incorporating the Proprietary Technologies. The Company also
believes that it will derive revenues through contract manufacture and supply of
clinical trial and commercial supplies of finished dosage products for use by
such Partners. The Company plans to utilize a single site vertical integration
strategy to conduct research, development and manufacturing activities for
opioid APIs and finished dosage form products utilizing the Proprietary
Technologies. The Import Registration, if ultimately granted, for which there
can be no assurances, will provide the Company with an economical source of NRMs
for use as starting materials in the commercial manufacture and supply of
certain opioid APIs utilizing the Opioid Synthesis Technologies.

         The Company files annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). These filings are available to the public over the internet at the
SEC's web site at http://www.sec.gov. You may also read and copy any document we
file at the SEC's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room.

         The Company's internet address is www.halseydrug.com. We make available
free of charge on www.halseydrug.com our annual, quarterly and current reports
and amendments to those reports, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. In addition,
you may request a copy of these filings (excluding exhibits) at no cost by
contacting us at the following address or telephone number:

                              Halsey Drug Co., Inc.
                          616 N. North Court, Suite 120
                            Palatine, Illinois 60067
                            Attn: Investor Relations
                                  847.705.7709

                                       1

<PAGE>

ADF TECHNOLOGY

         The class of drugs exhibiting opium or morphine-like properties are
referred to as opioids, or opioid agonists. This class of products has
experienced substantial growth in recent years due to an increase in the aging
population and the more aggressive treatment of pain by physicians. Certain
opioids act as agonists, interacting with stereo specific and saturable binding
sites in the brain and other tissues. Endogenous opioid-like peptides are
present in areas of the central nervous system that are presumed to be related
to the perception of pain, to movement, mood and behavior, and to the regulation
of neuroendocrinological functions. Three classical opioid receptor types, mu
((mu)), delta ((delta)), and kappa ((kappa)), have been studied extensively.
Each of these receptors has a unique anatomical distribution in the brain,
spinal cord, and the periphery. Most of the clinically used opioids are
relatively selective for (mu) receptors, reflecting their similarity to
morphine. However, it is important to note that opioid containing drugs that are
relatively selective at standard doses will often interact with additional
receptor subtypes when given at sufficiently high doses, leading to possible
changes in their pharmacological effect. This is especially true as opioid doses
are escalated to overcome tolerance.

         The potential for the development of tolerance, physical and/or
psychological dependence (i.e., addiction) with repeated opioid use is a
characteristic feature of most opioid containing drugs. The possibility of
developing addiction is one of the major societal concerns in the long-term use
of opioids for the management of pain. Another major concern associated with the
use of opioids is the diversion of these drugs from a patient in legitimate pain
to other individuals (non-patients) for illegitimate purposes.

         Drug abusers and/or addicts typically may obtain a commercial dosage
form containing an opioid analgesic and crush, shear, grind, chew, dissolve and/
or heat, extract or otherwise manipulate the product so that a significant
amount or even the entire amount of the drug becomes available for immediate
absorption by injection, inhalation, and/or oral consumption.

         There are three basic patterns of behavior leading to opioid abuse. The
first involves individuals whose opioid drug use begins in the context of
medical treatment and who obtain their initial drug supplies through
prescriptions from physicians. The second begins with experimental or
"recreational" drug use and progresses to more intensive use. A third pattern of
abuse involves users who begin in one or another of the preceding ways but later
switch to oral opioids such as methadone, obtained from organized addiction
treatment programs. Physicians cannot easily identify or predict which of their
patients may fall into one of these behavior patterns.

         There are various routes of administration an abuser may commonly
attempt to abuse an opioid containing drug formulation. The most common methods
include (1) intravenous injection, (2) intranasal (e.g., snorting), and (3)
repeated oral ingestion of excessive quantities of orally administered tablets
or capsules. One very common mode of abuse of oral solid drug product involves
mixing the tablet or capsule with a suitable solvent (e.g., water), and then
subsequently extracting the opioid component from the mixture for use in a
solution suitable for intravenous injection of the opioid to achieve a "high."

         Limited attempts have been made to diminish abuse of orally
administered opioid drugs. These attempts have generally centered on including
an opioid antagonist in the oral dosage form which is not orally active but
which will substantially block the analgesic effects of the opioid if one
attempts to dissolve/extract the opioid and administer it intravenously.
However, a clear patient and societal need continues to exist to have a delivery
system for commonly used oral dosage formulations of drugs (i.e., immediate
release, sustained or extended release and delayed release tablets and capsules)
which deters abuse and minimizes or reduces the potential for physical or
psychological dependency. The need is particularly imperative for drugs such as
opioid analgesics.

         It is with the growing concern about the illegitimate use of legitimate
opioid-based drug products described above in mind that the Company is pursuing
its abuse deterrent formulation technology (the "ADF Technology"). The Company
believes that the internally developed ADF Technology is applicable to both
immediate release and extended release orally administered tablets and capsules
which are formulated with an opioid analgesic as an active ingredient. Company
research and laboratory experiments to date suggest that the ADF Technology may
be formulated into an orally administered tablet with many of the commonly
utilized opioid active pharmaceutical ingredients and related salts including
morphine, codeine, hydrocodone, oxycodone and hydromorphone. The ADF Technology
utilizes certain pharmaceutical product excipients in addition to the opioid
active ingredients. The Company believes that the ADF Technology will discourage
or deter a pre-existing opioid drug abuser, or a legitimate patient properly
using opioid containing analgesics for management of pain, from abusing an
orally administered opioid containing tablet. Provided the ADF Technology is
appropriately tested and proves successful in clinical trials, of which no
assurance can be given, the Company believes that its ADF Technology will
discourage or deter the three most commonly utilized routes of opioid abuse
including (i) intravenous, (2) intranasal/snorting and (3) consumption of
excessive quantities of orally administered tablets or capsules. However, the
Company can make no assurances that such clinical testing will in fact
demonstrate that the ADF Technology will discourage or deter abuse. In addition,
if such abuse

                                       2

<PAGE>

deterrent characteristics are demonstrated, the Company can make no assurances
that the magnitude of such effect will be statistically significant or
clinically meaningful.

         In the fourth quarter of 2003 the Company filed a patent application
relating to the ADF Technology with the PTO. The Company can make no assurances
that such patent application will ever issue, or that if such application
issues, that the issued claims of such application will be sufficiently broad to
protect the ADF Technology from competition from similar technologies developed
or commercialized by others. Such patent application includes, among other
things, laboratory test results demonstrating the ability of the ADF Technology
to discourage the intravenous injection of opioids by potential abusers.

         In the first quarter of 2004, the Company, at its Congers, New York
facility, pursuant to current Good Manufacturing Practices ("cGMP"), formulated,
manufactured, packaged and labeled three test batches of different formulations
(the "Test Batches") of a tablet product containing a certain opioid active
ingredient utilizing the ADF Technology. Such Test Batches met all of the
physical specifications established in advance for such Test Batches and were
therefore quality assurance released. These Test Batches will be monitored for
stability under the appropriate conditions as required by the FDA for drug
products. The Company plans to utilize such Test Batches in clinical trials.

         In the first quarter of 2004, the Company entered into an agreement
with a certain contract research organization to develop, in concert with a
certain academic institution and clinical investigators, appropriate clinical
trial protocols, to prepare an investigational new drug application ("IND") and
to conduct clinical trials. The Company intends to file such IND in 2004 and at
the appropriate time thereafter begin clinical testing of its ADF Technology.
The Company can make no assurances that such clinical testing will in fact
demonstrate that the ADF Technology will discourage or deter abuse. In addition,
if such abuse deterrent characteristics are demonstrated, the Company can make
no assurances that the magnitude of such effect will be statistically
significant or clinically meaningful.

         The Company plans to enter into development and commercialization
agreements with strategically focused pharmaceutical company partners (the
"Partners") providing that such Partners license the Company's ADF Technology
and further develop, register and commercialize multiple formulations and
strengths of orally administered opioid containing finished dosage products
utilizing such ADF Technologies. The Company believes that it will derive
revenues through licensing fees, milestone payments, profit sharing and/or
royalties on net sales of such products as well as from the contract manufacture
and supply of clinical trial and commercial supplies of finished dosage products
for distribution and sale by such Partners. The Company can make no assurance
that it will be able to negotiate such agreements on favorable terms and,
provided that such agreements are successfully executed, that the milestones
will be achieved and the milestone payments will be subsequently made by our
Partners.

OPIOID SYNTHESIS TECHNOLOGIES

         The Company is engaged in the research, development and scale-up of its
proprietary Opioid Synthesis Technologies described in the table below.


<TABLE>
<CAPTION>
   OPIOID SYNTHESIS          STARTING        ESTIMATED    APPLICABLE DEA                STATUS OF PATENT
     TECHNOLOGY              MATERIAL          YIELD      REGISTRATIONS                    APPLICATION
----------------------   -----------------   ---------   ----------------   ---------------------------------------
<S>                      <C>                 <C>         <C>                <C>
    Oxycodone HCl        Codeine Phosphate    40 - 50%   a) Research        One (1) Notice of Allowance issued and
      Process #1                                         b) Manufacturing   one (1) other Patent Pending before the
                                                                                              PTO

Hydrocodone Bitartrate   Codeine Phosphate      85%      a) Manufacturing          Patent Application Drafted
      Process #1

    Oxycodone HCl              NRMs           68 - 72%   a) Research          Patent Application draft in process
      Process #2                                         b) Manufacturing
                                                         c) Import

  Codeine Phosphate            NRMs          90 - 100%   a) Research               Patent Application Drafted
      Process #1                                         b) Manufacturing
                                                         c) Import

Hydrocodone Bitartrate     Codeine Base       85 - 95%   a) Research               Patent Application Drafted
      Process #2                                         b) Manufacturing
</TABLE>


                                       3

<PAGE>


<TABLE>
<CAPTION>
    OPIOID SYNTHESIS          STARTING     ESTIMATED     APPLICABLE DEA               STATUS OF PATENT
       TECHNOLOGY             MATERIAL       YIELD       REGISTRATIONS                   APPLICATION
-------------------------   ------------   ---------   ------------------   -----------------------------------
<S>                         <C>            <C>         <C>                  <C>
     Morphine Sulfate           NRMs         96%        a) Research         Patent Application draft in process
                                                        b) Manufacturing
                                                        c) Import

Dihydrocodeine Bitartrate   Codeine Base     >90%       a) Research              Patent Application Drafted
                                                        b) Manufacturing

    Codeine Phosphate           NRMs       80 - 90%     a) Research              Patent Application Drafted
        Process #2                                      b) Manufacturing
                                                        c) Import

    Codeine Phosphate           NRMs       65 - 85%     a) Research         One (1) Patent Application Pending
        Process #3                                      b) Manufacturing               before the PTO
                                                        c) Import
</TABLE>


         The Opioid Synthesis Technologies outlined in the Table above are
proprietary processes that the Company intends and believes to be efficient and
cost-effective methods of manufacturing opioid APIs. The Company believes that
the advantages of these processes include a substantial reduction in the time
and number of processing steps required to produce the desired opioid APIs and
reduction of the quantity and/or toxicity of the waste products relating to such
production. The Company has filed three patents relating to the Opioid Synthesis
Technologies including two in June 2003 and one in September of 2003 and intends
to prepare and file at least four additional patent applications relating to
these technologies. In March 2004 the Company received a notice of allowance
from the PTO relating to one of the patent applications filed in June of 2003.
The Company intends to pay the issue fee and expects a U.S. patent will be
granted from that application. No assurance can be given, however, that any
other currently pending patent applications or future patent applications which
the Company intends to file relating to the Opioid Synthesis Technologies will
be granted by the PTO. Each of the Company's Opioid Synthesis Technologies
requires a DEA registration and/or an import registration for NRMs. All such
Opioid Synthesis Technologies require a DEA registration for manufacturing
Schedule II controlled substances.

         The development and ultimate commercialization of APIs and finished
dosage products incorporating the Opioid Synthesis Technologies are subject to
various factors some of which are outside the Company's control. For example,
presently only one of the Opioid Synthesis Technologies has been manufactured in
kilogram scale batches and none have been manufactured in commercial scale
batches. Each of the Opioid Synthesis Technologies will need to be successfully
scaled up to larger batches to be economically viable, of which no assurance can
be given.

IMPORT LICENSE REGISTRATION

         The research, development and manufacture of APIs and finished dosage
products incorporating the Opioid Synthesis Technologies are subject to
extensive regulation by the DEA and the U.S. Food and Drug Administration
("FDA"). The Culver Facility is currently registered by the DEA to research and
manufacture certain Schedule II - V controlled substances (the "Manufacturing
Registration"). To provide for an economical source of raw materials for the
commercial manufacturing of opioids utilizing the Opioid Synthesis Technologies
the Company filed with the DEA an application for registration to import
narcotic raw materials ("NRMs") including raw opium, opium poppy and concentrate
of poppy straw from certain foreign countries. These NRMs are commonly used as
the initial starting materials in the synthesis of certain opioid APIs.

         The Company filed its application for registration to import NRMs on
January 31, 2001 (the "Import Registration"). Notice of the Company's
application was published in the Federal Register on September 6, 2001. Within
the 30 day period provided under DEA guidelines, three parties, including two
companies that the Company believes are the largest U.S. importers of NRMs
requested a hearing to formally object to the Company's request for an Import
Registration. In their hearing request, the objecting parties opposed the
issuance of an Import Registration on various grounds, including (i) that the
Company's application should be stayed pending the resolution of pending import
registration requests from other parties; (ii) that the issuance of an Import
Registration to the Company has the potential for increasing the prices for
narcotic raw materials from foreign sources as a result of increased demand from
U.S. importers; (iii) that the Company lacks the experience, technology,
personnel and capital to process NRMs and, (iv) that the competition in the
marketplace for bulk opioid APIs manufactured from the NRMs is adequate. In
light of several other recent importer registration decisions, DEA's Office of
Diversion Control also opposed registration of additional importers at this
time.

                                       4

<PAGE>

         Pursuant to established procedures, an evidentiary hearing relating to
the Company's Import Registration application was held before a DEA
Administrative Law Judge ("ALJ") in August 2003. The ALJ later re-opened the
administrative record, at the request of opposing parties, to consider the
Company's November and December 2003 announcements concerning Company
restructuring and financing activities. Pursuant to the ALJ's order on March 30,
2004, the administrative record will remain open for at least 10 days following
the Company's filing of this Report to allow the opposing parties to file
statements indicating whether they intend to submit additional evidence in
response to this Report. Upon the closure of the administrative record, the ALJ
will make findings of fact, draw legal conclusions and recommend a specific
decision on the Company's Import Registration application to the DEA Deputy
Administrator. The Deputy Administrator will then consider the ALJ's decision
and administrative record and issue a final order relating to the Company's
application. DEA will judge whether the issuance of an Import Registration is
appropriate based on, among other considerations, whether adequate security
safeguards and controls are maintained at the Culver Facility and at all points
in the chain of transfer of the NRMs from foreign suppliers to the Culver
Facility, whether the Opioid Synthesis Technologies are viable processes,
whether market demand for opioid containing products or other factors support
the approval of another import registration, and whether the Company has
established itself as an eligible party to obtain NRMs for foreign sources. The
Company must continue to maintain compliance with DEA's requirements for
maintenance of its Manufacturing Registration in the meantime.

         Assuming DEA grants the Company's application, then the Company should
be permitted to import NRMs upon appropriate notice in the Federal Register. The
opposing parties may challenge the DEA decision to grant the Company's
application in an appropriate Court of Appeals. In such a case, assuming the
Company opposes an appellate challenge, the Company would likely incur
additional time delays and legal expenses prior to the issuance of a final
decision by the U.S. Court of Appeals. Provided the Company continues to seek
the Import Registration, the proceedings will continue through 2004 and beyond.

         No assurance can be given that the Company's Import Registration
application will be approved by the DEA or that, if granted by DEA, the Import
Registration would be upheld following an appellate challenge. Furthermore, 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 the
development of the Opioid 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 Opioid Synthesis
Technologies. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" for a
discussion of the Company's need for additional financing and estimated capital
requirements for the scale-up of the hydrocodone bitartrate process #1 Opioid
Synthesis Technology.

RECENT EVENTS

RESTRUCTURE OF OPERATIONS

         After due consideration of alternative strategies and considering the
optimal use of available funding, and the prospects for attracting new funding,
on October 30, 2003, the Company's Board of Directors unanimously adopted a
strategy to substantially restructure the Company's operations. On November 6,
2003, the Company publicly announced its restructuring plan to focus its efforts
on research and development related to certain proprietary finished dosage
products and APIs. In making its determination the Board of Directors
considered, among other factors, the Company's ability and time required to
generate positive cash flow and income from the operation of the Company's
finished dosage manufacturing, packaging, labeling and distribution facilities
located in Congers, New York (collectively, the "Congers Facilities") in the
manufacture and distribution of finished dosage generic products pursuant to
abbreviated new drug applications ("ANDAs").

         The Company incurred losses of $48.5 million in 2003, $59.6 million in
2002 and $12.6 million in 2001. The Board determined that near term sales of the
Company's finished dosage generic products would likely result in continued
financial losses in view of the highly competitive market environment, low
market pricing, declining market size for its existing generic products and the
lack of timely new generic product launches. Based on this analysis and other
factors, the Board concluded that the Company restructure its operations by
closing or divesting the Congers Facilities and reducing certain activities at
its Culver Facility. The plan targeted a reduction in workforce of approximately
70 employees at the Congers Facilities, 25 employees at the Culver Facility and
5 employees in Rockford, Illinois.

         In implementing the restructuring plan at the Culver Facility, the
reduction in work force involved approximately 25 employees engaged in or
supporting the manufacture of doxycycline hyclate and doxycycline monohydrate
APIs which were converted to finished dosage products at the Congers Facilities.
With the closure of the Congers Facilities the APIs

                                       5

<PAGE>

manufactured in Culver were not required. The Culver Facility work force
reduction was substantially completed by December 31, 2003.

         In implementing the restructuring plan at the Rockford, Illinois
administrative office facility, the Company terminated its Rockford office lease
agreement and relocated the administrative functions to Palatine, Illinois. This
process was completed on February 29, 2004 resulting in a reduction in work
force of 5 employees.

         In implementing the restructuring of operations at the Congers
Facilities, the reduction in work force involved essentially all of the
employees at the site. Finished generic product manufacturing operations
substantially ceased on January 30, 2004. Packaging and labeling operations
ceased approximately February 12, 2004 and quality assurance and related support
activities ceased on approximately February 27, 2004. Such dates also mark the
substantial completion of the reduction in work force of approximately 70
employees engaged in these activities at the Congers Facilities. From
approximately March 1, 2004 to March 19, 2004 a small logistics, maintenance and
warehouse staff prepared the Congers Facilities for sale to Ivax Pharmaceuticals
as described below under the caption "Sale of Assets".

         In accordance with the restructuring of the its operations, the Company
has transitioned to a single vertically integrated operations site located at
its Houba, Inc. subsidiary in Culver, Indiana. The Company intends to implement
the following strategy and perform relevant key activities primarily at the
Culver Facility:

                  -        Development of the Company's proprietary abuse
                           deterrent formulation technology (the "ADF
                           Technology") for use in orally administered opioid
                           finished dosage products.

                  -        Manufacture and quality assurance release of clinical
                           trial supplies of certain finished dosage form
                           products utilizing the ADF Technology.

                  -        Evaluation of certain finished dosage products
                           utilizing the ADF Technology in clinical trials.

                  -        Scale-up and manufacture of commercial quantities of
                           certain products utilizing the ADF Technology for
                           sale by the Company's licensees.

                  -        Research, development and scale up of the Company's
                           novel Opioid Synthesis Technologies.

                  -        Prosecution of the Company's application to the DEA
                           to receive a registration (the "Import Registration")
                           to import Narcotic Raw Materials ("NRMs") for use in
                           the production of opioid API's utilizing the
                           Company's Opioid Synthesis Technologies.

                  -        Negotiating and executing license and development
                           agreements with strategic pharmaceutical company
                           partners providing that such licensees will further
                           develop certain finished dosage products utilizing
                           the ADF Technology, file for regulatory approval with
                           the FDA and other regulatory authorities and
                           commercialize such products.

         The development, scale- up and commercialization of APIs incorporating
the Company's Opioid Synthesis Technologies and ADF Technology are subject to
various factors, many of which are outside the Company's control. To date, a
portion of such technologies have been tested in laboratory settings, and none
have been tested in clinical settings. All such technologies will need to be
successfully scaled up 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 and FDA's requirements for the maintenance of its
controlled substances research and manufacturing registrations. The Company is
pursuing the Import Registration to import NRMs from certain foreign countries
as described above under the caption "Import License Registration". The process
of seeking the Import Registration, the continuing development of the Company's
Opioid Synthesis Technologies and the development of finished dosage products
utilizing the Company's ADF Technology are planned to continue through 2004. The
Company is unable to provide any assurance that such technologies can be scaled
up to commercial scale or that they will be commercially viable. Moreover, no
assurance can be given that the Company will succeed in obtaining the Import
Registration. The Company is committing substantially all of its resources and
available capital to the development of the ADF Technology, Opioid Synthesis
Technologies and to the prosecution of the Import Registration. The failure of
the Company to successfully develop the ADF Technology will have a material
adverse effect on the Company's operations and financial condition.

                                       6

<PAGE>

2004 DEBENTURE OFFERING

         On February 6, 2004, the Company consummated a private offering of
securities for an aggregate purchase price of approximately $12.3 million (the
"2004 Debenture Offering"). The securities issued in the 2004 Debenture Offering
consisted of convertible senior secured debentures (the "2004 Debentures"). The
2004 Debentures were issued by the Company pursuant to a certain Debenture and
Share Purchase Agreement dated as of February 6, 2004 (the "2004 Purchase
Agreement") by and among the Company, Care Capital Investments II, LP ("Care
Capital"), Essex Woodlands Health Ventures V, L.P. ("Essex"), Galen Partners
III, L.P. and each of the Purchasers listed on the signature page thereto
(collectively, the "2004 Debenture Investor Group"). On April 14, 2004 the
Company completed an additional closing under the 2004 Purchase Agreement and
issued additional 2004 Debentures in the aggregate principal amount of
approximately $579,000, bringing the principal amount of the 2004 Debentures
issued by the Company under the 2004 Purchase Agreement to an aggregate amount
of approximately $12.879 million.

         Of the approximate $12.879 million in 2004 Debentures issued in the
2004 Debenture Offering, approximately $2 million of 2004 Debentures were issued
in exchange for the surrender of like amount of principal plus accrued interest
outstanding under Company's 5% convertible senior secured debentures issued
pursuant to working capital bridge loan transactions with Care Capital, Essex
Woodlands and Galen Partners III, L.P., Galen International III, L.P., and Galen
Employee Fund III, L.P. (collectively, "Galen") during November and December,
2003. The 2004 Purchase Agreement further provides that the Company may issue
additional 2004 Debentures in the principal amount of up to approximately $1.121
million on or prior to June 5, 2004, provided that the aggregate principal
amount of 2004 Debentures issued pursuant to the 2004 Purchase Agreement shall
not exceed $14 million without the consent of the holders of 60% of the
principal amount of the 2004 Debentures then held by Care Capital, Essex and
Galen.

         The 2004 Debentures, issued at par, bear interest at the rate of 1.62%
per annum, the short-term Applicable Federal Rate on the date of issuance. The
2004 Debentures are secured by a lien on all assets of the Company. In addition,
each of Houba, Inc. and Axiom Pharmaceutical Corporation, each a wholly-owned
subsidiary of the Company, has executed in favor of the 2004 Debenture holders,
an unconditional agreement of guaranty of the Company's obligations under the
2004 Purchase Agreement. Each guaranty is secured by all assets of such
subsidiary. In addition, the Company has pledged the stock of each such
subsidiary to the holders of the 2004 Debentures to further secure its
obligations under the 2004 Purchase Agreement.

         In accordance with the terms of an Amended and Restated Subordination
Agreement dated as of February 6, 2004 between the Company, the holders of the
2004 Debentures and the holders of the Company's other outstanding debentures,
the liens on the Company's and its subsidiary's assets as well as the payment
priority of the 2004 Debentures are (i) subordinate to the Company's lien and
payment obligations in favor of Watson Pharmaceuticals under the Watson Term
Loan Agreement, and (ii) senior to the Company's lien and payment obligations in
favor of the holders of the Company's other outstanding debentures in the
aggregate principal amount of approximately $87.7 million.

         The 2004 Debentures (including the principal amount plus interest
accrued at the date of conversion) will convert automatically into the Company's
Series A convertible preferred stock (the "Series A Preferred") immediately
following the Company's receipt of shareholder approval at its next
shareholders' meeting to restate the Company's Certificate of Incorporation (the
"Charter Amendment") to authorize the Series A Preferred and the Junior
Preferred Shares (as described below) and the filing of the Charter Amendment
with the Office of the New York Department of State (the date of such filing,
the "Charter Amendment Filing Date"), as provided in the 2004 Purchase
Agreement. The 2004 Debentures will convert into Series A Preferred at a price
per share (the "Series A Conversion Price") of $0.6425, representing the average
of the closing bid and asked prices of the Company's Common Stock for the twenty
(20) trading days ending February 4, 2004, as reported by the Over-the-Counter
("OTC") Bulletin Board. The Series A 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 options for the purchase of, or
stock or other securities convertible into, Common Stock ("Convertible
Securities"), if lower than the then applicable Series A Conversion Price.

         Based on the $0.6425 Series A Conversion Price of the Series A Shares
and estimating the interest accrual under the 2004 Debentures prior to the
Charter Amendment Filing Date, the 2004 Debentures with an aggregate principal
amount of $14 million would be convertible into an aggregate of approximately 22
million Series A Preferred shares.

                                       7

<PAGE>

         In general, the Series A Preferred shares have a liquidation preference
equal to five (5) times the initial $0.6425 Series A Conversion Price (the
"Series A Liquidation Preference"). In addition, the Series A Preferred shares
are convertible into the Company's Common Stock, with each Series A Preferred
share convertible into the number of shares of Common Stock obtained by dividing
(i) the Series A Liquidation Preference, by (ii) the $0.6425 Series A Conversion
Price, as such conversion price may be adjusted, from time to time, pursuant to
the dilution protections of such shares. Without limiting the Series A
Liquidation Preference, the holders of Series A Preferred shares also have the
right to participate with the holders of the Company's Common Stock upon the
occurrence of a liquidation event, including the Company's merger, sale of all
or substantially all of its assets or a change of control transaction, on an
as-converted basis (but for these purposes only, assuming the Series A Preferred
shares to be convertible into only thirty percent (30%) of the shares of Common
Stock into which they are otherwise then convertible). The holders of Series A
Preferred shares also have the right to vote as part of a single class with all
holders of the Company's voting securities on all matters to be voted on by such
security holders. Each holder of Series A Preferred shares will have such number
of votes as shall equal the number of votes he would have had if such holder
converted all Series A Preferred shares held by such holder into shares of
Common Stock immediately prior to the record date relating to such vote.

         The 2004 Purchase Agreement provides that each of Care Capital, Essex
and Galen (collectively, the "Lead 2004 Investors") has the right to designate
for nomination one member of the Company's Board of Directors, and that the Lead
Investors collectively may designate one additional member of the Board
(collectively, the Designees"). The Purchase Agreement further provides that the
Designees, if so requested by such Designee in his sole discretion, shall be
appointed to the Company's Executive Committee, Compensation Committee and any
other Committee of the Board of Directors. The Designees of Care Capital, Essex
and Galen are Messrs. Karabelas, Thangaraj and Wesson, respectively, each of
whom are current Board members. Effective as of the closing of the 2004 Purchase
Agreement, the Lead 2004 Investors may collectively nominate one additional
Designee to the Board. The Company has agreed to nominate and appoint to the
Board of Directors, subject to shareholder approval, one designee of each of
Care Capital, Essex and Galen, and one collective designee of the Lead 2004
Investors, for so long as each holds a minimum of 50% of the Series A Preferred
shares initially issued to such party (or at least 50% of the shares of Common
Stock issuable upon conversion of the Series A Preferred shares).

         As of February 10, 2004, the date of the initial closing of the 2004
Purchase Agreement, the Company had issued and outstanding and aggregate of
approximately $87.7 million in principal amount of 5% convertible senior secured
debentures maturing March 31, 2006 issued pursuant to three separate Debenture
Purchase Agreements dated March 10, 1998, as amended (the "1998 Debentures"),
May 26, 1999, as amended (the "1999 Debentures") and December 20, 2002 (the
"2002 Debentures"), respectively. The 1998 Debentures, 1999 Debentures and 2002
Debentures are referred to collectively as the "1998-2002 Debentures". After
giving effect to the Company's issuance of additional 5% convertible senior
secured debentures in satisfaction of interest payments on the 1998-2002
Debentures, as of February 10, 2004, the 1998-2002 Debentures were convertible
into an aggregate of approximately 190.1 million shares of the Company's Common
Stock.

         Simultaneous with the execution of the 2004 Purchase Agreement, and as
a condition to the initial closing of the 2004 Purchase Agreement, the Company,
the 2004 Debenture Investor Group and each of the holders of the 1998-2002
Debentures executed a certain Debenture Conversion Agreement, dated as of
February 6, 2004 (the "Conversion Agreement"). In accordance with the terms of
the Conversion Agreement, each holder of the 2004 Debentures agreed to convert
the 2004 Debentures held by such holder into the Company's Series A Preferred
shares and each holder of 1998-2002 Debentures agreed to convert the 1998-2002
Debentures held by such holder into the Company's Series B convertible preferred
stock (the "Series B Preferred") and/or Series C-1, C-2 and/or C-3 convertible
preferred stock (collectively, the "Series C Preferred"). The Series C Shares
together with the Series B Shares are herein referred to as, the "Junior
Preferred Shares", and the Junior Preferred Shares together with the Series A
Preferred, are collectively referred to as the "Preferred Stock". The Conversion
Agreement provides, among other things, for the automatic conversion of the 2004
Debentures and the 1998-2002 Debentures (collectively, the "Outstanding
Debentures") into the appropriate class of Preferred Stock immediately following
the Company's receipt of shareholder approval to the Charter Amendment
authorizing the creation of the Preferred Stock and the filing of the Charter
Amendment with the Office of the New York Department of State.

         Under the Conversion Agreement, the holders of approximately $6.7
million in principal amount of 2002 Debentures issued during 2003 will convert
such 2002 Debentures (plus accrued and unpaid interest) into Series B Preferred
Shares. Of the remaining approximate $81 million in principal amount of the
1998-2002 Debentures, approximately $31.6 million is comprised of 1998
Debentures, approximately $21.8 million is comprised of 1999 Debentures and
approximately $27.6 million is comprised of 2002 Debentures. The 1998 Debentures
will be converted into Series C-1 Preferred shares. The 1999 Debentures

                                       8

<PAGE>

will be converted into Series C-2 Preferred shares. The remaining balance of the
2002 Debentures shall be converted into Series C-3 Preferred shares.

         The number of Junior Preferred Shares to be received by each holder of
1998-2002 Debentures is based on the respective prices at which the 1998-2002
Debentures were convertible into Common Stock. The 2002 Debentures issued in
2003 have a conversion price of $0.3420 per share. The 1998 Debentures, 1999
Debentures and the remaining balance of the 2002 Debentures have conversion
prices of $0.5776, $0.5993 and $0.3481 per share, respectively. Based on the
respective conversion prices of the 1998-2002 Debentures, and estimating the
interest accrual on the 1998-2002 Debentures prior to the Charter Amendment
Filing Date, the 1998-2002 Debentures are convertible into an aggregate of
approximately 20.0 million Series B Preferred shares, 56.5 million Series C-1
Preferred shares, 37.5 million Series C-2 Preferred shares and 80.9 million
Series C-3 Preferred shares.

         In general, the Junior Preferred Shares have a liquidation preference
equal to one (1) time the principal amount plus accrued and unpaid interest of
the 1998-2002 Debentures converted into Junior Preferred Shares The liquidation
preference of the Series B Preferred has priority over, and will be satisfied
prior to, the liquidation preference of the Series C Preferred. The liquidation
preference for each class of the Junior Preferred Shares is equal to the
conversion prices of such shares. The Junior Preferred Shares are convertible
into the Company's Common Stock, with each Junior Preferred Share convertible
into one share of Common Stock. The holders of the Junior Preferred Shares have
the right to vote as part of the single class with all holders of the Company's
Common Stock and the holders of the Series A Preferred on all matters to be
voted on by such stockholders, with each holder of Junior Preferred Shares
having such number of votes as shall equal the number of votes he would have had
if such holder had converted all Junior Preferred Shares held by such holder
into Common Stock immediately prior to the record date relating to such vote.

         The Company was a party to a certain loan agreement with Watson
Pharmaceuticals ("Watson") pursuant to which Watson made term loans to the
Company (the "Watson Term Loan Agreement") in the aggregate principal amount of
$21.4 million as evidenced by two promissory notes (the "Watson Notes"). It was
a condition to the completion of the 2004 Debenture Offering that simultaneous
with the closing of the 2004 Purchase Agreement, the Company shall have paid
Watson the sum of approximately $4.3 million (which amount was funded from the
proceeds of the 2004 Debenture Offering) and conveyed to Watson certain Company
assets in consideration for Watson's forgiveness of approximately $16.4 million
of indebtedness under the Watson Notes. A part of such transaction, the Watson
Notes were amended to extend the maturity date of such notes from March 31, 2006
to June 30, 2007, to provide for satisfaction of future interest payments under
the Watson Notes in the form of the Company's Common Stock, to reduce the
principal amount of the Watson Notes from $21.4 million to $5 million, and to
provide for the forbearance from the exercise of rights and remedies upon the
occurrence of certain events of default under the Watson Notes (the Watson Notes
as so amended, the "Amended and Restated Watson Note"). Simultaneous with the
issuance of the Amended and Restated Watson Note, each of the Lead 2004
Investors and the other investors in the 2004 Debentures as of February 10, 2004
(collectively, the "Watson Note Purchasers") purchased the Amended and Restated
Note from Watson in consideration for a payment to Watson of $1.0 million.

         In addition to Watson's forgiveness of approximately $16.4 million
under the Watson Notes, as additional consideration for the Company's payment to
Watson of approximately $4.3 million and the Company's conveyance of certain
Company assets, all supply agreements between the Company and Watson were
terminated and Watson waived the dilution protections contained in the Common
Stock purchase warrant dated December 20, 2002 exercisable for approximately
10.7 million shares of the Company's Common Stock previously issued by the
Company to Watson, to the extent such dilution protections were triggered by the
transactions provided in the 2004 Debenture Offering.

         The Amended and Restated Watson Note in the principal amount of $5.0
million as purchased by the Watson Note Purchasers is secured by a first lien on
all of the Company's and its subsidiaries' assets, senior to the lien securing
the Outstanding Debentures and all other Company indebtedness, carries a
floating rate of interest equal to the prime rate plus 4.5% and matures on June
30, 2007.

         As of April 14, 2004, after giving effect to the payment to Watson of
approximately $4.3 million to restructure the Watson Term Loan and the payment
of legal and other professional fees relating to the 2004 Debenture Offering,
the Company realized net proceeds from the 2004 Debenture Offering of
approximately $ 5.8 million (the "2004 Debenture Offering Proceeds").

SALE OF ASSETS

                                       9

<PAGE>

         In the three months following the Company's November 6, 2003 press
release announcing the implementation of the restructuring of the Company's
operations, the Company contacted, or was contacted by, a total of 21 parties
expressing interest in the Congers Facilities and certain non revenue generating
ANDAs. Such parties were provided with a detailed descriptive memorandum
relating to the assets and operations of the Congers Facilities. The majority of
such parties completed a tour of the facilities and varying degrees of diligence
investigation. Of such parties four provided draft letters of intent outlining
non-binding terms for the acquisition of the assets of the Congers Facilities,
including the direct purchase by such parties of the Company's leased facility
located on Brenner Drive, Congers, New York from the landlord of this site.

         In February, 2004, the Company sold certain non-revenue generating
ANDAs to a third party in consideration of $2.0 million. In addition, on March
19, 2004, the Company and its wholly-owned subsidiary, Axiom Pharmaceutical
Corporation, entered into an Asset Purchase Agreement with IVAX Pharmaceuticals
New York LLC ("IVAX"). Pursuant to the Purchase Agreement, the Company and Axiom
agreed to sell to IVAX substantially all of the Company's assets used in the
operation of the Company's former generic manufacturing and packaging operations
located in Congers, New York. Shareholder approval is necessary to complete the
IVAX transaction and will be sought at the Company's next annual meeting of
shareholders. After giving effect to the payment of legal and other professional
fees relating to the IVAX transaction, the Company estimates that it will
realize aggregate net proceeds from the IVAX transaction of approximately $2.3
million. The aggregate proceeds of $4.3 million from these asset divestment
transactions is hereinafter referred to as the "Asset Divestment Proceeds."

HYDROCODONE OPTION AGREEMENT

         The Company estimates that to scale up its hydrocodone bitartrate
process #1 Opioid Synthesis Technology to desirable commercial scale at its
Culver Facility, additional funding of approximately $7.0 million will be
required for facility improvements, the purchase, installation and validation of
new API manufacturing equipment, environmental waste management compliance, the
preparation of the drug master files for the API to be produced at the facility,
and related direct labor expense (collectively, the "API Scale Up Expenses").
The Company is a party to a certain Hydrocodone Option Agreement dated February
6, 2004 with Watson Pharmaceuticals ("Watson") pursuant to which the Company has
granted Watson a six (6) month exclusive option to enter into a supply agreement
with the Company for supply of hydrocodone bitartrate API (the "Hydrocodone
API"). If such option is exercised by Watson, at Watson's sole discretion, of
which there can be no assurance, Watson will fund 50% of the API Scale Up
Expenses, up to a maximum of $3.5 million and the Company has agreed to use
commercially reasonable efforts to obtain financing dedicated to fund its
portion of the API Scale Up Expenses. In the event the Company is unable to
secure financing dedicated to fund its portion of the API Scale Up Expenses, the
Hydrocodone Option provides that the parties will discuss alternatives relating
to the scale up of the its Opioid Synthesis Technology for Hydrocodone API.

         There can be no assurance that Watson will exercise the Hydrocodone
Option or, even if exercised, that the Company will succeed in obtaining
financing dedicated to fund its portion of the API Scale Up Expenses. As
described in this Report, no portion of the 2004 Debenture Offering Proceeds or
the Asset Divestment Proceeds is budgeted for the API Scale Up Expenses. Until
such time, if any, as the Company secures third-party financing dedicated to the
API Scale Up Expenses, the Company will be unable to complete the commercial
scale up of its Opioid Synthesis Technologies.

MARKETING AND CUSTOMERS

         As a result of restructuring its operations, the Company has
discontinued the manufacture and distribution of all of its generic products and
therefore at this time is not engaged in product marketing, selling or
distributing finished dosage products or bulk API to trade or pharmaceutical
industry customers.

GOVERNMENT REGULATION

GENERAL

         All pharmaceutical technology and manufacturing firms, including the
Company, are subject to extensive regulation by the Federal government,
principally by the FDA, and, to a lesser extent, by state and local governments.
Additionally, the Company is subject to extensive regulation by the DEA for
research, development and manufacturing of controlled substances. The Company
cannot predict the extent to which it may be affected by legislative and other
regulatory developments concerning its products and the healthcare industry in
general. The Federal Food, Drug, and Cosmetic Act, the Controlled Substances Act
and other Federal statutes and regulations govern or influence the testing,
manufacture, labeling, storage, record keeping, approval, pricing, advertising,
promotion, sale and distribution of pharmaceutical products. Noncompliance with
applicable requirements can result in fines, recall or seizure of products,
criminal proceedings, total or partial suspension of production, and

                                       10

<PAGE>

refusal of the government to enter into supply contracts or to approve new drug
applications. The FDA also has the authority to revoke or withhold approvals of
new drug applications.

         FDA approval is required before any "new drug," whether prescription or
over-the-counter, can be marketed. A "new drug" is one not generally recognized
by qualified experts as safe and effective for its intended use. Such general
recognition must be based on published adequate and well controlled clinical
investigations. Each dosage form of a specific "new drug" product requires
separate approval by the FDA. In general, as discussed below, less costly and
time consuming approval procedures may be used for generic equivalents as
compared to the innovative products. In addition, certain modifications using
existing pharmaceutical products may be subject to streamlined approval
procedures, although a case-by-case analysis must be undertaken. In addition to
providing required safety and effectiveness data for FDA approval, a drug
manufacturer's practices and procedures must conform to current Good
Manufacturing Practice Regulations ("CGMPs"), which apply to the manufacture,
receiving, holding and shipping of all drugs, whether or not approved by the
FDA. To ensure full compliance with relevant standards, some of which are set
forth in regulations, the Company must continue to expend time, money and effort
in the areas of production and quality control. Failure to so comply risks
delays in approval of drugs, disqualification from eligibility to sell to the
government, and possible FDA enforcement actions, such as an injunction against
shipment of the Company's products, the seizure of non-complying drug products,
and/or, in serious cases, criminal prosecution. The Company's manufacturing
facilities are subject to periodic inspection by the FDA.

         In addition to the regulatory approval process, the Company is subject
to regulation under Federal, state and local laws, including requirements
regarding occupational safety, laboratory practices, environmental protection
and hazardous substance control, and may be subject to other present and future
local, state, Federal and foreign regulations, including possible future
regulations of the pharmaceutical industry.

DRUG APPROVALS

         There are currently three ways to obtain FDA approval to commercially
market and distribute a new drug in the U.S.

                  1. New Drug Applications ("NDA"). Unless one of the procedures
         discussed in paragraph 2 or 3 below is available, a prospective
         manufacturer must conduct and submit to the FDA complete clinical
         studies to prove a drug's safety and efficacy, in addition to the
         bioavailability and/or bioequivalence studies discussed below, and must
         also submit to the FDA information about manufacturing practices, the
         chemical make-up of the drug and labeling. Some of the products
         anticipated to be developed by the Company which will incorporate the
         API Synthesis Technologies and the ADF Technology will require an NDA
         filing.. The full clinical testing required for the preparation and
         filing of an NDA requires the expenditure of substantial resources. The
         Company intends to collaborate with third-parties to fund the
         preparation and filing of any such NDAs. There can be no assurance that
         any such collaboration will be available on terms acceptable to the
         Company, if at all.

                  2. Abbreviated New Drug Applications ("ANDAs"). The Drug Price
         Competition and Patent Term Restoration Act of 1984 (the "1984 Act")
         established the ANDA procedure for obtaining FDA approval for those
         drugs that are off-patent or whose exclusivity has expired and that are
         bioequivalent to brand-name drugs. An ANDA is similar to an NDA, except
         that the FDA waives the requirement of conducting complete clinical
         studies of safety and efficacy, although it may require expanded
         clinical bioavailability and/or bioequivalence studies.
         "Bioavailability" means the rate of absorption and levels of
         concentration of a drug in the blood stream needed to produce a
         therapeutic effect. "Bioequivalence" means equivalence in
         bioavailability between two drug products. In general, an ANDA will be
         approved only upon a showing that the generic drug covered by the ANDA
         is bioequivalent to the previously approved version of the drug
         product, i.e., that the rate of absorption and the levels of
         concentration of a generic drug in the body are substantially
         equivalent to those of a previously approved equivalent drug product.
         The principal advantage of this approval mechanism is that an ANDA
         applicant is not required to conduct the same preclinical and clinical
         studies to demonstrate that the product is safe and effective for its
         intended use.

                  The 1984 Act, in addition to establishing the ANDA procedure,
created new statutory protections for approved brand-name drugs. In general,
under the 1984 Act, approval of an ANDA for a generic drug may not be made
effective until all product and use patents listed with the FDA for the
equivalent brand name drug have expired or have been determined to be invalid or
unenforceable. The only exceptions are situations in which the ANDA applicant
successfully challenges the validity or absence of infringement of the patent
and either the patent holder does not file suit or litigation extends more than
30 months after notice of the challenge was received by the patent holder. Prior
to enactment of the 1984 Act, the FDA gave no consideration to the patent status
of a previously approved drug. Additionally, under the 1984 Act, if specific
criteria are met, the term of a product

                                       11

<PAGE>

or use patent covering a drug may be extended up to five years to compensate the
patent holder for the reduction of the effective market life of that patent due
to federal regulatory review. With respect to certain drugs not covered by
patents, the 1984 Act sets specified time periods of two to ten years during
which approvals of ANDAs for generic drugs cannot become effective or, under
certain circumstances, ANDAs cannot be filed if the equivalent brand-name drug
was approved after December 31, 1981.

                  3. "505(b)(2) or "Paper" NDA. An alternative NDA procedure is
         provided by the 1984 Act whereby the applicant may rely on published
         literature and more limited testing requirements. This application
         process is useful when the API is commercially available in an
         alternative dosage form or formulation. The Company believes that the
         505(b)(2) application procedure may be applicable to a portion of the
         products it intends to develop utilizing its ADF Technology.

HEALTHCARE REFORM

                  Several legislative proposals to address the rising costs of
healthcare have been introduced in Congress and several state legislatures. Many
of such proposals include various insurance market reforms, the requirement that
businesses provide health insurance coverage for all their employees,
significant reductions in the growth of future Medicare and Medicaid
expenditures, and stringent government cost controls that would directly control
insurance premiums and indirectly affect the fees of hospitals, physicians and
other healthcare providers. Such proposals could adversely affect the Company's
business by, among other things, reducing the demand, and the prices paid, for
pharmaceutical products such as those being developed by the Company.
Additionally, other developments, such as (i) the adoption of a nationalized
health insurance system or a single payor system, (ii) changes in needs-based
medical assistance programs, or (iii) greater prevalence of capitated
reimbursement of healthcare providers, could adversely affect the demand for the
Company's products in development utilizing the Proprietary Technologies.

ENVIRONMENTAL COMPLIANCE

         In addition to regulation by the FDA and DEA, the Company is subject to
regulation under Federal, state and local environmental laws. The Company
believes it is in material compliance with applicable environmental laws. In
February of 2001, the Indiana Department of Environmental Management (IDEM)
issued a notice of violation to the Culver Facility alleging deficiencies with
wastewater management at the site. The Company challenged those allegations and
has been engaged in productive discussions with IDEM since that time in an
effort to achieve a solution that is satisfactory to the parties. Although this
issue remains unresolved, discussions are ongoing. The Company does not believe
that the outcome of such discussion will have a material impact on the Company's
financial condition or its ability to effectively operate and undertake
activities at the Culver Facility.

COMPETITION

         The Company competes to varying degrees with numerous companies in the
pharmaceutical research, development, manufacturing and commercialization
fields. Most, if not all, of the Company's competitors have substantially
greater financial and other resources and are able to expend more funds and
effort than the Company in research and development of their competitive
technologies and products. Although a larger company with greater resources than
the Company will not necessarily have a higher likelihood of receiving
regulatory approval for a particular product or technology as compared to a
smaller competitor, the company with a larger research and development
expenditure will be in a position to support more development projects
simultaneously, thereby improving the likelihood of obtaining regulatory
approval of a commercially viable product or technology than its smaller rivals.

RAW MATERIALS

         The DEA controls both the quantity of controlled substances produced in
the U.S. and the quantity of certain raw materials obtained by pharmaceutical
developers and manufacturers for the production of controlled substances. In
this regard, the Company is required to file for and obtain quotas from the DEA
for the purchase and use of controlled substance materials including NRMs.
Although the Company has made initial contacts with overseas NRM suppliers, no
assurance can be given that the Company will be successful in obtaining an
adequate quota from the DEA or (even assuming the Company's Import Registration
is granted) in contracting with third-party suppliers in foreign countries for
NRMs on commercially acceptable terms for the Company's requirements of NRMs to
be used in its controlled substance development and commercialization efforts.
Provided the Company continues to seek the Import Registration, the process and
proceedings described in this Report will continue through 2004 and beyond.

                                       12

<PAGE>

SUBSIDIARIES

         The Company's Culver, Indiana research, development, and manufacturing
operations are conducted by Houba, Inc., an Indiana corporation and wholly-owned
subsidiary of the Company. Axiom Pharmaceutical Corporation, a Delaware
corporation, is a wholly-owned subsidiary of the Company and was formerly
engaged in generic product manufacturing and distribution in Congers, New York.
Inasmuch as the Company's generic drug manufacturing and distribution operations
have been terminated, Axiom Pharmaceutical Corporation will become an inactive
subsidiary of the Company.

EMPLOYEES

         As of March 31, 2004, the Company had 18 full-time employees. Twelve of
these employees are engaged in activities at the Culver Facility relating to the
research, development, scale-up and commercialization of the Opioid Synthesis
Technologies and ADF Technology. The remaining employees are engaged in
administrative, legal, accounting, finance, market research, business
development and licensing activities.


I
TEM 2. PROPERTIES

         The Company leases approximately 1,600 square feet of administrative
office space at 616 N. North Court, Suite 120, Palatine, Illinois 60067. The
lease agreement is between the Company and an unaffiliated lessor. The lease
agreement has a term of one year expiring February 28, 2005. The Company has an
option to renew the lease for an additional one year term. The lease agreement
provides for annual rent, property taxes, common area maintenance and janitorial
services for approximately $29,000 per year. This leased office space is
utilized for the Company's administrative, accounting, finance, market research,
and business development functions.

         The Company's research, development, laboratory, warehouse and
manufacturing facility is at 16235 State Road 17, Culver, Indiana. At this
location the Company's Houba, Inc. subsidiary owns a 45,000 square foot facility
on approximately 30 acres of land. This facility includes an office area for
administrative functions and quality assurance functions, an API manufacturing
area, an analytical methods development, assay testing and chemistry research
laboratory, a product and API stability testing area, a warehouse area, and an
area for tablet and capsule finished dosage product manufacturing.


ITEM 3. 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 defense of all of such matters was
assumed by the Company's insurance carrier and a substantial number have been
settled by the carrier. Currently, several actions remain pending with the
Company as a defendant and the insurance carrier is defending each action. The
Company does not believe any of such actions will have a material impact on the
Company's financial condition.

         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 $1.0 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 is complete. The Company's motion for summary judgment was due to be
heard by the Court on August 8, 2003. Plaintiff Kohn deceased shortly prior to
such hearing date, and the motion for summary judgment and any trial of this
matter have been stayed pending the substitution of Mr. Kohn's estate as the
plaintiff. The Company does not believe this action will have a material impact
on the Company's financial condition.

         On June 13, 2002, the Company was named an additional defendant in an
Amended Complaint filed in the matter entitled Vintage Pharmaceuticals, Inc., v.
Watson Pharmaceuticals, Inc., and Halsey Drug Company, Inc., pending in the
United States District Court for the Northern District of Alabama, Civil Action
No. CV 01-B-1847-NE. Vintage seeks unspecified damages from the Company for
allegedly interfering with Vintage's contract to produce Monodox(R), the brand
name of doxycycline monohydrate, for Watson the Company denies the allegations,
and is vigorously defending the action. Watson Pharmaceuticals' motion for
summary judgment was approved by the Court on April 13, 2004. The Company
intends to file a  motion to dismiss the Amended Complaint for failure to state
a cause of action based on the summary judgment approval in favor of Watson on
the underlying claim.

                                       13

<PAGE>

The Company does not believe this action will have a material impact on the
Company's financial condition.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of security holders during the
fourth quarter of 2003.


                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SECURITY HOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET AND MARKET PRICES OF COMMON STOCK

         Set forth below for the periods indicated are the high and low bid
price for the Company's Common Stock for trading in the Common Stock on the OTC
Bulletin Board as reported by the OTC Bulletin Board. Such over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.


<TABLE>
<CAPTION>
                                           BID PRICE
                                          ----------
               PERIOD                     HIGH   LOW
               ------                     ----  ----
<S>                                       <C>   <C>
2002 Fiscal Year
  First Quarter.........................   2.4   1.5
  Second Quarter........................  2.75   1.3
  Third Quarter.........................  1.95  1.05
  Fourth Quarter........................  1.85   .68
2003 Fiscal Year
  First Quarter.........................  1.09   .82
  Second Quarter........................  1.11   .76
  Third Quarter.........................  1.60   .76
  Fourth Quarter........................  1.07   .26
2004 Fiscal Year
  First Quarter.........................   .82   .41
</TABLE>


HOLDERS

         There were approximately 669 holders of record of the Company's common
stock on March 31, 2004. This number, however, does not reflect the ultimate
number of beneficial holders of the Company's common stock.

DIVIDEND POLICY

         The payment of cash dividends from current earnings is subject to the
discretion of the Board of Directors and is dependent upon many factors,
including the Company's earnings, its capital needs and its general financial
condition. The terms of the Series A Preferred shares issuable by the Company
upon conversion of the Company's 5% convertible senior secured debentures issued
pursuant to the Debenture and Share Purchase Agreement dated as of February 6,
2004 (the "2004 Debentures") and the Term Loan Agreement assigned by Watson
Pharmaceuticals to Care Capital Investments II, LP, Essex Woodlands Health
Ventures V, L.P., Galen Partners III, L.P. and other investors in the 2004
Debentures (see "Item 13. Certain Relationships and Related Transactions")
prohibit the Company from paying cash dividends. The Company does not intend to
pay any cash dividends in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

         During the quarter ended December 31, 2003, the Company issued the
following securities which were not registered under the Securities Act:

                  (i) 5% convertible senior secured debentures in the aggregate
         principal amount $3.5 million (the "Bridge Notes") issued to certain
         bridge lenders (the "Bridge Lenders") on each of October 7, November 2,
         December 5, and December 29, 2003; and

                                       14

<PAGE>

                  (ii) 5% convertible senior secured debentures in the aggregate
         principal amount of $427,577 issued in satisfaction of accrued interest
         under the Company's outstanding 5% convertible senior secured
         debentures.

         Each of the investors in the Bridge Notes and the recipients of 5%
convertible senior secured debentures in satisfaction of interest payments is an
Accredited Investor as defined in Rule 501(a) of Regulation D promulgated under
the Securities Act. Each of such securities was issued without registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act and
Regulation D promulgated thereunder.


ITEM 6. SELECTED FINANCIAL DATA

         The selected consolidated financial data presented on the following
pages for the years ended December 31, 2003, 2002, 2001, 2000 and 1999 are
derived from the Company's audited Consolidated Financial Statements. The
Consolidated Financial Statements as of December 31, 2003 and December 31, 2002,
and for each of the years in the three-year period ended December 31, 2003, and
the report thereon, are included elsewhere herein. The selected financial
information as of and for the years ended December 31, 2000 and 1999 are derived
from the audited Consolidated Financial Statements of the Company not presented
herein.

         The information set forth below is qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements and
related notes thereto included elsewhere in this Report and "Item 7.

Management's Discussion and Analysis of Financial Condition and Results of
Operations."


<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                      --------------------------------------------------------
                                        2003        2002        2001        2000        1999
                                      --------    --------    --------    --------    --------
                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                   <C>         <C>         <C>         <C>         <C>
OPERATING DATA:
Net revenues ......................   $  5,750    $  8,205    $ 16,929    $ 20,223    $ 11,420
Operating Costs
Cost of manufacturing .............   $ 11,705    $ 12,535      14,857      18,743      15,316
Research and development ..........   $  1,460    $  1,517       1,327       1,821       1,075
Selling, general and
  Administrative expenses .........   $  7,903    $  7,216       6,616       6,208       7,383
Plant shutdown costs ..............   $  1,926    $   (126)         68          53       3,220
Interest expense ..................   $  6,001    $  4,728       3,913       3,699       2,946
Interest income ...................   $     25    $     15          69         662          95
Amortization of deferred debt
  Discount and private offering
  Costs ...........................   $ 24,771    $ 12,558       2,591       2,448       1,825
Loss on extinguishments of
  Debt ............................   $     --    $ 28,415
Investment in joint venture .......   $     --    $     --        (202)        (57)         --
Other (income) expense ............   $    464    $    966         (13)       (101)       (187)
Loss before income tax
  Benefit .........................   $(48,455)   $(59,589)    (12,563)    (12,043)    (20,063)
Income tax benefit ................   $     --    $     --          --        (389)         --
Net loss ..........................   $(48,455)   $(59,589)   $(12,563)   $(11,654)   $(20,063)
                                      ========    ========    ========    ========    ========
Basic and diluted loss per
  common share ....................   $  (2.28)   $  (3.90)   $   (.84)   $   (.80)   $  (1.40)
                                      ========    ========    ========    ========    ========
Weighted average number of
  outstanding shares ..............     21,227      15,262      15,021      14,503      14,326
                                      ========    ========    ========    ========    ========
</TABLE>



<TABLE>
<CAPTION>
                                               DECEMBER 31,
                       -----------------------------------------------------------
                         2003         2002         2001         2000        1999
                       ---------    ---------    ---------    --------    --------
                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                    <C>          <C>          <C>          <C>         <C>
BALANCE SHEET DATA:
Working capital
  (deficiency) .....   $  (3,770)   $   5,933    $  (8,276)   $ (5,061)   $ (5,181)
Total assets .......   $   6,622    $  19,364       11,069      15,209      12,495
Total liabilities ..   $  29,964    $  31,632       76,505      68,558      54,869
Accumulated deficit    $(209,546)   $(161,090)    (101,501)    (88,938)    (77,284)
Stockholders' equity
  (deficit) ........   $ (52,067)   $ (12,268)     (65,436)    (53,349)    (42,374)
</TABLE>



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

         Certain statements set forth under this caption constitute
"forward-looking statements" within the meaning of the Reform Act. See "Special
Note Regarding Forward-Looking Statements" on page 2 of this Report for
additional factors relating to such

                                       15

<PAGE>

Statements.

OVERVIEW

         After due consideration of alternative strategies and considering the
optimal use of available funding, and the prospects for attracting new funding,
on October 30, 2003, the Company's Board of Directors unanimously adopted a
strategy to substantially restructure the Company's operations. On November 6,
2003, the Company publicly announced its restructuring plan to focus its efforts
on research and development related to certain proprietary finished dosage
products and APIs. In making its determination the Board of Directors
considered, among other factors, the Company's ability and time required to
generate positive cash flow and income from the operation of the Company's
finished dosage manufacturing, packaging, labeling and distribution facilities
located in Congers, New York (collectively, the "Congers Facilities") in the
manufacture and distribution of finished dosage generic products pursuant to
abbreviated new drug applications ("ANDAs").

         The Company incurred losses of $48.5 million in 2003, $59.6 million in
2002 and $12.6 million in 2001. The Board determined that near term sales of the
Company's finished dosage generic products would likely result in continued
financial losses in view of the highly competitive market environment, low
market pricing, declining market size for its existing generic products and the
lack of timely new generic product launches. Based on this analysis and other
factors, the Board concluded that the Company restructure its operations by
closing or divesting the Congers Facilities and reducing certain activities at
its Culver Facility. The plan targeted a reduction in workforce of approximately
70 employees at the Congers Facilities, 25 employees at the Culver Facility and
5 employees in Rockford, Illinois.

         In implementing the restructuring plan at the Culver Facility, the
reduction in work force involved approximately 25 employees engaged in or
supporting the manufacture of doxycycline hyclate and doxycycline monohydrate
APIs which were converted to finished dosage products at the Congers Facilities.
With the closure of the Congers Facilities the APIs manufactured in Culver were
not required. The Culver Facility work force reduction was substantially
completed by December 31, 2003.

         In implementing the restructuring plan at the Rockford, Illinois
administrative office facility, the Company terminated its Rockford office lease
agreement and relocated the administrative functions to Palatine, Illinois. This
process was completed on February 29, 2004 resulting in a reduction in work
force of 5 employees.

         In implementing the restructuring of operations at the Congers
Facilities, the reduction in work force involved essentially all of the
employees at the site. Finished generic product manufacturing operations
substantially ceased on January 30, 2004. Packaging and labeling operations
ceased approximately February 12, 2004 and quality assurance and related support
activities ceased on approximately February 27, 2004. Such dates also mark the
substantial completion of the reduction in work force of approximately 70
employees engaged in these activities at the Congers Facilities. From
approximately March 1, 2004 to March 19, 2004 a small logistics, maintenance and
warehouse staff prepared the Congers Facilities for sale to Ivax Pharmaceuticals
as described above under the caption "Sale of Assets".

         In implementing the restructuring adopted by the Board, the Company has
transitioned to a single vertically integrated operations site located at its
Houba, Inc. subsidiary in Culver, Indiana. The Company's strategy and key
activities to be conducted at the Culver Facility are as follows:

                  -        Development of the Company's ADF Technology for use
                           in orally administered opioid finished dosage
                           products.

                  -        Manufacture and quality assurance release of clinical
                           trial supplies of certain finished dosage form
                           products utilizing the ADF Technology.

                  -        Evaluation of certain finished dosage products
                           utilizing the ADF Technology in clinical trials.

                  -        Scale-up and manufacture of commercial quantities of
                           certain products utilizing the ADF Technology for
                           sale by the Company's licensees.

                                       16

<PAGE>

                  -        Research, development and scale up of the Company's
                           novel Opioid Synthesis Technologies.

                  -        Prosecution of the Company's application to the DEA
                           to receive a registration to import Narcotic Raw
                           Materials ("NRMs") for use in the production of
                           opioid API's utilizing the Company's Opioid Synthesis
                           Technologies.

                  -        Negotiating and executing license and development
                           agreements with strategic pharmaceutical company
                           partners providing that such licensees will further
                           develop certain finished dosage products utilizing
                           the ADF Technology, file for regulatory approval with
                           the FDA and other regulatory authorities and
                           commercialize such products.

RESULTS OF OPERATIONS

NET REVENUES

         Net product revenues for 2003 of $5,750,000 represents a decrease of
$2,455,000 in product revenues as compared to 2002. The decrease resulted
primarily from declining purchases by a single customer under an exclusive
supply agreement for the Company's major product lines. The Company, pursuant to
certain provisions in the agreement, terminated the exclusive supply agreement
in March, 2003 and thereafter attempted to reestablish itself in the marketplace
by manufacturing and distributing generic products under its Axiom subsidiary
label. The Company's relatively narrow generic product line, the entrenched
market positions of existing competitors, relatively low market prices and the
time required to fulfill the regulatory requirements of reestablishing the
generic products under the Company's Axiom label resulted in revenues lower than
anticipated. Ultimately, these conditions caused the Company to reassess its
strategy and to implement a restructuring of operations. Such restructuring was
announced on November 6, 2003.

         Net product revenues for 2002 of $8,205,000 represents a decrease of
$224,000 in product revenues as compared to 2001. During 2002 the Company
obtained sources for the key APIs for the manufacture of
butalbital/acetaminophen/caffeine tablets and prednisolone syrup. However due to
the length of time these products were not available for sale due to lack of
APIs, the Company lost consequential market share. The slow decline of product
sales in 2002 was also due in part to the time required to site transfer the
products from the Company's Brooklyn, NY facility, which closed in March 2001,
to the Company's Congers, NY Facilities. The Company also generated $8,500,000
in product development revenue in 2001 relating to the Company's sale of an ANDA
to Watson.

COST OF MANUFACTURING

         The Company's cost of manufacturing for 2003 was 203% of net product
sales versus 153% of net product sales for 2002. The increased cost as a percent
of sales in 2003 was directly attributable to a charge of $1,354,000 for
impairment of inventory in connection with the Company's restructuring.

         For 2002, the Company's cost of manufacturing was 153% net product
sales versus 176% for 2001, after adjustment of $8,500,000 for product
development revenues in 2001. This improvement occurred because the Company had
expanded its laboratory and packaging capabilities allowing for a reduction in
the use of third parties to perform these services at a net cost savings to the
Company.

RESEARCH & DEVELOPMENT EXPENSES

         For 2003, research and development expenses amounted to $1,460,000
compared to $1,517,000 for 2002. The decrease of $57,000 or 3.8% reflects the
reduction in resources available to fund these activities. The development
expenditures in 2003 were primarily related to the Company's development efforts
relating to the ADF Technology and the Opioid Synthesis Technologies.

         For 2002, research and development expenses amounted to $1,517,000
compared to $1,327,000 for 2001. The increase of $190,000 or 14% reflects
development expenses incurred on a number of projects including the development
of the Company's Opioid Synthesis Technologies.

                                       17

<PAGE>

         The Company has restructured its operations and expects to devote
substantially all of its resources in 2004 to research and development
activities relating to its ADF Technologies and Opioid Synthesis Technologies.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative costs were $7,903,000 (138% of net
product revenue) for 2003 compared to $7,216,000 (88% of net product revenue)
for 2002. This increase is primarily due to added professional costs associated
with the prosecution of the Import Registration of $233,000, increased bad debt
expenses of $350,000 and sales personnel cost of $93,000.

         Selling, general and administrative costs were $7,216,000 (88% of net
product revenue) for 2002 compared to $6,616,000 (78% of net product revenue
)for 2001 after adjustment of $8,500,000 in product development revenues in
2001. This increase is primarily due to added professional and personnel costs
incurred for patent research and matters associated with prosecution of the
Import Registration and on the Opioid Synthesis Technologies of $174,000,
increases in product marketing expenses of $253,000 and increased corporate
insurance premiums of $173,000.

PLANT SHUTDOWN COSTS

         On November 6, 2003, the Company announced its intent to restructure
the Company's operations to focus its efforts on research and development
relating to certain proprietary finished dosage products and active ingredients.
As part of that process, in February 2004 the Company discontinued the
manufacture and sale of finished dosage generic products at its Congers, New
York locations and substantially reduced activities at its active pharmaceutical
ingredient facility in Culver, Indiana. As of December 31, 2003, the Company
recorded aggregate restructure expenses of approximately $3,280,000 consisting
of an impairment charge of $1,673,000 against property, plant and equipment, an
impairment charge of $1,354,000 against inventory (charged to cost of sales) and
$253,000 of other costs.

INTEREST EXPENSE, NET OF INTEREST INCOME

         Interest expense, net of interest income for 2003 increased by
$1,263,000 or 26.7% over 2002 reflecting interest expense on the December, 2002
financing and the 2003 bridge financings.

         Interest expense, net of interest income for 2002 increased by $869,000
or 22.6% over 2001 reflecting interest on borrowings under the Galen Bridge Loan
Agreement. During 2002, the Company borrowed an aggregate of $12,500,000 under
the Galen Bridge Loan Agreement.

AMORTIZATION OF DEFERRED DEBT DISCOUNT, AND PRIVATE OFFERING COSTS

         In 2003, 2002 and 2001 the Company issued warrants and incurred costs
associated with private placements and bridge financings. The value of warrants
issued in 2003, 2002, and 2001, as determined by use of the Black-Scholes
valuation model, was approximately $581,000, $5,115,000 and $310,000,
respectively. The Company incurred private offering costs of approximately
$1,041,000 in 2002. The private placements and bridge financings included
beneficial conversion features with an estimated fair value of $7,178,000 and
$78,364,000 in 2003 and 2002, respectively. The value of the warrants, private
offering costs, and beneficial conversion features are being amortized over the
life of the underlying debentures and notes. In conjunction with the Company's
December 2002 private placement of debentures, the remaining unamortized balance
of private offering costs from 1999 were written-off. Amortization expense of
deferred debt discount and private offering costs was $24,771,000, $12,558,000
and $2,591,000 in 2003, 2002 and 2001, respectively. At December 31, 2003, there
remained $56,891,000 of debt discount which will be amortized to expense over
the remaining life of the related debentures.

LOSS ON EXTINGUISHMENT OF DEBT

         In 2002, the Company recorded a charge to earnings recorded as loss on
the extinguishment of debt of $28,415,000 as a result of the Company's 2002
Debenture Offering. The loss consists of the following amounts: 1) $11,985,000,
representing the fair value of 10,700,665 warrants, as calculated using the
Black-Scholes option-pricing model, that the Company issued to Watson in
consideration of Watson's extension of the maturity date of the Watson Term
Loan; 2) $2,282,000, representing the

                                       18

<PAGE>

fair value of the shares of Common Stock issued on the exercise of 8,145,736
Common Stock Purchase Warrants in excess of the number of shares that would have
been issued as a result of a modification of the Warrants' net share settlement
provision; and 3) $14,148,000, representing the incremental increase in the fair
value of the remaining 1998 Warrants and 1999 Warrants as a result of reducing
their exercise price in connection with the modification of the associated debt
agreements, as calculated using the Black-Scholes option-pricing model.

OTHER INCOME (EXPENSE)

         Included in other income (expense) for the year ended December 31, 2003
and 2002, are charges the Company recorded to earnings of $457,000 and $863,000,
respectively, representing the incremental increase in the fair value of certain
other outstanding warrants as a result of reducing the exercise price of the
warrants in accordance with their original terms, as calculated using the
Black-Scholes option-pricing model.

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 2003, the Company had cash and cash equivalents of
$942,000 as compared to $9,211,000 at December 31, 2002. The Company had a
working capital deficit of $3,770,000 at December 31, 2003.

         On February 6, 2004, the Company consummated a private offering of
securities for an aggregate purchase price of approximately $12.3 million (the
"2004 Debenture Offering"). The securities issued in the 2004 Debenture Offering
consisted of convertible senior secured debentures (the "2004 Debentures"). The
2004 Debentures were issued by the Company pursuant to a certain Debenture and
Share Purchase Agreement dated as of February 6, 2004 (the "2004 Purchase
Agreement") by and among the Company, Care Capital Investments II, LP ("Care
Capital"), Essex Woodlands Health Ventures V, L.P. ("Essex"), Galen Partners
III, L.P. and each of the Purchasers listed on the signature page thereto
(collectively, the "2004 Debenture Investor Group"). On April 14, 2004 the
Company completed an additional closing under the 2004 Purchase Agreement and
issued additional 2004 Debentures in the aggregate principal amount of
approximately $579,000, bringing the principal amount of the 2004 Debentures
issued by the Company under the 2004 Purchase Agreement to an aggregate amount
of approximately $12.879 million.

                  Of the approximate $12.879 million in 2004 Debentures issued
in the 2004 Debenture Offering, approximately $2.0 million of 2004 Debentures
were issued in exchange for the surrender of like amount of principal plus
accrued interest outstanding under Company's 5% convertible senior secured
debentures issued pursuant to working capital bridge loan transactions with Care
Capital, Essex Woodlands and Galen Partners III, L.P., Galen International III,
L.P., and Galen Employee Fund III, L.P. (collectively, "Galen") during November
and December, 2003. The 2004 Purchase Agreement further provides that the
Company may issue additional 2004 Debentures in the principal amount of up to
approximately $1.121 million on or prior to June 5, 2004, provided that the
aggregate principal amount of 2004 Debentures issued pursuant to the 2004
Purchase Agreement shall not exceed $14.0 million without the consent of the
holders of 60% of the principal amount of the 2004 Debentures then held by Care
Capital, Essex and Galen.

         The 2004 Debentures, issued at par, bear interest at the rate of 1.62%
per annum, the short-term Applicable Federal Rate on the date of issuance. The
2004 Debentures are secured by a lien on all assets of the Company. In addition,
each of Houba, Inc. and Axiom Pharmaceutical Corporation, each a wholly-owned
subsidiary of the Company, has executed in favor of the 2004 Debenture holders,
an unconditional agreement of guaranty of the Company's obligations under the
2004 Purchase Agreement. Each guaranty is secured by all assets of such
subsidiary. In addition, the Company has pledged the stock of each such
subsidiary to the holders of the 2004 Debentures to further secure its
obligations under the 2004 Purchase Agreement.

         In accordance with the terms of an Amended and Restated Subordination
Agreement dated as of February 6, 2004 between the Company, the holders of the
2004 Debentures and the holders of the Company's other outstanding debentures,
the liens on the Company's and its subsidiary's assets as well as the payment
priority of the 2004 Debentures are (i) subordinate to the Company's lien and
payment obligations in favor of Watson Pharmaceuticals under the Watson Term
Loan Agreement, and (ii) senior to the Company's lien and payment obligations in
favor of the holders of the Company's other outstanding debentures in the
aggregate principal amount of approximately $87.7 million.

         The 2004 Debentures (including the principal amount plus interest
accrued at the date of conversion) will convert automatically into the Company's
Series A convertible preferred stock (the "Series A Preferred") immediately
following the

                                       19

<PAGE>

Company's receipt of shareholder approval at its next shareholders' meeting to
restate the Company's Certificate of Incorporation (the "Charter Amendment") to
authorize the Series A Preferred and the Junior Preferred Shares (as described
below) and the filing of the Charter Amendment with the Office of the New York
Department of State (the date of such filing, the "Charter Amendment Filing
Date"), as provided in the 2004 Purchase Agreement. The 2004 Debentures will
convert into Series A Preferred at a price per share (the "Series A Conversion
Price") of $0.6425, representing the average of the closing bid and asked prices
of the Company's Common Stock for the twenty (20) trading days ending February
4, 2004, as reported by the Over-the-Counter ("OTC") Bulletin Board. The Series
A 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 options for the purchase of, or stock or other securities convertible
into, Common Stock ("Convertible Securities"), if lower than the then applicable
Series A Conversion Price.

         Based on the $0.6425 Series A Conversion Price of the Series A Shares
and estimating the interest accrual under the 2004 Debentures prior to the
Charter Amendment Filing Date, the 2004 Debentures with an aggregate principal
amount of $14 million would be convertible into an aggregate of approximately 22
million Series A Preferred shares.

         In general, the Series A Preferred shares have a liquidation preference
equal to five (5) times the initial $0.6425 Series A Conversion Price (the
"Series A Liquidation Preference"). In addition, the Series A Preferred shares
are convertible into the Company's Common Stock, with each Series A Preferred
share convertible into the number of shares of Common Stock obtained by dividing
(i) the Series A Liquidation Preference, by (ii) the $0.6425 Series A Conversion
Price, as such conversion price may be adjusted, from time to time, pursuant to
the dilution protections of such shares. Without limiting the Series A
Liquidation Preference, the holders of Series A Preferred shares also have the
right to participate with the holders of the Company's Common Stock upon the
occurrence of a liquidation event, including the Company's merger, sale of all
or substantially all of its assets or a change of control transaction, on an
as-converted basis (but for these purposes only, assuming the Series A Preferred
shares to be convertible into only thirty percent (30%) of the shares of Common
Stock into which they are otherwise then convertible). The holders of Series A
Preferred shares also have the right to vote as part of a single class with all
holders of the Company's voting securities on all matters to be voted on by such
security holders. Each holder of Series A Preferred shares will have such number
of votes as shall equal the number of votes he would have had if such holder
converted all Series A Preferred shares held by such holder into shares of
Common Stock immediately prior to the record date relating to such vote.

         The 2004 Purchase Agreement provides that each of Care Capital, Essex
and Galen (collectively, the "Lead 2004 Investors") has the right to designate
for nomination one member of the Company's Board of Directors, and that the Lead
Investors collectively may designate one additional member of the Board
(collectively, the Designees"). The Purchase Agreement further provides that the
Designees, if so requested by such Designee in his sole discretion, shall be
appointed to the Company's Executive Committee, Compensation Committee and any
other Committee of the Board of Directors. The Designees of Care Capital, Essex
and Galen are Messrs. Karabelas, Thangaraj and Wesson, respectively, each of
whom are current Board members. Effective as of the closing of the 2004 Purchase
Agreement, the Lead 2004 Investors may collectively nominate one additional
Designee to the Board. The Company has agreed to nominate and appoint to the
Board of Directors, subject to shareholder approval, one designee of each of
Care Capital, Essex and Galen, and one collective designee of the Lead 2004
Investors, for so long as each holds a minimum of 50% of the Series A Preferred
shares initially issued to such party (or at least 50% of the shares of Common
Stock issuable upon conversion of the Series A Preferred shares).

         As of February 10, 2004, the date of the initial closing of the 2004
Purchase Agreement, the Company had issued and outstanding and aggregate of
approximately $87.7 million in principal amount of 5% convertible senior secured
debentures maturing March 31, 2006 issued pursuant to three separate Debenture
Purchase Agreements dated March 10, 1998, as amended (the "1998 Debentures"),
May 26, 1999, as amended (the "1999 Debentures") and December 20, 2002 (the
"2002 Debentures"), respectively. The 1998 Debentures, 1999 Debentures and 2002
Debentures are referred to collectively as the "1998-2002 Debentures". After
giving effect to the Company's issuance of additional 5% convertible senior
secured debentures in satisfaction of interest payments on the 1998-2002
Debentures, as of February 10, 2004, the 1998-2002 Debentures were convertible
into an aggregate of approximately 190.4 million shares of the Company's Common
Stock.

         Simultaneous with the execution of the 2004 Purchase Agreement, and as
a condition to the initial closing of the 2004 Purchase Agreement, the Company,
the 2004 Debenture Investor Group and each of the holders of the 1998-2002
Debentures executed a certain Debenture Conversion Agreement, dated as of
February 6, 2004 (the "Conversion Agreement"). In accordance with the terms of
the Conversion Agreement, each holder of the 2004 Debentures agreed to convert
the 2004 Debentures held by such holder into the Company's Series A Preferred
shares and each holder of 1998-2002 Debentures agreed

                                       20

<PAGE>

to convert the 1998-2002 Debentures held by such holder into the Company's
Series B convertible preferred stock (the "Series B Preferred") and/or Series
C-1, C-2 and/or C-3 convertible preferred stock (collectively, the "Series C
Preferred"). The Series C Shares together with the Series B Shares are herein
referred to as, the "Junior Preferred Shares", and the Junior Preferred Shares
together with the Series A Preferred, are collectively referred to as the
"Preferred Stock". The Conversion Agreement provides, among other things, for
the automatic conversion of the 2004 Debentures and the 1998-2002 Debentures
(collectively, the "Outstanding Debentures") into the appropriate class of
Preferred Stock immediately following the Company's receipt of shareholder
approval to the Charter Amendment authorizing the creation of the Preferred
Stock and the filing of the Charter Amendment with the Office of the New York
Department of State.

         Under the Conversion Agreement, the holders of approximately $6.7
million in principal amount of 2002 Debentures issued during 2003 will convert
such 2002 Debentures (plus accrued and unpaid interest) into Series B Preferred
Shares. Of the remaining approximate $81 million in principal amount of the
1998-2002 Debentures, approximately $31.6 million is comprised of 1998
Debentures, approximately $21.8 million is comprised of 1999 Debentures and
approximately $27.6 million is comprised of 2002 Debentures. The 1998 Debentures
will be converted into Series C-1 Preferred shares. The 1999 Debentures will be
converted into Series C-2 Preferred shares. The remaining balance of the 2002
Debentures shall be converted into Series C-3 Preferred shares.

         The number of Junior Preferred Shares to be received by each holder of
1998-2002 Debentures is based on the respective prices at which the 1998-2002
Debentures were convertible into Common Stock. The 2002 Debentures issued in
2003 have a conversion price of $0.3420 per share. The 1998 Debentures, 1999
Debentures and the remaining balance of the 2002 Debentures have conversion
prices of $0.5776, $0.5993 and $0.3481 per share, respectively. Based on the
respective conversion prices of the 1998-2002 Debentures, and estimating the
interest accrual on the 1998-2002 Debentures prior to the Charter Amendment
Filing Date, the 1998-2002 Debentures are convertible into an aggregate of
approximately 20.0 million Series B Preferred shares, 56.5 million Series C-1
Preferred shares, 37.5 million Series C-2 Preferred shares and 80.9 million
Series C-3 Preferred shares.

         In general, the Junior Preferred Shares have a liquidation preference
equal to one (1) time the principal amount plus accrued and unpaid interest of
the 1998-2002 Debentures converted into Junior Preferred Shares The liquidation
preference of the Series B Preferred has priority over, and will be satisfied
prior to, the liquidation preference of the Series C Preferred. The liquidation
preference for each class of the Junior Preferred Shares is equal to the
conversion prices of such shares. The Junior Preferred Shares are convertible
into the Company's Common Stock, with each Junior Preferred Share convertible
into one share of Common Stock. The holders of the Junior Preferred Shares have
the right to vote as part of the single class with all holders of the Company's
Common Stock and the holders of the Series A Preferred on all matters to be
voted on by such stockholders, with each holder of Junior Preferred Shares
having such number of votes as shall equal the number of votes he would have had
if such holder had converted all Junior Preferred Shares held by such holder
into Common Stock immediately prior to the record date relating to such vote.

         The Company was a party to a certain loan agreement with Watson
Pharmaceuticals ("Watson") pursuant to which Watson made term loans to the
Company (the "Watson Term Loan Agreement") in the aggregate principal amount of
$21.4 million as evidenced by two promissory notes (the "Watson Notes"). It was
a condition to the completion of the 2004 Debenture Offering that simultaneous
with the closing of the 2004 Purchase Agreement, the Company shall have paid
Watson the sum of approximately $4.3 million (which amount was funded from the
proceeds of the 2004 Debenture Offering) and conveyed to Watson certain Company
assets in consideration for Watson's forgiveness of approximately $16.4 million
of indebtedness under the Watson Notes. A part of such transaction, the Watson
Notes were amended to extend the maturity date of such notes from March 31, 2006
to June 30, 2007, to provide for satisfaction of future interest payments under
the Watson Notes in the form of the Company's Common Stock, to reduce the
principal amount of the Watson Notes from $21.4 million to $5 million, and to
provide for the forbearance from the exercise of rights and remedies upon the
occurrence of certain events of default under the Watson Notes (the Watson Notes
as so amended, the "Amended and Restated Watson Note"). Simultaneous with the
issuance of the Amended and Restated Watson Note, each of the Lead 2004
Investors and the other investors in the 2004 Debentures as of February 10, 2004
(collectively, the "Watson Note Purchasers") purchased the Amended and Restated
Note from Watson in consideration for a payment to Watson of $1.0 million.

         In addition to Watson's forgiveness of approximately $16.4 million
under the Watson Notes, as additional consideration for the Company's payment to
Watson of approximately $4.3 million and the Company's conveyance of certain
Company assets, all supply agreements between the Company and Watson were
terminated and Watson waived the dilution protections contained in the Common
Stock purchase warrant dated December 20, 2002 exercisable for approximately
10.7 million shares of the

                                       21

<PAGE>

Company's Common Stock previously issued by the Company to Watson, to the extent
such dilution protections were triggered by the transactions provided in the
2004 Debenture Offering.

         The Amended and Restated Watson Note in the principal amount of $5.0
million as purchased by the Watson Note Purchasers is secured by a first lien on
all of the Company's and its subsidiaries' assets, senior to the lien securing
the Outstanding Debentures and all other Company indebtedness, carries a
floating rate of interest equal to the prime rate plus 4.5% and matures on June
30, 2007.

         As of April 14, 2004, after giving effect to the payment to Watson of
approximately $4.3 million to restructure the Watson Term Loan and the payment
of legal and other professional fees relating to the 2004 Debenture Offering,
the Company realized net proceeds from the 2004 Debenture Offering of
approximately $ 5.8 million (the "2004 Debenture Offering Proceeds").

         In February, 2004, the Company sold certain non-revenue generating
ANDAs. In addition, on March 19, 2004, the Company and its wholly-owned
subsidiary, Axiom Pharmaceutical Corporation, entered into an Asset Purchase
Agreement with IVAX Pharmaceuticals New York LLC ("IVAX"). Pursuant to the
Purchase Agreement, the Company and Axiom agreed to sell to IVAX substantially
all of the Company's assets used in the operation of the Company's former
generic manufacturing and packaging operations located in Congers, New York.
Shareholder approval is necessary to complete this transaction and will be
sought of the Company's next annual meeting of shareholders. After giving effect
to the payment of legal and other professional fees relating to these assets
divestment transactions, the Company estimates that it will realize aggregate
net proceeds from such transactions of approximately $4.3 million. (the "Asset
Divestment Proceeds").

         The development, scale- up and commercialization of APIs incorporating
the Company's Opioid Synthesis Technologies and ADF Technology are subject to
various factors, many of which are outside the Company's control. To date, a
portion of such technologies have been tested in laboratory settings, and none
have been tested in clinical settings. All such technologies will need to be
successfully scaled up 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 and FDA's requirements for the maintenance of its
controlled substances research and manufacturing registrations. The Company is
pursuing a registration (the "Import Registration") to import narcotic raw
materials ("NRMs") from certain foreign countries as described in Item 1 under
the caption "Import License Registration". The process of seeking the Import
Registration, the continuing development of the Company's Opioid Synthesis
Technologies and the development of finished dosage products utilizing the
Company's ADF Technology are planned to continue through 2004. The Company is
unable to provide any assurance that such technologies can be scaled up to
commercial scale or that they will be commercially viable. Moreover, no
assurance can be given that the Company will succeed in obtaining the Import
Registration. The Company is committing substantially all of its resources and
available capital to the development of the ADF Technology, Opioid Synthesis
Technologies and to the prosecution of the Import Registration. The failure of
the Company to successfully develop the ADF Technology will have a material
adverse effect on the Company's operations and financial condition.

         The Company estimates that to scale up its hydrocodone bitartrate
process #1, Opioid Synthesis Technology to desirable commercial scale at its
Culver Facility, additional funding of approximately $7.0 million will be
required for facility improvements, the purchase, installation and validation of
new API manufacturing equipment, environmental waste management compliance, the
preparation of the drug master files for the API to be produced at the facility,
and related direct labor expense (collectively, the "API Scale Up Expenses").
The Company is a party to a certain Hydrocodone Option Agreement dated February
6, 2004 with Watson Pharmaceuticals ("Watson") pursuant to which the Company has
granted Watson a six (6) month exclusive option to enter into a supply agreement
with the Company for supply of hydrocodone bitartrate API (the "Hydrocodone
API"). If such option is exercised by Watson, at Watson's sole discretion, of
which there can be no assurance, Watson will fund 50% of the API Scale Up
Expenses, up to a maximum of $3.5 million and the Company has agreed to use
commercially reasonable efforts to obtain financing dedicated to fund its
portion of the API Scale Up Expenses. In the event the Company is unable to
secure financing dedicated to fund its portion of the API Scale Up Expenses, the
Hydrocodone Option provides that the parties will discuss alternatives relating
to the scale up of the its Opioid Synthesis Technology for Hydrocodone API.

         There can be no assurance that Watson will exercise the Hydrocodone
Option or, even if exercised, that the Company will succeed in obtaining
financing dedicated to fund its portion of the API Scale Up Expenses. As
described in this Report, no portion of the 2004 Debenture Offering Proceeds or
the Asset Divestment Proceeds is budgeted for the API Scale Up Expenses. Until
such time, if any, as the Company secures third-party financing dedicated to the
API Scale Up Expenses, the Company will be unable to complete the commercial
scale up of its Opioid Synthesis Technologies.

                                       22

<PAGE>

         Except for the professional fees related to prosecution of the Import
Registration, the 2004 Debenture Offering Proceeds and the Asset Divestment
Proceeds, aggregating approximately $10.1 million, will be dedicated to the
development of the Company's ADF Technology, the Opioid Synthesis Technologies
and for administrative and related operating expenses.

         Subsequent to the completion restructuring of its operations, the
Company is no longer engaged in the manufacture and sale of finished dosage
generic pharmaceutical products. As a result, the Company has no ability
presently to generate revenue from product sales. Accordingly, the Company must
rely on its current cash reserves to fund the development of its ADF Technology,
the Opioid Synthesis Technologies and related ongoing operating expenses. The
Company's future sources of revenue, if any, will be derived from the sale of
API manufactured using its Opioid Synthesis Technologies, contract signing fees,
milestone payments and royalties and/or profit sharing payments from licensees
for the Company's ADF Technology or Opioid Synthesis Technologies. The Company
estimates that its current cash reserves will be sufficient to fund the
development of the ADF Technology, the Opioid Synthesis Technologies and related
operating expenses through January 2005. To fund operations through December,
2005, the Company estimates that it must raise additional financing, or enter
into alliances or collaboration agreements with third parties providing for net
proceeds to the Company of at least $5 million. No assurance can be given that
the Company will be successful in obtaining any such financing or in securing
collaborative agreements with third parties on acceptable terms, if at all, or
if secured, that such financing or collaborative agreements will provide for
payments to the Company sufficient to continue to fund operations. In the
absence of such financing or third-party collaborative agreements, the Company
will be required to scale back or terminate operations and/or seek protection
under applicable bankruptcy laws.

         Even assuming the Company is successful in securing additional sources
of financing to fund the continued development of the ADF Technology or the
Opioid Synthesis Technologies, or otherwise enters into alliances or
collaborative agreements relating to such technologies, there can be no
assurance that the Company's development efforts will result in commercial scale
technologies, or that if such technologies are capable of being scaled up, that
they will result in commercially viable products. The Company is also unable to
provide any assurance that it will succeed in its application to the DEA for the
Import Registration. The Company's failure to successfully develop the ADF
Technology in a timely manner will have a material adverse impact on its
financial condition and results of operations.

         The following table presents the Company's expected cash requirements
for contractual obligations outstanding as of December 31, 2003:


<TABLE>
<CAPTION>
                                                                DUE AS OF  DUE AS OF
                                                                12/31/05   12/31/07
                                                    DUE AS OF     AND         AND        DUE
                                            TOTAL    12/31/04   12/31/06   12/31/08   THEREAFTER
                                          --------  ---------   ---------  ---------  ----------
                                                             (IN THOUSANDS)
<S>                                       <C>       <C>        <C>         <C>        <C>
Convertible senior secured
  debentures .......................      $ 86,632    $   --   $ 86,632      $ --        $ --
Term loan payable ..................        21,401        --     21,401        --          --
Department of justice settlement....           433       300        133        --          --
Bridge loans .......................         2,000        --      2,000        --          --
Capital leases .....................           137        45         61        31          --
Operating leases ...................           228       225          3        --          --
Employment agreements ..............           873       620        253        --          --
                                          --------    ------   --------      ----        ----
Total Contractual Cash
  Obligations ......................      $111,704    $3,190   $108,483      $ 31        $ --
                                          ========    ======   ========      ====        ====
</TABLE>


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:

                                       23

<PAGE>

         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 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 complies 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.

                                       24

<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS                     

         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
adoption of SFAS No. 149 did not have a material impact on the Company's
financial position or 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 adoption of SFAS No. 150 did not have a material impact on the
Company's financial position or results of operations.

CAPITAL EXPENDITURES

         The Company's capital expenditures during 2003, 2002 and 2001 were
$412,000, $287,000 and $1,544,000, respectively.

                                       25

<PAGE>

The capital expenditures during these periods are attributable to capital
improvements to the Company's Congers, NY and Culver, Indiana facilities. For
the Company to receive the DEA Controlled Substance Manufacturing Registration,
specific improvements were made for security and related items to the Culver,
Indiana facility. Additionally, expenditures were made to improve and expand the
manufacturing capabilities of both Congers, NY locations.

         Consistent with the Company's restructured operations and its emphasis
on research and development, the Company has budgeted approximately $200,000 for
capital expenditures for 2004 primarily for scientific equipment for laboratory
use to be funded by the proceeds from the 2004 Debenture Offering and the Asset
Divestment.

IMPACT OF INFLATION

         The Company believes that inflation did not have a material impact on
its operations for the periods reported. Significant increases in labor,
employee benefits and other expenses could have a material adverse effect on the
Company's performance.


I
TEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The response to this item is submitted as a separate section of this
Report commencing on page F-1.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         Not Applicable


ITEM 9A. CONTROLS AND PROCEDURES

         Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic Securities and Exchange Commission filings.
No significant changes were made in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.

         Disclosure controls and procedures are those controls and other
procedures that are designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the Company's management, including the Company's principal executive officer
and principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure.


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The directors and executive officers of the Company are as follows:


<TABLE>
<CAPTION>
        NAME           AGE                              POSITION
---------------------  ---   ----------------------------------------------------------------------
<S>                    <C>   <C>
Jerry Karabelas......  51    Chairman of the Board
Andrew D. Reddick....  51    President and Chief Executive Officer
Ron J. Spivey........  57    Senior Vice President and Chief Scientific Officer
Vijai Kumar..........  57    Chief Operations Officer
Peter A. Clemens.....  51    Senior Vice President, Chief Financial Officer, Secretary and Director
James Emigh..........  48    Vice President of Marketing and Administration
Robert Seiser........  40    Vice President, Corporate Controller and Treasurer
</TABLE>


                                       26

<PAGE>


<TABLE>
<S>                    <C>   <C>
Bruce F. Wesson......  61    Director
Alan Smith...........  74    Director
William A. Sumner....  66    Director
William Skelly.......  53    Director
Srini Conjeevaram....  45    Director
Zubeen Shroff........  39    Director
Immanuel Thangaraj...  33    Director
</TABLE>


                  Jerry Karabelas has been a Director of the Company since
December, 2002 and Chairman of the Board since May 2003. Dr. Karabelas was Head
of Healthcare and CEO of Worldwide Pharmaceuticals for Novartis AG from 1998
until July 2000. Prior to joining Novartis, Dr. Karabelas was Executive Vice
President of SmithKline Beecham. From July, 2000 until December, 2001, Dr.
Karabelas was the Founder and Chairman of the Novartis Bio Venture Fund. Since
November, 2001 he has been a Partner with Care Capital LLC. Dr. Karabelas holds
a Ph.D. in pharmacokinetics from the Massachusetts College of Pharmacy and
serves as a Director of SykePharma Plc., Human Genome Sciences, Nitromed, Anadys
and Renova.

         Andrew D. Reddick has been President and Chief Executive Officer since
August, 2003. From April, 2000 to September, 2002 Mr. Reddick was Chief
Operating Officer and Sr. Vice President Commercial Operations for Adolor
Corporation, a pharmaceutical company. From June, 1999 to March, 2000 he served
as President of Faulding Laboratories, Inc. and he served as Executive Vice
President Marketing, Sales & Business Development with Purepac Pharmaceuticals
from August, 1996 to June, 1999. Mr. Reddick holds a BA degree in Biology from
the University of California and an MBA degree from Duke University.

Ron J. Spivey has been Senior Vice President and Chief Scientific Officer since
April, 2004. From June, 2002 to March, 2004 Dr. Spivey was President of
Gibraltar Associates, a private company providing consulting services to the
pharmaceutical industry relating to product research and development. From
March, 1998 to May, 2002 he served as Vice President, Scientific Affairs for
Alpharma / Purepac Pharmaceuticals. Additionally, Dr. Spivey has served in a
number of senior level scientific and leadership positions at Zenith Goldline
Pharmaceuticals, Cima Labs Inc., Marion Merrell Dow, Burroughs Wellcome Company
and Warner Chilcott Division of Warner Lambert. Dr. Spivey holds a BA degree
from Indiana University and a Ph.D. degree in pharmaceutics from the University
of Iowa.

         Vijai Kumar has been Chief Operations Officer of the Company since
November, 2002. From 1996 to 2002, Mr. Kumar was President & CEO of Pharmalogix
Inc., a pharmaceutical research and development company. From 1992 to 1996, Mr.
Kumar was Director, Research and Development for the Warner Chilcott Division of
Warner Lambert. In that capacity, he coordinated all technical aspects of the
Division responsible for cGMP compliance, formulation development, analytical
development and clinical and bioequivalence studies. Mr. Kumar holds B.Sc. in
Chemistry from the University of Lucknow, India, a D.Pharm. from the College of
Pharmacy, New Delhi, an M.B.A. from Fairleigh Dickinson University and an M.S.
in Industrial Pharmacy from Long Island University.

         Peter A. Clemens has been Senior Vice President, Chief Financial
Officer and Secretary since April 2004 and a Director of the Company since June
1998. Mr. Clemens was Vice President, Chief Financial Officer and Secretary of
the Company from February 1998 to March 2004. From February, 1988 until joining
the Company, Mr. Clemens was employed by TC Manufacturing Co., Inc. ("TC")
which, through its various subsidiaries and divisions, manufactures generic
pharmaceuticals, industrial coatings and flexible packaging. Mr. Clemens was
TC's President from February, 1996 through February, 1998. Prior to that time,
he held the position of Vice President and Chief Financial Officer. Mr. Clemens
is a Certified Public Accountant and earned a B.B.A. degree from the University
of Notre Dame and an MBA from Indiana University.

         James Emigh has been Vice President of Marketing and Administration
since April 2004. Prior to such time, Mr. Emigh was Vice President of Sales and
Marketing. Mr. Emigh joined the Company in May, 1998, serving first as Executive
Director of Customer Relations and then as Vice President of Operations until
November, 2002. From 1991 until joining the Company, Mr. Emigh was employed by
Organon, Inc., a pharmaceutical company, in various management positions and
most recently as its Director of Managed Care and Trade Relations. Mr. Emigh
holds a Bachelor of Pharmacy from Washington State University and a Masters of
Business Administration from George Mason University.

         Robert Seiser has been a Vice President, Corporate Controller and
Treasurer since April 2004. Prior to such time, Mr. Seiser was Corporate
Controller and Treasurer. From 1992 until joining the Company in March 1998, Mr.
Seiser served as Treasurer and Corporate Controller of TC Manufacturing Co.,
Inc., a privately held company based in Evanston, Illinois. Mr. Seiser is a

                                       27

<PAGE>

Certified Public Accountant and earned a B.B.A. degree from Loyola University of
Chicago.

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

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

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

         William Skelly has been a Director of the Company since May, 1996 and
served as Chairman of the Company from October, 1996 through June, 2000. Since
1990, Mr. Skelly has served as Chairman, President and Chief Executive Officer
of Central Biomedia, Inc. and its subsidiary SERA, Inc., companies involved in
the animal health industry including veterinary biologicals and custom
manufacturing of animal sera products. From 1985 to 1990, Mr. Skelly served as
President of Martec Pharmaceutical, Inc., a distributor and manufacturer of
human generic prescription pharmaceuticals.

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

         Zubeen Shroff has been a Director of the Company since June 1998. Mr.
Shroff is a General Partner of Galen Partners III, L.P. He joined Galen
Associates, a health care venture firm, in January 1997 from The Wilkerson
Group, a leading provider of management consulting services to the health care
industry. Prior to The Wilkerson Group, he worked for Schering-Plough
International from 1989 to 1993 in a variety of staff and line management
positions and as head of Schering-Plough France's biotech franchise. Mr. Shroff
received a Bachelor of Science in Biological Sciences from Boston University in
1986 and a Masters of Business Administration from The Wharton School in 1988.
Mr. Shroff serves as a Director of AmericasDoctor.com, Cortek, Inc. and Encore
Medical Corporation.

         Immanuel Thangaraj has been a Director of the Company since December,
2002. Mr. Thangaraj has been a Managing Director of Essex Woodlands Health
Ventures, a venture capital firm specializing in the healthcare industry, since
1997. Prior to joining Essex Woodlands Health Ventures, he helped form a
telecommunication services company, for which he served as its CEO. Mr.
Thangaraj also worked as an Associate for ARCH Venture Partners, LP and managing
one of its portfolio companies, a medical information technology company. Mr.
Thangaraj holds a Bachelor of Arts and a Masters in Business Administration from
the University of Chicago and serves as a Director of iKnowMed Systems, Sound ID
and CBR Systems.

AUDIT COMMITTEE

         The Audit Committee of the Board of Directors is composed of Messrs.
William A. Sumner, Chairman, Immanuel Thangaraj, Alan Smith and Bruce F. Wesson.
The Audit Committee is responsible for selecting the Company's independent
auditors, approving the audit fee payable to the auditors, working with
independent auditors and other corporate officials, reviewing the scope and
results of the audit by, and the recommendations of, the Company's independent
auditors, approving the

                                       28

<PAGE>

services provided by the auditors, reviewing the financial statements of the
Company and reporting on the results of the audits to the Board, reviewing the
Company's insurance coverage, financial controls and filings with the Securities
and Exchange Commission (the "Commission"), including, meeting quarterly prior
to the filing of the Company's quarterly and annual reports containing financial
statements filed with the Commission, and submitting to the Board its
recommendations relating to the Company's financial reporting, accounting
practices and policies and financial, accounting and operational controls.

         In assessing the independence of the Audit Committee members during
2003, the Company has reviewed and analyzed the standards for independence
provided in Section 121A of the American Stock Exchange Listing Standards. Based
on this analysis, the Company has determined that each of Messrs. Sumner and
Smith are deemed independent members of the Audit Committee. While Messrs.
Wesson and Thangaraj do not satisfy the standards for independence set forth in
the American Stock Exchange Listing Standards as a result of the controlling
interest held by each of Galen Partners III, L.P., of which Mr. Wesson is a
general partner, and Essex Woodlands Health Ventures V, L.P., of which Mr.
Thangaraj is a general partner, the Board values the experience of Messrs.
Wesson and Thangaraj in the review of the Company's financial statements and
believes that each is able to exercise independent judgment in the performance
of his duties on the Audit Committee.

         The Audit Committee does not have a financial expert (as defined under
applicable regulations of the Commission) serving on the Committee. The Board
has determined that while none of the Audit Committee members meet all of the
criteria established by the Commission to be classified as a "financial expert",
the Company believes that in general, the members of the Audit Committee have a
sufficient understanding of audit committee functions, internal control over
financial reporting and financial statement evaluation so as to capably perform
the tasks required of the Audit Committee.

         NOMINATING COMMITTEE

         The Company does not have a standing nominating committee. Currently
the Board of Directors functions as the Company's nominating committee. The
Board performs the functions typical of a nominating committee, including the
identification, recruitment and selection of nominees for election as directors
of the Company. Three of the of the nine members of the Board (Messrs. Sumner,
Skelly and Smith) are "independent" as that term is defined by Section 121(A) of
the American Stock Exchange Listing Standards and participate with entire Board
in the consideration of director nominees. The Board believes that a nominating
committee separate from itself is not necessary at this time, given the size of
the Company and the Board, to ensure that candidates are appropriately evaluated
and selected. The Board also believes that, given the Company's size and the
size of its Board, an additional committee of the Board would not add to the
effectiveness of the evaluation and nomination process. For these reasons, the
Board believes it is not appropriate to have a nominating committee.

         The Board's process for recruiting and selecting nominees is for Board
members to attempt to identify individuals who are thought to have the business
background and experience, industry specific knowledge and general reputation
and expertise that would allow them to contribute as effective directors to the
Company's governance, and who are willing to serve as directors of a public
company. To date, the Company has not engaged any third party to assist in
identifying or evaluating potential nominees. After a possible candidate is
identified, the individual meets with various members of the Board and is
sounded out concerning their possible interest and willingness to serve, and
Board members discuss amongst themselves the individual's potential to be an
effective Board member. If the discussions and evaluation are positive, the
individual is invited to serve on the Board.

         To date, no shareholder has presented any candidate for Board
membership to the Company for consideration, and the Company does not have a
specific policy on shareholder-recommended director candidates. However, the
Board believes its process for evaluation of nominees proposed by shareholders
would be no different from the process of evaluating any other candidate. In
evaluating candidates, the Board will require that candidates possess, at a
minimum, a desire to serve on the Company's Board, an ability to contribute to
the effectiveness of the Board, an understanding of the function of the Board of
a public company and relevant industry knowledge and experience. In addition,
while not required of any one candidate, the Board would consider favorably
experience, education, training or other expertise in business or financial
matters and prior experience serving on boards of public companies.

SHAREHOLDER COMMUNICATIONS TO THE BOARD

         Shareholders who wish to send communications to the Company's Board of
Directors may do so by sending them in care of the Secretary of the Company at
the address which appears on cover page of this Report. The envelope containing
such communication must contain a clear notation indicating that the enclosed
letter is a "Shareholder-Board Communication" or "Shareholder-Director
Communication" or similar statement that clearly and unmistakably indicates the
communication is

                                       29

<PAGE>

intended for the Board. All such communications must clearly indicate the author
as a shareholder and state whether the intended recipients are all members of
the Board or just certain specified directors. The Secretary of the Company will
have the discretion to screen and not forward to directors communications which
the Secretary determines in his or her discretion are communications unrelated
to the business or governance of the Company and its subsidiaries, commercial
solicitations, or communications that are offensive, obscene, or otherwise
inappropriate. The Secretary will, however, compile all shareholder
communications which are not forwarded and such communications will be available
to any director.

CODE OF ETHICS

         The Company has adopted a Code of Ethics that applies to the Company's
principal executive officer, principal financial officer and principal
accounting officer. A copy of the Code of Ethics has been filed as an Exhibit to
this Form 10-K and is posted on the Company's website @ www.halseydrug.com under
the caption Investor Relations. Any amendments to or waivers from the Code of
Ethics will be posted on the Company's website under the caption Investor
Relations.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's Directors and executive officers, and persons who own
beneficially more than ten percent (10%) of the Common Stock of the Company, to
file reports of ownership and changes of ownership with the Commission and,
during the period in which the Company's common stock was traded on the American
Stock Exchange, the AMEX. Copies of all filed reports are required to be
furnished to the Company pursuant to Section 16(a). Based solely on the reports
received by the Company and on written representations from reporting persons,
the Company believes that the Directors, executive officers and greater than ten
percent (10%) beneficial owners of the Company's Common Stock complied with all
Section 16(a) filing requirements during the year ended December 31, 2003,
except that (i) Mr. Reicher filed two Form 4 filings late, (ii) Mr. Thangaraj
filed three Form 4 filings late, (iii) Mr. Feinberg filed two Form 4 filings
late, and (iv) a Form 3 filing requirement by Mr. Dennis Adams, a beneficial
owner of in excess of 10% of the Company's Common Stock, has not been filed to
date.


ITEM 11. EXECUTIVE COMPENSATION

         The following table sets forth a summary of the compensation paid by
the Company for services rendered in all capacities to the Company during the
fiscal years ended December 31, 2003, 2002 and 2001 to the Company's Chief
Executive Officer and the Company's next four most highly compensated executive
officers (collectively, the "named executive officers") whose total annual
compensation for 2003 exceeded $100,000:

                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                                                          LONG TERM COMPENSATION
                                           ANNUAL COMPENSATION           -------------------------
                                  -------------------------------------  SECURITIES
                                                                         UNDERLYING
                                                           OTHER ANNUAL    STOCK       ALL OTHER
  NAME AND PRINCIPAL POSITION     YEAR   SALARY    BONUS   COMPENSATION   OPTIONS    COMPENSATION
--------------------------------  ----  --------  -------  ------------  ----------  ------------
<S>                               <C>   <C>       <C>      <C>           <C>         <C>
Andrew D. Reddick...............  2003  $ 96,923     0          --             --         --
   President and Chief            2002     -0-       0          --             --         --
   Executive Officer              2001     -0-       0          --             --         --
Michael K. Reicher (1)..........  2003  $119,231  110,000       --             --         --
   Chairman and Chief             2002   200,000     0          --             --         --
   Executive Officer              2001   191,346     0          --             --         --
Peter A. Clemens................  2003  $155,000   60,000       --             --         --
   Senior Vice President and      2002   155,000     0          --             --         --
   Chief Financial Officer        2001   149,807     0          --             --         --
Vijai Kumar.....................  2003  $180,000     0          --             --         --
   Chief Operations Officer       2002    18,000     0          --        400,000         --
                                  2001     -0-       0          --             --         --
James Emigh.....................  2003  $132,000     0          --             --         --
   Vice President Marketing       2002   132,000     0          --             --         --
   and Administration             2001   125,000     0          --             --         --
</TABLE>


(1) Mr. Reicher's services as Chairman and Chief Executive Officer ceased
effective June 16, 2003.

                                       30

<PAGE>

OTHER COMPENSATORY ARRANGEMENTS

         Executive Officers and key employees participate in medical and
disability insurance plans provided to all non-union employees of the Company.
The Company also pays the automobiles expenses of an executive officer. Such
expenses are less than the lesser of $6,000 or 10% of such officer's
compensation reported above in the Summary Compensation Table.

EMPLOYMENT AGREEMENTS

         Andrew D. Reddick is employed pursuant to an Employment Agreement
effective as of August 26, 2003, which provides that Mr. Reddick will serve as
the Company's Chief Executive Officer and President for term expiring August 26,
2005. The Employment Agreement provides for an annual base salary of $300,000,
plus the payment of annual bonus of up to thirty-five percent (35%) of Mr.
Reddick's base salary based on the achievement of such targets, conditions, or
parameters as may be set from time to time by the Board of Directors or the
Compensation Committee of the Board of Directors. The Employment Agreement also
provides for the Company to issue stock options exercisable for up to 5,500,000
shares of Common Stock at an exercise price of $0.34 per share. The grant of
such stock options is subject to the receipt of shareholder approval to amend
the Company's 1998 Stock Option Plan to permit the grant of such options. To
date, the Company's shareholders have not approved the amendment to the 1998
Stock Option Plan and the options have not been granted. The Employment
Agreement also permits the Company to purchase the vested portion of Mr.
Reddick's options upon his termination for Cause (as defined in the Employment
Agreement) or his resignation other than for Good Reason (as defined in the
Employment Agreement) at a purchase price equal to the positive difference, if
any, between (i) the average of the closing bid and asked prices of the
Company's Common Stock for the five trading days prior to the date of
termination or resignation, and (ii) the exercise price of the option shares,
multiplied by the numbers shares which, as of the date of termination or
resignation, are vested under the stock option. The Employment Agreement
contains standard termination provisions, including upon death, disability, for
Cause, for Good Reason and without Cause. In the event the Employment Agreement
is terminated due to death or disability, the Company is required to pay Mr.
Reddick, or his designee, a pro rata portion of the annual bonus that would have
been payable to Mr. Reddick during such year assuming full achievement of the
bonus criteria established for such bonus. Additionally, Mr. Reddick or his
designees shall have a period of twelve (12) months following such termination
to exercise Mr. Reddick's vested stock options. In the event that the Employment
Agreement is terminated by the Company without Cause or by Mr. Reddick for Good
Reason, the Company is required to pay Mr. Reddick an amount equal to the bonus
for such year, calculated on a pro rata basis assuming full achievement of the
bonus criteria for such year, as well as Mr. Reddick's base salary for the
greater of (i) the remainder of the initial term of the Employment Agreement,
and (ii) one year (the "Severance Pay"), payable in equal monthly installments
over a period of twelve (12) months. In addition, Mr. Reddick is entitled to
continued coverage under the Company's then existing benefit plans, including
medical and life insurance, for a term equal to the greater of (i) the remainder
of the initial term of the Employment Agreement, or (ii) twelve (12) months from
the date of termination. The Employment Agreement permits Mr. Reddick to
terminate the Employment Agreement in the event of a Change of Control (as
defined in the Employment Agreement), in which case such termination is
considered to be made without Cause, entitling Mr. Reddick to the benefits
described above, except that (i) the Severance Pay is payable in a lump sum
within thirty (30) days of the date of termination, and (ii) all outstanding
stock options granted to Mr. Reddick shall fully vest and be immediately
exercisable. The Employment Agreement restricts Mr. Reddick from disclosing,
disseminating or using for his personal benefit or for the benefit of others,
confidential or proprietary information (as defined in the Employment Agreement)
and, provided the Company has not breached the terms of the Employment Agreement
from competing with the Company at any time prior to one year after the
termination of his employment with the Company.

         Ron J. Spivey, Ph.D., is employed pursuant to an Employment Agreement
effective as of April 5, 2004 which provides that Dr. Spivey will serve as the
Company's Senior Vice President and Chief Scientific Officer for term expiring
April 4, 2006. The Employment Agreement provides for an annual base salary of
$260,000, plus the payment of annual bonus of up to thirty-five percent (35%) of
Dr. Spivey's base salary based on the achievement of such targets, conditions,
or parameters as may be set from time to time by the Board of Directors or the
Compensation Committee of the Board of Directors. The Employment Agreement also
provides for the Company to issue stock options exercisable for up to 3,000,000
shares of Common Stock at an exercise price of $0.13 per share. The grant of
such stock options is subject to the receipt of shareholder approval to amend
the Company's 1998 Stock Option Plan to permit the grant of such options. The
stock option provides for vesting of 1,000,000 shares on October 1, 2004 with
the remaining balance vesting in quarterly increments of 333,333 shares at the
expiration of each quarterly period commencing with the quarterly period ending
December 31, 2004. The Employment Agreement also permits the Company to purchase
the vested portion of Dr. Spivey's options upon his termination for Cause (as
defined in the Employment Agreement) or his resignation other than for Good
Reason (as defined in the Employment Agreement) at a

                                       31

<PAGE>

purchase price equal to the positive difference, if any, between (i) the average
of the closing bid and asked prices of the Company's Common Stock for the five
trading days prior to the date of termination or resignation, and (ii) the
exercise price of the option shares, multiplied by the numbers shares which, as
of the date of termination or resignation, are vested under the stock options.
The Employment Agreement contains standard termination provisions, including
upon death, disability, for Cause, for Good Reason and without Cause. In the
event the Employment Agreement is terminated due to death or disability, Dr.
Spivey or his designees shall have a period of twelve (12) months following such
termination to exercise Dr. Spivey's vested stock options. In the event that the
Employment Agreement is terminated by the Company without Cause or by Dr. Spivey
for Good Reason, the Company is required to pay Dr. Spivey an amount equal to
the bonus for such year, calculated on a pro rata basis assuming full
achievement of the bonus criteria for such year, as well as Dr. Spivey's base
salary for one year (the "Severance Pay"), payable in equal monthly installments
over a period of twelve (12) months. In addition, Dr. Spivey is entitled to
continued coverage under the Company's then existing benefit plans, including
medical and life insurance, for twelve (12) months from the date of termination.
The Employment Agreement permits Dr. Spivey to terminate the Employment
Agreement in the event of a Change of Control (as defined in the Employment
Agreement), in which case such termination is considered to be made without
Cause, entitling Dr. Spivey to the benefits described above, except that (i) the
Severance Pay is payable in a lump sum within thirty (30) days of the date of
termination, and (ii) all outstanding stock options granted to Dr. Spivey shall
fully vest and be immediately exercisable. The Employment Agreement restricts
Dr. Spivey from disclosing, disseminating or using for his personal benefit or
for the benefit of others, confidential or proprietary information (as defined
in the Employment Agreement) and, provided the Company has not breached the
terms of the Employment Agreement from competing with the Company at any time
prior to one year after the termination of his employment with the Company.

         Peter A. Clemens is employed pursuant to an Employment Agreement
effective as of March 10, 1998, which after giving effect to amendments dated
June 28, 2000 and May 4, 2001, provides that Mr. Clemens will serve as the
Company's Vice President and Chief Financial Officer for a term expiring April
30, 2005. The Employment Agreement provides for an annual base salary of
$180,000 plus the payment of an annual bonus to be determined based on the
satisfaction of such targets, conditions or parameters as may be determined from
time to time by the Compensation Committee of the Board of Directors. Mr.
Clemens received a bonus of $60,000 in fiscal 2003. The Employment Agreement
also provides for the grant of stock options on March 10, 1998 to purchase
300,000 shares of the Company's common stock at an exercise price of $2.375 per
share, which options vest in equal increments of 25,000 option shares at the end
of each quarterly period during the term of the Employment Agreement (as such
vesting schedule may be amended by mutual agreement of Mr. Clemens and the Board
of Directors). The Employment Agreement also permits the Company to repurchase
the vested portion of Mr. Clemens' options upon his termination for Cause (as
defined in the Employment Agreement) or his resignation (other than for Good
Reason as defined therein), at a purchase price equal to the positive
difference, if any, between (i) the average of the closing price of the
Company's common stock for the five trading days prior to the date of
termination or resignation, and (ii) the exercise price of the option shares,
multiplied by the number of option shares which, as of the date of termination,
are vested under the option. The Employment Agreement contains standard
termination provisions, including upon death, disability, for Cause, for Good
Reason and without Cause. In the event the Employment Agreement is terminated by
the Company without Cause or by Mr. Clemens for Good Reason, the Company is
required to pay Mr. Clemens an amount equal to $310,000 or twice his then base
salary, whichever is greater, payable in a lump sum within 30 days of
termination and to continue to provide Mr. Clemens coverage under the Company's
then existing benefit plans, including medical and life insurance, for a term of
24 months. The Employment Agreement permits Mr. Clemens to terminate the
Employment Agreement in the event of a Change of Control (as defined in the
Employment Agreement) and for Good Reason. The Employment Agreement also
restricts Mr. Clemens from disclosing, disseminating or using for his personal
benefit or for the benefit of others confidential or proprietary information (as
defined in the Employment Agreement) and, provided the Company has not breached
the terms of the Employment Agreement, from competing with the Company at any
time prior to two years after the earlier to occur of the expiration of the term
and the termination of his employment.

         Vijai Kumar is employed pursuant to an Employment Agreement effective
as of November 18, 2002, which provides that Mr. Kumar will serve as the
Company's Chief Operations Officer for a term expiring November 18, 2004. The
Employment Agreement provides for an annual base salary of $180,000 plus the
payment of an annual bonus to be determined based on the satisfaction of such
targets, conditions or parameters as may be determined from time to time by the
Compensation Committee of the Board of Directors. The Employment Agreement also
provides for the grant of stock options on November 18, 2002 to purchase 400,000
shares of the Company's common stock at an exercise price of $1.125 per share,
which options vest in equal increments of 100,000 annually commencing on
November 18, 2003. The Employment Agreement permits the Company to repurchase
the vested portion of Mr. Kumar's options upon his termination for Cause (as
defined in the Employment Agreement) or his resignation, at a purchase price
equal to the positive difference, if any, between the average of the closing
price of the Company's common stock for the five trading days prior to the date
of termination or resignation, multiplied by the number of

                                       32

<PAGE>

option shares which, as of the date of termination, are vested under the option.
The Employment Agreement contains standard termination provisions, including
upon death, disability, for Cause (as defined in the Employment Agreement) and
without Cause. The Employment Agreement also provides that in the event of a
Change of Control (as defined in the Employment Agreement), or if Mr. Kumar's
employment with the Company is terminated without Cause, he is entitled to his
base salary for the lesser of (i) the remaining term of the Employment
Agreement, and (ii) one year. The Employment Agreement also restricts Mr. Kumar
from disclosing, disseminating or using for his personal benefit or the benefit
of others confidential or proprietary information (as defined in the Employment
Agreement) and, provided the Company has not breached the terms of the
Employment Agreement, from competing with the Company at any time prior to one
year after the earlier to occur of the expiration of the term and the
termination of his employment.

COMPENSATION OF DIRECTORS

         Directors who are employees of the Company receive no additional or
special remuneration for their services as Directors. Directors who are not
employees of the Company receive an annual grant of options to purchase 10,000
shares of the Company's common stock (15,000 shares in the case of the Chairman
of the Board) and $500 for each meeting attended ($250 in the case of telephonic
meetings). The Company also reimburses Directors for travel and lodging
expenses, if any, incurred in connection with attendance at Board meetings.
Directors who serve on any of the Committees established by the Board of
Directors receive $250 for each Committee meeting attended unless held on the
day of a full Board meeting.

STOCK OPTION PLANS

         The Company currently maintains two stock option plans adopted in 1995
and 1998, respectively. The Company in the past has used, and will continue to
use, stock options to attract and retain key employees in the belief that
employee stock ownership and stock-related compensation devices encourage a
community of interest between employees and shareholders.

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

         As of April 1, 2004, ISO's to purchase 630,608 shares and non-qualified
options to purchase 257,780 shares have been granted under the 1995 Stock Option
Plan, leaving 111,612 shares available for grant under the Plan. The average per
share exercise price for all outstanding options under the 1995 Stock Option
Plan is approximately $1.44. No exercise price of an ISO was set at less than
100% of the fair market value of the underlying Common Stock, except for grants
made to any person who owned stock possessing more than 10% of the total voting
power of the Company, in which case the exercise price was set at not less than
110% of the fair market value of the underlying Common Stock.

         The 1998 Stock Option Plan. The 1998 Stock Option Plan was adopted by
the Board of Directors in April, 1998 and approved by the Company's shareholders
in June 1998. The 1998 Stock Option Plan was amended by the Board of Directors
in April, 1999 to increase the number of shares available for the grant of
options under the Plan from 2,600,000 to 3,600,000 shares. The Company's
shareholders ratified the Plan amendment on August 19, 1999. The 1998 Stock
Option Plan was further amended by Board of Directors in April, 2001 to increase
the number of shares available for grant of options under the Plan from
3,600,000 to 8,100,000 shares. The Company's shareholders ratified the Plan
amendment on June 14, 2001. The Board will seek authorization at the Company's
2004 Annual Meeting of Shareholders to amend the 1998 Stock Option Plan to (a)
increase the number of shares available for grant of options under the Plan from
8,100,000 to 20,000,000 shares, (b) permit the grant of non-qualified stock
options having an exercise price per share which is less than the fair market
value of the Company's Common Stock, and (c) set a limit of 8,750,000 option
awards that may be granted to one individual in any calendar year. The 1998
Stock Option Plan permits the grant of ISO's and non-qualified stock options to
purchase shares of the Company's Common Stock. As of April 1, 2004, stock
options to purchase 2,691,342 shares of Common Stock had been granted under the
1998 Stock Option Plan. Of such option grants, 1,562,466 are ISOs and 1,128,876
are non-qualified options. The average per share exercise price for all
outstanding options under the 1998 Stock Option Plan is approximately $1.94. No
exercise price of an ISO was set at less than 100% of the fair market value of
the underlying Common Stock, except for grants made to any

                                       33

<PAGE>

person who owned stock possessing more than 10% of the total voting power of the
Company, in which case the exercise price was set at not less than 10% of the
fair market value of the underlying Common Stock. Subject to the terms of the
1998 Stock Option Plan, the Stock Option Committee determines the persons to
whom grants are made and the vesting, timing, amounts and other terms of such
grant. An employee may not receive ISO's exercisable in any one calendar year
for shares with a fair market value on the date of grant in excess of $100,000.
No quantity limitations apply to the grant of non-qualified stock options.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

         The following table includes information as of December 31, 2003
relating to the Company's 1995 Stock Option Plan and 1998 Stock Option Plan,
which comprise all of the equity compensation plans of the Company. The table
provides the number of securities to be issued upon the exercise of outstanding
options under such plans, the weighted-average exercise price of such
outstanding options and the number of securities remaining available for future
issuance under such equity compensation plans:

                      EQUITY COMPENSATION PLAN INFORMATION


<TABLE>
<CAPTION>
                                                                                          NUMBER OF SECURITIES
                                                                                         REMAINING AVAILABLE FOR
                                      NUMBER OF SECURITIES TO     WEIGHTED-AVERAGE     FUTURE ISSUANCE UNDER EQUITY
                                      BE ISSUED UPON EXERCISE     EXERCISE PRICE OF        COMPENSATION PLANS
                                      OF OUTSTANDING OPTIONS,   OUTSTANDING OPTIONS,      (EXCLUDING SECURITIES
           PLAN CATEGORY                WARRANTS AND RIGHTS      WARRANTS AND RIGHTS     REFLECTED IN COLUMN(a))
           -------------              -----------------------   --------------------   ----------------------------
                                                (a)                      (b)                        (c)
<S>                                   <C>                       <C>                    <C>
Equity Compensation Plans
  Approved by Security
  Holders..........................         3,417,270                  $1.83                     5,520,270
Equity Compensation Plans Not
  Approved by Security
  Holders..........................                 0                      0                             0
  TOTAL............................         3,417,270                  $1.83                     5,520,270
</TABLE>


                 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR END OPTION VALUES

         No stock options were granted to or exercised by the named executive
officers during 2003. The following table presents information regarding the
value of options outstanding at December 31, 2003 for each of the named
executive officers.


<TABLE>
<CAPTION>
                               NUMBER OF SECURITIES        VALUE OF UNEXERCISED
                              UNDERLYING UNEXERCISED     IN-THE-MONEY OPTIONS AT
                            OPTIONS AT FISCAL YEAR END     FISCAL YEAR END (2)
                            --------------------------  --------------------------
          NAME              EXERCISABLE  UNEXERCISABLE  EXERCISABLE  UNEXERCISABLE
-------------------------   -----------  -------------  -----------  -------------
<S>                         <C>          <C>            <C>          <C>
Andrew D. Reddick........          ---          ---        $ ---         $ ---
Michael K. Reicher(1)....    1,065,170          ---        $ ---         $ ---
Peter A. Clemens.........      600,000       25,000        $ ---         $ ---
Vijai Kumar..............      100,000      300,000        $ ---         $ ---
James Emigh..............      116,000       35,000        $ ---         $ ---
</TABLE>


(1)      Mr. Reicher's services as Chief Executive Officer ceased effective June
         16, 2003.

(2)      Value is based upon the average of the closing bid and asked price of
         $.47 per share at December 31, 2003.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The Company's Compensation Committee consisted of Messrs. Wesson,
Conjeevaram, Skelly, Reicher and Thangaraj during fiscal 2003. During 2003,
except for Mr. Reicher, there were no Compensation Committee interlocks or
insider participation in compensation decisions. Mr. Reicher resigned as a
Director of the Company effective September 18, 2003.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

         The following table sets forth information regarding the beneficial
ownership of the Common Stock, as of April 1, 2004, for individuals or entities
in the following categories: (i) each of the Company's Directors and nominees
for Directors; (ii) the Chief

                                       34

<PAGE>

Executive Officer and the next four highest paid executive officers of the
Company whose total annual compensation for 2003 exceeded $100,000 (the "named
executive officers"); (iii) all Directors and executive officers as a group; and
(iv) each person known by the Company to be a beneficial owner of more than 5%
of the Common Stock. Unless indicated otherwise, each of the shareholders has
sole voting and investment power with respect to the shares beneficially owned.


<TABLE>
<CAPTION>
                                                SHARES OF COMMON STOCK ON AN AS-
                                                CONVERTED AND AS-EXERCISED BASIS
                                               -----------------------------------
                                                                PERCENT   PERCENT
                                                 AMOUNT           OF        OF
            NAME OF BENEFICIAL OWNER            OWNED(1)        CLASS(2)  CLASS(3)
---------------------------------------------  ----------       --------  --------
<S>                                            <C>              <C>       <C>
Galen Partners III, L.P(4)...................  36,997,999(5)      63.1%     56.3%
  610 Fifth Avenue, 5th Floor
  New York, New York 10020

Galen Partners International III, L.P(4).....   3,796,736(6)      15.0%      5.8%
  610 Fifth Avenue, 5th Floor
  New York, New York 10020

Oracle Strategic Partners, L.P(4)............  13,515,299(7)      38.5%     20.6%

Watson Pharmaceuticals, Inc..................  10,700,665(8)      33.1%     16.3%
   311 Bonnie Circle
   Corona, California 92880

Dennis Adams.................................   2,577,173(9)      10.7%      3.9%
   c/o Delaware Investment Advisors
   One Commerce Square
   Philadelphia, Pennsylvania 19103

Hemant K. Shah and Varsha H. Shah............   1,885,627(10)      8.0%      2.9%
   29 Christy Drive
   Warren, New Jersey 07059

Bernard Selz.................................     974,552(11)      4.3%      1.5%
   c/o Furman Selz
   230 Park Avenue
   New York, New York 10069

Michael and Susan Weisbrot...................  1,626,403(12)       7.0%      2.5%
   1136 Rock Creek Road
   Gladwyne, Pennsylvania 19035

Andrew D. Reddick............................          --           *         *
Michael K. Reicher...........................   1,142,426(13)      5.0%      1.7
William Skelly...............................     211,000(14)      1.0%       *
Bruce F. Wesson..............................          --           *         *
Srini Conjeevaram............................          --           *         *
William A. Sumner............................      50,000(15)       *         *
Zubeen Shroff................................          --           *         *
Peter A. Clemens.............................     774,843(16)      3.5%      1.2%
Jerry Karabelas..............................          --           *         *
Immanuel Thangaraj...........................          --           *         *
Alan Smith...................................      83,468(17)       *         *
Vijai Kumar..................................     100,000(18)       *         *
James Emigh..................................     173,500(19)       *         *
All Directors and Officers as a Group
(12 persons).................................   1,521,311(20)      6.6%      2.3%
</TABLE>


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

(1)      The information with respect to Hemant K. Shah and Varsha H. Shah,
         Dennis Adams, Bernard Selz and Michael and Susan Weisbrot and Watson
         Pharmaceuticals, is based upon filings with the Commission and/or
         information provided to the Company.

                                       35

<PAGE>

(2)      Shows percentage ownership assuming (i) such party converts all of its
         currently convertible securities or securities convertible within 60
         days of April 1, 2004 into the Company's common stock, and (ii) no
         other Company securityholder converts any of its convertible
         securities.

(3)      Shows percentage ownership assuming such party and all other
         securityholders of the Company convert all of their convertible
         securities into the Company's common stock.

(4)      Despite reasonable efforts, the Company was unable to obtain from its
         security holders the names of the individuals that exercise voting,
         investment and dispositive rights over the Company's securities held of
         record by such entities. The Company was unable to obtain such
         information without unreasonable effort and expense.

(5)      Includes (i) 22,195,668 shares issuable upon conversion of 1998
         Debentures and 1999 Debentures, (ii) 5,068,748 shares issuable upon
         exercise of 1998 Warrants and 1999 Warrants, (iii) 4,932,231 shares
         issuable upon exercise of common stock purchase warrants issued in
         connection with the 1998/1999 and 2001/2002 Galen Bridge Loans, (iv)
         4,276,062 shares issuable upon conversion of Debentures issued in lieu
         of quarterly cash interest payments, and (v) 150,000 shares subject to
         currently exercisable stock options.

(6)      Includes (i) 2,356,348 shares issuable upon conversion of 1998
         Debentures and 1999 Debentures, (ii) 537,358 shares issuable upon
         exercise of 1998 Warrants and 1999 Warrants, (iii) 447,876 shares
         issuable upon exercise of common stock purchase warrants issued in
         connection with the 1998/1999 and 2001/2002 Galen Bridge Loans, and
         (iv) 455,154 shares issuable upon conversion of Debentures issued in
         lieu of quarterly cash interest payments.

(7)      Includes (i) 8,533,847 shares issuable upon conversion of the 1999
         Debentures, and (ii) 1,301,991 shares issuable upon conversion of
         Debentures issued in lieu of quarterly cash interest payments, and
         (iii) 30,000 shares subject to currently exercisable stock options.

(8)      Includes 10,700,665 shares issuable upon exercise of the Watson
         Warrant.

(9)      Includes 1,553,641 shares issuable upon conversion of 1998 Debentures
         and 1999 Debentures.

(10)     Includes 1,053,627 shares issuable upon conversion of 1998 Debentures
         and 1999 Debentures.

(11)     Includes 614,309 shares issuable upon conversion of 1998 Debentures and
         1999 Debentures.

(12)     Includes 814,415 shares issuable upon conversion of 1998 Debentures and
         1999 Debentures.

(13)     Includes (i) 62,590 shares issuable upon conversion of 1998 Debentures,
         (ii) 14,666 shares issuable upon conversion of Debentures issued in
         lieu of quarterly interest payments and (iii) 1,065,170 shares subject
         to currently exercisable stock options.

(14)     Includes 200,000 shares subject to currently exercisable stock options.

(15)     Includes 50,000 shares subject to currently exercisable stock options.

(16)     Includes (i) 110,908 shares issuable upon conversion of 1998
         Debentures, (ii) 17,885 shares issuable upon conversion of Debentures
         issued in lieu of quarterly interest payments, and (iii) 600,000 shares
         subject to currently exercisable stock options.

(17)     Includes (i) 50,000 shares subject to currently exercisable common
         stock purchase options, and (ii) 22,490 shares issuable upon conversion
         of 1998 Debentures.

(18)     Includes 100,000 shares subject to currently exercisable stock options.

(19)     Includes 128,500 shares subject to currently exercisable stock options.

(20)     Includes 1,408,283 shares which Directors and executive officers have
         the right to acquire within the next 60 days through the conversion of
         Debentures and the exercise of outstanding stock options.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         On December 20, 2002, the Company completed 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 maturing March 31, 2006
(the "2002 Debentures"). The Debentures were issued by the

                                       36

<PAGE>

Company pursuant to a certain Debenture Purchase Agreement dated December 20,
2002 (the "2002 Purchase Agreement") by and among the Company, Care Capital,
Essex, Galen and each of the purchasers listed on the signature page thereto. In
accordance with the terms of the 2002 Purchase Agreement, each of Jerry
Karabelas, a designee of Care Capital, and Immanuel Thangaraj, a designee of
Essex, were appointed to the Company's Board of Directors.

         As part of the closing of the 2002 Debenture Offering, the Company's
term loan agreement (the "Watson Loan Agreement") with Watson Pharmaceuticals,
Inc. ("Watson") was amended to (i) extend the maturity date of the Watson Loan
Agreement from March 31, 2003 to March 31, 2006, and (ii) increase the principal
amount of the Watson Loan Agreement from $17,500,000 to $21,401,331 (the "Watson
Term Loan") to reflect the inclusion of approximately $3,901,331 owed by the
Company to Watson under a product supply agreement between the parties. In
consideration for the amendment to the Watson Loan Agreement, the Company issued
to Watson a Common Stock purchase warrant exercisable for 10,700,665 shares of
the Company's Common Stock (the "Watson Warrant"). The Watson Warrant has a term
expiring December 31, 2009 and an exercise price of $.34 per share.

         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 "2003 Letter of Support"). In
consideration for the issuance of the 2003 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 (such exercise price being equal to the
conversion price of the 2002 Debentures). In accordance with the terms of the
Letter of Support, the Majority 2002 Debentureholders advance to the Company an
aggregate principal amount of $8.6 million during the period from June 16, 2004
through and including December 29, 2003 to fund the Company's operating losses
and working capital requirements (the "Letter of Support Advances"). The Letter
of Support Advances were made in accordance with the terms of the 2002 Purchase
Agreement resulting in the Company's issuance of additional 2002 Debentures in
an aggregate principal amount of $8.6 million (plus additional 2002 Debentures
issued in satisfaction of accrued interest on the Letter of Support Advances).

         On February 10, 2004, the Company consummated a private offering of
convertible senior secured debentures (the "2004 Debentures") in the aggregate
principal amount of approximately $12.3 million (the "2004 Debenture Offering").
The 2004 Debentures were issued by the Company pursuant to a certain Debenture
and Share Purchase Agreement dated as of February 6, 2004 (the "2004 Purchase
Agreement") by and among the Company, Care Capital, Essex, Galen and each of the
purchasers listed on the signature page thereto. Of the approximate $12.3
million in debentures issued on February 10, 2004 under in the 2004 Debenture
Offering, approximately $2 million of 2004 Debentures were issued in exchange
for the surrender of a like amount of principal plus accrued and unpaid interest
under the Company's 2002 Debentures issued to Care Capital, Essex and Galen
during November and December, 2003 pursuant to the Letter of Support. On April
14, 2004, the Company completed an additional closing under the 2004 Purchase
Agreement pursuant to which the Company issued additional 2004 Debentures in the
aggregate principal amount of approximately $579,000, bringing the aggregate
principal amount of 2004 Debentures issued by the Company under the 2004
Purchase Agreement to $12.879 million.

         The 2004 Debentures (including the principal amount plus interest
accrued at the date of conversion) will convert automatically into the Company's
series A convertible preferred stock (the "Series A Preferred") immediately
following the Company's receipt of shareholder approval of the Company's
restated Certificate of Incorporation (the "Charter Amendment") to, among other
things, authorize the Series A Preferred shares, and the filing of the Charter
Amendment with the Office of New York Department of State (the date of such
filing, the "Charter Amendment Filing Date"). The Debentures will convert into
Series A Preferred at a price per share (the "Conversion Price") of $0.6425,
representing the average of the closing bid and asked prices of the Company's
Common Stock for the 20 trading days ending February 4, 2004, as reported by the
Over-the-Counter ("OTC") Bulletin Board. Based on the $0.6425 Conversion Price
of the Series A Preferred and estimating the interest accrual under the 2004
Debentures prior to the Charter Amendment Filing Date, the 2004 Debentures are
convertible into an aggregate of approximately 19.9 million Series A Preferred
shares, of which 5.2 million, 6.8 million and 6.8 million are issuable to Care
Capital, Essex and Galen, respectively, under the 2004 Debentures held by such
parties (representing 26.1%, 34.2% and 34.2%, respectively, of the total Series
A Preferred issuable upon conversion of the 2004 Debentures). The 2004 Purchase
Agreement also provides that the holders of the Series A Shares shall have the
right to vote as part of the single class with all holders of the Company's
voting securities on all matters to be voted on by such security holders. Each
holder of Series A Preferred shall have such number of votes as shall equal the
number of votes he would have had if such holder converted all Series A
Preferred held by such holder into shares of Common Stock immediately prior to
the record date relating to such vote.

                                       37

<PAGE>

         As a condition to the completion of the 2004 Purchase Agreement, the
Company, the investors in the 2004 Debentures and the holders of the Company's
outstanding 5% convertible senior secured debentures due March 31, 2006 issued
by the Company in 1998, 1999, 2002 and 2003 (collectively, the "1998-2002
Debentures"), executed a certain Voting Agreement dated as of February 6, 2004
(the "Voting Agreement"). The Voting Agreement provides that each of Care
Capital, Essex and Galen (collectively, the "Lead 2004 Investors") has the right
to designate for nomination one member of the Company's Board of Directors, and
that the Lead 2004 Investors collectively may designate one additional member of
the Board (collectively, the "Designees"). The Designees of Care Capital, Essex
and Galen are Messrs. Karabelas, Thangaraj and Wesson, respectively, each of
whom are current Board members. As of the date of this Report, the collective
Designee of the Lead 2004 Investors had not been determined.

         Simultaneous with the execution of a 2004 Purchase Agreement, and as a
condition to the initial closing of the 2004 Purchase Agreement, the Company,
the investors in the 2004 Debentures and each of the holders of the 1998-2002
Debentures (the 2004 Debentures and the 1998-2002 Debentures are collectively
referred to as the "Outstanding Debentures") executed a certain Debenture
Conversion Agreement dated as of February 6, 2004 (the "Conversion Agreement").
In accordance with the terms of the Conversion Agreement, each holder of the
Outstanding Debentures agreed to convert their debentures into the Company's
Preferred Stock. Specifically, the Conversion Agreement provides, among other
things, for the automatic conversion of the 2004 Debentures into the Company's
Series A Preferred and the automatic conversion of the 1998-2002 Debentures into
the Company's Series B convertible preferred stock (the "Series B Preferred")
and/or the Company's series C convertible preferred stock (the "Series C
Preferred") immediately upon the Charter Amendment Filing Date. The Series B
Preferred and the Series C Preferred are referred to collectively as the "Junior
Preferred Shares", and the Junior Preferred Shares, together with the Series A
Preferred are referred to collectively as the "Preferred Stock".

         After giving effect to the 2004 Debenture Offering and assuming (i) the
receipt of shareholder approval of the Charter Amendment, (ii) the filing of the
Charter Amendment, (iii) the conversion of the 2004 Debentures into Series A
Preferred, and (iv) the conversion of the 1998-2002 Debentures into Junior
Preferred Shares, Care Capital, Essex and Galen would control approximately 15.1
%, 17.6 % and 47.9 %, respectively, of the Company's voting securities (or
approximately 13.3 %, 15.6 %, 47.9 %, respectively, after giving effect to the
conversion of all of the Company's issued and outstanding Common Stock purchase
options and warrants).

         It was a condition to the completion of the 2004 Debenture Offering
that the Watson Loan Agreement be restructured to provide for a reduction in the
principal amount of the Watson Term Loan and for the assignment of the Watson
Term Loan as restructured to Care Capital, Essex, Galen and the other investors
in the 2004 Debentures as of February 10, 2004 (collectively, the "Watson Note
Purchasers"). Accordingly, simultaneous with the closing of the 2004 Purchase
Agreement, each of the Company, Watson and the Watson Note Purchasers executed
an Umbrella Agreement dated as of February 6, 2004 (the "Umbrella Agreement").
The Umbrella Agreement provides for (i) the Company's payment to Watson of
approximately $4.3 million in consideration of amendments to the Watson term
notes in the aggregate principal amount of approximately $21.4 million
evidencing the Watson Term Loan (the "Watson Notes") (A) to forgive
approximately $16.4 million of indebtedness under that Watson Notes, leaving a
$5 million principal balance, (B) to extend the maturity date of the Watson
Notes from March 31, 2006 to June 30, 2007, (C) to provide for the satisfaction
of future interest payments under the Watson Notes in the form of the Company's
Common Stock, and (D) to provide for the forbearance from the exercise of rights
and remedies upon the occurrence of certain events of default under the Watson
Notes (the Watson Notes as so amended, the "Amended and Restated Watson Note"),
and (ii) Watson's sale and conveyance of the Amended and Restated Watson Note to
the Watson Note Purchasers for cash consideration of $1.0 million.

         In accordance with the terms of the Umbrella Agreement, simultaneous
with the Company's payment to Watson of approximately $4.3 million, the Company
conveyed to Watson approximately $165,000 in finished dosage products, at no
charge, ANDAs for butalbital/acetaminophen/caffeine tablets, doxycycline hyclate
capsules and doxycycline monohydrate capsules, the drug master files and certain
related assets for doxycycline monohydrate API and doxycycline hyclate API, and
the Company's equipment dedicated to the production of doxycycline API
(collectively, the "Transferred Assets"). The Company also granted to Watson an
option to enter into a commercial supply agreement for hydrocodone bitartrate
API (the "Hydrocodone Option"). In addition to Watson forgiveness of
approximately $16.4 million of indebtedness under the Watson Notes, as
additional consideration for the payment to Watson of approximately $4.3
million, the conveyance of the Transferred Assets, and the grant of the
Hydrocodone Option, all current supply agreements between the Company and Watson
were terminated and Watson waived the dilution protections contained in the
Watson Warrant, to the extent such dilution protections were triggered by the
transactions contemplated in the 2004 Debenture Offering.

                                       38

<PAGE>

         The Amended and Restated Watson Note in the principal amount of $5.0
million is secured by a first lien on all of the Company's and its subsidiaries'
assets, senior in right of payment and lien priority over all other Company
indebtedness, carries a floating rate of interest equal to the prime rate plus
4.5% and matures on June 30, 2007.

         After giving effect to the transactions provided in the Umbrella
Agreement, the Watson Note Purchasers represent the Company's senior lenders.
The allocation of ownership of the $5.0 million Amended and Restated Watson Note
among each of the Watson Note Purchasers was based on the quotient of the
principal amount of the 2004 Debentures purchased by such Watson Note Purchaser,
divided by approximately $12.3 million, representing the aggregate principal
amount of the 2004 Debentures issued by the Company on February 10, 2004. As
such, of the $5.0 million principal amount of the Amended and Restated Watson
Note, approximately $1,352,000, $1,754,000, and $1,754,000, is owed by the
Company to Care Capital, Essex and Galen, respectively (representing
approximately 27%, 35% and 35%, respectively, of the Amended and Restated Watson
Note).

         Each of Michael and Susan Weisbrot and Dennis Adams beneficially own in
excess of 5% of the Company's voting securities. Each of such security holders
participated as an investor in the 2004 Debentures, agreed to convert their
1998-2002 Debentures into Junior Preferred Shares and purchased a portion of the
Amended and Restated Watson Note a member of the Watson Note Purchasers. In
addition, Bernard Selz, Hemant and Varsha Shah and Oracle Strategic Partners,
L.P., each a beneficial owner of in excess of 5% of the Company's voting
securities, is a party to the Conversion Agreement pursuant to which each has
agreed to automatically convert their respective 1998-2002 Debentures into
Junior Preferred Shares on the Charter Amendment Filing Date. See "Item
12-Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters".


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

         The aggregate fees billed for professional services rendered by the
Company's principal accountant for the audit of the Company's annual financial
statements for the fiscal years ended December 31, 2002 and December 31, 2003,
and for the reviews of the financial statements included in the Company's
Quarterly Reports on Form 10-Q for such fiscal years, were $176,000 and
$150,623, respectively, all of which were attributable to Grant Thornton LLP.

AUDIT - RELATED FEES

         The aggregate fees billed for professional services rendered by the
Company's principal accountant and which are reasonably related to the
performance of the audit or review of the Company's financial statements and
which are not reported above under the caption "Audit Fees" for each of the
fiscal years ended December 31, 2002 and December 31, 2003 were $14,180 and
$36,620, respectively, all of which were attributable to Grant Thornton LLP.
These fees relate to services provided in connection with the audit of the
Company's 401(k) and profit sharing plan.


TAX FEES

         The aggregate fees bills for professional services rendered by the
Company's principal accountant for tax compliance, tax advice and tax planning
for the fiscal years ended December 31, 2002 and December 31, 2003 were $54,000
and $51,236, respectively, all of which were attributable to Grant Thornton LLP.
These services related to the preparation of various state and Federal tax
returns.

ALL OTHER FEES

         There were no fees billed for professional services rendered by the
Company's principal accountant for products and services provided, other than
those described above under the captions "Audit Fees", "Audit-Related Fees" and
"Tax Fees".

AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES

         Consistent with policies of the Commission regarding auditor
independence and the Audit Committee Charter, the Audit Committee has the
responsibility for appointing, setting compensation and overseeing the work of
the independent auditor. The

                                       39

<PAGE>

Audit Committee's policy is to pre-approve all audit and permissible non-audit
services provided by the independent auditor. Pre-approval is detailed as to the
particular service or category of services and is generally subject to a
specific budget. The Audit Committee may also pre-approve particular services on
a case-by-case basis. In assessing requests for services by the independent
auditor, the Audit Committee considers whether such services are consistent with
the auditor's independence, whether the independent auditor is likely to provide
the most effective and efficient service based upon their familiarity with the
Company, and whether the service could enhance the Company's ability to manage
or control risk or improve audit quality.

         All of the audit-related, tax and other services provided by Grant
Thornton LLP in fiscal year 2003 and related fees (as described in the captions
above) were approved in advance by the Audit Committee.


PART IV


ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

         (a)(1) Consolidated Financial Statements -- See Index to Financial
Statements.

         (a)(2) Consolidated Financial Statement Schedules -- See Index to
Financial Statements

         (b) Reports on Form 8-K

         On November 19, 2003, the Company filed a Current Report on Form 8-K.
The Form 8-K described the Company's issuance of a press release disclosing the
financial results for its third quarter ended September 30, 2003 and the nine
months then ended.

         (c) Exhibits

         The following exhibits are included as a part of this Annual Report on
Form 10-K or incorporated herein by reference.


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                 DOCUMENT
-------  -----------------------------------------------------------------------
<S>      <C>
3.1      Certificate of Incorporation and amendments (incorporated by reference
         to Exhibit 3.1 to the Registrant's Annual Report on 10-K for the year
         ended December 31, 1999).

3.2      Restated Bylaws (incorporated by reference to Exhibit 3.1 to the
         Registrant's Quarterly Report on Form 10-Q for the quarter ended June
         30, 1993).

3.3      Restated By-Laws (incorporated by reference to Exhibit 3.3 to the
         Registrant's Annual Report Form 10-K for the year ended December 31,
         1998 (the "1998 Form 10-K")).

4.1      Form of 5% Convertible Senior Secured Debenture (incorporated by
         reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K
         dated December 20, 2002 (the "December 2002 Form 8-K")).

4.2      Form of Convertible Senior Secured Debenture issued pursuant to the
         Debenture and Share Purchase Agreement dated as of February 6, 2004
         (incorporated by reference to Exhibit 4.1 of the Registrant's Current
         Report on Form 8-K dated February 10, 2004 (the "February 2004 Form
         8-K")

10.1     Credit Agreement, dated as of December 22, 1992, among the Registrant
         and The Chase Manhattan Bank, N.A. (incorporated by reference to
         Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the
         year ended December 31, 1992 (the "1992 Form 10-K")).

10.2     Amendment Two, dated as of January 12, 1994, to Credit Agreement among
         the Registrant and The Chase Manhattan Bank, N.A., together with forms
         of Stock Warrant and Registration Rights Agreement (incorporated by
         reference to Exhibit 10.1 to the Registrant's Annual Report on Form
         10-K for the year ended December 31, 1993 (the "1993 Form 10-K")).
</TABLE>


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10.3     Amendment Three, dated as of May 31, 1994, to Credit Agreement among
         the Registrant and The Chase Manhattan Bank, N.A. (incorporated by
         reference to Exhibit 6(a) to the Registrant's Quarterly Report on Form
         10-Q for the quarter ended March 31, 1994).

10.4     Amendment Four, dated as of July 1994, to Credit Agreement among the
         Registrant and The Chase Manhattan Bank, N.A. (incorporated by
         reference to Exhibit 6(a) to the Registrant's Quarterly Report on Form
         10-Q for the quarter ended June 30, 1994).

10.5     Amendment Five, dated as of March 21, 1995, to Credit Agreement among
         the Registrant and The Chase Manhattan Bank, N.A. (incorporated by
         reference to Exhibit 10.7 to the Registrant's Current Report on Form
         8-K dated March 21, 1995 (the "March 8-K")).

10.5(1)  Form of Warrants issued to The Bank of New York, The Chase Manhattan
         Bank, N.A. and the Israel Discount Bank (incorporated by reference to
         Exhibit 10.5(i) to the Registrant's Annual Report on Form 10-K for the
         year ended December 31, 1995 (the "1995 Form 10-K")).

10.5(2)  Letter Agreement, dated July 10, 1995, among Halsey Drug Co., Inc., The
         Chase Manhattan Bank, N.A., The Bank of New York and Israel Discount
         Bank of New York (incorporated by reference to Exhibit 6(a) to the
         Registrant's Quarterly Report on Form 10-Q for the quarter ended June
         30, 1995 (the "June 10-Q")).

10.5(3)  Letter Agreement, dated November 16, 1995, among Halsey Drug Co., Inc.,
         The Chase Manhattan Bank, N.A., The Bank of New York and Israel
         Discount Bank of New York (incorporated by reference to Exhibit
         10.25(iv) to the 1995 10-K).

10.5(4)  Amendment 6, dated as of August 6, 1996, to Credit Agreement among
         Halsey Drug Co., Inc., The Chase Manhattan Bank, N.A., The Bank of New
         York and Israel Discount Bank of New York (incorporated by reference to
         Exhibit 10.1 to Amendment No. 1 to the Registrant's Quarterly Report on
         Form 10-Q for the quarter ended June 30, 1996 (the "June 1996 10-Q").

10.5(5)  Letter Agreement, dated March 25, 1997 among Halsey Drug Co., Inc., The
         Chase Manhattan Bank, as successor in interest to The Chase Manhattan
         Bank (National Association), The Bank of New York and Israel Discount
         Bank.

10.6     Agreement Regarding Release of Security Interests dated as of March 21,
         1995 by and among the Company, Mallinckrodt Chemical Acquisition, Inc.
         and The Chase Manhattan Bank, N.A. (incorporated by reference to
         Exhibit 10.9 of the March 8-K).

10.7     Consulting Agreement dated as of September, 1993 between the Registrant
         and Joseph F. Limongelli (incorporated by reference to Exhibit 10.6 to
         the 1993 Form 10-K).

10.8     Employment Agreement, dated as of January 1, 1993, between the
         Registrant and Rosendo Ferran (incorporated by reference to Exhibit
         10.2 to the 1992 Form 10-K).

10.10(1) Halsey Drug Co., Inc. 1984 Stock Option Plan, as amended (incorporated
         by reference to Exhibit 10.3 to the 1992 Form 10-K).

10.10(2) Halsey Drug Co., Inc. 1995 Stock Option and Restricted Stock Purchase
         Plan (incorporated by reference to Exhibit 4.1 to the Registrant's
         Registration Statement on Form S-8, File No. 33-98396).

10.10(3) Halsey Drug Co., Inc. Non-Employee Director Stock Option Plan.
</TABLE>


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10.11    Leases, effective February 13, 1989 and January 1, 1990, respectively,
         among the Registrant and Milton J. Ackerman, Sue Ackerman, Lee
         Hinderstein, Thelma Hinderstein and Marilyn Weiss (incorporated by
         reference to Exhibits 10.6 and 10.7, respectively, to the Registrant's
         Annual Report on Form 10-K for the year ended December 31, 1989).

10.12    Lease, effective as of April 15, 1988, among the Registrant and Milton
         J. Ackerman, Sue Ackerman, Lee Hinderstein, Thelma Hinderstein and
         Marilyn Weiss, and Rider thereto (incorporated by reference to Exhibit
         10.12 to the Registrant's Annual Report on Form 10-K for the year ended
         December 31, 1987).

10.12(l) Lease, as of October 31, 1994, among Registrant and Milton J. Ackerman,
         Sue Ackerman, Lee Hinderstein, Thelma Hinderstein and Marilyn Weiss,
         together with Modification, Consolidation and Extension Agreement
         (incorporated by reference to Exhibit 10.12(i) to the 1995 Form 10-K).

10.13    Asset Purchase Agreement dated as of March 21, 1995 among Mallinckrodt
         Chemical Acquisition, Inc. ("Acquisition"), Mallinckrodt Chemical,
         Inc., as guarantor and the Registrant (incorporated by reference to
         Exhibit 10.1 to the March 8-K).

10.14    Toll Manufacturing Agreement for APAP/Oxycodone Tablets dated as of
         March 21, 1995 between Acquisition and the Registrant (incorporated by
         reference to Exhibit 10.2 to the March 8-K).

10.15    Capsule ANDA Option Agreement dated as of March 21, 1995 between
         Acquisition and the Registrant (incorporated by reference to Exhibit
         10.3 to the March 8-K).

10.16    Tablet ANDA Noncompetition Agreement dated as of March 21, 1995 between
         the Registrant and Acquisition (incorporated by reference to Exhibit
         10.4 to the March 8-K).

10.17    Subordinated Non-Negotiable Promissory Term Note in the amount of
         $1,200,00 dated March 21, 1995 issued by the Registrant to Acquisition
         (incorporated by reference to Exhibit 10.5 to the March 8-K).

10.18    Term Note Security Agreement dated as of March 21, 1995 among the
         Company, Houba, Inc. and Acquisition (incorporated by reference to
         Exhibit 10.6 to the March 8-K).

10.19    Amendment dated March 21, 1995 to Subordination Agreement dated as of
         July 21, 1994 between Mallinckrodt Chemical, Inc., Mallinckrodt
         Chemical Acquisition, Inc., the Registrant, The Chase Manhattan Bank
         (National Association), Israel Discount Bank of New York, The Bank of
         New York, and The Chase Manhattan Bank (National Association)
         (incorporated by reference to Exhibit 10.8 to the March 8-K).

10.20    Agreement dated as of March 30, 1995 between the Registrant and
         Zatpack, Inc. (incorporated by reference to Exhibit 10.10 to the March
         8-K).

10.21    Waiver and Termination Agreement dated as of March 30, 1995 between
         Zuellig Group, W.A., Inc. and Indiana Fine Chemicals Corporation
         (incorporated by reference to Exhibit 10.11 to the March 8-K).

10.22    Convertible Subordinated Note of the Registrant dated December 1, 1994
         issued to Zatpack, Inc. (incorporated by reference to Exhibit 10.12 to
         the March 8-K).

10.23    Agreement dated as of March 30, 1995 among the Registrant, Indiana Fine
         Chemicals Corporation, Zuellig Group, N.A., Inc., Houba Inc.,
         Zetapharm, Inc. and Zuellig Botanical,
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                                       42

<PAGE>


<TABLE>
<S>      <C>
         Inc. (incorporated by reference to Exhibit 10.13 to the March 8-K).

10.24    Supply Agreement dated as of March 30, 1995 between Houba, Inc. and
         ZetaPharm, Inc. (incorporated by reference to Exhibit 10.14 to the
         March 8-K).

10.25    Form of 10% Convertible Subordinated Debenture (incorporated by
         reference to Exhibit 6(a) to the June 10-Q).

10.26    Form of Redeemable Common Stock Purchase Warrant (incorporated by
         reference to Exhibit 6(a) to the June 10-Q).

10.27    Form of 10% Convertible Subordinated Debenture (incorporated by
         reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K
         dated December 4, 1995 (the "December 8-K")).

10.28    Form of Redeemable Common Stock Purchase Warrant (incorporated by
         reference to Exhibit 4.2 to the December 8-K).

10.29    Form of 10% Convertible Subordinated Debenture (incorporated by
         reference to Exhibit 99 to the June 1996 10-Q).

10.30    Form of Redeemable Common Stock Purchase Warrant (incorporated by
         reference to Exhibit 4.1 to Amendment No. 1 to the June 1996 10-Q).

10.31    Form of 5% Convertible Senior Secured Debenture (incorporated by
         reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K
         dated March 24, 1998 (the "March 1998 8-K")).

10.32    Form of Common Stock Purchase Warrant (incorporated by reference to
         Exhibit 4.2 to the March 1998 8-K).

10.33    Debenture and Warrant Purchase Agreement dated March 10, 1998, by and
         among the Registrant, Galen Partners III, L.P. and the other Purchasers
         listed on the Signature Page thereto (incorporated by reference to
         Exhibit 10.1 to the March 1998 8-K).

10.34    Form of General Security Agreement of Halsey Drug Co., Inc. dated March
         10, 1998 (incorporated by reference to Exhibit 10.2 to the March 1998
         8-K).

10.35    Form of Agreement of Guaranty of Subsidiaries of Halsey Drug Co., Inc.
         dated March 10, 1998 (incorporated by reference to Exhibit 10.3 to the
         March 1998 8-K).

10.36    Form of Guarantor General Security Agreement dated March 10, 1998
         (incorporated by reference to Exhibit 10.4 to the March 1998 8-K).

10.37    Stock Pledge Agreement dated March 10, 1998 by and between the
         Registrant and Galen Partners III, L.P., as agent (incorporated by
         reference to Exhibit 10.5 to the March 1998 8-K).

10.38    Form of Irrevocable Proxy Agreement (incorporated by reference to
         Exhibit 10.6 to the March 1998 8-K).

10.39    Agency Letter Agreement dated March 10, 1998 by and among the
         Purchasers a party to the Debenture and Warrant Purchase Agreement,
         dated March 10, 1998 (incorporated by reference to Exhibit 10.7 to the
         March 1998 8-K).

10.40    Press Release of Registrant dated March 13, 1998 (incorporated by
         reference to Exhibit 99.1 to the March 1998 8-K).

10.41    Current Report on Form 8-K as filed by the Registrant with the
         Securities and Exchange Commission on March 24, 1998.

10.42    Letter Agreement between the Registrant and the U.S. Department of
         Justice dated March 27, 1998 relating to the restructuring of the fine
         assessed by the Department of
</TABLE>


                                       43

<PAGE>


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         Justice under the Plea Agreement dated June 21, 1993.

10.43    Employment Agreement dated as of March 10, 1998 between the Registrant
         and Michael K. Reicher (incorporated by reference to Exhibit 10.43 to
         the Registrant's Annual Report of Form 10-K for the year ended December
         31, 1997 (the "1997 Form 10-K")).

10.44    Employment Agreement dated as of March 10, 1998 between the Registrant
         and Peter Clemens (incorporated by reference to Exhibit 10.44 to the
         1997 Form 10-K.

10.45    Amended, Restated and Consolidated Bridge Loan Agreement dated as of
         December 2, 1998 between the Company, Galen Partners III, L.P., Galen
         Partners International III, L.P., Galen Employee Fund III, L.P. and the
         other signatures thereto (incorporated by reference to Exhibit 10.45 to
         the 1998 Form 10-K).

10.46    First Amendment to Amended, Restated and Consolidated Bridge Loan
         Agreement dated December 7, 1998 between the Company and the lenders
         listed on the signature page thereto (incorporated by reference to
         Exhibit 10.46 to the 1998 Form 10-K).

10.47    Second Amendment to Amended, Restated and Consolidated Bridge Loan
         Agreement dated March 8, 1999 between the Company and the lenders
         listed on the signature page thereto (incorporated by reference to
         Exhibit 10.47 to the 1998 Form 10-K).

10.48    Form of 10% Convertible Secured Note due May 30, 1999 (incorporated by
         reference to Exhibit 10.48 to the 1998 Form 10-K).

10.49    Form of Common Stock Purchase Warrant issued pursuant to be Amended,
         Restated and Consolidated Bridge Loan Agreement (incorporated by
         reference to Exhibit 10.49 to the 1998 Form 10-K).

10.50    Amended and Restated General Security Agreement dated December 2, 1998
         between the Company and Galen Partners III, L.P., as Agent
         (incorporated by reference to Exhibit 10.50 to the 1998 Form 10-K).

10.51    Subordination Agreement dated December 2, 1998 between the Registrant
         and Galen Partners III, L.P., as Agent (incorporated by reference to
         Exhibit 10.51 to the 1998 Form 10-K).

10.52    Agency Letter Agreement dated December 2, 1998 by and among the lenders
         a party to the Amended, Restated and Consolidated Bridge Loan
         Agreement, as amended (incorporated by reference to Exhibit 10.52 to
         the 1998 Form 10-K).

10.53    Lease Agreement dated March 17, 1999 between the Registrant and Par
         Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.53 to
         the 1998 Form 10-K).

10.54    Lease Agreement dated September 1, 1998 between the Registrant and
         Crimson Ridge Partners (incorporated by reference to Exhibit 10.54 to
         the 1998 Form 10-K).

10.55    Manufacturing and Supply Agreement dated March 17, 1999 between the
         Registrant and Par Pharmaceuticals, Inc. (incorporated by reference to
         Exhibit 10.55 to the 1998 Form 10-K).

10.56    Halsey Drug Co., Inc. 1998 Stock Option Plan (incorporated by reference
         to Exhibit 10.56 to the 1998 Form 10-K).
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10.57    Loan Agreement dated March 29, 2000 between the Registrant and Watson
         Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.57 to
         the Registrant's Current Report on Form 8-K dated March 29, 2000 (the
         "March 2000 8-K")).+

10.58    Amendment to Loan Agreement dated March 31, 2000 between the Registrant
         and Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit
         10.58 to the March 2000 8-K).

10.59    Secured Promissory Note in the principal amount of $17,500,000 issued
         by the Registrant, as the maker, in favor of Watson Pharmaceuticals,
         Inc. dated March 31, 2000 (incorporated by reference to Exhibit 10.59
         to the March 2000 8-K).

10.60    Watson Security Agreement dated March 29, 2000 between the Registrant
         and Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit
         10.60 to the March 2000 8-K).

10.61    Stock Pledge Agreement dated March 29, 2000 between the Registrant and
         Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit
         10.61 to the March 2000 8-K).

10.62    Watson Guarantee dated March 29, 2000 between Houba, Inc. and Watson
         Pharmaceuticals, Inc., as the guarantors, in favor of Watson
         Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.62 to
         the March 2000 8-K).

10.63    Watson's Guarantors Security Agreement dated March 29, 2000 between
         Halsey Pharmaceuticals, Inc., Houba, Inc. and Watson Pharmaceuticals,
         Inc. (incorporated by reference to Exhibit 10.63 to the March 2000
         8-K).

10.64    Subordination Agreement dated March 29, 2000 by and among the
         Registrant, Watson Pharmaceuticals, Inc. and the holders of the
         Registrant's outstanding 5% convertible debentures due March 10, 2003.
         (incorporated by reference to Exhibit 10.64 to the March 2000 8-K).+

10.65    Real Estate Mortgage dated March 29, 2000 between Houba, Inc. and
         Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit
         10.65 to the March 2000 8-K).

10.66    Subordination Agreement by and among Houba, Inc., Galen Partners, III,
         L.P., Oracle Strategic Partners, L.P. and Watson Pharmaceuticals, Inc.
         (incorporated by reference to Exhibit 10.66 to the March 2000 8-K).

10.67    Product Purchase Agreement dated March 29, 2000 between the Registrant
         and Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit
         10.67 to the March, 2000 8-K).+

10.68    Finished Goods Supply Agreement dated March 29, 2000 between the
         Registrant and Watson Pharmaceuticals, Inc. (incorporated by reference
         to Exhibit 10.68 to the March 2000 8-K).+

10.69    Active Ingredient Supply Agreement dated March 29, 2000 between the
         Registrant and Watson Pharmaceuticals, Inc. (incorporated by reference
         to Exhibit 10.69 to the March 2000 8-K).+

10.70    Right of First Negotiation Agreement dated March 29, 2000 between the
         Registrant and Watson Pharmaceuticals, Inc. (incorporated by reference
         to Exhibit 10.70 to the March 2000 8-K).+
</TABLE>


                                       45

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<TABLE>
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10.71    Finished Goods Supply Agreement (Core Products) dated March 29, 2000
         between the Registrant and Watson Pharmaceuticals, Inc. (incorporated
         by reference to Exhibit 10.71 to the March 2000 8-K).+

10.72    Debenture and Warrant Purchase Agreement dated May 26, 1999 by and
         among the Registrant, Oracle Strategic Partners, L.P. and the other
         purchasers listed on the signature page thereto (the "Oracle Purchase
         Agreement") (incorporated by reference to Exhibit 10.72 to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1999).

10.73    Form of 5% Convertible Senior Secured Debenture issued pursuant to the
         Oracle Purchase Agreement (incorporated by reference to Exhibit 10.73
         to the Registrant's Annual Report on Form 10-K for the year ended
         December 31, 1999).

10.74    Form of Common Stock Purchase Warrant issued pursuant to the Oracle
         Purchase Agreement (incorporated by reference to Exhibit 10.74 to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1999).

10.75    Lease Termination and Settlement Agreement dated March 20, 2000 between
         the Registrant and Atlantic Properties Company in respect of the
         Registrant's Brooklyn, New York leased facility (incorporated by
         reference to Exhibit 10.75 to the Registrant's Annual Report on Form
         10-K for the year ended December 31, 1999).

10.76    Debenture Purchase Agreement dated December 20, 2002 by and among
         Halsey Drug Co., Inc., Care Capital Investments II, LP, Essex Woodlands
         Health Ventures V, L.P. and the other purchasers listed on the
         signature page thereto (the "2002 Debentureholders") (incorporated by
         reference to Exhibit 10.1 to the December 2002 Form 8-K).

10.77    Form of General Security Agreement dated December 20, 2002 between the
         Registrant and the 2002 Debentureholders (incorporated by reference to
         Exhibit 10.2 to the December 2002 Form 8-K).

10.78    Form of Agreement of Guaranty of Subsidiaries of Halsey Drug Co., Inc.
         dated December 20, 2002 between Houba, Inc., Halsey Pharmaceuticals,
         Inc. and the 2002 Debentureholders (incorporated by reference to
         Exhibit 10.3 to the December 2002 Form 8-K).

10.79    Form of Guarantor General Security Agreement between the Guarantors and
         the 2002 Debentureholders dated December 20, 2002 (incorporated by
         reference to Exhibit 10.4 to the December 2002 Form 8-K).

10.80    Stock Pledge Agreement dated December 20, 2002 by and between Halsey
         Drug Co., Inc. and Galen Partners III, L.P., as agent (incorporated by
         reference to Exhibit 10.5 to the December 2002 Form 8-K).

10.81    Voting Agreement dated December 20, 2002 (incorporated by reference to
         Exhibit 10.6 to the December 2002 Form 8-K).

10.82    Debentureholders Agreement dated December 20, 2002 (incorporated by
         reference to Exhibit 10.7 to the December 2002 Form 8-K).

10.83    Amendment to Debenture and Warrant Purchase Agreement between Halsey
         Drug Co., Inc., Galen Partners III, L.P. and other signatories thereto,
         dated December 20, 2002, amending the Debenture and Warrant Purchase
         Agreement dated March 10, 1998 between the Company, Galen Partners III,
         L.P. and the other signatories thereto (incorporated by reference to
         Exhibit 10.8 to the December 2002 Form 8-K).
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                                       46

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10.84    Amendment to Debenture and Warrant Purchase Agreement between Halsey
         Drug Co., Inc., Oracle Strategic Partners, L.P. and the other
         signatories thereto, dated December 20, 2002, amending the Debenture
         and Warrant Purchase Agreement dated May 26, 1999 between the Company,
         Oracle Strategic Partners, L.P. and the other signatories thereto
         (incorporated by reference to Exhibit 10.9 to the December 2002 Form
         8-K).

10.85    Amended and Restated 5% Convertible Senior Secured Debenture due March
         31, 2006 (incorporated by reference to Exhibit 10.10 to the December
         2002 Form 8-K).

10.86    Second Amendment to Loan Agreement dated December 20, 2002, between
         Halsey Drug Co., Inc. and Watson Pharmaceuticals, Inc., amending the
         Loan Agreement dated March 29, 2000 between Halsey Drug Co., Inc. and
         Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit
         10.11 to the December 2002 Form 8-K).

10.87    Amended and Restated Secured Promissory Note dated December 20, 2002,
         issued by Halsey Drug Co., Inc. in favor of Watson Pharmaceuticals,
         Inc. in the principal amount $17,500,000 (incorporated by reference to
         Exhibit 10.12 to the December 2002 Form 8-K).

10.88    Second Amendment to Finished Goods Supply Agreement (Core Products)
         dated December 20, 2002, between Halsey Drug Co., Inc. and Watson
         Pharmaceuticals, Inc. amending the Finished Goods Supply Agreement
         (Core Products) dated March 29, 2000 2008 (incorporated by reference to
         Exhibit 10.13 to the December 2002 Form 8-K).

10.89    Watson Common Stock Purchase Warrant dated December 20, 2002
         (incorporated by reference to Exhibit 10.14 to the December 2002 Form
         8-K).

10.90    Registration Rights Agreement dated December 20, 2002 (incorporated by
         reference to Exhibit 10.15 to the December 2002 Form 8-K).

10.91    Warrant Recapitalization Agreement dated December 20, 2002
         (incorporated by reference to Exhibit 10.15 to the December 2002 Form
         8-K).

10.92    Debenture and Share Purchase Agreement dated as of February 6, 2004 by
         and among Halsey Drug Co., Inc., Care Capital Investments, II, LP,
         Essex Woodlands Health Ventures V, L.P., Galen Partners III, L.P. and
         the other purchasers listed on the signature page thereto (incorporated
         by reference to Exhibit 10.1 of the February 2004 Form 8-K).

10.93    Debenture Conversion Agreement dated as of February 6, 2004 by and
         among Halsey Drug Co., Inc., Care Capital, Essex Woodlands, Galen
         Partners and the other signatories thereto (incorporated by reference
         to Exhibit 10.2 of the February 2004 Form 8-K).

10.94    Amended and Restated Certificate of Incorporation of Halsey Drug Co.,
         Inc. (incorporated by reference to Exhibit 10.3 of the February 2004
         Form 8-K).

10.95    Investor Rights Agreement dated as of February 6, 2004 by and among
         Halsey Drug Co., Inc., Care Capital, Essex Woodlands, Galen Partners
         and the other signatories thereto (incorporated by reference to Exhibit
         10.4 of the February 2004 Form 8-K).

10.96    Amended and Restated Voting Agreement dated as of February 6, 2004 by
         and among Halsey Drug Co., Inc., Care Capital, Essex Woodlands, Galen
         Partners and the other signatories thereto (incorporated by reference
         to Exhibit 10.5 of the February 2004 Form 8-K).
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                                       47

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<TABLE>
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10.97    Amended and Restated Registration Rights Agreement dated as of February
         6, 2004 by and among Halsey Drug Co., Inc., Watson Pharmaceuticals,
         Care Capital, Essex Woodlands, Galen Partners and the other signatories
         thereto (incorporated by reference to Exhibit 10.6 of the February 2004
         Form 8-K).

10.98    Amended and Restated Subordination Agreement dated as of February 6,
         2004 by and among Halsey Drug Co., Inc., Care Capital, Essex Woodlands,
         Galen Partners and the other signatories thereto (incorporated by
         reference to Exhibit 10.7 of the February 2004 Form 8-K).

10.99    Company General Security Agreement (incorporated by reference to
         Exhibit 10.8 of the February 2004 Form 8-K).

10.100   Form of Unconditional Agreement of Guaranty (incorporated by reference
         to Exhibit 10.9 of the February 2004 Form 8-K).

10.101   Form of Guarantor Security Agreement (incorporated by reference to
         Exhibit 10.10 of the February 2004 Form 8-K).

10.102   Stock Pledge Agreement dated as of February 6, 2004 by and between
         Halsey Drug Co., Inc. and Galen Partners, as agent (incorporated by
         reference to Exhibit 10.11 of the February 2004 Form 8-K).

10.103   Umbrella Agreement dated as of February 6, 2004 by and among Halsey
         Drug Co., Inc., Watson Pharmaceuticals, Care Capital, Essex Woodlands,
         Galen Partners and the other signatories thereto (incorporated by
         reference to Exhibit 10.12 of the February 2004 Form 8-K).

10.104   Third Amendment to Loan Agreement dated as of February 6, 2004 by and
         among Halsey Drug Co., Inc. and Watson Pharmaceuticals (incorporated by
         reference to Exhibit 10.13 of the February 2004 Form 8-K).

10.105   Amended and Restated Promissory Note in the principal amount of
         $5,000,000 issued by Halsey Drug Co., Inc. in favor of Watson
         Pharmaceuticals (incorporated by reference to Exhibit 10.14 of the
         February 2004 Form 8-K).

10.106   Hydrocodone API Supply Option Agreement dated as of February 6, 2004
         between Halsey Drug Co, Inc. and Watson Pharmaceuticals (incorporated
         by reference to Exhibit 10.15 of the February 2004 Form 8-K).

10.107   Noteholders Agreement dated as of February 6, 2004 by and among Halsey
         Drug Co., Inc., Care Capital, Essex Woodlands, Galen Partners and the
         other signatories thereto (incorporated by reference to Exhibit 10.16
         of the February 2004 Form 8-K).

10.108   Asset Purchase Agreement dated March 19, 2004 by and among Halsey Drug
         Co., Inc., Axiom Pharmaceutical Corporation and IVAX Pharmaceuticals
         New York LLC (incorporated by reference to Exhibit 2.1 of the
         Registrant's Form 8-K filed March 25, 2004 (the "March 2004 Form
         8-K")).

10.109   Voting Agreement dated March 19, 2004 by and among Halsey Drug Co.,
         Inc., IVAX Pharmaceuticals New York LLC and certain holders of Halsey
         Drug Co., Inc. voting securities (incorporated by reference to Exhibit
         10.1 of the March 2004 Form 8-K).

10.110   Use and License Agreement dated March 19, 2004 by and among Halsey Drug
         Co., Inc., Axiom Pharmaceutical Corporation and IVAX Pharmaceuticals
         New York LLC (incorporated by reference to Exhibit 10.2 of the March
         2004 Form 8-K.)

  *14    Code of Ethics

   21    Subsidiaries of the Registrant (incorporated by reference to Exhibit 22
         to the 1993 Form 10-K).

*23.1    Consent of Grant Thornton LLP, independent certified public
         accountants, to the incorporation by reference of its report to the
         consolidated financial statements of the Registrant contained in its
         Form 10-K for the year ended December 31, 2003, into the Registrant's
         Registration Statements on Form S-8 (Registration Nos. 333-63288 and
         33-98356).
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*31.1    Certification of Periodic Report by 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 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>


* Filed herewith

+ A portion of this exhibit has been omitted pursuant to an application for
  confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act
  of 1934, as amended.

                                       49

<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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.

                                     HALSEY DRUG CO., INC.

                                     By:          /s/ ANDREW D. REDDICK
                                         --------------------------------------
                                                  Andrew D. Reddick
                                         President and Chief Executive Officer
                                             (Principal Executive Officer)

Date: April 14, 2004

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.


<TABLE>
<S>                        <C>                                       <C>
 /s/ William G. Skelly                    Director                   April 14, 2004
-----------------------
   William G. Skelly

   /s/ Peter Clemens       Vice President, Chief Financial Officer   April 14, 2004
-----------------------      (Principal Financial and Accounting
     Peter Clemens                  Officer) and Director

   /s/ Alan J. Smith                      Director                   April 14, 2004
-----------------------
    Alan J. Smith

  /s/ Bruce F. Wesson                     Director                   April 14, 2004
-----------------------
    Bruce F. Wesson

  /s/ William Sumner                      Director                   April 14, 2004
-----------------------
    William Sumner

 /s/ Srini Conjeevaram                    Director                   April 14, 2004
-----------------------
   Srini Conjeevaram

   /s/ Zubeen Shroff                      Director                   April 14, 2004
-----------------------
     Zubeen Shroff

  /s/ Jerry Karabelas                     Director                   April 14, 2004
-----------------------
    Jerry Karabelas

/s/ Immanuel Thangaraj                    Director                   April 14, 2004
-----------------------
  Immanuel Thangaraj
</TABLE>


                                       50

<PAGE>


                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                  Page
                                                               -----------
<S>                                                            <C>
Report of Independent Certified Public Accountants                 F-2

Consolidated Balance Sheets                                     F-3 - F-4

Consolidated Statements of Operations                              F-5

Consolidated Statement of Stockholders' Equity (Deficit)           F-6

Consolidated Statements of Cash Flows                           F-7 - F-9

Notes to Consolidated Financial Statements                     F-10 - F-51

Schedule II - Valuation and Qualifying Accounts                   F-52
</TABLE>


                                      F-1

<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Directors and Stockholders
    HALSEY DRUG CO., INC.

We have audited the accompanying consolidated balance sheets of Halsey Drug Co.,
Inc. and Subsidiaries (a development stage enterprise) (the "Company") as of
December 31, 2003 and 2002, and the related consolidated statements of
operations, shareholders' equity(deficit) and cash flows for each of the three
years in the period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Halsey Drug Co.,
Inc. and Subsidiaries at December 31, 2003 and 2002, and the results of their
operations and their consolidated cash flows for each of the three years in the
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.

We have also audited the consolidated financial statement schedule listed in the
Index at Item 15(a)(2). In our opinion, this schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note B, the
Company incurred a net loss of $48,455,000 during the year ended December 31,
2003, and, as of that date, the Company's current liabilities exceeded its
current assets by $3,770,000, and its total liabilities exceeded its total
assets by $52,067,000. These factors, among others, as discussed in Note B to
the financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note B. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

GRANT THORNTON LLP

New York, New York
February 26, 2004, except for Note B,

    as to which the date is March 19, 2004

                                      F-2

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEETS

                                  December 31,
                                 (in thousands)


<TABLE>
<CAPTION>
                                                             2003      2002
                                                            -------   -------
<S>                                                         <C>       <C>
  CURRENT ASSETS
      Cash                                                  $   942   $ 9,211
      Accounts receivable - trade, net of allowances
           of $428 and $14 in 2003 and 2002, respectively       467       610
      Inventories                                               312     2,285
      Prepaid expenses and other current assets                 401       394
                                                            -------   -------

               Total current assets                           2,122    12,500

PROPERTY, PLANT AND EQUIPMENT, NET                            3,394     5,367

DEFERRED PRIVATE OFFERING COSTS, net of
      accumulated amortization of $ 318 and $9 in 2003
      and 2002, respectively                                    714     1,032

OTHER ASSETS AND DEPOSITS                                       392       465
                                                            -------   -------
                                                            $ 6,622   $19,364
                                                            =======   =======
</TABLE>


The accompanying notes are an integral part of these statements.

                                      F-3

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

                     CONSOLIDATED BALANCE SHEETS (CONTINUED)

                                  December 31,
                      (in thousands, except per share data)


<TABLE>
<CAPTION>
                                                                2003         2002
                                                              ---------    ---------
<S>                                                           <C>          <C>
CURRENT LIABILITIES
      Current maturities of notes payable and capital lease   $      45    $      33
           obligations
      Accounts payable                                            1,895        3,119
      Accrued expenses                                            3,652        3,115
      Department of Justice settlement                              300          300
                                                              ---------    ---------

               Total current liabilities                          5,892        6,567

TERM NOTE PAYABLE                                                21,401       21,401

BRIDGE LOANS                                                      2,000            -
      Less: debt discount                                          (568)           -
                                                              ---------

                                                                  1,432            -

CONVERTIBLE SUBORDINATED DEBENTURES                              86,632       77,118
      Less: debt discount                                       (56,893)     (73,955)
                                                              ---------    ---------

                                                                 29,739        3,163

CAPITAL LEASE OBLIGATIONS                                            92           40

DEPARTMENT OF JUSTICE SETTLEMENT                                    133          461

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT)
      Common stock - $.01 par value; authorized,
           80,000 shares; issued and outstanding,
           21,602 shares and 21,035 shares in
           2003 and 2002, respectively                              216          211
      Additional paid-in capital                                157,262      148,611
      Accumulated deficit                                      (209,545)    (161,090)
                                                              ---------    ---------
                                                                (52,067)     (12,268)
                                                              ---------    ---------
                                                              $   6,622    $  19,364
                                                              =========    =========
</TABLE>


The accompanying notes are an integral part of these statements.

                                      F-4

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                             Year ended December 31,
                      (in thousands, except per share data)


<TABLE>
<CAPTION>
                                                       2003        2002        2001
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Product sales                                        $  5,750    $  8,205    $  8,429
Product development revenues                                -           -       8,500
                                                     --------    --------    --------

               Net product revenues                     5,750       8,205      16,929

Operating costs
      Cost of manufacturing                            11,705      12,535      14,857
      Research and development                          1,460       1,517       1,327
      Selling, general and administrative expenses      7,903       7,216       6,616
      Plant shutdown costs                              1,926        (126)         68
                                                     --------    --------    --------

               Loss from operations                   (17,244)    (12,937)     (5,939)

Other income (expense)
      Interest expense                                 (6,001)     (4,728)     (3,913)
      Interest income                                      25          15          69
      Amortization of deferred debt discount and
           private offering costs                     (24,771)    (12,558)     (2,591)
      Loss on extinguishment of debt                        -     (28,415)          -
      Investment in joint venture                           -           -        (202)
      Other income (expense)                             (464)       (966)         13
                                                     --------    --------    --------

               NET LOSS                              $(48,455)   $(59,589)   $(12,563)
                                                     ========    ========    ========

Basic and diluted loss per common share              $  (2.28)   $  (3.90)   $   (.84)
                                                     ========    ========    ========
Weighted average number of outstanding shares          21,227      15,262      15,021
                                                     ========    ========    ========
</TABLE>


The accompanying notes are an integral part of these statements.

                                      F-5

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

                  Years ended December 31, 2003, 2002 and 2001
                                 (in thousands)


<TABLE>
<CAPTION>
                                                         Common stock,
                                                        $.01 par value      Additional
                                                      -------------------    Paid-in    Accumulated
                                                      Shares      Amount     Capital       Deficit     Total
                                                      -------    --------   ----------  -----------  --------
<S>                                                   <C>        <C>        <C>         <C>          <C>
Balance at January 1, 2002                             15,065    $    151    $ 35,914   $  (101,501) $(65,436)

Issuance of common stock in exchange for
    warrants                                            5,970          60       2,222                   2,282
Beneficial conversion
    features in connection with debentures (Note H)                            74,619                  74,619
Issuance of warrant in connection with extension of
maturity date of term loan (Note I(a))                                         11,985                  11,985
Issuance of warrant in connection with Bridge Loans
(Note I(b))                                                                     5,115                   5,115
Beneficial conversion features in connection with
issuance of Bridge Loans (Note I (b))                                           3,745                   3,745
Modification of terms of existing warrants                                     15,011                  15,011
                                                                             --------                --------
Net loss for the year ended December 31, 2002                                               (59,589)  (59,589)
                                                      -------    --------    --------   -----------  --------

Balance at December 31, 2002                           21,035         211     148,611      (161,090)  (12,268)

Conversion of Debentures                                  567           5         322                     327
Issuance of warrant for lending commitment                                        581                     581
Issuance of beneficial conversion
    features in connection with debt                                            7,178                   7,178
Issuance of warrant in severance                                                  113                     113
Increase in fair value of warrants                                                457                     457
Net loss for the year ended December 31, 2002                                               (48,455)  (48,455)
                                                      -------    --------    --------   -----------  --------
Balance at December 31, 2003                           21,602    $    216    $157,262   $  (209,545) $(52,067)
                                                      =======    ========    ========   ===========  ========
</TABLE>


The accompanying notes are an integral part of these statements.

                                      F-6

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                             Year ended December 31,
                        (in thousands, except share data)


<TABLE>
<CAPTION>
                                                                                 2003        2002        2001
                                                                               --------    --------    --------
<S>                                                                            <C>         <C>         <C>
Cash flows from operating activities
      Net loss                                                                 $(48,455)   $(59,589)   $(12,563)
                                                                                           --------    --------
      Adjustments to reconcile net loss to net cash used
         in operating activities
               Depreciation and amortization                                        811         835         861
               Amortization of deferred debt discount and private
                  offering costs                                                 24,771      12,558       2,591
               Amortization of deferred product acquisition costs                    42          37          35
               Provision for losses on accounts receivable                          351         101         318
               (Gain) loss on disposal of assets                                      7          28          68
               Debentures and stock issued for interest expense                   3,241       2,191       2,154
               Loss on debt extinguishment                                            -      28,415           -
               Change in fair value of warrants due to modification of terms
                                                                                    457         863           -
               Write-down of investment in affiliate                                  -         202
               Impairment reserve against assets                                  3,619           -           -
               Changes in assets and liabilities
                    Accounts receivable                                          (2,244)     (2,170)       (382)
                    Inventories                                                      28         444          40
                    Prepaid expenses and other current assets                       (76)       (156)        952
                    Other assets and deposits                                       103         121        (174)
                    Accounts payable                                               (877)        853       2,324
                    Accrued expenses                                              2,137       3,010       1,484
                                                                               --------    --------    --------
               Total adjustments                                                 32,370      47,130      10,473
                                                                               --------    --------    --------
               Net cash used in operating activities                            (16,085)    (12,459)     (2,090)
                                                                               --------    --------    --------
Cash flows from investing activities
      Capital expenditures                                                         (410)       (287)     (1,544)
      Capital contribution to joint venture                                           -           -         (89)
      Net proceeds from sale of assets                                                -          16          28
                                                                               --------    --------    --------
               Net cash used in investing activities                               (410)       (271)     (1,605)
                                                                               --------    --------    --------
Cash flows from financing activities
      Proceeds from issuance of notes payable                                     2,000      12,500       7,700
      Payments to Department of Justice                                            (328)       (313)       (301)
      Exercise of stock options                                                       -           -          96
      Repayment of debentures                                                         -           -      (2,200)
      Payments on notes payable and capital lease obligations                       (46)       (147)     (1,855)
      Proceeds from issuance of convertible subordinated
         debentures                                                               6,600      10,500           -
      Deferred private offering costs                                                 -      (1,041)          -
                                                                               --------    --------    --------
               Net cash provided by financing activities                          8,226      21,499       3,440
                                                                               --------    --------    --------
               NET INCREASE (DECREASE) IN CASH AND
                    CASH EQUIVALENTS                                             (8,269)      8,769        (255)
Cash and cash equivalents at beginning of year                                    9,211         442         697
                                                                               --------    --------    --------
Cash and cash equivalents at end of year                                       $    942    $  9,211    $    442
                                                                               ========    ========    ========
</TABLE>


The accompanying notes are an integral part of these statements.

                                      F-7

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                  Years ended December 31, 2003, 2002 and 2001
                        (in thousands, except share data)

Supplemental disclosures of noncash investing and financing activities:

Year ended December 31, 2003

1.       The Company's bridge loans contained beneficial conversion features,
         which were valued at $578.

2.       The Company's convertible debentures contained beneficial conversation
         features, which were valued at $6,600.

3.       The Company issued $3,241 of debentures as payment of like amounts of
         debenture accrued interest.

4.       The Company repaid $2,037 of indebtedness in the form of product
         deliveries.

5.       The Company issued 645,000 warrants with an estimated relative fair
         value of $582 for the lending commitment in the form of debentures and
         bridge loans.

6.       The Company issued 567,000 shares of common stock upon conversion of
         $327 of debentures.

7.       The Company issued 150,000 warrants with an estimated relative fair
         value of $113 in connection with the termination of an employment
         agreement.

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

                                      F-8

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                  Years ended December 31, 2003, 2002 and 2001
                        (in thousands, except share data)

Year ended December 31, 2002

1.       The Company issued 5,970,083 shares of common stock as result of
         recapitalization of warrants to purchase 8,145,736 shares of common
         stock and recorded a charge to earnings of $2,282 in connection with
         this transaction.

2.       The Company issued 10,700,665 warrants with an estimated relative fair
         value of $11,985 in connection with the extension of a note payable.

3.       The Company issued $15,885 in debentures in exchange for like amounts
         of notes payable and accrued interest.

4.       The Company's convertible debentures contained beneficial conversion
         features, which were valued at $74,619.

5.       The Company issued $2,191 of debentures as payment of like amounts of
         debenture accrued interest.

6.       The Company repaid $1,826 of indebtedness in the form of product
         deliveries.

7.       The Company issued approximately 2,120,000 warrants with an estimated
         relative fair value of $2,412 in connection with the refinancing of
         existing bridge loans in January and May 2002.

8.       The Company issued 600,000 warrants with an estimated relative fair
         value of $948 for the lending commitment of a bridge loan.

9.       The Company issued approximately 1,535,000 warrants with an estimated
         relative fair value of $1,755 in connection with the issuance of bridge
         loans.

10.      The Company's bridge loans contained beneficial conversion features,
         which were valued at $3,745.

11.      Equipment financed through capital leases aggregated approximately $35.

                                      F-9

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                  Years ended December 31, 2003, 2002 and 2001
                        (in thousands, except share data)

Year ended December 31, 2001

1.       The Company issued 51,924 shares of common stock as payment for
         approximately $70 in debenture accrued interest.

2.       The Company issued 187,500 warrants with an estimated relative fair
         value of $310 in connection with the issuance of bridge loans.

3.       The Company issued $2,085 of debentures as payment of like amounts of
         debenture accrued interest.

4.       The Company has repaid $3,979 of indebtedness in the form of product
         deliveries.

5.       Equipment financed through capital leases aggregated approximately $79.

6.       The Company issued $300 in notes payable in exchange for $300 in
         debentures that matured.

                                      F-10

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002 and 2001

NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES

         Halsey Drug Co., Inc. (the "Company" or "Halsey"), a New York
         corporation established in 1935, and its subsidiaries, was engaged in
         the development, manufacture, sale and distribution of generic drugs
         and active pharmaceutical ingredients ("APIs"). A generic drug is the
         chemical and therapeutic equivalent of a brand-name drug for which
         patent protection has expired. A generic drug may only be manufactured
         and sold if patents (and any additional government-granted exclusivity
         periods) relating to the brand-name equivalent of the generic drug have
         expired. A generic drug is usually marketed under its generic chemical
         name or under a brand name developed by the generic manufacturer.
         Through its strategic alliance with Watson Pharmaceuticals, Inc.
         ("Watson"), as described below, the Company sold its generic drug
         products under the Watson name for distribution by Watson to drugstore
         chains and drug wholesalers. In addition, the Company sold its generic
         drug products under its own name or that of a wholly-owned subsidiary
         commencing in the second quarter of 2003. While subject to the same
         governmental standards for safety and efficacy as its brand-name
         equivalent, a generic drug is usually sold at a price substantially
         below that of its brand-name equivalent.

         In the fourth quarter of 2003, the Company restructured it operations,
         as more fully describe in Note B, and substantially ceased the
         manufacturing of the Company's generic finished dosage products on
         January 30, 2004.

         As restructured, the Company is engaged in the development and
         commercial scale up of the Company's novel API opioid synthesis
         technologies at the Culver, Indiana facility, the prosecution of the
         Company's application to the DEA to receive a registration to import
         Narcotic Raw Materials ("NRMs") for use in the production of opioid
         API's, the development of the Company's proprietary abuse deterrent
         formulation technologies for use in orally administered opioid
         containing finished dosage products, the manufacture of clinical trial
         supplies of abuse deterrent formulations, the evaluation of products
         utilizing abuse deterrent formulation technology in appropriate
         clinical trials, entering into license agreements with strategic
         partners providing that such licensees will further develop such abuse
         deterrent formulation finished dosage products, file for regulatory
         approval with the U.S. Food and Drug Administration ("FDA") and
         commercialize such products, and the Company's manufacture of
         commercial quantities of such products for sale by the Company's
         licensees. During 2003, Axiom Pharmaceutical Corporation began
         operations of manufacturing and distributing generic pharmaceutical
         products under its own label. As of January 30, 2004, substantially all
         operations of Axiom Pharmaceutical Corporation ceased.

                                      F-11

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

         A summary of the significant accounting policies consistently applied
         in the preparation of the accompanying consolidated financial
         statements follows.

         1.       Principles of Consolidation

                  The consolidated financial statements include the accounts of
                  the Company and its wholly-owned subsidiaries, Houba, Inc.,
                  and Axiom Pharmaceutical Corporation (formerly known as Halsey
                  Pharmaceuticals, Inc.) All material intercompany accounts and
                  transactions have been eliminated. During 2002, the Company
                  dissolved all of its inactive subsidiaries with the exception
                  of Houba, Inc. and Axiom Pharmaceutical Corporation. The
                  dissolution of the inactive subsidiaries had no impact on the
                  consolidated financial position, results of operations or cash
                  flows of the Company.

         2.       Statements of Cash Flows

                  For purposes of the statements of cash flows, the Company
                  considers all highly liquid debt instruments purchased with an
                  original maturity of three months or less to be cash
                  equivalents. The Company paid no substantial income taxes for
                  the years ended December 31, 2003, 2002 and 2001. In addition,
                  the Company paid cash interest of approximately $ 526,000,
                  $136,000 and $683,000 for the years ended December 31, 2003,
                  2002 and 2001, respectively.

         3.       Accounts Receivable - Trade and Allowance Accounts

                  The Company's accounts receivable - trade are due from
                  customers engaged in the distribution of pharmaceutical
                  products. Credit is extended based on evaluation of a
                  customer's financial condition and, generally, collateral is
                  not required. Accounts receivable are due generally between 30
                  and 60 days and are stated at amounts due from customers net
                  of allowances for doubtful accounts, returns, term discounts,
                  and other allowances. Accounts outstanding longer than the
                  contractual payment terms are considered past due. Estimates
                  that are used in determining these allowances are based on the
                  Company's historical experience, current trends, credit policy
                  and a percentage of its accounts receivable by aging category.
                  In determining these percentages, the Company 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. The Company writes off
                  accounts receivable when they become uncollectible, and
                  payments subsequently received on such receivables are
                  credited to bad debt expense.

                                      F-12

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE A (CONTINUED)

Changes in the Company's allowance accounts are as follows:


<TABLE>
<CAPTION>
                                                     2003      2002      2001
                                                    ------    ------    ------
                                                          (in thousands)
<S>                                                 <C>       <C>       <C>
Beginning balance                                   $   14    $  347    $  315
      Provision for losses on accounts receivable      351       101       402
      Provision for all other allowances                77         -         -
      Allowances paid                                   (6)     (434)     (288)
      Write-off                                         (8)        -         -
      Recoveries                                         -         -       (82)
                                                    ------    ------    ------
Ending balance                                      $  428    $   14    $  347
                                                    ======    ======    ======
</TABLE>


         4.       Inventories

                  Inventories are stated at the lower of cost or market and
                  include material, labor and manufacturing overhead. The
                  first-in, first-out method is used to determine the cost of
                  inventories. 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.

                                      F-13

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE A (CONTINUED)

         5.       Property, Plant and Equipment

                  Property, plant and equipment are stated at cost less
                  accumulated depreciation and amortization. Major improvements
                  are capitalized and maintenance and repairs are expensed as
                  incurred. Depreciation and amortization are provided for in
                  amounts sufficient to relate the cost of depreciable assets to
                  operations over their estimated service lives, principally on
                  a straight-line basis.

                  The estimated lives used in determining depreciation and
                  amortization are:


<TABLE>
<S>                                   <C>
Building and building improvements    20 - 39 years
Machinery and equipment                3 - 10 years
Leasehold improvements                Shorter of the life of the lease or
                                        the service life of the asset
</TABLE>


         6.       Impairment of Long-Lived Assets

                  Long-lived assets are reviewed for impairment whenever events
                  or changes in circumstances indicate the carrying value may
                  not be recoverable. Impairment is measured by comparing the
                  carrying value of the long-lived assets to the estimated
                  undiscounted future cash flows expected to result from use of
                  the assets and their ultimate disposition. To the extent
                  impairment has occurred, the carrying amount of the asset
                  would be written down to an amount to reflect the fair value
                  of the asset. See Note J for the impairment charge related to
                  the write-off of leasehold improvements of the Company's
                  Brooklyn, New York plant, which closed in March 2001. See Note
                  B for impairment charge relating to write-down of
                  manufacturing assets of the Company's Congers, New York and
                  Culver, Indiana plants.

         7.       Deferred Private Offering Costs

                  Deferred private offering costs represent costs incurred by
                  the Company in conjunction with securing debt financing. The
                  Company incurred approximately $582,000 in deferred private
                  offering costs during the year ended December 31, 2003 in
                  conjunction with a lending commitment received for the private
                  offering of securities in the form of Debentures and Bridge
                  Loans. The Company incurred approximately $1,041,000 in
                  deferred private offering costs during the year ended December
                  31, 2002 in conjunction with a private offering of securities.
                  (See Note H.) Deferred private offering costs are amortized to
                  interest expense over the life of the related obligations.

                                      F-14

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE A (CONTINUED)

         8.       Deferred Debt Discount

                  Debt discount resulting from the issuance of stock warrants in
                  connection with the issuance of subordinated debt and other
                  notes payable as well as beneficial conversion features
                  contained in convertible debt instruments (Notes H and I) is
                  recorded as a reduction of the related obligations and is
                  amortized over the remaining life of the related obligations.
                  Debt discount related to the stock warrants issued is
                  determined by a calculation which is based on the relative
                  fair values ascribed to such warrants determined management's
                  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.

         9.       Revenue Recognition

                  The Company recognizes revenue, net of sales discounts and
                  allowances, when title to the product passes to customers,
                  which occurs upon shipment. 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.

                  The Company recognizes product development revenue when the
                  Company has earned such revenue in accordance with the
                  achievement of specific criteria as outlined in the applicable
                  products development agreement.

         10.      Shipping and Handling Costs

                  The Company includes all shipping and handling expenses
                  incurred as a component of cost of manufacturing.

         11.      Research and Development Costs

                  All research and development costs are expensed when incurred.

                                      F-15

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE A (CONTINUED)

         12.      Advertising Costs

                  Advertising costs are expensed as incurred. Advertising costs
                  charged to operations for the years ended December 31, 2002
                  and 2001 were approximately $288,000 and $39,000,
                  respectively. During the year ended December 31, 2003, the
                  company benefited from previously accrued advertising costs of
                  approximately $306,000.

         13.      Income Taxes

                  The Company accounts for income taxes under the liability
                  method in accordance with Statement of Financial Accounting
                  Standards No. 109 ("SFAS No. 109"), "Accounting for Income
                  Taxes." Under this method, deferred tax assets and liabilities
                  are determined based on differences between financial
                  reporting and tax bases of assets and liabilities and are
                  measured using the enacted tax rates and laws that will be in
                  effect when the differences are expected to reverse. A
                  valuation allowance is established if it is more likely than
                  not that all, or some portion, of deferred tax assets will not
                  be realized. 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.

         14.      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, 2002 and 2001 computation are approximately
                  249,877,514, 200,368,000 and 52,976,000, respectively, of
                  outstanding warrants and options and the effect of convertible
                  debentures outstanding which would have been antidilutive.

                                      F-16

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE A (CONTINUED)

         15.      Stock-Based Compensation

                  The Company has two stock-based employee compensation plans,
                  which are described more fully in Note N. 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. ("SFAS No.
                  148")". 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.


<TABLE>
<CAPTION>
                                                               Year ended December 31,
                                                       --------------------------------------
                                                        (in thousands, except per share data)
                                                          2003          2002          2001
                                                       ----------    ----------    ----------
<S>                                                    <C>           <C>           <C>
Net loss, as reported                                  $  (48,455)   $  (59,589)   $  (12,563)
Deduct: Total stock-based employee
    compensation expense determined under fair
    value-based method for all awards
                                                             (662)       (1,047)       (1,679)
                                                       ----------    ----------    ----------
Pro forma net loss                                     $  (49,117)   $  (60,636)   $  (14,242)
                                                       ==========    ==========    ----------
Loss per share:
      Basic and diluted - as reported                  $    (2.28)   $    (3.90)   $     (.84)
                                                       ----------    ----------    ----------
      Basic and diluted - pro forma                    $    (2.31)   $    (3.97)   $     (.95)
                                                       ----------    ==========    ==========
</TABLE>


                                      F-17

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE A (CONTINUED)

                  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.

                  The weighted-average option fair values and the assumptions
                  used to estimate these values are as follows:


<TABLE>
<CAPTION>
                                           Grants issued during
                                     --------------------------------
                                       2003        2002        2001
                                     --------    --------    --------
<S>                                  <C>         <C>         <C>
Expected life (years)                     2.5          10          10
Risk-free interest rate                   1.8%        4.6%        5.3%
Expected volatility                        94%         88%         86%
Dividend yield                            0.0%        0.0%        0.0%
Weighted-average option fair value   $    .53    $   1.12    $   1.87
</TABLE>


                  Equity instruments issued to nonemployees in exchange for
                  goods, fees and services are accounted for under the fair
                  value-based method of SFAS No. 123.

         16.      Use of Estimates in Consolidated Financial Statements

                  In preparing consolidated financial statements in conformity
                  with accounting principles generally accepted in the United
                  States of America, management makes estimates and assumptions
                  that affect the reported amounts of assets and liabilities and
                  disclosure of contingent assets and liabilities at the date of
                  the consolidated financial statements, as well as the reported
                  amounts of revenues and expenses during the reporting period.
                  Actual results could differ from those estimates.

                                      F-18

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE A (CONTINUED)

         17.      Carrying Amount and Fair Value of Financial Instruments

                  The carrying amount of cash and cash equivalents and accounts
                  receivable approximates fair value due to the short-term
                  maturities of the instruments. The Company believes that it is
                  not practical to estimate the fair value of its accounts
                  payable based upon the costs that would be incurred to obtain
                  such valuation. The fair value of the Company's short-term and
                  long-term debt approximates the book value based upon the
                  proximity of the issuance of new debt where the cash
                  consideration received equaled the face value of the debt.

         18.      New Accounting Pronouncements

                  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 adoption of
                  SFAS No. 149 did not have a material impact on the Company's
                  financial position or 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 adoption of SFAS No. 150 did not have a material
                  impact on the Company's financial position or results of
                  operations.

         19.      Reclassifications

                  Certain reclassifications have been made to the prior years'
                  amounts to conform to the current year's presentation.

                                      F-19

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE B - BASIS OF PRESENTATION AND LIQUIDITY MATTERS

         The accompanying financial statements have been prepared assuming the
         Company will continue as a going concern. At December 31, 2003, the
         Company had cash and cash equivalents of approximately $942,000,
         working capital deficit of approximately $3,770,000 and a stockholders'
         deficit of approximately $52,067,000. The Company incurred a loss from
         operations of approximately $17,244,000 and a net loss of approximately
         $48,455,000 during the year ended December 31, 2003. These factors,
         among others, raise substantial doubt about the Company's ability to
         continue as a going concern. Management's plans with respect to these
         matters follow:

         After due consideration of alternative strategies and considering the
         optimal use of available funding, and the prospects for attracting new
         funding, on October 30, 2003, the Company's Board of Directors
         unanimously adopted a strategy to substantially restructure the
         Company's operations. On November 6, 2003, the Company publicly
         announced its restructuring plan to focus its efforts on research and
         development related to certain proprietary finished dosage products and
         APIs. In making its determination the Board of Directors considered,
         among other factors, the Company's ability and time required to
         generate positive cash flow and income from the operation of the
         Company's finished dosage manufacturing, packaging, labeling and
         distribution facilities located in Congers, New York (collectively, the
         "Congers Facilities") in the manufacture and distribution of finished
         dosage generic products pursuant to abbreviated new drug applications
         ("ANDAs").

         The Company incurred losses of $48.5 million in 2003, $59.6 million in
         2002 and $12.6 million in 2001. The Board determined that near term
         sales of the Company's finished dosage generic products would likely
         result in continued financial losses in view of the highly competitive
         market environment, low market pricing, declining market size for its
         existing generic products and the lack of timely new generic product
         launches. Based on this analysis and other factors, the Board concluded
         that the Company restructure its operations by closing or divesting the
         Congers Facilities and reducing certain activities at its Culver
         Facility. The plan targeted a reduction in workforce of approximately
         70 employees at the Congers Facilities, 25 employees at the Culver
         Facility and 5 employees in Rockford, Illinois.

         In implementing the restructuring plan at the Culver Facility, the
         reduction in work force involved approximately 25 employees engaged in
         or supporting the manufacture of doxycycline hyclate and doxycycline
         monohydrate APIs which were converted to finished dosage products at
         the Congers Facilities. With the closure of the Congers Facilities the
         APIs manufactured in Culver were not required. The Culver Facility work
         force reduction was substantially completed by December 31, 2003.

         In implementing the restructuring plan at the Rockford, Illinois
         administrative office facility, the Company terminated its Rockford
         office lease agreement and relocated the administrative functions to
         Palatine, Illinois. This process was completed on February 29, 2004
         resulting in a reduction in work force of 5 employees.

         In implementing the restructuring of operations at the Congers
         Facilities, the reduction in work force involved essentially all of the
         employees at the site. Finished generic product manufacturing
         operations substantially ceased on January 30, 2004. Packaging and
         labeling operations ceased approximately February 12, 2004 and quality
         assurance and related support activities ceased on approximately
         February 27, 2004. Such dates also mark the substantial completion of
         the reduction in work force of approximately 70 employees engaged in
         these activities at the Congers Facilities. From approximately March 1,
         2004 to March 19, 2004 a small logistics, maintenance and warehouse
         staff prepared the Congers Facilities for sale to IVAX Pharmaceuticals
         as discussed below.

         In implementing the restructuring adopted by the Board, the Company has
         transitioned to a single vertically integrated operations site located
         at its Houba, Inc. subsidiary in Culver, Indiana. The Company's
         strategy and key activities to be conducted at the Culver Facility are
         as follows:

              o   Development of the Company's ADF Technology for use in
                  orally administered opioid finished dosage products.

              o   Manufacture and quality assurance release of clinical trial
                  supplies of certain finished dosage form products utilizing
                  the ADF Technology.

              o   Evaluation of certain finished dosage products utilizing the
                  ADF Technology in clinical trials.

              o   Scale-up and manufacture of commercial quantities of certain
                  products utilizing the ADF Technology for sale by the
                  Company's licensees.

              o   Research, development and scale up of the Company's novel
                  Opioid Synthesis Technologies.

              o   Prosecution of the Company's application to the DEA to receive
                  a registration to import Narcotic Raw Materials ("NRMs") for
                  use in the production of opioid API's utilizing the Company's
                  Opioid Synthesis Technologies.

              o   Negotiating and executing license and development agreements
                  with strategic pharmaceutical company partners providing that
                  such licensees will further develop certain finished dosage
                  products utilizing the ADF Technology, file for regulatory
                  approval with the FDA and other regulatory authorities and
                  commercialize such products.

         As of December 31, 2003, the Company has recorded aggregate restructure
         expenses of approximately $3,280,000 consisting of an impairment charge
         of $1,673,000 against property, plant and equipment, an impairment
         charge of $1,354,000 against inventory (charged against cost of sales),
         and 253,000 of other costs.

         On February 6, 2004, the Company consummated a private offering of
         securities for an aggregate purchase price of approximately $12.3
         million (the "2004 Debenture Offering"). The securities issued in the
         2004 Debenture Offering consisted of convertible senior secured
         debentures (the "2004 Debentures"). The 2004 Debentures were issued by
         the Company pursuant to a certain Debenture and Share Purchase
         Agreement dated as of February 6, 2004 (the "2004 Purchase Agreement")
         by and among the Company, Care Capital Investments II, LP, Essex
         Woodlands Health Ventures V, L.P., Galen Partners III, L.P. and each of
         the Purchasers listed on the signature page thereto (collectively, the
         "2004 Debenture Investor Group").

         Of the approximate $12.7 million in 2004 Debentures issued in the 2004
         Debenture Offering, approximately $2 million of 2004 Debentures were
         issued in exchange for the surrender of like amount of principal plus
         accrued interest outstanding under Company's 5% convertible senior
         secured debentures issued pursuant to working capital bridge loan
         transactions with Care Capital, Essex Woodlands and Galen Partners III,
         L.P., Galen International III, L.P., and Galen Employee Fund III, L.P.
         during November and December, 2003. The 2004 Purchase Agreement further
         provides that the Company may issue additional 2004 Debentures in the
         principal amount of up to approximately $1.3 million on or prior to
         June 5, 2004, provided that the aggregate principal amount of 2004
         Debentures issued pursuant to the 2004 Purchase Agreement shall not
         exceed $14 million without the consent of the holders of 60% of the
         principal amount of the 2004 Debentures then held by Care Capital,
         Essex and Galen.

         The 2004 Debentures, issued at par, bear interest at the rate of 1.62%
         per annum, the short-term Applicable Federal Rate on the date of
         issuance. The 2004 Debentures are secured by a lien on all assets of
         the Company. In addition, each of Houba, Inc. and Axiom Pharmaceutical
         Corporation, each a

                                      F-20

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

         NOTE B (CONTINUED)

         wholly-owned subsidiary of the Company, has executed in favor of the
         2004 Debenture holders, an unconditional agreement of guaranty of the
         Company's obligations under the 2004 Purchase Agreement. Each guaranty
         is secured by all assets of such subsidiary. In addition, the Company
         has pledged the stock of each such subsidiary to the holders of the
         2004 Debentures to further secure its obligations under the 2004
         Purchase Agreement.

         In accordance with the terms of an Amended and Restated Subordination
         Agreement dated as of February 6, 2004 between the Company, the holders
         of the 2004 Debentures and the holders of the Company's other
         outstanding debentures, the liens on the Company's and its subsidiary's
         assets as well as the payment priority of the 2004 Debentures are (i)
         subordinate to the Company's lien and payment obligations in favor of
         Watson Pharmaceuticals under the Watson Term Loan Agreement, and (ii)
         senior to the Company's lien and payment obligations in favor of the
         holders of the Company's other outstanding debentures in the aggregate
         principal amount of approximately $87.7 million.

         The 2004 Debentures (including the principal amount plus interest
         accrued at the date of conversion) will convert automatically into the
         Company's Series A convertible preferred stock (the "Series A
         Preferred") immediately following the Company's receipt of shareholder
         approval at its next shareholders' meeting to restate the Company's
         Certificate of Incorporation (the "Charter Amendment") to authorize the
         Series A Preferred and the Junior Preferred Shares (as described below)
         and the filing of the Charter Amendment with the Office of the New York
         Department of State (the date of such filing, the "Charter Amendment
         Filing Date"), as provided in the 2004 Purchase Agreement. The 2004
         Debentures will convert into Series A Preferred at a price per share
         (the "Series A Conversion Price") of $0.6425, representing the average
         of the closing bid and asked prices of the Company's Common Stock for
         the twenty (20) trading days ending February 4, 2004, as reported by
         the Over-the-Counter ("OTC") Bulletin Board. The Series A 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 options for the purchase of, or stock or
         other securities convertible into, Common Stock ("Convertible
         Securities"), if lower than the then applicable Series A Conversion
         Price.

         Based on the $0.6425 Series A Conversion Price of the Series A Shares
         and estimating the interest accrual under the 2004 Debentures prior to
         the Charter Amendment Filing Date, the 2004 Debentures with an
         aggregate principal amount of $14 million would be convertible into an
         aggregate of approximately 22 million Series A Preferred shares.

         In general, the Series A Preferred shares have a liquidation preference
         equal to five (5) times the initial $0.6425 Series A Conversion Price
         (the "Series A Liquidation Preference"). In addition, the Series A
         Preferred shares are convertible into the Company's Common Stock, with
         each Series A Preferred share convertible into the number of shares of
         Common Stock obtained by dividing (i) the Series A Liquidation
         Preference, by (ii) the $0.6425 Series A Conversion Price, as such
         conversion price may be

                                      F-21

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

         NOTE B (CONTINUED)

         adjusted, from time to time, pursuant to the dilution protections of
         such shares. Without limiting the Series A Liquidation Preference, the
         holders of Series A Preferred shares also have the right to participate
         with the holders of the Company's Common Stock upon the occurrence of a
         liquidation event, including the Company's merger, sale of all or
         substantially all of its assets or a change of control transaction, on
         an as-converted basis (but for these purposes only, assuming the Series
         A Preferred shares to be convertible into only thirty percent (30%) of
         the shares of Common Stock into which they are otherwise then
         convertible). The holders of Series A Preferred shares also have the
         right to vote as part of a single class with all holders of the
         Company's voting securities on all matters to be voted on by such
         security holders. Each holder of Series A Preferred shares will have
         such number of votes as shall equal the number of votes he would have
         had if such holder converted all Series A Preferred shares held by such
         holder into shares of Common Stock immediately prior to the record date
         relating to such vote.

         The 2004 Purchase Agreement provides that each of Care Capital, Essex
         and Galen (collectively, the "Lead 2004 Investors") has the right to
         designate for nomination one member of the Company's Board of
         Directors, and that the Lead Investors collectively may designate one
         additional member of the Board (collectively, the Designees"). The
         Purchase Agreement further provides that the Designees, if so requested
         by such Designee in his sole discretion, shall be appointed to the
         Company's Executive Committee, Compensation Committee and any other
         Committee of the Board of Directors. The Designees of Care Capital,
         Essex and Galen are Messrs. Karabelas, Thangjaraj and Wesson,
         respectively, each of whom are current Board members. Effective as of
         the closing of the 2004 Purchase Agreement, the Lead 2004 Investors may
         collectively nominate one additional Designee to the Board. The Company
         has agreed to nominate and appoint to the Board of Directors, subject
         to shareholder approval, one designee of each of Care Capital, Essex
         and Galen, and one collective designee of the Lead 2004 Investors, for
         so long as each holds a minimum of 50% of the Series A Preferred shares
         initially issued to such party (or at least 50% of the shares of Common
         Stock issuable upon conversion of the Series A Preferred shares).

         As of February 6, 2004, the date of the initial closing of the 2004
         Purchase Agreement, the Company had issued and outstanding and
         aggregate of approximately $87.7 million in principal amount of 5%
         convertible senior secured debentures maturing March 31, 2006 issued
         pursuant to three separate Debenture Purchase Agreements dated March
         10, 1998, as amended (the "1998 Debentures"), May 26, 1999, as amended
         (the "1999 Debentures") and December 20, 2002 (the "2002 Debentures"),
         respectively. The 1998 Debentures, 1999 Debentures and 2002 Debentures
         are referred to collectively as the "1998-2002 Debentures". After
         giving effect to the Company's issuance of additional 5% convertible
         senior secured debentures in satisfaction of interest payments on the
         1998-2002 Debentures, as of February 10, 2004, the 1998-2002 Debentures
         were convertible into an aggregate of approximately 190.4 million
         shares of the Company's Common Stock.

         Simultaneous with the execution of the 2004 Purchase Agreement, and as
         a condition to the initial closing of the 2004 Purchase Agreement, the
         Company, the 2004 Debenture Investor Group and each of

                                      F-22

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

         NOTE B (CONTINUED)

         the holders of the 1998-2002 Debentures executed a certain Debenture
         Conversion Agreement, dated as of February 6, 2004 (the "Conversion
         Agreement"). In accordance with the terms of the Conversion Agreement,
         each holder of the 2004 Debentures agreed to convert the 2004
         Debentures held by such holder into the Company's Series A Preferred
         shares and each holder of 1998-2002 Debentures agreed to convert the
         1998-2002 Debentures held by such holder into the Company's Series B
         convertible preferred stock (the "Series B Preferred") and/or Series
         C-1, C-2 and/or C-3 convertible preferred stock (collectively, the
         "Series C Preferred"). The Series C Preferred Shares together with the
         Series B Preferred Shares are herein referred to as, the "Junior
         Preferred Shares", and the Junior Preferred Shares together with the
         Series A Preferred, are collectively referred to as the "Preferred
         Stock". The Conversion Agreement provides, among other things, for the
         automatic conversion of the 2004 Debentures and the 1998-2002
         Debentures (collectively, the "Outstanding Debentures") into the
         appropriate class of Preferred Stock immediately following the
         Company's receipt of shareholder approval to the Charter Amendment
         authorizing the creation of the Preferred Stock and the filing of the
         Charter Amendment with the Office of the New York Department of State.

         Under the Conversion Agreement, the holders of approximately $6.7
         million in principal amount of 2002 Debentures issued during 2003 will
         convert such 2002 Debentures (plus accrued and unpaid interest) into
         Series B Preferred Shares. Of the remaining approximate $81 million in
         principal amount of the 1998-2002 Debentures, approximately $31.6
         million is comprised of 1998 Debentures, approximately $21.8 million is
         comprised of 1999 Debentures and approximately $27.6 million is
         comprised of 2002 Debentures. The 1998 Debentures will be converted
         into Series C-1 Preferred shares. The 1999 Debentures will be converted
         into Series C-2 Preferred shares. The remaining balance of the 2002
         Debentures shall be converted into Series C-3 Preferred shares.

         The number of Junior Preferred Shares to be received by each holder of
         1998-2002 Debentures is based on the respective prices at which the
         1998-2002 Debentures were convertible into Common Stock. The 2002
         Debentures issued in 2003 have a conversion price of $0.3420 per share.
         The 1998 Debentures, 1999 Debentures and the remaining balance of the
         2002 Debentures have conversion prices of $0.5776, $0.5993 and $0.3481
         per share, respectively. Based on the respective conversion prices of
         the 1998-2002 Debentures, and estimating the interest accrual on the
         1998-2002 Debentures prior to the Charter Amendment Filing Date, the
         1998-2002 Debentures are convertible into an aggregate of approximately
         20.0 million Series B Preferred shares, 56.5 million Series C-1
         Preferred shares, 37.5 million Series C-2 Preferred shares and 80.9
         million Series C-3 Preferred shares.

         In general, the Junior Preferred Shares have a liquidation preference
         equal to one (1) time the principal amount plus accrued and unpaid
         interest of the 1998-2002 Debentures converted into Junior Preferred
         Shares The liquidation preference of the Series B Preferred has
         priority over, and will be satisfied prior to, the liquidation
         preference of the Series C Preferred. The liquidation preference for
         each class of the Junior Preferred Shares is equal to the conversion
         prices of such shares. The Junior Preferred Shares are convertible into
         the Company's Common Stock, with each Junior Preferred Share
         convertible into one

                                      F-23

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

         NOTE B (CONTINUED)

         share of Common Stock. The holders of the Junior Preferred Shares have
         the right to vote as part of the single class with all holders of the
         Company's Common Stock and the holders of the Series A Preferred on all
         matters to be voted on by such stockholders, with each holder of Junior
         Preferred Shares having such number of votes as shall equal the number
         of votes he would have had if such holder had converted all Junior
         Preferred Shares held by such holder into Common Stock immediately
         prior to the record date relating to such vote.

         The Company was a party to a certain loan agreement with Watson
         Pharmaceuticals ("Watson") pursuant to which Watson made term loans to
         the Company (the "Watson Term Loan Agreement") in the aggregate
         principal amount of $21.4 million as evidenced by two promissory notes
         (the "Watson Notes"). It was a condition to the completion of the 2004
         Debenture Offering that simultaneous with the closing of the 2004
         Purchase Agreement, the Company shall have paid Watson the sum of
         approximately $4.3 million (which amount was funded from the proceeds
         of the 2004 Debenture Offering) and conveyed to Watson certain Company
         assets in consideration for Watson's forgiveness of approximately $16.4
         million of indebtedness under the Watson Notes. A part of such
         transaction, the Watson Notes were amended to extend the maturity date
         of such notes from March 31, 2006 to June 30, 2007, to provide for
         satisfaction of future interest payments under the Watson Notes in the
         form of the Company's Common Stock, to reduce the principal amount of
         the Watson Notes from $21.4 million to $5 million, and to provide for
         the forbearance from the exercise of rights and remedies upon the
         occurrence of certain events of default under the Watson Notes (the
         Watson Notes as so amended, the "Amended and Restated Watson Note").
         Simultaneous with the issuance of the Amended and Restated Watson Note,
         each of the Lead 2004 Investors and the other investors in the 2004
         Debentures as of February 10, 2004 (collectively, the "Watson Note
         Purchasers") purchased the Amended and Restated Note from Watson in
         consideration for a payment to Watson of $1,000,000.

         In addition to Watson's forgiveness of approximately $16.4 million
         under the Watson Notes, as additional consideration for the Company's
         payment to Watson of approximately $4.3 million and the Company's
         conveyance of certain Company assets, all current supply agreements
         between the Company and Watson were cancelled and Watson waived the
         dilution protections contained in the Common Stock purchase warrant
         dated December 20, 2002 exercisable for approximately 10.7 million
         shares of the Company's Common Stock previously issued by the Company
         to Watson, to the extent such dilution protections were triggered by
         the transactions provided in the 2004 Debenture Offering.

         The Amended and Restated Watson Note in the principal amount of $5
         million as purchased by the Watson Note Purchasers is secured by a
         first lien on all of the Company's and its subsidiaries' assets, senior
         to the lien securing the Outstanding Debentures and all other Company
         indebtedness, carries a floating rate of interest equal to the prime
         rate plus 4.5% and matures on June 30, 2007.

         As part of the restructuring of the Company's operations, in February,
         2004, the Company sold certain non-revenue generating abbreviated new
         drug applications ("ANDAs"). Additionally, on March 19, 2004, the
         Company and its wholly-owned subsidiary, Axiom Pharmaceutical
         Corporation, entered into an Asset Purchase Agreement with IVAX
         Pharmaceuticals New York LLC ("IVAX"). Pursuant to the Purchase
         Agreement, the Company and Axiom agreed to sell to IVAX substantially
         all of the Company's assets used in the operation of the Company's
         former manufacturing and packaging locations in Congers, New York.
         Shareholder approval is necessary to complete this transaction and will
         be sought of the Company's next annual meeting of shareholders. After
         giving effect to the payment of legal and other professional fees
         relating to these assets divestment transactions, the Company estimates
         that it will realize aggregate net proceeds of approximately $4.3
         million from such transactions.

                                      F-24

<PAGE>


                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE B (CONTINUED)

         The development and commercialization of active pharmaceutical
         ingredients ("APIs") and finished dosage products incorporating the
         Company's opiate synthesis and finished dosage formulation technologies
         are subject to various factors, many of which are outside the Company's
         control. Specifically, only a limited portion of such technologies have
         been tested in laboratory settings, none have been tested in clinical
         settings, and all of such technologies will need to be successfully
         scaled up to commercial scale 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 and FDA's requirements
         for the maintenance of its controlled substances manufacturing
         registrations (the "Manufacturing Registration") and the issuance and
         maintenance of the DEA raw material import registration (the "Import
         Registration"). The process of seeking the Import Registration and
         contesting opposition proceedings, as well as the continuing
         development of the Company's opiate synthesis and finished dosage
         formulation technologies, are intended to continue through 2004. The
         Company is currently unable to provide any assurance that such
         technologies can be scaled up to commercial scale or that they will be
         commercially viable. Moreover, no assurance can be given that the
         Company will succeed in obtaining the Import Registration. The Company
         is committing substantially all of its resources, and available capital
         to the development of the opiate synthesis and finished dosage
         formulation technologies and to the receipt of the Import Registration.
         The failure of the Company to successfully develop the finished dosage
         formulation technologies 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 and
         finished dosage formulation technologies, to obtain required DEA and
         FDA approvals and to fund the capital improvements necessary for the
         manufacture of APIs and finished dosage products incorporating such
         technologies.

         In view of the matters described above, recoverability of a major
         portion of the recorded asset amounts shown in the accompanying
         consolidated balance sheets is dependent upon continued operations of
         the Company, which in turn are dependent upon the Company's ability to
         meet its financing requirements on a continuing basis, to maintain
         present financing, and to succeed in its future operations. The
         financial statements do not include any adjustments relating to the
         recoverability and classification of recorded asset amounts or amounts
         and classification of liabilities that might be necessary should the
         Company be unable to continue in existence.

                                      F-25

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE C - 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
         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
         I(a).)

         1.       Product Acquisition Agreement

                  The product acquisition portion of the transactions with
                  Watson provided for Halsey's sale of a pending ANDA and
                  related rights (the "Product") to Watson for aggregate
                  consideration of $13,500,000 (the "Product Acquisition
                  Agreement"). As part of the execution of the Product
                  Acquisition Agreement, the Company and Watson executed
                  ten-year supply agreements covering the active pharmaceutical
                  ingredient ("API") and finished dosage form of the Product
                  pursuant to which Halsey, at Watson's discretion, will
                  manufacture and supply Watson's requirements for the Product
                  API and, where the Product API is sourced from the Company,
                  finished dosage forms of the Product. The purchase price for
                  the Product was payable in three installments as certain
                  milestones were achieved. The first of such milestones was
                  achieved in April of 2000, whereby the Company received FDA
                  approval and Watson paid the Company $5,000,000. In April
                  2001, Watson remitted $5,000,000 to the Company representing
                  the second milestone achievement. The third and last of the
                  milestones was achieved in July 2001, and Watson remitted
                  $3,500,000 to the Company.

         2.       Right of First Negotiation Agreement

                  The Company and Watson also executed a right of first
                  negotiation agreement providing Watson with a first right to
                  negotiate the terms under which the Company would manufacture
                  and supply certain specified APIs and finished dosage products
                  to be developed by the Company. The right of first negotiation
                  agreement provides that upon Watson's exercise of its right to
                  negotiate for the supply of a particular product, the parties
                  will negotiate the specific terms of the manufacturing and
                  supply arrangement, including price, exclusivity, minimum
                  purchase requirements, if any, territory and term.

                                      F-26

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE C (CONTINUED)

                  In the event Watson does not exercise its right of first
                  negotiation upon receipt of written notice from the Company as
                  to its receipt of applicable governmental approval relating to
                  a covered product, or in the event the parties are unable to
                  reach agreement on the material terms of a supply arrangement
                  relating to such product within sixty days of Watson's
                  exercise of its right to negotiate for such product, the
                  Company may negotiate with third parties for the supply,
                  marketing and sale of the applicable product. The right of
                  first negotiation agreement has a term of ten years, subject
                  to extension in the absence of written notice from either
                  party for two additional periods of five years each. The right
                  of first negotiation agreement applies only to API and
                  finished dosage products identified in the agreement and does
                  not otherwise prohibit the Company from developing other APIs
                  or finished dosage products for itself or third parties. (See
                  Note B)

         3.       Core Products Supply Agreement

                  The Company and Watson also 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 provided in Subsection (iii) above) in
                  two (2) equal monthly installments on October 1, 2002 and
                  November 1, 2002. On December 20, 2002, the Company's
                  remaining advance payments from Watson were $3,901,331. At
                  such date, this amount was consolidated with the Company's
                  obligations under its term loan with Watson. (See Notes C-4
                  and B) 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. Those products
                  were sold by the Company's subsidiary, Axiom Pharmaceutical
                  Corporation.

                                      F-27

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE C (CONTINUED)

         4.       Term Loan Agreement

                  The final component of the Company's strategic alliance with
                  Watson provided for Watson's extension of a $17,500,000 term
                  loan to the Company ("Watson Term Loan"). The loan was funded
                  in installments upon the Company's request for advances and
                  the provision to Watson of a supporting use of proceeds
                  relating to each such advance. The loan is secured by a first
                  lien on all of the Company's assets, senior to the lien
                  securing all other Company indebtedness, carries a floating
                  rate of interest equal to prime plus two percent and had an
                  initial maturity date of March 31, 2003. As part of the
                  Company's 2002 Debenture Offering (Note H), 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, 8.5% at December 31, 2003, and (3) increase
                  the principal amount by $3,901,331 to reflect the inclusion of
                  the Core Products Supply Agreement advance payments owed by
                  the Company to Watson. 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 December 31, 2003, Watson had advanced $21,401,331 to
                  the Company under the Watson Term Loan. (See Notes B and H(a))

                                      F-28

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE D - INVENTORIES

         Inventories consist of the following:


<TABLE>
<CAPTION>
                             December 31,
                          ------------------
                           2003       2002
                          -------    -------
                            (in thousands)
<S>                       <C>        <C>
Finished goods            $   357    $     -
Work-in-process               953        831
Raw materials                 356      1,454
                          -------    -------
                            1,666      2,285

Less impairment reserve    (1,354)         -
                          -------    -------
                          $   312    $ 2,285
                          =======    =======
</TABLE>


NOTE E - PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment are summarized as follows:


<TABLE>
<CAPTION>
                                                                        December 31,
                                                                    --------------------
                                                                      2003        2002
                                                                    --------    --------
                                                                       (in thousands)
<S>                                                                 <C>         <C>
Machinery and equipment                                             $  9,457    $  9,120
Construction in progress                                                 312         157
Leasehold improvements                                                 1,454       1,454
Building and building improvements                                     2,816       2,813
Land                                                                      44          44
                                                                    --------    --------
                                                                      14,083      13,588

Less accumulated depreciation and amortization (including
    $11 in 2003 and $8 in 2002 of capitalized lease amortization)     (9,016)     (8,221)
                                                                    --------    --------
                                                                       5,067       5,367
                                                                    --------    --------

    Less impairment reserve (Note B)                                  (1,673)          -
                                                                    --------    --------

                                                                    $  3,394    $  5,367
                                                                    ========    ========
</TABLE>


         Included in machinery and equipment is equipment recorded under
         capitalized leases at December 31, 2003 and 2002, of approximately
         $221,000 and $108,000, respectively. Depreciation and amortization
         expense for the years ended December 31, 2003, 2002 and 2001 was
         approximately $811,000, $835,000 and $861,000, respectively.

                                      F-29

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE F - ACCRUED EXPENSES

         Accrued expenses are summarized as follows:


<TABLE>
<CAPTION>
                                      December 31,
                                    ---------------
                                     2003     2002
                                    ------   ------
                                    (in thousands)
<S>                                 <C>      <C>
Interest                            $1,544   $  988
Accrued payroll and payroll taxes      310      497
Professional fees                      491      388
Other                                1,307    1,242
                                    ------   ------

                                    $3,652   $3,115
                                    ======   ======
</TABLE>


NOTE G - CONVERTIBLE SUBORDINATED DEBENTURES AND STOCK WARRANTS

         At December 31, 2003 and 2002, convertible subordinated debentures
         outstanding and related debt discount related to the following
         issuances are as follows:


<TABLE>
<CAPTION>
                                          December 31,
                                     ----------------------
                                       2003          2002
                                     --------      --------
     Issuance of Debentures              (in thousands)
<S>                                  <C>           <C>
1998 Debentures                      $ 31,212      $ 30,215
1999 Debentures                        21,485        20,509
2002 Debentures                        27,303        26,394
2003 Debentures                         6,632             -
                                     --------      --------
                                       86,632        77,118
Less:  Debt discount                  (56,893)      (73,955)
                                     --------      --------
                                     $ 29,739      $  3,163
                                     ========      ========
</TABLE>


                                      F-30

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE G (CONTINUED)

         In March and June 1998, the Company consummated a private offering of
         securities for an aggregate purchase price of approximately $25,800,000
         million (the "Galen Offering"). The securities issued in the Galen
         Offering consisted of 5% Convertible Senior Secured Debentures (the
         "1998 Debentures") and Common Stock Purchase Warrants (the "1998
         Warrants"). The 1998 Debentures had an initial conversion price of
         $1.404 per share, for an aggregate of up to approximately 18,376,068
         shares of the Company's Common Stock. The 1998 Warrants were initially
         exercisable for an aggregate of approximately 5,500,084 shares of the
         Company's Common Stock. Of such Warrants, 2,784,250 Warrants were
         exercisable at $1.404 per share and the remaining 2,715,834 Warrants
         were exercisable at $2.279 per share. In connection with the Galen
         Offering, the Company incurred offering costs of $1,236,000 for legal
         and investment banker fees. These related offering costs were amortized
         over the life of the related debentures. Pursuant to certain provisions
         contained in the Watson Term Loan (see Note H(a)), certain interest
         payments on the 1998 Debentures to investors, as agreed, are to be made
         in the form of additional debentures. As of December 31, 2003 and 2002,
         the Company has issued additional debentures as payment of accrued
         interest on the 1998 Debentures of $4,427,000 and $3,166,000,
         respectively.

         In May 1999, the Company consummated a private offering of securities
         for an aggregate purchase price of approximately $17,862,000(the
         "Oracle Offering"). The securities issued in the Oracle Offering
         consisted of 5% Convertible Senior Secured Debentures (the "1999
         Debentures") and Common Stock Purchase Warrants (the "1999 Warrants").
         The 1999 Debentures had an initial conversion price of $1.404 per
         share, for an aggregate of up to approximately 12,722,222 shares of the
         Company's Common Stock. The 1999 Warrants were initially exercisable
         for an aggregate of approximately 3,608,602 shares of the Company's
         Common Stock. Of such Warrants, 1,804,301 Warrants were exercisable at
         $1.404 per share and the remaining 1,804,301 Warrants were exercisable
         at $2.279 per share. Approximately $7,037,000 of the 1999 Debentures
         were issued in exchange for the surrender of a like amount of principal
         and accrued interest outstanding under the Company's convertible
         promissory notes issued pursuant to various bridge loans received in
         the aggregate amount of $10,533,000 during the period from August 1998
         through and including May 1999 (the "1999 Bridge Loans"). In exchange
         for the creditors granting extensions on maturity dates of the
         Company's 1999 Bridge Loans, the Company issued warrants to purchase
         1,025,049 shares of the Company's common stock at exercise prices
         ranging from $1.18 to $2.32. Pursuant to certain provisions contained
         in the Watson Term Loan (see Note H(a)), certain interest payments on
         the 1999 Debentures to investors, as agreed, are to be made in the form
         of additional debentures. As of December 31, 2003 and 2002, the Company
         has issued additional debentures as payment of accrued interest on the
         1999 Debentures of $2,647,000 and $1,718,000, respectively.

                                      F-31

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE G (CONTINUED)

         Each of the 1998 Debentures, 1999 Debentures, 1998 Warrants and 1999
         Warrants contain customary antidilution protection. Specifically, each
         of such convertible securities provides that in the event the Company
         issues shares of its Common Stock or securities convertible into Common
         Stock at a price less than the fair market value of the Company's
         Common Stock on the date of issuance (fair market value being equal to
         the average of the closing bid and asked price for the Company's Common
         Stock as reported by the Over-the-Counter Bulletin Board for the 20
         trading days preceding the date of issuance), the conversion and
         exercise prices of the 1998 Debentures, 1999 Debentures, 1998 Warrants
         and 1999 Warrants are adjusted downward on a weighted-average basis. In
         addition, once having determined the new conversion/exercise price of
         such convertible securities, the holder of such convertible securities
         is entitled to acquire upon conversion or exercise of such instrument,
         the number of shares of Common Stock obtained by multiplying the
         conversion/exercise price in effect immediately prior to such
         adjustment by the number of shares of Common Stock acquirable
         immediately prior to such adjustments, and dividing the product thereof
         by the new conversion/exercise price.

         On December 20, 2002, the Company consummated a private offering of
         securities (the "2002 Debenture Offering") for an aggregate purchase
         price of $26,394,000. The securities issued consisted of 5% convertible
         senior secured debentures (the "2002 Debentures"). Of the 2002
         Debentures, approximately $15,894,000 of Debentures were issued in
         exchange for the surrender of like amount of principal and accrued
         interest outstanding under various working capital bridge loan
         transactions during the period from August 15, 2001 through and
         including December 20, 2002. (See Note H(b).) The 2002 Debentures were
         issued at par, will become due and payable as to principal on March 31,
         2006 and interest is accrued at the rate of 5% per annum and is payable
         on a quarterly basis. Interest payments on certain of the 2002
         Debentures are to be made in the form of additional debentures.

         2002 Debentures issued to certain investors in the aggregate face
         amount of $10,000,000 are convertible at any time after issuance into
         shares of the Company's Common Stock. The remainder of the 2002
         Debentures are convertible at any time after the approval of the
         Company's shareholders and debentureholders to 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

                                      F-32

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE G (CONTINUED)

         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 Stock or Convertible Securities by the Company
         during any six (6) month period for an aggregate gross consideration of
         at least $10,000,000. The 2002 Debentures are initially convertible
         into an aggregate of approximately 77,629,000 shares of Common Stock.
         Debentures that are issued to pay interest on the 2002 Debentures are
         convertible at anytime after issuance into shares of Common Stock at a
         price per share equal to the average of the closing bid and asked
         prices of the Common Stock for the twenty (20) trading days immediately
         preceding the applicable interest payment date under the 2002
         Debentures, as reported by the Over-the-Counter ("OTC") Bulletin Board.
         As a condition of the 2002 Debenture Offering, the maturity of the 1998
         Debentures and 1999 Debentures was extended from March 15, 2003 to
         March 31, 2006.

         As part of the completion of the 2002 Debenture Offering, the Company
         also amended its term loan agreement with Watson and issued to Watson a
         common stock purchase warrant for 10,700,665 shares (the "Watson
         Warrant"). (See Note H(a).) The exercise price of the Watson Warrant is
         $.34 per share. The fair market value of the Company's Common Stock on
         December 20, 2002, the date of the closing of the 2002 Purchase
         Agreement (as calculated in accordance with the definition of fair
         market value contained in the 1998 Debentures, 1999 Debentures, 1998
         Warrants and 1999 Warrants), was $.99 per share. As the conversion
         price of the 2002 Debentures and exercise price of the Watson Warrant
         were less than the fair market value of the Company's Common Stock on
         the date of issuance of the 2002 Debentures, the dilution adjustment
         provisions contained in each of the 1998 Debentures, 1999 Debentures,
         1998

                                      F-33

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE G (CONTINUED)

         Warrants and 1999 Warrants were triggered. As a result, the conversion
         price of the 1998 Debentures was reduced from $1.34 per share to $.59
         and the conversion price of the 1999 Debentures was reduced from $1.404
         per share to $.61. Additionally, the exercise price of the 1998
         Warrants was reduced from $1.34 per share to $.59 per share and from
         $2.16 per share to $.95 per share. The conversion price of the 1999
         Warrants was reduced from $1.404 per share to $ .61 per share and from
         $2.285 per share to $1.00 per share. After giving effect to the
         Dilution Adjustments, the number of shares issuable upon conversion of
         the 1998 Debentures and 1999 Debentures has been increased by
         41,184,184 shares of Common Stock, from 31,967,120 to 73,151,304
         shares. In addition, the number of shares issuable upon exercise of the
         remaining 1998 Warrants and 1999 Warrants, after taking into effect the
         Warrant recapitalization, as discussed below, has been increased by
         8,023,928 shares, from 5,867,013 to 13,890,941 shares. As a condition
         of the 2002 Debenture Offering, the maturity date of the 1998
         Debentures and 1999 Debentures was extended from March 15, 2003 to
         March 31, 2006. The Company recorded a charge to earnings, as loss on
         extinguishments of debt, of $14,148,757 related to an 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 of the
         1998 Warrants and 1999 Warrants.

         The conversion features contained in the Company's 2002 Debentures are
         considered to be beneficial to the holder as they allow the holder to
         convert the 2002 Debentures to the Company's common stock at conversion
         prices that were below the fair market value of the Company's common
         stock on the date of issuance. The conversion features, as adjusted,
         contained in certain of the Company's 1998 Debentures and 1999
         Debentures are also considered to beneficial to the holder as they
         allow the holder to convert the 1998 Debentures and 1999 Debentures to
         the Company's common stock at conversion prices that were below the
         fair market value of the Company's common stock on the date of
         issuance. The estimated value of the beneficial conversion features
         contained in each of the 1998 Debentures, 1999 Debentures and 2002
         Debentures of $74,618,817 has been recorded as debt discounts and is
         being amortized to expense over the life of the debt.

         The 2002 Debentures are secured by a lien on all assets of the Company,
         tangible and intangible. In addition, each of Houba, Inc. and Axion
         Pharmaceuticals Corporation 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 secure its obligations
         under the Purchase Agreement.

                                      F-34

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE G (CONTINUED)

         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 1998 and 1999 Debentures and 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, and (ii) senior to the Company's lien and payment
         obligations in favor of holders of the 1998 and 1999 Debentures.

         Warrant Recapitalization

         As part of the completion of the transactions contemplated in the 2002
         Purchase Agreement, the Company consummated the terms of a Warrant
         Recapitalization Agreement dated December 20, 2002 (the
         "Recapitalization Agreement") between the Company and certain holders
         of an aggregate of 8,145,736 Common Stock Purchase Warrants issued by
         the Company (i) pursuant to the 1998 Purchase Agreement (the "1998
         Warrants"), (ii) pursuant to the 1999 Purchase Agreement (the "1999
         Warrants"), and (iii) pursuant to various bridge loan transactions
         during the period from 1998 through 2002 (the "Bridge Loan Warrants"
         and collectively with the 1998 Warrants and 1999 Warrants, the
         "Recapitalization Warrants"). As part of the closing of the
         Recapitalization Agreement, the warrant holders surrendered to the
         Company for cancellation the Recapitalization Warrants in exchange for
         the issuance of an aggregate of 5,970,083 shares of Common Stock. The
         Company recorded a charge to earnings as loss on extinguishments of
         debt, of $2,282,000, representing the fair value of excess shares of
         Common Stock granted, related to the warrant recapitalization.

         Certain other outstanding warrant agreements were modified as a result
         of dilution adjustment provisions contained therein. The Company
         recorded a charge to earnings as other expense, of $863,000 related to
         an 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.

         2003 Financing

         At the Company's request, on May 5, 2003, the Company received a letter
         executed by each of Care Capital Investment II, L.P., Galen Partners
         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") and expiring January 1, 2004. The Letter of Support further
         provided 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 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. The Company valued the warrants at $581,000 using the
         Black-Scholes option-pricing model. Accordingly, the Company recorded a
         deferred charge that was amortized as an expense to the Company's
         operations during 2003, which was the commitment period of the Letter
         of Support.

                                      F-35

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE G (CONTINUED)

         During the period from May 5, 2003 and December 31, 2003, Care Capital,
         Essex Woodlands and Galen Partners (collectively, the "Majority 2002
         Debentureholders") had collectively advanced an aggregate of $8,600,000
         to the Company pursuant to a Letter of Support issued by the Majority
         2002 Debentureholders dated May 5, 2003 in order 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 $6,600,000 and $2,000,000 in Bridge Loans (" the 2003 Bridge Loans"
         having a maturity date of March 31, 2006 The securities issued in the
         offering, issued at par, have a conversion price of $0.3420 per share,
         bear interest payable quarterly at the rate of 5% per annum. Interest
         on the 2002 Debentures and the 2003 Bridge Loans will be substantially
         paid by the Company's issuance of a debenture instrument substantial by
         identical to the 2002 Debentures issued in the 2002 Debenture Offering,
         in the principal amount equal to the accrued interest for each
         quarterly period.

         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 $175,000 and
         $364,000 at December 31, 2003 and 2002, respectively. Interest expense
         on these debentures was approximately $7,000, $17,000 and $17,000, for
         the years ended December 31, 2003, 2002 and 2001, respectively, of
         which approximately $5,000, $16,000 and $15,000 was paid through the
         issuance of like debentures.

                                      F-36

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE H - NOTES PAYABLE AND STOCK WARRANTS

         At December 31, 2003 and 2002, notes payable consisted of the
         following:


<TABLE>
<CAPTION>
                                December 31,
                            --------------------
                              2003        2002
                            --------    --------
                               (in thousands)
<S>                         <C>         <C>
Term note payable (a)       $ 21,401    $ 21,401
                            ========    ========

Bridge loans (b)            $  2,000     $     -
Capital lease obligations        137          73
                            --------    --------

                               2,137          73

Less:  Current maturities        (45)        (33)
                            --------    --------

                            $  2,092    $     40
                            ========    ========
</TABLE>


         (a)      In connection with various strategic alliance transactions,
                  Watson advanced $17,500,000 to the Company under a 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 Core Products Supply Agreement advance payments. The
                  interest rate at December 31, 2003 was 8.50%. In consideration
                  for the extension of the maturity date of the Watson Term
                  Loan, the Company granted the Watson Warrant described in
                  Notes C and H. The fair value of the warrant on the date of
                  grant, as calculated using the Black-Scholes option-pricing
                  model, of $11,985,745 was charged to operations on the date of
                  grant as loss on the extinguishment of debt.

                                      F-37

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE H (CONTINUED)

         (b)      During the period January 9, 2002 through December 5, 2002,
                  the Company secured various bridge loans in the total
                  principal amount of $12,500,000 to fund the Company's working
                  capital requirements. These loans bear interest at 10.0% per
                  annum and were convertible at prices ranging from $2.16 to
                  $1.28 into a total of 7,389,940 shares of the Company's common
                  stock. The conversion features contained in certain of these
                  bridge loans were considered to be beneficial to the holder as
                  they allowed the holder to convert the bridge loans to the
                  Company's common stock at conversion prices that were below
                  the fair market value of the Company's common stock on the
                  date of issuance. As additional consideration for these bridge
                  loans, the Company issued warrants to purchase 4,255,143
                  shares of the Company's common stock with exercise prices
                  ranging from $2.16 to $1.28. The relative estimated fair value
                  of the warrants of $5,115,000 and the estimated value of the
                  conversion feature of $3,745,000 were recorded as additional
                  debt discount and amortized over the life of the bridge loans.

                  At December 20, 2002, total bridge loans and accrued interest
                  outstanding equaled approximately $16,022,000, of which
                  approximately $15,894,000 was surrendered in exchange for the
                  2002 Debentures and approximately $128,000 was repaid. The
                  total number of warrants issued in connection with these
                  bridge loans was 4,442,643. Under the terms of the warrant
                  agreements the conversion price of each of these warrants was
                  adjusted to $.34 (Note G)

                  During the period from May 5, 2003 through December 31, 2003,
                  certain holders of the Company's 2002 Debentures advanced an
                  aggregate of $8.6 million consisting of $6.6 million
                  debentures and $2.0 million bridge loans to the Company under
                  a Letter of Support dated May 5, 2003. The debentures and
                  bridge loans were made in accordance with the terms of the
                  2002 Debenture Purchase Agreement and have a maturity date of
                  March 31, 2006. (See Note G).

                                      F-38

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE H (CONTINUED)

         The following table summarizes information concerning outstanding and
         exercisable stock purchase warrants:


<TABLE>
<CAPTION>
                            Warrants outstanding
                  -----------------------------------------
                                    Weighted-
                       Number        average      Weighted-
                  outstanding at    remaining      average
   Ranges of       December 31,    contractual    exercise
exercise prices        2003        life (years)     price
---------------   --------------   ------------   ---------
<S>               <C>              <C>            <C>
$0.34 - $0.93       34,315,714         4.60         $0.54
                    ==========         ====         =====
</TABLE>


NOTE I - INCOME TAXES

         Reconciliations between the Federal income tax rate and the Company's
         effective income tax rate were as follows:


<TABLE>
<CAPTION>
                                                         Year ended December 31,
                                 ----------------------------------------------------------------------
                                         2003                     2002                     2001
                                 --------------------     --------------------     --------------------
                                  AMOUNT        %          Amount        %          Amount        %
                                 --------    --------     --------    --------     --------    --------
                                                         (dollars in thousands)
<S>                              <C>         <C>          <C>         <C>          <C>         <C>
Federal statutory rate           $(15,966)      (34.0)%   $(20,260)      (34.0)%   $ (4,271)      (34.0%)
Loss for which no tax
    benefit was provided            4,357         9.2       12,951        21.7        4,231        33.7
Non-deductible financing costs     11,589        24.6        7,278        12.2            -           -
Federal tax carryback
    refund

Department of Justice
    settlement                         11          .1           16          .1           21          .2
Other                                   9          .1           15          .0           19          .1
                                 --------    --------     --------    --------     --------    --------

Actual tax benefit               $      -           -%    $      -           -%    $      -           -%
                                 ========    --------     ========    --------     ========    ========
</TABLE>


         The Company has net operating loss carryforwards aggregating
         approximately $128,789,000, expiring during the years 2011 through
         2023.

                                      F-39

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE I (CONTINUED)

         The tax loss carryforwards of the Company and its subsidiaries may be
         subject to limitation by Section 382 of the Internal Revenue Code with
         respect to the amount utilizable each year. This limitation reduces the
         Company's ability to utilize net operating loss carryforwards included
         above each year. The amount of the limitation has not been quantified
         by the Company. During the calendar year, the company adjusted its net
         operating loss carryforward. This adjustment has no effect on the
         current or prior year financial statements.

         The components of the Company's deferred tax assets (liabilities),
         pursuant to SFAS No. 109, are summarized as follows:


<TABLE>
<CAPTION>
                                                    December 31,
                                                --------------------
                                                  2003        2002
                                                --------    --------
                                                   (in thousands)
<S>                                             <C>         <C>
Deferred tax assets
      Net operating loss carryforwards          $ 55,998    $ 52,687
      Asset reserves                               1,016         320
      Research and development tax credit             29          29
      Accrued expenses                               205         294
      Capital loss carryforwards                     212         211
      Depreciation and amortization                   20         378
      Accrued shutdown costs                         703           -
      Other                                           73          73
                                                --------    --------

               Gross deferred tax assets          58,256      53,992
                                                --------    --------

Deferred tax liabilities
      Depreciation                                     -         (93)
                                                --------    --------

               Net deferred tax assets before
                     valuation allowance          58,256      53,899
 Valuation allowance                             (58,256)    (53,899)
                                                --------    --------

               Net deferred tax assets          $      -    $      -
                                                ========    ========
</TABLE>


         SFAS No. 109 requires a valuation allowance against deferred tax assets
         if, based on the weight of available evidence, it is more likely than
         not that some or all of the deferred tax assets may not be realized.
         The valuation allowance at December 31, 2003 primarily pertains to
         uncertainties with respect to future utilization of net operating loss
         carryforwards.

                                      F-40

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE J - CESSATION OF BROOKLYN, NEW YORK PLANT

         The Company's formal decision to discontinue its Brooklyn, New York
         plant operations was initiated in the fourth quarter of 1999 with
         notification to its union. The Brooklyn operations ceased in March
         2001. The total charge of approximately $3,220,000 resulting from
         eliminating the Brooklyn operation taken in 1999 includes the lease
         termination payment of $1,150,000, a provision of $200,000 for plant
         repairs, the write-off of leasehold improvements of $1,778,000,
         severance and other costs for terminated employees of $730,000, less
         deferred rent previously expensed of $638,000.

         During the year ended December 31, 2000, the Company recorded a charge
         of approximately $53,000 representing additional severance costs.
         During the year ended December 31, 2001, the Company recorded a charge
         of approximately $68,000 representing loss on disposal of idle fixed
         assets. During the year ended December 31, 2002, the Company recorded a
         benefit of approximately $126,000 representing a recovery from the
         landlord related to the Company's provision of plant repair costs that
         were not utilized by the landlord.

NOTE K - INVESTMENT IN JOINT VENTURE AND IMPAIRMENT CHARGE

         The Company entered into a 50% joint venture in February 2000 for the
         purpose of engaging in the development, manufacture and marketing of
         various products. The joint venture was accounted for under the equity
         method. During the fourth quarter of 2001, the Company recorded an
         impairment charge of $151,000, as it was determined that the fair value
         of such investment was zero, due to the uncertainty of the joint
         venture's ability to raise additional capital or to generate income
         from operations. During 2003, the partners in the joint venture
         dissolved the entity.

NOTE L - PRODUCT AGREEMENTS

         1.       Acquisition of Barr Laboratories, Inc. ANDA

                  On April 16, 1999, the Company completed an acquisition
                  agreement with Barr Laboratories, Inc. ("Barr") providing for
                  the Company's purchase of the rights to 50 pharmaceutical
                  products (the "Barr Products"). Under the terms of the
                  acquisition agreement with Barr, the Company acquired all of
                  Barr's rights in the Barr Products, including all related
                  governmental approvals (including ANDAs) and related technical
                  data and information. In consideration for the acquisition of
                  the Barr Products, the Company issued to Barr a common stock
                  purchase warrant exercisable for 500,000 shares of the
                  Company's common stock having an exercise price of $1.0625 per
                  share (the fair value of the

                                      F-41

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE L (CONTINUED)

                  Common Stock on the date of issuance) and having a term of
                  five years. The Company valued the warrants at $350,000 using
                  the Black-Scholes option-pricing model. Accordingly, the
                  Company recorded a deferred charge to be amortized as an
                  expense to the Company's operations over a ten-year period,
                  which is the estimated life of the related ANDAs. The
                  acquisition agreement with Barr also allows Barr to purchase
                  any of the Barr Products manufactured by the Company for a
                  period of five years.

         2.       Commercialization and License Agreement

                  Effective September 27, 2000, the Company entered into an
                  exclusive license for certain patented technology owned by
                  Bio-Fine Pharmaceuticals, Inc. ("Bio-Fine") for the synthesis
                  of codeine from morphine. The agreement provided for a fixed
                  amount of $3,175,000 to be paid out as certain milestones are
                  achieved with a total of $500,000 paid during 2000. The
                  agreement also provided for the grant of 50,000 warrants and
                  an employment agreement, both contingent upon FDA approval and
                  the first commercial sale, which has not yet occurred.

                  In November 2001, the Company notified Bio-Fine of its
                  election to immediately terminate the commercialization and
                  license agreement. Upon termination of this agreement, the
                  contingent warrant and employment agreement expired.

NOTE M - EMPLOYEE BENEFIT PLANS

         1.       Employees' Pension Plan

                  The Company contributed approximately $19,000 in 2001 to a
                  multiemployer pension plan for employees covered by collective
                  bargaining agreements. The Company has not made any
                  contributions to this plan subsequent to April 1, 2001, since
                  the Company ceased operations at its Brooklyn, New York plant
                  in March 2001, whose employees were covered by this plan. (See
                  Note K.) The Company did not administer this plan and
                  contributions were determined in accordance with provisions of
                  negotiated labor contracts. Information with respect to the
                  Company's proportionate share of the excess, if any, of the
                  actuarially computed value of vested benefits over the total
                  of the pension plan's net assets is not available from the
                  plan's administrator.

                                      F-42

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE M (CONTINUED)

                  The Multiemployer Pension Plan Amendments Act of 1980 (the
                  "Act") significantly increased the pension responsibilities of
                  participating employers. Under the provision of the Act, if
                  the plans terminate or the Company withdraws, the Company
                  could be subject to a "withdrawal liability." As of December
                  31, 2003, the Company has not been notified of any withdrawal
                  liability.

         2.       401(k) and Profit-sharing Plan

                  Effective October 1, 1998, the Company established a 401(k)
                  and profit-sharing plan for all employees other than those
                  covered under collective bargaining agreements. Eligible
                  employees may elect to make a basic contribution of up to 1.5%
                  of their annual earnings. The plan provides that the Company
                  can make discretionary matching contributions equal to 25% of
                  the first 6% of employee contributions for an aggregate
                  employee contribution of 1.5%, along with a discretionary
                  profit-sharing contribution. The Company incurred no expense
                  under the plan in 2003, 2002 and 2001, respectively.

         3.       Stock Option Plans

                  In September 1995, the stockholders of the Company approved
                  the adoption of a stock option and restricted stock purchase
                  plan (the "1995 Option Plan"). The 1995 Option Plan provides
                  for the granting of (i) nonqualified options to purchase the
                  Company's common stock at not less than the fair market value
                  on the date of the option grant, (ii) incentive stock options
                  to purchase the Company's common stock at not less than the
                  fair market value on the date of the option grant and (iii)
                  rights to purchase the Company's common stock on a "Restricted
                  Stock" basis, as defined, at not less than the fair market
                  value on the date the right is granted. The total number of
                  shares which may be sold pursuant to options and rights
                  granted under the 1995 Option Plan is 1,000,000. No option can
                  be granted under the 1995 Option Plan after May 2005 and no
                  option can be outstanding for more than ten years after its
                  grant. At December 31, 2003, approximately 64,000 shares are
                  available for grant under the 1995 Option Plan.

                  In June 1998, the stockholders of the Company approved the
                  adoption of a stock option and restricted stock purchase plan
                  (the "1998 Option Plan"). The 1998 Option Plan provides for
                  the granting of (i) nonqualified options to purchase the
                  Company's common stock at a price determined by the Stock
                  Option Committee, and (ii) incentive stock options to purchase
                  the Company's common stock at not less than the fair market
                  value on the date of the option grant. All grants of stock
                  options have been at the fair market value on the date of
                  grant. In June 2001, the shareholders of the Company approved
                  a resolution to increase the total number of shares which may
                  be sold pursuant to options and rights granted under the 1998
                  Option Plan to 8,100,000. No option can be granted under the
                  1998 Option Plan after April 2008 and no option can be
                  outstanding for more than ten years after its grant. At
                  December 31, 2003, approximately 5,349,000 options are
                  available for grant under the 1998 Option Plan.

                  As discussed in Note N, the Company's Board of Directors
                  approved the granting of an aggregate of 5,500,000 options to
                  purchase the Company's stock at an exercise price of $0.34 per
                  common share which is subject to shareholder approval of
                  amendments to the Company's 1998 Stock Option Plan. These
                  options have not been granted nor issued for accounting
                  purposes. Upon shareholder approval, if the market price of
                  the common stock is greater than $0.34 per common share, then
                  compensation expense will be accounted for as prescribed in
                  APB Opinion No. 25 , and amortized over the vesting period of
                  the option.

                                      F-43

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE M (CONTINUED)

         Transactions involving stock options under all plans are summarized as
         follows:


<TABLE>
<CAPTION>
                                                           Weighted-
                                               Stock        Average
                                               options     exercise
                                             outstanding     Price
                                             -----------   ---------
<S>                                          <C>           <C>
Balance at December 31, 2001                   4,589,950    $ 1.85

Granted                                          470,000      1.29
Forfeited                                        (51,000)     2.28
                                              ----------

Balance at December 31, 2002                   5,008,950      1.80

Granted                                           45,000       .96
Exercised                                              -        -
Forfeited                                     (1,529,280)     1.69
                                              ----------    ------

Balance at December 31, 2003                   3,524,670    $ 5.46
                                              ==========    ======

Granted but subject to shareholder approval    5,500,000    $  .34
                                              ==========    ======
</TABLE>


         The following table summarizes information concerning currently
         outstanding and exercisable stock options:


<TABLE>
<CAPTION>
                               Options outstanding               Options exercisable
                  -----------------------------------------   --------------------------
                                    Weighted-
                      Number         average      Weighted-       Number       Weighted-
                  outstanding at     remaining     average    exercisable at    average
    Ranges of      December 31,    contractual    exercise     December 31,    exercise
exercise prices        2003        life (years)     price          2003          price
---------------   --------------   ------------   ---------   --------------   ---------
<S>               <C>              <C>            <C>         <C>              <C>
$ .85 - $1.88        1,853,945         5.99        $  1.32       1,307,834      $  1.35
 2.08  - 2.50        1,658,325         3.53           2.38       1,550,825         2.37
 3.19  - 4.38           12,400         2.42           4.15          12,400         4.15
                     ---------         ----        -------       ---------      -------

                     3,524,670         4.82        $  5.46       2,871,059      $  1.91
                     =========         ====        =======       =========      =======
</TABLE>


                                      F-44

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE N - COMMITMENTS AND CONTINGENCIES

         The Company occupies plant and office facilities under noncancellable
         operating leases, which expire at various dates through June 2004.
         These operating leases provide for scheduled base rent increases over
         the term of the lease. The leases provide for payment of real estate
         taxes based upon a percentage of the annual increase. In addition, the
         Company rents certain equipment under operating leases, generally for
         terms of two years or less. Total rent expense for the years ended
         December 31, 2003, 2002 and 2001 was approximately $868,000, $993,000
         and $986,000, respectively.

         Lease of Congers, New York Facility (Brenner Drive location)

         Effective March 22, 1999, the Company leased, as sole tenant, a
         pharmaceutical manufacturing facility located in Congers, New York (the
         "Brenner Drive Facility") from Par Pharmaceuticals, Inc. ("Par")
         pursuant to an Agreement to Lease (the "Lease"). The Brenner Drive
         Facility contains office, warehouse and manufacturing space and is
         approximately 35,000 square feet. The Lease provides for a term of
         three years, with a two-year renewal option, and provides for annual
         fixed rent of $500,000 per year during the primary term of the Lease
         and $600,000 per year during the option period. The Lease also covers
         certain manufacturing and related equipment previously used by Par in
         its operations at the Brenner Drive Facility (the "Leased Equipment").
         In connection with the execution of the Lease, the Company and Par
         entered into a certain Option Agreement pursuant to which the Company
         may purchase the Brenner Drive Facility and the Leased Equipment at any
         time during the lease term for $5,000,000. The Company paid $100,000
         for the right to exercise the Option Agreement any time during the
         primary term of three years. In March 2002, the Company paid Par
         $150,000 to secure the right to exercise the Option Agreement through
         March 31, 2004. (See Note B)

         As part of the execution of the Lease, the Company and Par entered into
         a certain Manufacturing and Supply Agreement (the "M&S Agreement")
         having a minimum term of twenty-seven months. The M&S Agreement
         provided for the Company's contract manufacture of certain designated
         products manufactured by Par at the Brenner Drive Facility prior to the
         effective date of the Lease. The M&S Agreement also provided that Par
         will purchase a minimum of $1,150,000 in product during the initial
         eighteen months of the Agreement. The M&S Agreement ended in July 2001
         and was not renewed; however, the Company continued to provide contract
         manufacturing services to Par. The M&S Agreement further provided that
         the Company will not manufacture, supply, develop or distribute the
         designated products to be supplied by the Company to Par under the M&S
         Agreement to or for any other person for a period of three years.
         Effective April 2002, the restriction on the designated products to be
         supplied by the Company to Par was removed.

                                      F-45

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE N (CONTINUED)

         Lease of Congers, New York Facility (Wells Avenue location)

         Effective July 1, 2000, the Company leased, as sole tenant, a facility
         located at 125 Wells Avenue, Congers, New York (the "Wells Avenue
         Facility"). The Wells Avenue Facility contains office, warehouse and
         manufacturing space and is approximately 18,000 square feet. The lease
         provides for a term of four years with an option to renew for an
         additional three years and provides for annual fixed rent of
         approximately $127,000 per year during the first two years of the lease
         and approximately $135,000 per year during the last two years. (See
         Note B)

         As of December 31, 2003, the approximate minimum rental commitments
         under these operating leases are as follows:


<TABLE>
<CAPTION>
Twelve months ending December 31,         (in thousands)
<S>                                       <C>
      2004                                   $ 225,140
      2005                                       2,456
      2004                                         950

        Total minimum payments required      $ 228,546
                                             =========
</TABLE>


         Employment Contracts

         During March 1998, the Company entered into employment contracts with
         each of two new officers/employees of the Company, which cover a
         five-year and a three-year period, respectively. The contracts provide
         for, among other things: (i) annual salaries of $175,000 and $140,000
         to be paid over the five-year and three-year periods, respectively, and
         (ii) an aggregate of 1,300,000 options to purchase the Company's stock
         at an exercise price of $2.38 per common share that vest evenly over a
         three-to-five-year service period and expire in ten years. In April
         2000, these contracts were extended to April 30, 2005. In 2001, the
         annual salaries under these contracts were increased to $200,000 and
         $155,000, respectively.

         During November 2002, the Company entered into an employment contract
         with a new officer/employee of the Company which covers a two-year
         period. The contract calls for, among other things: (1) annual salary
         of $180,000 to be paid over the two-year period, and (2) an aggregate
         of 400,000 options to purchase the Company's stock at an exercise price
         of $1.15 per common share that vest evenly over a four-year period. The
         employment agreement automatically renews for successive one-year
         periods unless the Company provides 90 days' notice of nonrenewal.

         In May 2003, an employment agreement between the Company and the
         Company's former Chief Executive Officer was terminated. Pursuant to
         provisions of a negotiated separation agreement dated September 18,
         2003, the Company has accrued for a total value of approximately
         $500,000 to such employee including a $400,000 promissory note plus the
         estimated the value of benefits provided by the Company to such former
         employee. The promissory note is payable in quarterly installments
         commencing October 16, 2003. The separation agreement also granted a
         warrant to this individual for the purchase of up to 150,000 shares of
         the Company's common stock at an exercise price of .34 per share. The
         fair value of the warrant of $112,000, as calculated using the
         Black-

                                      F-46

<PAGE>

         Scholes option pricing model, has been charged to operations during the
         three months ended September 30, 2003. The warrant has a seven-year
         term and has a cashless exercise clause providing that upon the
         exercise of the warrant, such individual can receive common shares for
         the equivalent amount of appreciated value of the warrant at the time
         of exercise.

         On December 4, 2003, the Company and the former Chief Executive Officer
         amended the separation agreement providing for (i) the termination of
         the Company's promissory note in the principal amount of $400,000, and
         (ii) the Company's payment of $162,790 in full satisfaction of the
         Company's severance and other payment obligations under the separation
         agreement.

         During August 2003, the Company entered into an employment agreement
         with a new officer/employee of the Company. The agreement provides for,
         among other things: (i) an annual base salary of $300,000, and (ii) an
         aggregate of 5,500,000 options to purchase the Company's stock at an
         exercise price of $0.34 per common share that vest 1,000,000 option
         shares on March 31, 2004 and the balance thereafter at a rate of
         500,000 per calendar quarter, beginning June 30, 2004 which an exercise
         term expiring in ten years. The stock option is subject to the
         shareholders approval to modify the Company's 1998 Stock Option Plan to
         (i) increase the number of shares reserved for issuance and (ii)
         authorize issuance of stock options having an exercise price less than
         fair market value of the common stock of the Company on the date of
         issuance. The employment agreement term is for a two year period which
         automatically renews for successive one-year periods unless either the
         Company or the employee provides 90 days' notice of non-renewal.

                                      F-47

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE N (CONTINUED)

         U.S. Department of Justice Settlement

         On June 21, 1993, the Company entered into a Plea Agreement with the
         U.S. Department of Justice (the "DOJ") to resolve the DOJ's
         investigation into the manufacturing and record keeping practices of
         the Company's Brooklyn, New York plant. The Plea Agreement required the
         Company to pay a fine of $2,500,000 over five years in quarterly
         installments of $125,000, commencing on or about September 15, 1993.

         As of February 28, 1998, the Company was in default of the payment
         terms of the Plea Agreement and had made payments aggregating $350,000.
         On May 8, 1998, the Company and the DOJ signed the Letter Agreement
         serving to amend the Plea Agreement relating to the terms of the
         Company's satisfaction of the fine assessed under the Plea Agreement.
         Specifically, the Letter Agreement provided that the Company will
         satisfy the remaining $2,150,000 of the fine through the monthly
         payments of $25,000 commencing June 1, 1998, plus interest on such
         outstanding balance (at the rate calculated pursuant to 28 U.S.C.
         Section 1961 (5.319%). Such payment schedule will result in the full
         satisfaction of the DOJ fine in July 2005. The Letter Agreement also
         provides certain restrictions on the payment of salary or compensation
         to any individual in excess of certain amounts without the written
         consent of the DOJ. In addition, the Letter Agreement requires the
         repayment of the outstanding fine to the extent of 25% of the Company's
         after-tax profit or 25% of the net proceeds received by the Company on
         any sale of a capital asset for a sum in excess of $10,000, if not
         invested in another capital asset. At December 31, 2003, the Company is
         current in its payment obligations, with a remaining obligation of
         $433,000. In February 2004, the Company satisfied its obligation to the
         DOJ.

         Other 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 defense of all of
         such matters was assumed by the Company's insurance carrier, and a
         substantial number have been settled by the carrier. 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 consolidated financial statements.

                                      F-48

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE N (CONTINUED)

         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. The Company's
         motion for summary judgment was due to be heard by the Court on August
         8, 2003. Plaintiff Kohn deceased shortly prior to such hearing date,
         and the motion for summary judgment and any trial of this matter have
         been stayed pending the substitution of Mr. Kohn's estate as the
         plaintiff. The Company does not believe this action will 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 consolidated financial
         statements.

         On June 13, 2002, the Company was named an additional defendant in an
         Amended Complaint filed in the matter entitled Vintage Pharmaceuticals,
         Inc., v. Watson Pharmaceuticals, Inc., and Halsey Drug Company, Inc.,
         pending in the United States District Court for the Northern District
         of Alabama, Civil Action No. CV 01-B-1847-NE. Vintage seeks unspecified
         damages from the Company for allegedly interfering with Vintage's
         contract to produce Monodox(R), the brand name of doxycycline
         monohydrate, for Watson. The Company denies the allegations, and is
         vigorously defending the action, and on July 12, 2002, filed a motion
         to dismiss the Amended Complaint for lack of jurisdiction and for
         failure to state a cause of action. Watson Pharmaceuticals has filed a
         motion for summary judgment, which if granted would also terminate the
         suit as to Halsey. Accordingly, the Court stayed Halsey's motion to
         dismiss pending the outcome of Watson's motion for summary judgment.
         That motion was fully briefed and submitted to the Court by December 6,
         2002, and the parties are awaiting a decision from the Court. The
         Company does not believe this action will 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 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.

         Each of the purchase agreements for the Company's 1998 Debentures, 1999
         Debentures, 2002 Debentures, and 2003 Debentures and Bridge Loans
         contains 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 or
         disbursements arising out of or resulting from the breach of any
         representation, warranty or agreement of the Company related to the
         purchase of the debentures and bridge loans. These indemnification
         obligations do not include a limit on maximum potential future
         payments, nor are there any recourse provisions or collateral that may
         offset the cost.

         As of December 31, 2003, the Company does not believe that any
         liability has been incurred as a result of these indemnification
         obligations.

                                      F-49

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE O - SIGNIFICANT CUSTOMERS AND SUPPLIERS

         Through its strategic alliance with Watson, as discussed in Note C, the
         Company sells its portfolio of core products under the Watson label for
         distribution by Watson to drugstore chains and drug wholesalers. The
         Company continues to perform limited contract manufacturing of certain
         non-core products for other customers. During 2003, the Company had net
         product revenues from one customer in excess of 10% of total product
         revenues, accounting for 58% of total product revenues. No accounts
         receivable was due from this customer at December 31, 2003. During
         2002, the Company had net product revenues from two customers in excess
         of 10% of total product revenues, accounting for 85% and 13%,
         respectively, of total product revenues, and 82% and 1%, respectively,
         of gross accounts receivable at December 31, 2002. During 2001 the
         Company had net product revenues to one customer in excess of 10% of
         total product revenues aggregating to 86% of total product revenues. At
         December 31, 2001, accounts receivable from this customer aggregated
         61% of gross accounts receivable.

         During 2003, 2002 and 2001, the Company purchased approximately
         $552,000, $1,264,000 and $1,512,000, respectively, of its raw
         materials, representing approximately 26%, 25%, and 28% in each year,
         of total raw material purchases from one supplier.

                                      F-50

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 2003, 2002 and 2001

NOTE P - QUARTERLY FINANCIAL DATA (UNAUDITED)


<TABLE>
<CAPTION>
Quarterly Financial Data
 (amounts in thousands         1st         2nd         3rd         4th
except per share amounts)    Quarter     Quarter     Quarter     Quarter       Year
-------------------------    --------    --------    --------    --------    --------
<S>                          <C>         <C>         <C>         <C>         <C>
2003
    Net product revenue      $  1,526    $  1,206    $  1,478    $  1,540    $  5,750
    Operating loss             (3,387)     (3,552)     (3,325)     (6,980)    (17,244)
    Net loss                  (10,575)    (11,027)    (11,590)    (15,263)    (48,455)
    Loss per share -
        basic and diluted    $   (.50)   $   (.52)   $   (.55)   $   (.71)   $  (2.28)

2002
    Net product revenue      $  1,881    $  2,258    $  2,013    $  2,053    $  8,205
    Operating loss             (2,888)     (3,379)     (3,466)     (3,204)    (12,937)
    Net loss                   (5,479)     (7,340)     (7,869)    (38,901)    (59,589)
    Loss per share -
        basic and diluted    $   (.36)   $   (.49)   $   (.52)   $  (2.46)   $  (3.90)
</TABLE>


                                      F-51

<PAGE>

                     Halsey Drug Co., Inc. and Subsidiaries

 
                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                 (in thousands)


<TABLE>
<CAPTION>
                  COL. A                          COL. B                 COL. C            COL. D       COL. E
                                                            Additions                       (1)
                                                Balance at  charged to    Additions
                                                 beginning  costs and     charged to                 Balance at
                Description                      of period  expenses    other accounts  Deductions  end of period
                -----------                     ----------  ----------  --------------  ----------  -------------
<S>                                             <C>         <C>         <C>             <C>         <C>
Year ended December 31, 2003
    Allowances - accounts receivable             $     14    $    428      $      -      $    (14)     $    428
                                                 ========    ========      ========      ========      ========
    Valuation allowance - deferred tax assets    $ 53,899    $  4,357      $      -         $   -      $ 58,256
                                                 ========    ========      ========      ========      ========

Year ended December 31, 2002
    Allowances - accounts receivable             $    347    $    101      $      -      $   (434)     $     14
                                                 ========    ========      ========      ========      ========
    Valuation allowance - deferred tax assets    $ 40,948    $ 12,951      $      -         $   -      $ 53,899
                                                 ========    ========      ========      ========      ========

Year ended December 31, 2001
    Allowances - accounts receivable             $    315    $    402      $      -      $   (370)     $    347
                                                 ========    ========      ========      ========      ========
    Valuation allowance - deferred tax assets    $ 35,151    $  5,797      $      -      $      -      $ 40,948
                                                 ========    ========      ========      ========      ========
</TABLE>


(1) Accounts written-off.

                                      F-52

<PAGE>


                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                 DOCUMENT
-------  -----------------------------------------------------------------------
<S>      <C>
3.1      Certificate of Incorporation and amendments (incorporated by reference
         to Exhibit 3.1 to the Registrant's Annual Report on 10-K for the year
         ended December 31, 1999).

3.2      Restated Bylaws (incorporated by reference to Exhibit 3.1 to the
         Registrant's Quarterly Report on Form 10-Q for the quarter ended June
         30, 1993).

3.3      Restated By-Laws (incorporated by reference to Exhibit 3.3 to the
         Registrant's Annual Report Form 10-K for the year ended December 31,
         1998 (the "1998 Form 10-K")).

4.1      Form of 5% Convertible Senior Secured Debenture (incorporated by
         reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K
         dated December 20, 2002 (the "December 2002 Form 8-K")).

4.2      Form of Convertible Senior Secured Debenture issued pursuant to the
         Debenture and Share Purchase Agreement dated as of February 6, 2004
         (incorporated by reference to Exhibit 4.1 of the Registrant's Current
         Report on Form 8-K dated February 10, 2004 (the "February 2004 Form
         8-K")

10.1     Credit Agreement, dated as of December 22, 1992, among the Registrant
         and The Chase Manhattan Bank, N.A. (incorporated by reference to
         Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the
         year ended December 31, 1992 (the "1992 Form 10-K")).

10.2     Amendment Two, dated as of January 12, 1994, to Credit Agreement among
         the Registrant and The Chase Manhattan Bank, N.A., together with forms
         of Stock Warrant and Registration Rights Agreement (incorporated by
         reference to Exhibit 10.1 to the Registrant's Annual Report on Form
         10-K for the year ended December 31, 1993 (the "1993 Form 10-K")).

10.3     Amendment Three, dated as of May 31, 1994, to Credit Agreement among
         the Registrant and The Chase Manhattan Bank, N.A. (incorporated by
         reference to Exhibit 6(a) to the Registrant's Quarterly Report on Form
         10-Q for the quarter ended March 31, 1994).

10.4     Amendment Four, dated as of July 1994, to Credit Agreement among the
         Registrant and The Chase Manhattan Bank, N.A. (incorporated by
         reference to Exhibit 6(a) to the Registrant's Quarterly Report on Form
         10-Q for the quarter ended June 30, 1994).

10.5     Amendment Five, dated as of March 21, 1995, to Credit Agreement among
         the Registrant and The Chase Manhattan Bank, N.A. (incorporated by
         reference to Exhibit 10.7 to the Registrant's Current Report on Form
         8-K dated March 21, 1995 (the "March 8-K")).

10.5(1)  Form of Warrants issued to The Bank of New York, The Chase Manhattan
         Bank, N.A. and the Israel Discount Bank (incorporated by reference to
         Exhibit 10.5(i) to the Registrant's Annual Report on Form 10-K for the
         year ended December 31, 1995 (the "1995 Form 10-K")).
</TABLE>



<PAGE>


<TABLE>
<S>      <C>
10.5(2)  Letter Agreement, dated July 10, 1995, among Halsey Drug Co., Inc., The
         Chase Manhattan Bank, N.A., The Bank of New York and Israel Discount
         Bank of New York (incorporated by reference to Exhibit 6(a) to the
         Registrant's Quarterly Report on Form 10-Q for the quarter ended June
         30, 1995 (the "June 10-Q")).

10.5(3)  Letter Agreement, dated November 16, 1995, among Halsey Drug Co., Inc.,
         The Chase Manhattan Bank, N.A., The Bank of New York and Israel
         Discount Bank of New York (incorporated by reference to Exhibit
         10.25(iv) to the 1995 10-K).

10.5(4)  Amendment 6, dated as of August 6, 1996, to Credit Agreement among
         Halsey Drug Co., Inc., The Chase Manhattan Bank, N.A., The Bank of New
         York and Israel Discount Bank of New York (incorporated by reference to
         Exhibit 10.1 to Amendment No. 1 to the Registrant's Quarterly Report on
         Form 10-Q for the quarter ended June 30, 1996 (the "June 1996 10-Q").

10.5(5)  Letter Agreement, dated March 25, 1997 among Halsey Drug Co., Inc., The
         Chase Manhattan Bank, as successor in interest to The Chase Manhattan
         Bank (National Association), The Bank of New York and Israel Discount
         Bank.

10.6     Agreement Regarding Release of Security Interests dated as of March 21,
         1995 by and among the Company, Mallinckrodt Chemical Acquisition, Inc.
         and The Chase Manhattan Bank, N.A. (incorporated by reference to
         Exhibit 10.9 of the March 8-K).

10.7     Consulting Agreement dated as of September, 1993 between the Registrant
         and Joseph F. Limongelli (incorporated by reference to Exhibit 10.6 to
         the 1993 Form 10-K).

10.8     Employment Agreement, dated as of January 1, 1993, between the
         Registrant and Rosendo Ferran (incorporated by reference to Exhibit
         10.2 to the 1992 Form 10-K).

10.10(1) Halsey Drug Co., Inc. 1984 Stock Option Plan, as amended (incorporated
         by reference to Exhibit 10.3 to the 1992 Form 10-K).

10.10(2) Halsey Drug Co., Inc. 1995 Stock Option and Restricted Stock Purchase
         Plan (incorporated by reference to Exhibit 4.1 to the Registrant's
         Registration Statement on Form S-8, File No. 33-98396).

10.10(3) Halsey Drug Co., Inc. Non-Employee Director Stock Option Plan.

10.11    Leases, effective February 13, 1989 and January 1, 1990, respectively,
         among the Registrant and Milton J. Ackerman, Sue Ackerman, Lee
         Hinderstein, Thelma Hinderstein and Marilyn Weiss (incorporated by
         reference to Exhibits 10.6 and 10.7, respectively, to the Registrant's
         Annual Report on Form 10-K for the year ended December 31, 1989).

10.12    Lease, effective as of April 15, 1988, among the Registrant and Milton
         J. Ackerman, Sue Ackerman, Lee Hinderstein, Thelma Hinderstein and
         Marilyn Weiss, and Rider thereto (incorporated by reference to Exhibit
         10.12 to the Registrant's Annual Report on Form 10-K for the year ended
         December 31, 1987).
</TABLE>



<PAGE>


<TABLE>
<S>      <C>
10.12(l) Lease, as of October 31, 1994, among Registrant and Milton J. Ackerman,
         Sue Ackerman, Lee Hinderstein, Thelma Hinderstein and Marilyn Weiss,
         together with Modification, Consolidation and Extension Agreement
         (incorporated by reference to Exhibit 10.12(i) to the 1995 Form 10-K).

10.13    Asset Purchase Agreement dated as of March 21, 1995 among Mallinckrodt
         Chemical Acquisition, Inc. ("Acquisition"), Mallinckrodt Chemical,
         Inc., as guarantor and the Registrant (incorporated by reference to
         Exhibit 10.1 to the March 8-K).

10.14    Toll Manufacturing Agreement for APAP/Oxycodone Tablets dated as of
         March 21, 1995 between Acquisition and the Registrant (incorporated by
         reference to Exhibit 10.2 to the March 8-K).

10.15    Capsule ANDA Option Agreement dated as of March 21, 1995 between
         Acquisition and the Registrant (incorporated by reference to Exhibit
         10.3 to the March 8-K).

10.16    Tablet ANDA Noncompetition Agreement dated as of March 21, 1995 between
         the Registrant and Acquisition (incorporated by reference to Exhibit
         10.4 to the March 8-K).

10.17    Subordinated Non-Negotiable Promissory Term Note in the amount of
         $1,200,00 dated March 21, 1995 issued by the Registrant to Acquisition
         (incorporated by reference to Exhibit 10.5 to the March 8-K).

10.18    Term Note Security Agreement dated as of March 21, 1995 among the
         Company, Houba, Inc. and Acquisition (incorporated by reference to
         Exhibit 10.6 to the March 8-K).

10.19    Amendment dated March 21, 1995 to Subordination Agreement dated as of
         July 21, 1994 between Mallinckrodt Chemical, Inc., Mallinckrodt
         Chemical Acquisition, Inc., the Registrant, The Chase Manhattan Bank
         (National Association), Israel Discount Bank of New York, The Bank of
         New York, and The Chase Manhattan Bank (National Association)
         (incorporated by reference to Exhibit 10.8 to the March 8-K).

10.20    Agreement dated as of March 30, 1995 between the Registrant and
         Zatpack, Inc. (incorporated by reference to Exhibit 10.10 to the March
         8-K).

10.21    Waiver and Termination Agreement dated as of March 30, 1995 between
         Zuellig Group, W.A., Inc. and Indiana Fine Chemicals Corporation
         (incorporated by reference to Exhibit 10.11 to the March 8-K).

10.22    Convertible Subordinated Note of the Registrant dated December 1, 1994
         issued to Zatpack, Inc. (incorporated by reference to Exhibit 10.12 to
         the March 8-K).

10.23    Agreement dated as of March 30, 1995 among the Registrant, Indiana Fine
         Chemicals Corporation, Zuellig Group, N.A., Inc., Houba Inc.,
         Zetapharm, Inc. and Zuellig Botanical, Inc. (incorporated by reference
         to Exhibit 10.13 to the March 8-K).

10.24    Supply Agreement dated as of March 30, 1995 between Houba, Inc. and
         ZetaPharm, Inc. (incorporated by reference to Exhibit 10.14 to the
         March 8-K).
</TABLE>



<PAGE>


<TABLE>
<S>      <C>
10.25    Form of 10% Convertible Subordinated Debenture (incorporated by
         reference to Exhibit 6(a) to the June 10-Q).

10.26    Form of Redeemable Common Stock Purchase Warrant (incorporated by
         reference to Exhibit 6(a) to the June 10-Q).

10.27    Form of 10% Convertible Subordinated Debenture (incorporated by
         reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K
         dated December 4, 1995 (the "December 8-K")).

10.28    Form of Redeemable Common Stock Purchase Warrant (incorporated by
         reference to Exhibit 4.2 to the December 8-K).

10.29    Form of 10% Convertible Subordinated Debenture (incorporated by
         reference to Exhibit 99 to the June 1996 10-Q).

10.30    Form of Redeemable Common Stock Purchase Warrant (incorporated by
         reference to Exhibit 4.1 to Amendment No. 1 to the June 1996 10-Q).

10.31    Form of 5% Convertible Senior Secured Debenture (incorporated by
         reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K
         dated March 24, 1998 (the "March 1998 8-K")).

10.32    Form of Common Stock Purchase Warrant (incorporated by reference to
         Exhibit 4.2 to the March 1998 8-K).

10.33    Debenture and Warrant Purchase Agreement dated March 10, 1998, by and
         among the Registrant, Galen Partners III, L.P. and the other Purchasers
         listed on the Signature Page thereto (incorporated by reference to
         Exhibit 10.1 to the March 1998 8-K).

10.34    Form of General Security Agreement of Halsey Drug Co., Inc. dated March
         10, 1998 (incorporated by reference to Exhibit 10.2 to the March 1998
         8-K).

10.35    Form of Agreement of Guaranty of Subsidiaries of Halsey Drug Co., Inc.
         dated March 10, 1998 (incorporated by reference to Exhibit 10.3 to the
         March 1998 8-K).

10.36    Form of Guarantor General Security Agreement dated March 10, 1998
         (incorporated by reference to Exhibit 10.4 to the March 1998 8-K).

10.37    Stock Pledge Agreement dated March 10, 1998 by and between the
         Registrant and Galen Partners III, L.P., as agent (incorporated by
         reference to Exhibit 10.5 to the March 1998 8-K).

10.38    Form of Irrevocable Proxy Agreement (incorporated by reference to
         Exhibit 10.6 to the March 1998 8-K).

10.39    Agency Letter Agreement dated March 10, 1998 by and among the
         Purchasers a party to the Debenture and Warrant Purchase Agreement,
         dated March 10, 1998 (incorporated by reference to Exhibit 10.7 to the
         March 1998 8-K).

10.40    Press Release of Registrant dated March 13, 1998 (incorporated by
         reference to Exhibit 99.1 to the March 1998 8-K).

10.41    Current Report on Form 8-K as filed by the Registrant with the
         Securities and Exchange Commission on March 24, 1998.
</TABLE>



<PAGE>


<TABLE>
<S>      <C>
10.42    Letter Agreement between the Registrant and the U.S. Department of
         Justice dated March 27, 1998 relating to the restructuring of the fine
         assessed by the Department of Justice under the Plea Agreement dated
         June 21, 1993.

10.43    Employment Agreement dated as of March 10, 1998 between the Registrant
         and Michael K. Reicher (incorporated by reference to Exhibit 10.43 to
         the Registrant's Annual Report of Form 10-K for the year ended December
         31, 1997 (the "1997 Form 10-K")).

10.44    Employment Agreement dated as of March 10, 1998 between the Registrant
         and Peter Clemens (incorporated by reference to Exhibit 10.44 to the
         1997 Form 10-K.

10.45    Amended, Restated and Consolidated Bridge Loan Agreement dated as of
         December 2, 1998 between the Company, Galen Partners III, L.P., Galen
         Partners International III, L.P., Galen Employee Fund III, L.P. and the
         other signatures thereto (incorporated by reference to Exhibit 10.45 to
         the 1998 Form 10-K).

10.46    First Amendment to Amended, Restated and Consolidated Bridge Loan
         Agreement dated December 7, 1998 between the Company and the lenders
         listed on the signature page thereto (incorporated by reference to
         Exhibit 10.46 to the 1998 Form 10-K).

10.47    Second Amendment to Amended, Restated and Consolidated Bridge Loan
         Agreement dated March 8, 1999 between the Company and the lenders
         listed on the signature page thereto (incorporated by reference to
         Exhibit 10.47 to the 1998 Form 10-K).

10.48    Form of 10% Convertible Secured Note due May 30, 1999 (incorporated by
         reference to Exhibit 10.48 to the 1998 Form 10-K).

10.49    Form of Common Stock Purchase Warrant issued pursuant to be Amended,
         Restated and Consolidated Bridge Loan Agreement (incorporated by
         reference to Exhibit 10.49 to the 1998 Form 10-K).

10.50    Amended and Restated General Security Agreement dated December 2, 1998
         between the Company and Galen Partners III, L.P., as Agent
         (incorporated by reference to Exhibit 10.50 to the 1998 Form 10-K).

10.51    Subordination Agreement dated December 2, 1998 between the Registrant
         and Galen Partners III, L.P., as Agent (incorporated by reference to
         Exhibit 10.51 to the 1998 Form 10-K).

10.52    Agency Letter Agreement dated December 2, 1998 by and among the lenders
         a party to the Amended, Restated and Consolidated Bridge Loan
         Agreement, as amended (incorporated by reference to Exhibit 10.52 to
         the 1998 Form 10-K).

10.53    Lease Agreement dated March 17, 1999 between the Registrant and Par
         Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.53 to
         the 1998 Form 10-K).

10.54    Lease Agreement dated September 1, 1998 between the Registrant and
         Crimson Ridge Partners (incorporated by reference to Exhibit 10.54 to
         the 1998 Form 10-K).
</TABLE>



<PAGE>


<TABLE>
<S>      <C>
10.55    Manufacturing and Supply Agreement dated March 17, 1999 between the
         Registrant and Par Pharmaceuticals, Inc. (incorporated by reference to
         Exhibit 10.55 to the 1998 Form 10-K).

10.56    Halsey Drug Co., Inc. 1998 Stock Option Plan (incorporated by reference
         to Exhibit 10.56 to the 1998 Form 10-K).

10.57    Loan Agreement dated March 29, 2000 between the Registrant and Watson
         Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.57 to
         the Registrant's Current Report on Form 8-K dated March 29, 2000 (the
         "March 2000 8-K")).+

10.58    Amendment to Loan Agreement dated March 31, 2000 between the Registrant
         and Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit
         10.58 to the March 2000 8-K).

10.59    Secured Promissory Note in the principal amount of $17,500,000 issued
         by the Registrant, as the maker, in favor of Watson Pharmaceuticals,
         Inc. dated March 31, 2000 (incorporated by reference to Exhibit 10.59
         to the March 2000 8-K).

10.60    Watson Security Agreement dated March 29, 2000 between the Registrant
         and Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit
         10.60 to the March 2000 8-K).

10.61    Stock Pledge Agreement dated March 29, 2000 between the Registrant and
         Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit
         10.61 to the March 2000 8-K).

10.62    Watson Guarantee dated March 29, 2000 between Houba, Inc. and Watson
         Pharmaceuticals, Inc., as the guarantors, in favor of Watson
         Pharmaceuticals, Inc. (incorporated by reference to Exhibit 10.62 to
         the March 2000 8-K).

10.63    Watson's Guarantors Security Agreement dated March 29, 2000 between
         Halsey Pharmaceuticals, Inc., Houba, Inc. and Watson Pharmaceuticals,
         Inc. (incorporated by reference to Exhibit 10.63 to the March 2000
         8-K).

10.64    Subordination Agreement dated March 29, 2000 by and among the
         Registrant, Watson Pharmaceuticals, Inc. and the holders of the
         Registrant's outstanding 5% convertible debentures due March 10, 2003.
         (incorporated by reference to Exhibit 10.64 to the March 2000 8-K).+

10.65    Real Estate Mortgage dated March 29, 2000 between Houba, Inc. and
         Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit
         10.65 to the March 2000 8-K).

10.66    Subordination Agreement by and among Houba, Inc., Galen Partners, III,
         L.P., Oracle Strategic Partners, L.P. and Watson Pharmaceuticals, Inc.
         (incorporated by reference to Exhibit 10.66 to the March 2000 8-K).

10.67    Product Purchase Agreement dated March 29, 2000 between the Registrant
         and Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit
         10.67 to the March, 2000 8-K).+

10.68    Finished Goods Supply Agreement dated March 29, 2000 between the
         Registrant and Watson Pharmaceuticals, Inc. (incorporated by reference
         to Exhibit 10.68 to the March 2000 8-K).+

10.69    Active Ingredient Supply Agreement dated March 29, 2000 between the
         Registrant and Watson Pharmaceuticals, Inc. (incorporated by reference
         to Exhibit 10.69 to the March 2000 8-K).+

10.70    Right of First Negotiation Agreement dated March 29, 2000 between the
         Registrant and Watson Pharmaceuticals, Inc. (incorporated by reference
         to Exhibit 10.70 to the March 2000 8-K).+
</TABLE>



<PAGE>


<TABLE>
<S>      <C>
10.71    Finished Goods Supply Agreement (Core Products) dated March 29, 2000
         between the Registrant and Watson Pharmaceuticals, Inc. (incorporated
         by reference to Exhibit 10.71 to the March 2000 8-K).+

10.72    Debenture and Warrant Purchase Agreement dated May 26, 1999 by and
         among the Registrant, Oracle Strategic Partners, L.P. and the other
         purchasers listed on the signature page thereto (the "Oracle Purchase
         Agreement") (incorporated by reference to Exhibit 10.72 to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1999).

10.73    Form of 5% Convertible Senior Secured Debenture issued pursuant to the
         Oracle Purchase Agreement (incorporated by reference to Exhibit 10.73
         to the Registrant's Annual Report on Form 10-K for the year ended
         December 31, 1999).

10.74    Form of Common Stock Purchase Warrant issued pursuant to the Oracle
         Purchase Agreement (incorporated by reference to Exhibit 10.74 to the
         Registrant's Annual Report on Form 10-K for the year ended December 31,
         1999).

10.75    Lease Termination and Settlement Agreement dated March 20, 2000 between
         the Registrant and Atlantic Properties Company in respect of the
         Registrant's Brooklyn, New York leased facility (incorporated by
         reference to Exhibit 10.75 to the Registrant's Annual Report on Form
         10-K for the year ended December 31, 1999).

10.76    Debenture Purchase Agreement dated December 20, 2002 by and among
         Halsey Drug Co., Inc., Care Capital Investments II, LP, Essex Woodlands
         Health Ventures V, L.P. and the other purchasers listed on the
         signature page thereto (the "2002 Debentureholders") (incorporated by
         reference to Exhibit 10.1 to the December 2002 Form 8-K).

10.77    Form of General Security Agreement dated December 20, 2002 between the
         Registrant and the 2002 Debentureholders (incorporated by reference to
         Exhibit 10.2 to the December 2002 Form 8-K).

10.78    Form of Agreement of Guaranty of Subsidiaries of Halsey Drug Co., Inc.
         dated December 20, 2002 between Houba, Inc., Halsey Pharmaceuticals,
         Inc. and the 2002 Debentureholders (incorporated by reference to
         Exhibit 10.3 to the December 2002 Form 8-K).

10.79    Form of Guarantor General Security Agreement between the Guarantors and
         the 2002 Debentureholders dated December 20, 2002 (incorporated by
         reference to Exhibit 10.4 to the December 2002 Form 8-K).

10.80    Stock Pledge Agreement dated December 20, 2002 by and between Halsey
         Drug Co., Inc. and Galen Partners III, L.P., as agent (incorporated by
         reference to Exhibit 10.5 to the December 2002 Form 8-K).

10.81    Voting Agreement dated December 20, 2002 (incorporated by reference to
         Exhibit 10.6 to the December 2002 Form 8-K).

10.82    Debentureholders Agreement dated December 20, 2002 (incorporated by
         reference to Exhibit 10.7 to the December 2002 Form 8-K).
</TABLE>



<PAGE>


<TABLE>
<S>      <C>
10.83    Amendment to Debenture and Warrant Purchase Agreement between Halsey
         Drug Co., Inc., Galen Partners III, L.P. and other signatories thereto,
         dated December 20, 2002, amending the Debenture and Warrant Purchase
         Agreement dated March 10, 1998 between the Company, Galen Partners III,
         L.P. and the other signatories thereto (incorporated by reference to
         Exhibit 10.8 to the December 2002 Form 8-K).

10.84    Amendment to Debenture and Warrant Purchase Agreement between Halsey
         Drug Co., Inc., Oracle Strategic Partners, L.P. and the other
         signatories thereto, dated December 20, 2002, amending the Debenture
         and Warrant Purchase Agreement dated May 26, 1999 between the Company,
         Oracle Strategic Partners, L.P. and the other signatories thereto
         (incorporated by reference to Exhibit 10.9 to the December 2002 Form
         8-K).

10.85    Amended and Restated 5% Convertible Senior Secured Debenture due March
         31, 2006 (incorporated by reference to Exhibit 10.10 to the December
         2002 Form 8-K).

10.86    Second Amendment to Loan Agreement dated December 20, 2002, between
         Halsey Drug Co., Inc. and Watson Pharmaceuticals, Inc., amending the
         Loan Agreement dated March 29, 2000 between Halsey Drug Co., Inc. and
         Watson Pharmaceuticals, Inc. (incorporated by reference to Exhibit
         10.11 to the December 2002 Form 8-K).

10.87    Amended and Restated Secured Promissory Note dated December 20, 2002,
         issued by Halsey Drug Co., Inc. in favor of Watson Pharmaceuticals,
         Inc. in the principal amount $17,500,000 (incorporated by reference to
         Exhibit 10.12 to the December 2002 Form 8-K).

10.88    Second Amendment to Finished Goods Supply Agreement (Core Products)
         dated December 20, 2002, between Halsey Drug Co., Inc. and Watson
         Pharmaceuticals, Inc. amending the Finished Goods Supply Agreement
         (Core Products) dated March 29, 2000 2008 (incorporated by reference to
         Exhibit 10.13 to the December 2002 Form 8-K).

10.89    Watson Common Stock Purchase Warrant dated December 20, 2002
         (incorporated by reference to Exhibit 10.14 to the December 2002 Form
         8-K).

10.90    Registration Rights Agreement dated December 20, 2002 (incorporated by
         reference to Exhibit 10.15 to the December 2002 Form 8-K).

10.91    Warrant Recapitalization Agreement dated December 20, 2002
         (incorporated by reference to Exhibit 10.15 to the December 2002 Form
         8-K).

10.92    Debenture and Share Purchase Agreement dated as of February 6, 2004 by
         and among Halsey Drug Co., Inc., Care Capital Investments, II, LP,
         Essex Woodlands Health Ventures V, L.P., Galen Partners III, L.P. and
         the other purchasers listed on the signature page thereto (incorporated
         by reference to Exhibit 10.1 of the February 2004 Form 8-K).

10.93    Debenture Conversion Agreement dated as of February 6, 2004 by and
         among Halsey Drug Co., Inc., Care Capital, Essex Woodlands, Galen
         Partners and the other signatories thereto (incorporated by reference
         to Exhibit 10.2 of the February 2004 Form 8-K).

10.94    Amended and Restated Certificate of Incorporation of Halsey Drug Co.,
         Inc. (incorporated by reference to Exhibit 10.3 of the February 2004
         Form 8-K).
</TABLE>



<PAGE>


<TABLE>
<S>      <C>
10.95    Investor Rights Agreement dated as of February 6, 2004 by and among
         Halsey Drug Co., Inc., Care Capital, Essex Woodlands, Galen Partners
         and the other signatories thereto (incorporated by reference to Exhibit
         10.4 of the February 2004 Form 8-K).

10.96    Amended and Restated Voting Agreement dated as of February 6, 2004 by
         and among Halsey Drug Co., Inc., Care Capital, Essex Woodlands, Galen
         Partners and the other signatories thereto (incorporated by reference
         to Exhibit 10.5 of the February 2004 Form 8-K).

10.97    Amended and Restated Registration Rights Agreement dated as of February
         6, 2004 by and among Halsey Drug Co., Inc., Watson Pharmaceuticals,
         Care Capital, Essex Woodlands, Galen Partners and the other signatories
         thereto (incorporated by reference to Exhibit 10.6 of the February 2004
         Form 8-K).

10.98    Amended and Restated Subordination Agreement dated as of February 6,
         2004 by and among Halsey Drug Co., Inc., Care Capital, Essex Woodlands,
         Galen Partners and the other signatories thereto (incorporated by
         reference to Exhibit 10.7 of the February 2004 Form 8-K).

10.99    Company General Security Agreement (incorporated by reference to
         Exhibit 10.8 of the February 2004 Form 8-K).

10.100   Form of Unconditional Agreement of Guaranty (incorporated by reference
         to Exhibit 10.9 of the February 2004 Form 8-K).

10.101   Form of Guarantor Security Agreement (incorporated by reference to
         Exhibit 10.10 of the February 2004 Form 8-K).

10.102   Stock Pledge Agreement dated as of February 6, 2004 by and between
         Halsey Drug Co., Inc. and Galen Partners, as agent (incorporated by
         reference to Exhibit 10.11 of the February 2004 Form 8-K).

10.103   Umbrella Agreement dated as of February 6, 2004 by and among Halsey
         Drug Co., Inc., Watson Pharmaceuticals, Care Capital, Essex Woodlands,
         Galen Partners and the other signatories thereto (incorporated by
         reference to Exhibit 10.12 of the February 2004 Form 8-K).

10.104   Third Amendment to Loan Agreement dated as of February 6, 2004 by and
         among Halsey Drug Co., Inc. and Watson Pharmaceuticals (incorporated by
         reference to Exhibit 10.13 of the February 2004 Form 8-K).

10.105   Amended and Restated Promissory Note in the principal amount of
         $5,000,000 issued by Halsey Drug Co., Inc. in favor of Watson
         Pharmaceuticals (incorporated by reference to Exhibit 10.14 of the
         February 2004 Form 8-K).

10.106   Hydrocodone API Supply Option Agreement dated as of February 6, 2004
         between Halsey Drug Co, Inc. and Watson Pharmaceuticals (incorporated
         by reference to Exhibit 10.15 of the February 2004 Form 8-K).

10.107   Noteholders Agreement dated as of February 6, 2004 by and among Halsey
         Drug Co., Inc., Care Capital, Essex Woodlands, Galen Partners and the
         other signatories thereto (incorporated by reference to Exhibit 10.16
         of the February 2004 Form 8-K).

10.108   Asset Purchase Agreement dated March 19, 2004 by and among Halsey Drug
         Co., Inc., Axiom Pharmaceutical Corporation and IVAX Pharmaceuticals
         New York LLC (incorporated by reference to Exhibit 2.1 of the
         Registrant's Form 8-K filed March 25, 2004 (the "March 2004 Form
         8-K")).

10.109   Voting Agreement dated March 19, 2004 by and among Halsey Drug Co.,
         Inc., IVAX Pharmaceuticals New York LLC and certain holders of Halsey
         Drug Co., Inc. voting securities (incorporated by reference to Exhibit
         10.1 of the March 2004 Form 8-K).
</TABLE>



<PAGE>


<TABLE>
<S>      <C>
10.110   Use and License Agreement dated March 19, 2004 by and among Halsey Drug
         Co., Inc., Axiom Pharmaceutical Corporation and IVAX Pharmaceuticals
         New York LLC (incorporated by reference to Exhibit 10.2 of the March
         2004 Form 8-K.)

  *14    Code of Ethics

   21    Subsidiaries of the Registrant (incorporated by reference to Exhibit 22
         to the 1993 Form 10-K).

*23.1    Consent of Grant Thornton LLP, independent certified public
         accountants, to the incorporation by reference of its report to the
         consolidated financial statements of the Registrant conferred in its
         Form 10-K for the year ended December 31, 2003, into the registrant's
         Registration Statements on Form S-8 (Registration Nos. 333-63288 and
         33-98356).

*31.1    Certification of Periodic Report by 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 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>


* Filed herewith.

+   A portion of this exhibit has been omitted pursuant to an application for
    confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act
    of 1934, as amended.





<PAGE>

                                                                      EXHIBIT 14

                              HALSEY DRUG CO., INC.

                                 CODE OF ETHICS

I.       INTRODUCTION

This Code of Ethics (the "Code") is established pursuant to Section 406 of the
Sarbanes-Oxley Act of 2002, which requires that the Company establish a code of
ethics to apply to the Company's principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions (the "Designated Officers"). The purpose of the
Code is to deter wrongdoing and to promote:

         -        Honest and ethical conduct, including the ethical handling of
                  actual or apparent conflicts of interest between personal and
                  professional relationships;

         -        Full, fair, accurate, timely, and understandable disclosure in
                  reports and documents that the Company files with, or submits
                  to, the Securities and Exchange Commission and in other public
                  communications made by the Company;

         -        Compliance with applicable governmental laws, rules and
                  regulations;

         -        The prompt internal reporting of violations of the Code to an
                  appropriate person or persons identified in the Code; and

         -        Accountability for adherence to the Code.

Designated Officers are expected to be familiar with the Code and from time to
time may be asked to affirm their agreement
 to adhere to its standards.

II.      CONFLICTS OF INTEREST

Designated Officers must avoid any activity or association that creates or
appears to create a conflict between the Designated Officer's personal interest
and the Company's interest. For example, a possible conflict of interest exists
when a Designated Officer or a member of his or her family has a financial or
other interest in, or seeks personal loans or services from, a company that does
business with the Company. Designated Officers are expected to make prompt and
full disclosure in writing to the Chairman of the Audit Committee of any
potential conflict of interest. Any transaction in which a Designated Officer
may have a conflict of interest must be approved by the Audit Committee.
Designated Officers should avoid the receipt of gifts, gratuities, favors or
other benefits that might affect or appear to affect the exercise of their
judgment on the Company's behalf. Any substantial gift or favor offered by an
actual or potential client, contractor, or provider of goods or services,
lender, security holder, or other affiliate whether it be in tangible form or in
the form of a service or individual benefit, should be refused unless acceptance
of such gift or favor has been approved by the Audit Committee. This prohibition
is not intended to apply to ordinary courtesies of business life, such as token
gifts of insubstantial value, modest entertainment incidental to a business
relationship, or the giving or receipt of normal hospitality of a social nature.

III.     ACCURATE AND TIMELY PERIODIC REPORTS

The Company is committed to full, fair, accurate, timely and understandable
disclosure in reports and documents that it files with, or submits to, the
Securities and Exchange Commission and in other public communications made by
the Company. The Company expects Designated Officers to establish and manage the
Company's reporting systems and procedures with due care and diligence to ensure
that:

         -        Reports filed with or submitted to the Securities and Exchange
                  Commission and other public communications contain information
                  that is full, fair, accurate, timely and understandable and do
                  not misrepresent or omit material facts;


<PAGE>

         -        Business transactions are properly authorized and completely
                  and accurately recorded on the Company's books and records in
                  accordance with generally accepted accounting principles and
                  the Company's established financial policies; and

         -        Retention or disposal of Company records is in accordance with
                  established Company policies and applicable legal and
                  regulatory requirements.

IV.      COMPLIANCE WITH LAWS, RULES & REGULATIONS

Designated Officers must comply fully with all applicable laws, rules,
regulations and corporate governance standards.

V.       REPORTING VIOLATIONS

Designated Officers must promptly report any violations of the Code to the
Chairman of the Audit Committee.

VI.      DISCIPLINARY MEASURES

Designated Officers who violate any applicable laws, rules or regulations or the
Code will face appropriate disciplinary action, as determined by the Audit
Committee, which may include discharge. The matter may also be referred to
appropriate governmental agencies.

VII.     AMENDMENT, MODIFICATION AND WAIVER

The Code may be amended or modified by the Audit Committee. Any amendments or
modifications will be publicly disclosed in accordance with the rules of the
Securities and Exchange Commission. The Audit Committee may waive violations of
the Code, but any such waiver that constitutes a material departure from a
provision of the Code will be publicly disclosed in accordance with the rules of
the Securities and Exchange Commission.



<PAGE>

                                  EXHIBIT 23.1

               CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our report dated February 26, 2004, except for Note B, as to
which the date is March 19,2004, accompanying the consolidated financial
statements and schedules included in the Annual Report of Halsey Drug Co., Inc.
and Subsidiaries on Form 10-K for the year ended December 31, 2003. We hereby
consent to the incorporation by reference of said report in the Registration
Statements of Halsey Drug Co., Inc. on Forms S-8 (Registration Nos. 333-63288
and 33-98356), pertaining to the 1998 Stock Option Plan and the 1995 Stock
Option Plan.

GRANT THORNTON LLP

New York, New York

April 19, 2004





<PAGE>

                                                                    EXHIBIT 31.1

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

I, Andrew D. Reddick, the President and Chief Executive Officer of Halsey Drug
Co., Inc., certify that:

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

2.   Based on my knowledge, this annual 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 annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual 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 annual 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 annual report is
     being prepared;

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

c)   disclosed in this annual 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: April 14, 2004                              /s/ Andrew D. Reddick
                                                  ------------------------
                                                  Andrew D. Reddick
                                                  President and
                                                  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 Vice President and Chief Financial Officer of Halsey
Drug Co., Inc., certify that:

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

2.   Based on my knowledge, this annual 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 annual report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this annual 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 annual 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 annual is being
     prepared;

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

(c)  disclosed in this annual 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: April 14, 2004

                                                     /s/ Peter A. Clemens
                                                     ------------------------
                                                     Peter A. Clemens
                                                     Vice President and
                                                     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 Annual Report of Halsey Drug Co., Inc. (the
"Company") on Form 10-K for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Andrew D. Reddick, the 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: April 14, 2004

                                             /s/ Andrew D. Reddick
                                             ---------------------------
                                             Andrew D. Reddick
                                             President and
                                             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 Annual Report of Halsey Drug Co., Inc. (the
"Company") on Form 10-K for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Peter A. Clemens, the Vice President and 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: April 14, 2004

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