HALSEY DRUG CO INC/NEW, 424B2, 1996-10-17

HALSEY DRUG CO INC/NEW
424B2, 1996-10-17
PHARMACEUTICAL PREPARATIONS

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Filed Pursuant to Rule 424(b)(2)
Registration No. 333-3665

7,197,066 SHARES OF COMMON STOCK
HALSEY DRUG CO., INC.

This Prospectus relates to 2,590,397 shares of common stock, $.01 par value
per share (the "Common Stock"), of Halsey Drug Co., Inc. (the "Company") which
are held by certain shareholders (the "Selling Shareholders") of the Company.
This Prospectus also relates to the issuance and sale by the Company of up to
4,606,669 shares of Common Stock (the "Underlying Shares") issuable to holders
upon: (i) conversion of outstanding 10% Convertible Subordinated Debentures due
in July 2000 (the "July Debentures"); (ii) conversion of outstanding 10%
Convertible Subordinated Debentures due in November 2000 (the "November
Debentures"); (iii) conversion of outstanding 10% Convertible Subordinated
Debentures due in August 2001 (the "August Debentures" and, collectively with
the July Debentures and the November Debentures, the "Debentures"); (iv)
payments of interest on the August Debentures; (v) exercise of outstanding
redeemable Common Stock Purchase Warrants expiring in November 2000 (the
"November Redeemable Warrants"); (vi) exercise of outstanding Redeemable Common
Stock Purchase Warrants expiring in August 2001 (the "August Redeemable
Warrants" and, collectively with the November Redeemable Warrants, the
"Redeemable Warrants"); (vii) conversion of an outstanding Convertible
Promissory Note (the "Zatpack Note"); (viii) exercise of outstanding Common
Stock Purchase Warrants (the "Bank Warrants"); and (ix) exercise of outstanding
Common Stock Purchase Options (the "Options") (the Debentures, Redeemable
Warrants, Zatpack Note, Bank Warrants and Options are sometimes referred to
collectively as the "Convertible Securities"). The July Debentures were issued
by the Company in connection with a July 1995 private offering, and are
convertible into Common Stock for $2.00 per share, subject to adjustment,
through July 17, 2000. Pursuant to their terms, the July Debentures
automatically converted in Common Stock effective August 19, 1996. See
"Description of Securities--Debentures". The November Debentures and November
Redeemable Warrants were issued by the Company in connection with a November
1995 private offering, and are convertible and exercisable, respectively, into
Common Stock for $2.50 per share, subject to adjustment, through November 29,
2000. The August Debentures and August Redeemable Warrants were issued by the
Company in connection with an August 1996 private offering, and are convertible
and exercisable, respectively, into Common Stock for $3.25 per share subject to
adjustments, through August 6, 2001. The Zatpack Note was issued by the Company
to a creditor of the Company in March 1995, and is convertible into Common Stock
for $2.39 per share, subject to adjustment, through December 1, 1997. The Bank
Warrants were issued by the Company from time to time to its institutional
lenders, and are exercisable into Common Stock for prices ranging from $1.98 to
$2.07 per share, subject to adjustment, through July 17, 2005. The Options were
issued by the Company to a former director, and are exercisable into Common
Stock for prices ranging from $1.94 to $4.375 per share, subject to adjustment,
through various expiration dates. The holders of the Convertible Securities,
together with the Selling Shareholders, are sometimes hereinafter referred to
collectively as the "Selling Securityholders." See "USE OF PROCEEDS," "SELLING
SECURITYHOLDERS" and "PLAN OF DISTRIBUTION".

The Common Stock and the Underlying Shares offered (the "Offering") by this
Prospectus may be sold from time to time by the Selling Securityholders,
provided a current registration statement with respect to such securities is
then in effect. The distribution of shares of Common Stock offered hereby by the
Selling Securityholders may be effected in one or more transactions that may
take place on the American Stock Exchange, Inc. (the "Exchange"), including
ordinary broker's transactions, privately negotiated transactions or through
sales to one or more dealers for resale of such securities as principals, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders.

The Selling Securityholders and intermediaries through whom the securities
offered hereby are sold may be deemed to be "underwriters" within the meaning of
the Securities Act of 1933, as amended (the "Securities Act") with respect to
such securities.

The Company will receive all the proceeds from the issuance of shares of
Common Stock upon the exercise of the Convertible Securities. No proceeds will
be derived from the conversion of the Debentures and the Zatpack Note. Moreover,
the Company will not receive any of the proceeds from the sale of shares of
Common Stock (including the Underlying Shares) by the Selling Securityholders.
Expenses of this offering, other than fees and expenses of counsel to the
Selling Securityholders and selling commissions, if any, will be paid by the
Company. See "Plan of Distribution."

The Common Stock is listed on the Exchange under the symbol "HDG." On
October 4, 1996, the closing sale price of the Common Stock on the Exchange was
$4.25.

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 6 OF THIS PROSPECTUS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS, ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

]The date of this Prospectus is October 16, 1996.

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AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (such Registration Statement,
together with all amendments and exhibits thereto, being hereinafter referred to
as the "Registration Statement") under the Securities Act, for the registration
under the Securities Act of the shares of Common Stock offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Reference is hereby made to the Registration
Statement for further information with respect to the Company and the Common
Stock offered hereby. Statements herein concerning the provisions of documents
filed as exhibits to the Registration Statement are necessarily summaries of
such documents, and each such statement is qualified in its entirety by
reference to the copy of the applicable document filed with the Commission.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Commission. Reports,
proxy statements and other information filed by the Company can be inspected and
copied at public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices located at Suite 1300, Seven World Trade Center,
14th floor, New York, New York 10048, and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained by mail from the Public Reference Section of the Commission, at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. In addition, such reports, proxy statements and other
information may be electronically accessed at the Commission's site on the World
Wide Web located at http://www.sec.gov.

The Common Stock is listed on the Exchange. Reports, proxy statements and
other information filed by the Company can be inspected at the Exchange.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in the Prospectus Summary and under the captions "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this Prospectus 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 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 services by other companies; 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; regulatory obstacles to the introduction of new services
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 Prospectus. When used in this Prospectus, the words
"estimate," "project," "anticipate," "expect," "intend," "believe," and similar
expressions are intended to identify forward-looking statements.

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, references to the
Company include Halsey Drug Co., Inc. and its subsidiaries.

Unless otherwise indicated, the information included in this Prospectus
does not give effect to the exercise of options granted or to be granted by the
Company, or to the exercise or conversion of the Convertible Securities.

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 for additional factors relating to such
Statements.

THE COMPANY

Halsey Drug Co., Inc. ("Halsey"), a New York corporation established in
1935, and its subsidiaries (collectively, the "Company"), are engaged in the
manufacture, sale and distribution of generic drugs. 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. The Company sells its generic drug products under
its Halsey label and under private-label arrangements with drugstore chains and
drug wholesalers. 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.

During the past several years, the Company's business has been adversely
affected by the discovery of various manufacturing and record keeping problems
identified with certain products manufactured at its Brooklyn, New York plant.
These problems caused the Company to halt production and sale of a number of
products and to establish a $2,000,000 reserve as of December 31, 1992, and a
reserve of $3,875,000 in 1993 to cover estimated costs associated with inventory
write-offs, recalls of the affected products and estimated additional legal
expenses.

On June 21, 1993, the Company entered into a plea agreement (the "Plea
Agreement") with the United States Department of Justice (the "DOJ") to resolve
the DOJ's investigation into the manufacturing and recordkeeping practices at
the Company's Brooklyn plant. Under the terms of the plea agreement, the Company
agreed to plead guilty to five counts of adulteration of a single drug product
shipped in interstate commerce and related recordkeeping violations. The plea
agreement also requires the Company to pay a fine of $2,500,000 over five years
in quarterly installments of $125,000 commencing in September 1993. The Company
has not remained current on such payments. Although the entire fine is currently
due and payable, the Company does not have the financial resources available to
pay the outstanding balance of the fine. The Company intends to pay installments
of the fine to the extent funds become available for such purpose, from
operations or otherwise. The Company intends to use any proceeds from the
exercise of the Bank Warrants, Redeemable Warrants and Options to reduce amounts
outstanding under its Credit Agreement with its banks, and not to pay the fine.
See "Legal Proceedings--Government Consent Decrees." There can be no assurance
that the DOJ will not move to seize the Company's assets as a result of the
Company's failure to pay the fine on a timely basis. If the DOJ took such
action, investors purchasing the shares offered hereby likely would lose their
entire investment in the Company. See "Risk Factors."

On June 29, 1993, the Company entered into a consent decree with the United
States Attorney for the Eastern District of New York on behalf of the Food &
Drug Administration (the "FDA") that resulted from the FDA's investigation into
the Brooklyn plant's compliance with the FDA's Current Good Manufacturing
Practice ("CGMP") regulations. Under the terms of the consent decree, the
Company was enjoined from shipping any solid dosage drug products (i.e.,
excluding liquid drug

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formulations) manufactured at the Brooklyn plant until the Company established,
to the satisfaction of the FDA, that the methods used in, and the facilities and
controls to be used for, manufacturing, processing, packing, labeling and
holding any drug, are established, operated, and administered in conformity with
the Federal Food, Drug, and Cosmetic Act and all CGMP regulations. The Company,
however, was permitted under the terms of the consent decree to manufacture and
ship from the Brooklyn plant certain identified solid dosage drug products ("the
"Brooklyn Solid Dosage Products") provided that it meet certain conditions set
forth in the consent decree. The Company has complied with these conditions and
is currently manufacturing and shipping Brooklyn Solid Dosage of Products. See
"Legal Proceedings--Government Consent Decrees."

The Company conducts research and development activities at its Brooklyn
and Indiana facilities. The Company's research and development activities
consist primarily of new generic drug product development efforts and
manufacturing process improvements, as well as the development for sale of new
chemical products. There can be no assurance that the FDA will grant the
requisite approvals for any such product introductions. Moreover, as a result of
the FDA investigation and consent decree and the concommitant reduction of the
Company's operations, the Company's research and development activities have
been significantly reduced from prior levels. Although the Company currently is
increasing its research and development efforts, and utilized a portion of the
proceeds from the sale of the Debentures and the Redeemable Warrants in
connection therewith (see "The Private Offerings"), there can be no assurance
that the Company will continue to have the resources available to fund its
research and development program. See "Risk Factors."

The Company's principal executive offices are located at 1827 Pacific
Street, Brooklyn, New York 11233, and its telephone number is 718/467-7500.

THE OFFERING

<TABLE>
<S> <C>
Securities Offered Hereby........... 7,197,066 shares of Common Stock. As of the date of this Prospectus, the
Selling Securityholders own 2,590,397 of such shares, while 4,606,669
shares are issuable to the Selling Securityholders upon the conversion or
exercise of the outstanding Convertible Securities. See "Description of
Securities."
Common Stock to be Outstanding after
the Offering...................... 15,735,022 shares(1)(2)
Use of Proceeds..................... The Company will receive all of the proceeds from the exercise, of which
there can be no assurance, of the Bank Warrants, the Redeemable Warrants
and the Options, or approximately $1,936,000. Such proceeds will be used by
the Company for repayments of amounts outstanding under the Company's
Credit Agreement with its banks. None of the proceeds from the sale of
shares of Common Stock offered hereby by the Selling Securityholders
(including the Underlying Shares) will go to the Company. See "Use of
Proceeds."
Risk Factors........................ The securities offered hereby involve a high degree of risk. See "Risk
Factors."
American Stock Exchange Symbol
Common Stock........................ HDG
</TABLE>

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(1) Excludes shares of Common Stock issuable upon the exercise of currently
exercisable options granted under the Company's 1984 Stock Option Plan and
the 1995 Stock Option and Restricted Stock Purchase Plan (the "1995 Stock
Option Plan" and together with the 1984 Stock Option Plan, the "Option
Plans") and 474,603 treasury shares. Excludes shares of Common Stock issued
upon exercise of options under the Option Plans after August 12, 1996.

(2) Includes 4,606,669 shares of Common Stock issuable upon conversion or
exercise of outstanding Convertible Securities, 525,000 shares of Common
Stock issued in April, May and June 1996 upon exercise of Redeemable
Warrants (including certain Redeemable Warrants issued in June 1995) and
1,540,000 shares of Common Stock issued upon conversion of July Debentures
in September 1996.

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SUMMARY FINANCIAL INFORMATION
(In thousands, except per share amounts)

The following table sets forth summary financial information concerning the
Company derived from the Consolidated Financial Statements of the Company as of
(i) December 31, 1995 and 1994 and as of and for each of the three years ended
December 31, 1995, 1994 and 1993 and (ii) as of June 30, 1996 and 1995 and as of
and for each of the six month periods ended June 30, 1996 and 1995, appearing
elsewhere in this Prospectus. The Consolidated Financial Statements as and for
the six month periods ended June 30, 1996 and 1995 are unaudited. The summary
financial information as of and for the years ended December 31, 1992 and 1991
are derived from the audited Consolidated Financial Statements of the Company
not presented herein. This information should be read in conjunction with such
Consolidated Financial Statements, including the Notes thereto. See "Financial
Statements."

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<S> <C> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- --------------------------------------------------------------------
1996 1995(1) 1995(1) 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------ ------------
SELECTED OPERATING DATA:
Net Sales................. $ 7,643 $ 11,756 $ 20,225 $ 24,182 $ 36,024 $ 49,868 $ 37,462
Income (loss) before
taxes, minority interest
and cumulative effect of
accounting change......... $ (4,749) $ 1,504 $ (3,807) $ (5,767) $ (13,326) $ 2,019 $ 3,104
Net Income (Loss)......... $ (4,749) $ 1,208 $ (4,103) $ (5,767) $ (10,903) $ 928 $ 1,727
Income (loss) per common
share..................... $ (.47) $ .15 $ (.52) $ (.80) $ (1.57) $ .13 $ .26
Weighted average common
and common share
equivalents
outstanding............... 10,179,172 7,884,986 7,886,101 7,173,908 6,954,713 7,157,871 6,579,061
</TABLE>

<TABLE>
<S> <C> <C>
JUNE 30, 1996
------------------------
AS
ACTUAL(1) ADJUSTED(2)
--------- -------------
BALANCE SHEET DATA:
Working capital (deficiency)........................................................... $ (10,378) $ 1,026
Total Assets........................................................................... $ 17,842 $ 19,820
Total Liabilities...................................................................... $ 22,575 $ 12,304
Stockholders' equity................................................................... $ (4,733) $ 7,516
</TABLE>

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(1) The financial statements for the year ended December 31, 1995 and the six
months ended June 30, 1995 have been restated with respect to the gain
recognized on the sale of assets. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--and Note I of Notes to
Consolidated Financial Statements.

(2) Adjusted to give effect to the issuance of 6,146,669 shares of Common Stock
at June 30, 1996 upon the conversion and/or exercise of the Convertible
Securities, of which 525,000 were exercised in April, May and June 1996.
Also includes 25,397 KCI Shares and the conversion of the Zatpack Note into
approximately 682,000 shares. See "Business--Other Transactions" and
"Certain Transactions."

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RISK FACTORS

Prospective purchasers of the securities offered hereby should carefully
consider the following factors, as well as the information contained elsewhere
in this Prospectus.

NEED FOR ADDITIONAL FINANCING AND CAPITAL RESOURCES

The Company believes that the net proceeds derived by it from a private
offering of its securities in August 1996 (see "The Private Offerings"),
together with funds from operations, will be sufficient to satisfy the Company's
contemplated cash requirements through December 31, 1996. The Company currently
has insufficient resources to satisfy all of its contemplated cash requirements
for the 12 month period following December 31, 1996. For example, the Company's
Credit Agreement with its banks matures on December 31, 1996, at which time the
Company will be required to repay all outstanding principal plus any accrued
interest, or approximately $3,195,000 of principal plus unpaid interest. If all
of the Bank Warrants, Redeemable Warrants and Options are exercised, of which
there can be no assurance, the Company intends to use the entire proceeds
thereof (a maximum of approximately $1,936,000) to reduce amounts outstanding
under the Credit Agreement. Accordingly, any such proceeds would not be
available for other purposes. In addition, pursuant to the Plea Agreement with
the DOJ, the Company is required to satisfy a $2,500,000 fine by making
quarterly payments of $125,000. As of the date of this Prospectus, $2,160,000 of
the fine remains outstanding. Two installments of $125,000 each and additional
amounts totaling $100,000 have been paid to date. Pursuant to the terms of the
Plea Agreement the entire fine is currently due and payable. Accordingly, the
entire amount of the settlement has been classified as current. As of the date
of this Prospectus no action has been initiated to require the Company to pay
the entire outstanding amount of the fine, although the DOJ could take such
action (including, but not limited to, an action to seize the Company's assets)
at any time. If amounts outstanding under the Credit Agreement are not repaid on
the maturity thereof, the banks whose debt is secured by assets of the Company
could foreclose on substantially all Company assets. If the DOJ or the banks
seized the Company's assets for non-payments of the obligations due them,
investors purchasing the shares offered hereby could lose their entire
investment in the Company.

The Company will require additional funding to meet its obligations under
the Credit Agreement on the maturity date thereof (approximately $3,195,000,
plus unpaid interest), the Plea Agreement (approximately $2,100,000) and its
other operating expenses. Although the Company is seeking additional debt and/or
equity financing, the Company has not entered into any arrangements to obtain
such financing, and there can be no assurance that the Company will be able to
obtain such financing on commercially acceptable terms. The unavailability of
additional funding could prevent or delay the continued development and
marketing of the Company's products and could require the Company to curtail its
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."

INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT WITH DISCLOSURE OF GOING
CONCERN ISSUE

The report of the Company's independent certified public accountants, which
is included herein, contains an explanatory paragraph as to the Company's
ability to continue as a going concern. Among the factors cited by the
accountants as raising substantial doubt as to the Company's ability to continue
as a going concern are, the loss incurred by the Company of approximately
$4,103,000 during the year ended December 31, 1995; the Company's working
capital deficiency of approximately $7,393,000 at that date; the expiration of
the Credit Agreement on March 31, 1996 (the term of which was subsequently
extended to December 31, 1996); and the uncertainties concerning the FDA consent
decree and the ongoing inquiry by the Commission. See Note A of Notes to
Consolidated Financial Statements. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for management's
discussion of the Company's financial condition at December 31, 1995 and June
30, 1996.

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DEPENDENCY ON PRODUCT DEVELOPMENT

The Company historically has manufactured and sold a broad range of
prescription and over-the-counter drug products. The Company's future success
will be largely dependent on its ability to develop, manufacture and market
commercially viable generic pharmaceutical products.

The Company's wholly-owned Houba subsidiary is not subject to the FDA
suspension, and is preparing ANDAs for submission to the FDA for its review.
Houba does not anticipate receiving approvals to market new products from the
FDA during 1996.

Development activities for each new generic drug product begin several
years in advance of the patent expiration date of the brand-name drug
equivalent. This is because the profitability of a new generic drug usually
depends on the ability of the Company to obtain FDA approval to market that drug
product upon or immediately after the patent expiration date of the equivalent
brand-name drug so that the Company will be among the first to market the new
generic drug product. As other off-patent drug manufacturers receive FDA
approvals on competing products, prices and revenues typically decline.
Accordingly, the Company's ability to attain profitable operations depends on
the Company's ability to develop and introduce new products, the resumption of
FDA review of the Company's application for new drug approvals at its Brooklyn
plant, the timing of FDA approval of such products and the number and timing of
FDA approvals for competing products.

GOVERNMENTAL REGULATION

The development, manufacture and sale of pharmaceutical products are
subject to strict regulation and approval by the federal government, principally
the FDA, and, to a lesser extent, by state and local governments. The process of
obtaining regulatory approval is rigorous, time consuming and costly. There can
be no assurance that the Company will obtain necessary approvals on a timely
basis, if at all. Delays in receiving regulatory approvals would adversely
affect the Company's ability to market products commercially. Product approvals
by the FDA may be withdrawn if compliance with regulatory standards is not
maintained or if problems relating to the products are experienced after the
initial approval.

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 produced and marketed 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.

COMPETITION

The Company competes in varying degrees with numerous companies in the
healthcare industry, including other manufacturers of generic drugs (among which
are several major pharmaceutical companies) and manufacturers of brand-name
drugs. Many of the Company's competitors have substantially greater financial
and other resources and are able to expend more money and effort than

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the Company in areas such as marketing and product development. Although a
company with greater resources will not necessarily receive FDA approval for a
particular generic drug before its smaller competitors, relatively large
research and development expenditures enable a company to support many FDA
applications simultaneously, thereby improving the likelihood of being among the
first to obtain approval of at least some generic drugs.

One of the principal competitive factors in the generic pharmaceutical
market is the ability to introduce generic versions of brand-name drugs promptly
after a patent expires. The Company believes that it will be at a competitive
disadvantage until the FDA resumes review of Abbreviated New Drug Applications
("ANDAs") submitted by the Company's Brooklyn plant. See "Legal Proceedings-
Government Consent Decrees." Other competitive factors in the generic
pharmaceutical market are price, quality and customer service (including
maintenance of sufficient inventories for timely deliveries).

ALTERNATE SOURCES OF RAW MATERIALS; POSSIBLE SHORTAGES

The raw materials essential to the Company's business are bulk
pharmaceutical chemicals purchased from numerous sources. Raw materials are
generally available from several sources. During 1995, the Company purchased a
substantial amount of its raw materials from Mallinckrodt Chemical, Inc.
(Mallinckrodt Chemical, Inc. and/or its affiliates are hereafter referred to as
"Mallinckrodt"). If the Company became unable to continue to purchase raw
materials from this supplier, there can be no assurance that the Company will
not face difficulties in obtaining raw materials on commercially acceptable
terms from alternate suppliers, which could have a material adverse effect on
the Company. In addition, the federal drug application process requires
specification of raw materials suppliers. If raw materials from a supplier
specified in a drug application were to become unavailable on commercially
acceptable credit terms, FDA supplemental approval of any new supplier would be
required. In 1994, one of the Company's suppliers filed a Chapter 11 petition
under the United States Bankruptcy Code. The supplier continues to supply the
Company but there can be no assurance it will continue to do so. See
"Business--Products and Product Developments--Acquisitions." In view of the FDA
consent decree and the suspension of review of the Company's ANDAs by the FDA,
the Company would be unable to obtain FDA supplemental approval at the Brooklyn
plant for a new supplier.

The United States Drug Enforcement Administration (the "DEA") limits the
quantity of the Company's inventories of certain raw materials used in the
production of controlled substances based on historical sales data. These
limitations could increase the likelihood of raw material shortages and of
manufacturing delays in the event the Company was required to find new suppliers
of these raw materials.

HISTORICAL LOSSES AND ACCUMULATED DEFICIT

The Company has had net losses in each of the last three years of its
operation and in the six months ended June 30, 1996. For the years ended
December 31, 1995, 1994 and 1993, the Company had net losses of $4,103,000,
$5,767,457 and $10,902,760, respectively. For the six months ended June 30,
1996, the Company had a net loss of $4,749,000. At December 31, 1995, the
Company had an accumulated retained earnings deficit of $14,989,000, and at June
30, 1996, the Company had an accumulated retained earnings deficit of
$19,738,000.

LIMITED PROCEEDS

The Company will not receive any proceeds from this Offering except in
connection with the exercise of the Bank Warrants, the Redeemable Warrants and
the Options, and there can be no assurance that any of such securities will be
exercised by the holders thereof. The Company currently intends to utilize a
significant portion of any such proceeds to reduce amounts outstanding under the
Company's Credit Agreement with its banks. Accordingly, such proceeds, if any,
will not be available for other purposes. None of the proceeds from the sale of
shares of Common Stock offered hereby by the

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Selling Securityholders (including the Underlying Shares) will go to the
Company. See "Use of Proceeds."

NO DIVIDENDS

The Company has not declared and paid cash dividends on its Common Stock in
the past, and the Company does not anticipate paying any cash dividends in the
foreseeable future. Certain of the Company's debt instruments prohibit the
payment of cash dividends. Earnings, if any, will be retained to finance the
Company's operations and to expand its business. See "Dividend Policy."

CONTINUED EXCHANGE LISTING

In April 1995, the Exchange halted trading in the Common Stock because (i)
the Company was late in filing its Annual Report on Form 10-K for the year ended
December 31, 1994 (the "1994 Form 10-K") and (ii) the Company had not fully
satisfied the Exchange's financial guidelines for continued listing of the
Common Stock in that it had shareholders' equity of less than $2,000,000 and had
sustained net losses in two of its three most recent fiscal years. Although
trading resumed on May 16, 1995, there is no assurance that such listing will
continue. While the Company has timely filed its various periodic reports with
the Commission for over the last 12 months, the Company still does not meet the
Exchange's financial guidelines since it has shareholders' equity of less than
$4,000,000 and has sustained net losses in three of its four most recent fiscal
years. If the Common Stock should become delisted from the Exchange, trading, if
any, in the Common Stock would then continue to be conducted in the
over-the-counter market on the Nasdaq Small-Cap market (if the Common Stock
qualifies for inclusion therein), on the OTC Bulletin Board, an NASD-sponsored
inter-dealer quotation system, or in what are commonly referred to as "pink
sheets." As a result, an investor may find it more difficult to dispose of, or
to obtain accurate quotations as to the market value of, the Common Stock. In
addition, if the Common Stock ceases to be quoted on the Exchange or is not
qualified for inclusion on the Nasdaq Small-Cap market and the Company fails to
meet certain other criteria, the Common Stock would be subject to a Commission
rule that imposes additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and accredited
investors. For transactions covered by this rule, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently, if
the Company's securities were no longer listed on the Exchange or were not
quoted on Nasdaq, the rule may affect the ability of broker-dealers to sell the
Company's securities and the ability of purchasers in this offering to sell the
Underlying Shares in the secondary market.

CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO ISSUE UNDERLYING
SHARES

The Company will be able to issue Underlying Shares upon conversion or
exercise of the Convertible Securities only if a current prospectus relating to
such shares is then in effect and only if the shares are qualified for sale
under the securities laws of the applicable state or states or an exemption from
any such qualification is available. Although the Company has undertaken to
maintain such a current prospectus and intends to seek to qualify the Underlying
Shares for sale in applicable jurisdictions, there is no assurance that it will
be able to do so. See "Description of Securities."

DEPENDENCE ON CERTAIN CUSTOMERS AND PRODUCTS

The Company sells its products to a large number of customers who are
primarily drug store chains and wholesalers. These customers are not
concentrated in any particular region. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. During
1995, the Company had net sales to two customers in excess of 10% of total
sales. Such customers accounted for 25% and 11% of total sales, respectively.
During 1994, the Company had net sales to three customers in excess of 10% of
total sales, each aggregating 12% of total sales. During 1993, the Company had
net sales to two customers in excess of 10% of total sales, each aggregating 12%
of total sales. Balances due from these customers were approximately 25%, 7% and
14% of total accounts

9
<PAGE>
receivable at December 31, 1995, 1994 and 1993, respectively. The Company
believes that the loss of any of these customers could have a material adverse
effect on the Company.

In March 1995, the Company sold its Oxycodone with Acetaminophen Tablet
business ("Tablets ANDA") to Mallinckrodt. In connection with the sale of the
Tablets ANDA the Company has granted to Mallinckrodt an option to purchase the
Company's ANDA for Oxycodone with Acetaminophen Capsules ("Capsule ANDA")
business.

In connection with the sale of the Tablets ANDA business the Company
continues to manufacture certain tablets on behalf of Mallinckrodt. Revenues
from such manufacturing comprised 7.7% of the Company's revenues in 1995.
Mallinckrodt may terminate the manufacturing arrangement in March 1997. In any
event the manufacturing arrangement terminates by its terms in March 1998, after
which date Mallinckrodt may conduct the Tablets ANDA business without the
Company's involvement. See "Business--Dispositions." Moreover, if Mallinckrodt
exercises the option associated with the Capsule ANDA, the Company may lose all
revenues associated from that business, after an initial period in which it
manufactures Capsules for Mallinckrodt. See "Business--Dispositions."

In connection with its purchase of the Tablets ANDA, Mallinckrodt agreed to
pay $1,000,000 of the purchase price when the Company receives general clearance
from the FDA for unrestricted operations at its Brooklyn facility and written
notice from the FDA that the Company is in compliance with certain provisions of
the consent decree. If the Company does not receive such general clearance and
written notification from the FDA, of which there can be no assurance, the
Company will not realize the full value of the sale of its Tablets ANDA business
to Mallinckrodt. See "Business-- Products and Product Development--Dispositions"
for a description of the Company's transaction with Mallinckrodt.

COMMISSION INVESTIGATION; POSSIBLE ADMINISTRATIVE PROCEEDING

In November 1993, the staff (the "Staff") of the Commission requested that
the Company provide to the Commission, on a voluntary basis, information and
documents regarding the ingredients and filings relating to several drugs
manufactured and sold by the Company. The Staff advised the Company that the
inquiry related to public information disseminated by the Company and trading in
the Company's securities during the period August 1987 through July 1993. The
Company is cooperating with the Staff and has made available various documents.
In addition, officers and directors of the Company have testified before the
Staff. On October 24, 1995, the Staff informed the Company that it would
recommend that the Commission authorize the institution of an administrative
proceeding pursuant to Section 21C of the Exchange Act against the Company. The
proposed action would allege that the Company's December 31, 1990 and December
31, 1991 Annual Reports on Form 10-K and March 31, 1991, June 30, 1991,
September 30, 1991, March 31, 1992, June 30, 1992, and September 30, 1992
quarterly reports on Form 10-Q were materially false and misleading. On August
14, 1996, the Staff forwarded to counsel for the Company an Offer of Settlement
relating to the administrative proceeding. The Offer of Settlement requires
Halsey to "cease and desist from committing or causing any violation and any
future violation of Section 17(a) of the Securities Act, Sections 10(b) and
13(a) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, and 13a-13
thereunder." If the Offer of Settlement is approved by the Commission, the
Company will not be required to pay any additional fines. See "Legal
Proceedings--Other Governmental Proceedings."

MARKET OVERHANG FROM OPTIONS, WARRANTS AND CONVERTIBLE NOTES

Immediately after the Offering, the Company will have outstanding a number
of options, warrants and convertible promissory notes, including the Convertible
Securities described herein. To the extent that such stock options, warrants or
convertible promissory notes are exercised or converted, as the case may be, the
equity interests of the Company's current stockholders will be diluted.
Moreover, the terms upon which the Company may be able to obtain additional
equity capital may be adversely affected since the holders of the outstanding
options, warrants and convertible promissory notes can be expected

10
<PAGE>
to exercise or convert them, as the case may be, to the extent they are able to,
at a time when the Company would, in all likelihood, be able to obtain any
needed capital on terms more favorable to the Company than those provided in the
options, warrants and convertible promissory notes. Further, the sale of Common
Stock or other securities held by or issuable to the holders of such options,
warrants and convertible promissory notes, including the Underlying Shares
offered hereby, or merely the potential of such sales, could have an adverse
effect on the market price of the Company's Common Stock.

LIMITATION ON FUTURE INDEBTEDNESS

Pursuant to the terms of the Debentures, the Company is limited as to the
type of future indebtedness it may incur. Other than trade indebtedness and
purchase money indebtedness, the Company may only borrow from banks and other
financial institutions. To the extent such borrowing is senior to the
Debentures, the Company is limited in the amount of such indebtedness it may
incur. See "The Private Offerings--General."

RIGHT OF FIRST REFUSAL

The Company has granted the purchasers of the November Debentures and the
August Debentures, collectively, a right of first refusal with respect to future
equity sales by the Company. As a result, the Company may in the future have
difficuly attracting new investors because investors' offers to purchase equity
securities will be subject to such right of first refusal. See "The Private
Offerings."

POSSIBLE VOLATILITY OF STOCK PRICE

The market for the Company's Common Stock could be subject to wide
fluctuations in response to such factors as, among others, variations in the
Company's anticipated or actual results of operations and market conditions
(which may be unrelated to the Company's operation and/or performance). See
"Stock Price and Dividend Policy."

CONTROL OF THE COMPANY

Several persons beneficially own over 5% of the Common Stock of the
Company. One person controls 26.2% of the Common Stock. Some of such persons
acting alone or together could control or strongly affect the votes of
shareholders for directors of the Company. In addition, holders of the November
and August Debentures are entitled to nominate a total of four persons to the
Board of Directors of the Company, which Board shall consist of no more than
seven members. See "Principal Shareholders" and "The Private Offerings."

11
<PAGE>
THE PRIVATE OFFERINGS

THE JULY PRIVATE OFFERING

The Company consummated a private offering (the "July Private Offering") of
408 units of securities on July 18, 1995 for an aggregate purchase price of
$4,080,000. Each unit consisted of (i) a July Debenture in the principal amount
of $10,000 issued at par and (ii) 750 redeemable Common Stock purchase warrants
("July Redeemable Warrants").

The July Debentures were to become due and payable as to principal five
years from the date of issuance. Interest, at the rate of 10% per annum, was
payable on a quarterly basis. The July Debentures were convertible at any time
after issuance into Underlying Shares at a conversion price (the "Conversion
Price") of $2.00 per share, subject to adjustment.

The July Debentures automatically converted into Common Stock, pursuant to
their terms, effective August 19, 1996, and interest ceased to accrue thereon
after such date. In September 1996 $3,080,000 principal amount of July
Debentures were physically presented to the Company for conversion, and
1,540,000 shares of Common Stock were issued upon the conversion thereof. See
"Description of Securities--Debentures--Conversion."

Each July Redeemable Warrant entitled the holder to purchase one Underlying
Share for $2.00 during the five year period commencing on the date of issuance.
The July Redeemable Warrants were redeemable by the Company at a price of $.01
per Warrant at any time commencing one year after issuance, upon not less than
30 days prior written notice, if the last sale price of the Common Stock on the
Exchange following such one year anniversary equals or exceeds $2.00 per share,
subject to adjustment, for the 20 consecutive trading days ending on the third
day prior to the notice of redemption to holders. All July Redeemable Warrants
were exercised during April, May and June 1996.

THE NOVEMBER PRIVATE OFFERING

The Company consummated a private offering (the "November Private
Offering") of 366 units on November 29, 1995 for an aggregate purchase price of
$3,660,000. Each unit consisted of (i) a November Debenture in the principal
amount of $10,000 issued at par and (ii) 600 November Redeemable Warrants.

The November Debentures will become due and payable as to principal five
years from the date of issuance. Interest, at the rate of 10% per annum, is
payable on a quarterly basis. The November Debentures are convertible at any
time after issuance into Underlying Shares at a Conversion Price of $2.50 per
share, subject to adjustment.

Each November Redeemable Warrant entitles the holder to purchase one
Underlying Share for $2.50 during the five year period commencing on the date of
issuance. The November Redeemable Warrants are redeemable by the Company at a
price of $.01 per Warrant at any time commencing one year after issuance, upon
not less than 30 days prior written notice, if the last sale price of the Common
Stock on the Exchange following such one year anniversary equals or exceeds
$2.50 per share, subject to adjustment, for the 20 consecutive trading days
ending on the third day prior to the notice of redemption to holders.

THE AUGUST PRIVATE OFFERING

As of August 6, 1996, the Company consummated an additional private
offering (the "August Private Offering" and, collectively with the July and
November Private Offerings, the "Private Offerings") of 250 units for an
aggregate purchase price of $2,500,000. Each unit consisted of (i) an August
Debenture in the principal amount of $10,000 issued at par and (ii) 461 August
Redeemable Warrants.

12
<PAGE>
The August Debentures will become due and payable as to principal five
years from the date of issuance. Interest, at the rate of 10% per annum, is
payable on a quarterly basis. Holders of August Debentures may elect to have
interest paid in Common Stock, at an issuance price of $3.25 per share. The
August Debentures are convertible at any time after issuance into shares of
Common Stock at a Conversion Price of $3.25 per share, subject to adjustment.

Each August Redeemable Warrant entitles the holder to purchase one
Underlying Share for $3.25 during the five year period commencing on the date of
issuance. The August Redeemable Warrants are redeemable by the Company at a
price of $.01 per Warrant at any time commencing one year after issuance, upon
not less than 30 days prior written notice, if the last sale price of the Common
Stock on the Exchange following such one year anniversary equals or exceeds
$3.25 per share, subject to adjustment, for the 20 consecutive trading days
prior to the notice of redemption to holders.

GENERAL

Pursuant to the terms of Debentures, other than trade indebtedness and
purchase money indebtedness, the Company may only borrow from banks and other
financial institutions. Pursuant to the terms of the July Debentures only up to
$5,522,000 over a base amount of bank indebtedness of $3,278,000 in debt which
is senior to the July Debentures may be incurred from banks or other financial
institutions. Pursuant to the terms of the November Debentures up to $6,722,000
over a base amount of bank indebtedness of $3,278,000 in debt which is senior to
the November Debentures may be incurred from banks or other financial
institutions. Pursuant to the terms of the August Debentures up to $5,405,000
over a base amount of bank indebtedness of $4,595,000 in debt which is senior to
the August Debentures may be incurred from banks or other financial
institutions. This amount includes an existing $1,200,000 secured note issued to
Mallinckrodt.

The holders of the Debentures and the Redeemable Warrants and the shares
underlying such instruments are entitled to demand that the Company register the
shares underlying their securities and also may participate in a registration by
the Company of its securities.

Holders of the November and August Debentures and any shares into which
such Debentures are converted have a right of first refusal while the November
and August Debentures remain outstanding to participate in any offering of
securities by the Company to the extent the gross proceeds from such offering,
or series of offerings in a twelve month period, exceed $200,000.

Subscriptions for units were solicited by management of the Company on a
'best efforts' basis. HKS & Co., Inc. ("HKS") assisted the Company in the
Private Offerings. For its services, the Company paid HKS consideration valued
at $517,000, and reimbursed HKS in the amount of approximately $65,000 for its
expenses. HKS is a Selling Securityholder in connection with the Offering
described herein. See "Selling Securityholders." HKS may receive a fee in
connection with the exercise of Redeemable Warrants.

The net proceeds of the Private Offerings were approximately $9,143,000.
The Company utilized $1,100,000 of such proceeds to repurchase 500,000 shares of
Common Stock (the "RPI Shares") from a former stockholder of the Company. See
"Certain Transactions." The Company used approximately an additional $1,000,000
of such net proceeds to repay a portion of its bank debt, and expenses
associated therewith. The Company utilized the balance of the net proceeds of
the Private Offerings for the following purposes: for working capital; for the
purchase of equipment; for research and development expenses; and for
registration of the Underlying Shares pursuant to the Registration Statement of
which this Prospectus is a part.

13
<PAGE>
USE OF PROCEEDS

The only proceeds to be received by the Company from this Offering will be
derived from the exercise of the Bank Warrants, the Redeemable Warrants and the
Options. There can be no assurance that any of such securities will be
exercised. If all of the outstanding Bank Warrants, Redeemable Warrants and
Options are exercised, the net proceeds to the Company will be approximately
$1,936,000. The proceeds from the exercise of the outstanding Bank Warrants,
Redeemable Warrants and Options, if any, will be used to repay amounts
outstanding under the Company's Credit Agreement with its banks.

The Company will not receive any of the proceeds from the sale of the
shares of Common Stock being offered hereby (including the Underlying Shares) by
the Selling Securityholders.

DILUTION

At June 30, 1996, the Company's net tangible book value (deficiency) per
share was $(.58). "Net tangible book value (deficiency) per share" represents
total tangible assets minus total liabilities divided by the total number of
shares outstanding. The table below sets forth dilution to shareholders
purchasing shares of Common Stock being offered hereby (including Underlying
Shares) from the Selling Securityholders at $4.50, the closing sale price of the
Common Stock on the Exchange on September 6, 1996.

<TABLE>
<S> <C> <C>
Assumed offering price per share $ 4.50
Net Tangible Book Value (deficiency) per Share before the Offering and before conversion of the $ (.58)
Convertible Securities...........................................................................
Increase in Net Tangible Book Value per share attributable to issuance of 6,146,669 Underlying $ 1.04
Shares upon exercise or conversion of Convertible Securities................................
Pro forma net tangible book value per share after the Offering................................... .46
Dilution of net tangible book value per share to new shareholders................................ 4.04
</TABLE>

14
<PAGE>
CAPITALIZATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following table sets forth the capitalization of the Company at June
30, 1996 and as adjusted to give effect to the issuance of the KCI Shares and
the conversion or exercise of the Convertible Securities as of such date, the
application of the estimated net proceeds derived therefrom as described under
"Use of Proceeds" and the payment of the expenses of this Offering (which are
estimated to be approximately $200,000). This table should be read in
conjunction with the Company's Consolidated Financial Statements appearing
elsewhere in this Prospectus.

<TABLE>
<S> <C> <C>
JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
Current liabilities..................................................................... $ 19,928 11,104
Long term debt, less current portion.................................................... 2,647 1,200
Stockholders' equity (deficiency):
Common stock, $.01 par value, 20,000,000 shares authorized; 9,582,354(1) shares issued
and outstanding; 15,735,022 shares as adjusted(2)(3).................................... 95 153
Additional paid in capital.............................................................. 15,954 28,145
Retained earnings (deficit)............................................................. (19,738) (19,738)
---------- -----------
(3,689) 8,560
Less: Treasury Stock--at cost (474,603 shares).......................................... (1,044) (1,044)
---------- -----------
Total stockholders' equity (deficit).................................................... (4,733) 7,516
---------- -----------
Total capitalization.................................................................... $ (2,086) 8,716
---------- -----------
---------- -----------
</TABLE>

(1) Includes 474,603 treasury shares.

(2) Includes 30,000 shares of Common Stock issuable upon exercise of an Option
held by a former director, 681,737 shares issuable upon conversion of the
Zatpack Note at December 31, 1995, 699,696 shares of Common Stock issuable
upon exercise of the Bank Warrants, 4,273,232 shares of Common Stock
issuable upon conversion of Debentures, 346,154 shares of Common Stock
issuable in payments of interest on August Debentures and 640,850 shares of
Common Stock issuable upon exercise of the Redeemable Warrants.

(3) Excludes shares issuable upon the exercise currently exercisable options
under the Company's Option Plans.

15
<PAGE>
STOCK PRICE AND DIVIDEND POLICY

The Company's Common Stock is listed on the Exchange under the symbol
"HDG". Set forth below for the periods indicated are the high and low sales
prices for the Common Stock as reported on the Exchange. The last reported sale
price of the Common Stock on October 4, 1996 was $4.25 per share.

<TABLE>
<S> <C> <C> <C>
AMERICAN STOCK EXCHANGE HIGH LOW
- ------------------------------------------------------------------------------------------------ -------------------- ---------
1996 FISCAL YEAR
First Quarter................................................................................... 7 3/4 3
Second Quarter.................................................................................. 7 1/4 4
Third Quarter................................................................................... 5 7/8 4
Fourth Quarter (through October 4, 1996)........................................................ 4 3/8 4

1995 FISCAL YEAR
First Quarter................................................................................... 2 1/2 1
Second Quarter.................................................................................. 3 1/16 1
Third Quarter................................................................................... 4 1/4 1
Fourth Quarter.................................................................................. 4 1/4 3

1994 FISCAL YEAR
First Quarter................................................................................... 5 3/8 3
Second Quarter.................................................................................. 4 1/2 2
Third Quarter................................................................................... 4 2
Fourth Quarter.................................................................................. 3 13/16 1

<CAPTION>
AMERICAN STOCK EXCHANGE
1996 FISCAL YEAR
First Quarter................................................................................... 5/8
Second Quarter.................................................................................. 7/8
Third Quarter...................................................................................
Fourth Quarter (through October 4, 1996)........................................................ 1/4
1995 FISCAL YEAR
First Quarter................................................................................... 7/8
Second Quarter.................................................................................. 1/4
Third Quarter................................................................................... 3/4
Fourth Quarter.................................................................................. 5/16
1994 FISCAL YEAR
First Quarter................................................................................... 1/8
Second Quarter.................................................................................. 11/16
Third Quarter................................................................................... 1/8
Fourth Quarter.................................................................................. 9/16

There were approximately 1,021 holders of record of the Common Stock as of
September 6, 1996. This number, however, does not reflect the ultimate number of
beneficial holders of the Company's Common Stock.

In April 1995, the Exchange halted trading in the Common Stock because the
Company (i) was late in filing the 1994 Form 10-K and (ii) had not fully
satisfied the Exchange's financial guidelines for continued listing of the
Common Stock in that it had shareholders' equity of less than $2,000,000 and had
sustained net losses in two of its three most recent fiscal years. Although
trading resumed on May 16, 1995, there is no assurance that such listing will
continue. The Company currently does not meet the Exchange's financial
guidelines for continued listing, since it has shareholders' equity of less than
$4,000,000 and has sustained net losses in three of its four most recent fiscal
years. See "Risk Factors."

The Company does not expect to declare or pay any cash or stock dividends
in the foreseeable future. Certain of the Company's debt instruments prohibit
the payment of cash dividends. The payment of dividends, if any, in the future
is within the discretion of the Board of Directors and will depend on the
Company's earnings, its capital requirements and financial condition, the
agreement of holders of the aforementioned debt instruments, and other relevant
factors.

16
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except per share information)

The selected consolidated financial data presented on the following pages
for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 are derived
from the Company's audited Consolidated Financial Statements. The Selected
Financial Data for the six months ended June 30, 1996 are derived from the
Company's Unaudited Consolidated Financial Statements. The Unaudited
Consolidated Financial Statements include all adjustments, consisting of normal,
recurring accruals, which management considers necessary for a fair presentation
of the consolidated financial position and consolidated results of operations
for these periods. Operating results for interim periods are not necessarily
indicative of the results that may be expected for the full year. The
Consolidated Financial Statements as of December 31, 1995 and December 31, 1994,
and for each of the years in the three year period ended December 31, 1995, and
the report thereon, are included elsewhere herein. The selected financial
information as of and for the years ended December 31, 1992 and 1991 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 Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31,
-------------------------- ------------------------------------------------------
1996 1995(1) 1995(1) 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
OPERATING DATA:
Net sales............................. $ 7,643 $ 11,756 $ 20,225 $ 24,182 $ 36,024 $ 49,868
Costs and expenses:
Cost of sales....................... 7,740 8,819 17,774 21,372 28,848 35,769
Research and development............ 629 307 818 491 2,140 1,090
Selling, general and
administrative........................ 3,144 2,981 5,806 6,924 8,796 8,616
Temporary closing costs of facility... -- -- 615 427 -- --
Provision for regulatory
settlement............................ -- -- -- -- 5,935 2,000
Interest expense.................... 879 433 1,307 735 631 372
Gain on sale of assets.............. -- (2,288) (2,288) -- -- --
Provision for stockholders'
litigation settlement................. -- -- -- -- 3,000 --
Income (loss) before provision for
income taxes, minority interest and
cumulative effect of accounting
change................................ (4,749) 1,504 (3,807) (5,767) (13,326) 2,019
Provision (benefit) for income taxes.. -- 296 296 -- (2,540) 1,128
Minority interest in net loss
(benefit) of subsidiaries............. -- -- -- -- 150 37
Cumulative effect of accounting
change................................ -- -- -- -- (267) --
Net income (loss):.................... $ (4,749) $ 1,208 $ 4,103 $ (5,767) $ (10,903) $ 928
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) per share........... $ (.47) $ .15 $ (.52) $ (.80) $ (1.57) $ .13
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Weighted average common and common
share equivalents outstanding....... 10,179,172 7,884,986 7,886,101 7,173,908 6,954,713 7,157,871

1991
------------
OPERATING DATA:
Net sales............................. $ 37,462
Costs and expenses:
Cost of sales....................... 27,343
Research and development............ 783
Selling, general and
administrative........................ 5,722
Temporary closing costs of facility... --
Provision for regulatory
settlement............................ --
Interest expense.................... 509
Gain on sale of assets.............. --
Provision for stockholders'
litigation settlement................. --
Income (loss) before provision for
income taxes, minority interest and
cumulative effect of accounting
change................................ 3,104
Provision (benefit) for income taxes.. 1,340
Minority interest in net loss
(benefit) of subsidiaries............. (37)
Cumulative effect of accounting
change................................ --
Net income (loss):.................... $ 1,727
------------
------------
Net income (loss) per share........... $ .26
------------
------------
Weighted average common and common
share equivalents outstanding....... 6,579,061

</TABLE>

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
JUNE 30, DECEMBER 31,
------------------- -----------------------------------------------------
1996(1) 1995(1) 1994 1993 1992 1991
------------------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital................................. $ (10,378) $ (7,393) $ (4,451) $ (2,801) $ 3,461 $ 2,350
Total assets.................................... 17,842 18,862 19,276 24,674 33,385 26,561
Total liabilities............................... 22,575 20,402 19,924 20,755 19,347 15,407
Retained earnings/(accumulated deficit)......... (19,738) 14,989 (10,886) (5,118) 5,785 4,856
Stockholders equity (deficit)................... (4,733) (1,540) (648) 3,920 14,038 11,117
</TABLE>

- ---------------
(1) The financial statements for the year ended December 31, 1995 and the six
months ended June 30, 1995 have been restated with respect to the gain
recognized on the sale of assets. See "Management Discussion and Analysis of
Financial Condition and Results of Operations--and Note I of Notes to
Consolidated Financial Statements.

17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company's net sales for the six months ended June 30, 1996 of
$7,643,000 represents a decrease of $4,113,000 (35.0%) as compared to net sales
for the six months ended June 30, 1995 of $11,756,000. The six month period
sales for 1995 included sales of Oxycodone HCL and Acetaminophen Tablets of
approximately $1,100,000 sold prior to the sale of the Tablets ANDA to
Mallinckrodt. Also included in the first six month period of 1995 were sales of
inventory of approximately $800,000 to Mallinckrodt. In addition the decrease is
attributable to price reductions effected during the first six month period of
1996 in an effort to meet increased competition.

Sales for the year ended December 31, 1995 were approximately $20,000,000
as compared to sales of approximately $24,000,000 for 1994. The net loss for the
year ended December 31, 1995 was $4,100,000 or $.52 per share, compared with the
net loss of $5,700,000 or $.80 per share for 1994.

For the year ended December 31, 1995, the reduction in sales from the
approximately $36,000,00 in sales for the year ended December 31, 1993 was
primarily attributable to the reduction in shipments of tablet products due to
the sale at the end of the first quarter by the Company of the Tablets ANDA to
Mallinckrodt which is partially offset by manufacturing revenue that the Company
is receiving as part of its agreement with Mallinckrodt. In addition, the
decrease is attributable to price reductions effected during the year in order
to meet increased competition in the market. Depreciation and amortization was
approximately $1,956,000 in 1995 as compared to $2,350,000 for 1994.

For the year ended December 31, 1994, the reduction in sales was primarily
attributable to the FDA consent decree of June 29, 1993, which resulted in lower
sales from July 1993 to December 31, 1994. The net credits issued for recalled
products in excess of previous estimated reserves for returns was approximately
$740,000. Cost of Goods Sold includes inventory write-offs in excess of
estimated reserves for inventory of recalled products (approximately $440,000).
Depreciation and amortization was approximately $2,350,000 in 1994 as compared
to $2,104,000 for 1993. The year ended December 31, 1994 had no benefit
available for carryback to prior years as a result of the prior year 1993
carryback utilizing the available tax benefit of $2,500,000.

On June 21, 1993, the Company entered into a plea agreement with the DOJ
pursuant to which the Company agreed to plead guilty to five counts of
adulteration of a single drug product and related record keeping violations. The
Company also agreed to pay a fine in the amount of $2,500,000, payable in
quarterly installments of $125,000 over five years commencing on September 15,
1993.

On June 29, 1993, the Company entered into a consent decree with the U. S.
Attorney for the Eastern District of New York on behalf of the FDA as a result
of the FDA's investigation into the manufacturing and record keeping practices
at the Company's Brooklyn plant.

See "Legal Proceedings" for additional information regarding the plea
agreements with the DOJ and the consent decree on behalf of the FDA.

During 1994, the Company completed the validation of the five solid dosage
products required by the FDA consent decree in 1994. The Company also completed
validation of certain liquid products at the Brooklyn plant. The Company is
currently in the process of completing validity assessment studies

18
<PAGE>
and preparing validation protocols for products with plans to re-introduce the
products in the near future.

OUTLOOK

During 1996, the Company intends to focus its research and development
program primarily on the reintroduction of certain previously discontinued
products as well as the development of new generic pharmaceuticals. Research and
development expenses increased by 79.5% as compared to the six months of 1995.
The Company is continuing its effort to obtain FDA clearance for the Brooklyn
facility. At the same time it has engaged in a research and development program
which include submissions to the FDA of several new products as soon as
permitted. See "Business--Research and Development." Moreover, as a result of
the consent decree, the Company is conforming the operations of its Brooklyn
plant to the FDA's CGMP regulations and to satisfy the conditions for the
resumption of shipments of the five products permitted under the consent decree.
For the fiscal years ended December 31, 1995, 1994 and 1993, these five solid
dosage products accounted for approximately $12,400,000, $15,275,000 and
$17,729,000 of sales or 61%, 63% and 49.2% of the total net sales for the
Company, respectively.

For the fiscal year ended December 31, 1993, Hydrocodone Bitartrate and
Acetaminophen Tablets ("HBA") (shipments of which have not been resumed as a
result of the validation process) accounted for approximately $2,922,000 or 8.1%
of the total sales of the Company. There were no shipments of this product after
June 29, 1993. The Company wrote off inventory of HBA of approximately
$1,000,000 during 1993. There can be no assurance that the Company will be able
to achieve prior levels of sales of this products in future periods, or that the
Company's current product mix will enable the Company to return to
profitability. As a result of the substantial reduction in the number of
products manufactured at the Brooklyn plant, however, and as part of the
Company's continuing efforts to reduce operating costs at the Brooklyn plant,
the Company has achieved substantial workforce reductions. As a result of the
foregoing, the historical results of operations reflected in the condensed
consolidated financial statements may not be indicative of future operating
results.

As a result of problems identified at H.R. Cenci Laboratories, Inc.
("Cenci"), a 51%-owned subsidiary of the Company, new management conducted an
internal review of its operations. This review led Cenci to discover
irregularities which prompted it to cease all manufacturing operations and to
replace certain key personnel. Cenci has had ongoing discussions with officials
of the FDA. Cenci has cooperated with requests from the U.S. Department of
Justice/U.S. Attorney for the District of Maryland ("USDOJ/USADM") in its
investigation into the practices of certain of Cenci's former employees while
they were acting on behalf of Cenci. In addition, several current employees have
appeared before the grand jury and or spoken with representatives of the
USDOJ/USADM. In October 1995 the former regulatory affairs director for Cenci
pleaded guilty to making false statements to the FDA. In December 1995 this
individual was sentenced. At this time, the Company is unable to predict what
other consequences, if any, will result from the USDOJ/USADM's investigation.

19
<PAGE>
RESULTS OF OPERATIONS

The following chart reflects the listed items expressed as a percentage of
net sales.

<TABLE>
<S> <C> <C> <C> <C> <C>
PERCENTAGE OF NET SALES
-----------------------------------------------------
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1994 1993 1996 1995
--------- --------- --------- --------- ---------
Net sales........................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods.................................................... 89.5 89.2 80.1 101.3 75.0
--------- --------- --------- --------- ---------
Gross profit..................................................... 10.5 10.8 19.9 (1.3) 25.0
Research and development......................................... 4.0 2.0 5.9 8.2 2.6
Selling, general and administrative expenses..................... 30.2 29.6 24.4 41.1 25.4
Provision for regulatory settlement.............................. -- -- 16.5 -- --
(Loss) earnings from operations.................................. (23.7) (20.8) (26.9) (50.6) (3.0)
Provision for stockholders litigation settlement................. -- -- 8.3 -- --
Gain on the sale of assets....................................... 11.3 -- -- -- 19.5
Interest expense................................................. 6.5 3.0 1.8 11.5 3.6
--------- --------- --------- --------- ---------
(Loss) earnings before income taxes, minority interest and
cumulative effect of accounting change........................... (18.9) (23.8) (37.0) (62.2) 12.9
(Benefit) provision for income taxes............................. 1.5 -- (7.0) -- 2.6
--------- --------- --------- --------- ---------
(Loss) earnings before minority interest and cumulative effect of
accounting change................................................ (20.4) (23.8) (29.9) (62.2) 10.3
Minority interest in net earnings (loss) of subsidiaries......... -- -- .4 -- --
--------- --------- --------- --------- ---------
Loss (earnings) before cumulative effect of accounting change.... (20.4) (23.8) (29.5) (62.2) 10.3
Cumulative effect of accounting change........................... -- -- (.7) -- --
--------- --------- --------- --------- ---------
Net (loss) earnings.............................................. (20.4) (23.8) (30.2) (62.2) 10.3
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

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

(1) The financial statements for the year ended December 31, 1995 and the six
months ended June 30, 1995 have been restated with respect to the gain
recognized on the sale of assets. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note I of Notes to
Consolidated Financial Statements.

NET SALES

The Company's net sales for the six months ended June 30, 1996 of
$7,643,000 represents a decrease of $4,113,000 (35.0%) as compared to net sales
for the six months ended June 30, 1995 of $11,756,000. The decrease in 1996 is
attributable to the reduction in shipments of tablet products due to the sale at
the end of the first quarter of 1995 by the Company of the Tablets ANDA to
Mallinckrodt which is partially offset by manufacturing revenue that the Company
is receiving as part of its manufacturing agreement with Mallinckrodt. In
addition, the decrease is the result of price reductions due to increased
competition during the current year.

The Company's net sales for the fiscal year ended December 31, 1995 of
$20,225,000 represents a decrease by $3,957,000 as compared to net sales for the
fiscal year ended December 31, 1994. The decrease in 1995 is primarily
attributable to the sale of the Tablets ANDA to Mallinckrodt. Also, in 1995 the
decrease in sales is attributable to price reductions implemented in order to
meet increased market competition. In 1994, the Company's net sales decreased by
$11,842,000 as compared to 1993. The decrease in 1994 is primarily attributable
to the discontinuance of certain solid dosage products as a result of the June
1993 consent decree on behalf of the FDA. In addition, the Company decided to
suspend shipments of liquid products of Cenci for the last six months of 1994
and in 1995. This

20
<PAGE>
suspension of shipments contributed to the decline in net sales during 1994.
Also impacting 1994 sales are credits issued for recalled products which
exceeded the estimated reserves established at December 31, 1993 by
approximately $740,000.

COST OF GOODS SOLD

For the six months ended June 30, 1996, cost of goods sold decreased by
approximately $1,079,000 as compared to the six months ended June 30, 1995. The
decrease for 1996 is attributable to the reduction in shipments of tablet
products due to the sale at the end of the first quarter of 1995 by the Company
of the Tablets ANDA. In addition price reductions were effected during the six
month period as a result of increased market competition. In an effort to reduce
manufacturing costs, the Company has decreased operating costs through
significant reductions in personnel and other expenses. The Company's gross
margin as a percentage of sales for the six months ended June 30, 1996 was
(1.3)% as compared to 25.0% for the six months ended June 30, 1995.

For 1995, cost of goods sold decreased by approximately $3,487,000 as
compared to 1994, and in 1994 by approximately $7,264,000 as compared to 1993.
The decrease for 1995 is primarily attributable to the reduction in shipments of
tablet products due to the sale by the Company of the Tablets ANDA combined with
significant reductions in manufacturing costs of personnel and other expenses.
However, these reductions were partially offset by increased raw material costs
during the year. The decrease for 1994 is primarily attributable to the
reduction in units produced and the suspension of shipments of certain solid
dosage products. In addition, in 1994, the suspension of shipments of certain
liquid products of Cenci as a result of the Company's review of operations at
this location and at the Brooklyn plant, resulted in the write-off of inventory
for recalled products in excess of the reserve in the amount of approximately
$440,000. Management effected certain cost saving measures such as reducing
personnel and other expenditures during 1995. The Company's gross margin as a
percentage of sales for the fiscal years ended December 31, 1995, 1994 and 1993
was 12.1%, 11.6% and 20.0%, respectively.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses as a percentage of sales for
the six months ended June 30, 1996 and 1995 were 41.1% and 25.4%, respectively.
These expenses increased by $163,000 or 5.5% as compared to the prior year as a
result of the Company's effort to reduce expenses through implementing cost
saving measures combined with a reduction in freight cost associated with a
reduced sales volume at the Company's various locations.

Selling, general and administrative expenses as a percentage of sales for
the fiscal years 1995, 1994 and 1993 were 30.2%, 29.5% and 30.1%, respectively.
These expenses decreased by approximately $1,118,000 or 16.0% in fiscal year
1995 as compared to 1994. The decrease in both years was attributable to cost
saving measures effected by management during each year, coupled with a decrease
in net sales.

PROVISION FOR STOCKHOLDERS LITIGATION

In June 1994, the Company and the plaintiffs in certain class actions and
shareholder derivative lawsuits agreed to settle the litigations. In June 1994,
the Company agreed to a settlement of these lawsuits. In November 1994, both the
Federal and State Courts approved the terms of the settlement, under which the
Company agreed to pay $1,000,000 in cash and, at the Company's option, either
(i) to issue shares of Common Stock having an aggregate market value, as of the
date of distribution, of $3,000,000, or (ii) to pay $3,000,000 in cash, or (iii)
to distribute any combination of shares or cash having a combined value as of
the date of distribution of $3,000,000. The initial payment of $1,000,000 was
paid by the Company's insurers. In November 1995 the Company paid the remainder
of the

21
<PAGE>
settlement fund by the issuance of 824,742 shares of Common Stock at a per share
price of $3.6375, or an aggregate value of $3,000,000. The Company had
previously recorded an estimated provision of $3,000,000 in the fourth quarter
of 1993 as the estimated cost to settle the above shareholder actions.

INTEREST EXPENSE

Interest expense for 1995 increased by $572,000 as compared to 1994 as a
result of fees payable to the Company's banks, an increase in the level of
borrowings due to the issuance of convertible subordinated debentures and an
increase in the interest rate after the second quarter of 1994 (see "Liquidity
and Capital Resources" below). Interest expense for 1994 increased by $104,000
as compared to 1993 as a result of an increase in the prime rate in 1994 and an
increase in the margin rate in mid-1993 applicable to the Company's borrowings.

(BENEFIT) PROVISION FOR INCOME TAXES

The Company had no tax (benefit) provision for 1995 and 1994 since the
available loss carryback to prior years was utilized by the net operating loss
for 1993 carryback to the prior three years. In 1993 the Company's effective tax
benefit rate was approximately 19.2% as compared to an effective income tax rate
of 55.8% in fiscal year 1992. The benefit rate in 1993 arose as a result of a
net operating loss carryback to the preceding three years and is attributable to
the lack of tax benefit of subsidiary losses combined with the nondeductibility
of the DOJ settlement.

NET LOSS

For the six months ended June 30, 1996, the Company had a net loss of
$4,749,000 as compared to net earnings of $1,208,000 for the six months ended
June 30, 1995. This increase in loss is attributable to the reduction in
shipments of tablet products due to the sale at the end of the first quarter of
1995 by the Company of the Tablets ANDA combined with price reductions during
the first six months of 1996 to compete with increased market competion.

For 1995, the Company had a net loss of $4,103,000 as compared to a net
loss of $5,767,000 for 1994. The decrease in net loss is attributable to the
gain on the sale of assets of $2,288,000 net of the tax provision of $296,000,
or $1,992,000. The net loss for 1994 of $5,767,000 represents a decrease in the
amount of loss of $5,136,000 as compared to the net loss for 1993 of
$10,903,000. The loss in 1994 is primarily attributable to the suspension of
shipments of certain solid dosage products as part of the aforementioned consent
decree in June 1993 combined with the suspension of shipments of liquid products
at the subsidiary for the second half of the year.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1996, the Company had cash and cash equivalents of $111,000 as
compared to $353,000 at December 31, 1995. The Company had a working capital
deficiency at June 30, 1996 of $(10,378,000) and $7,393,000 at December 31,
1995.

The Company consummated the Private Offerings in July 1995, November 1995
and August 1996.

The net proceeds of the Private Offerings were approximately $9,173,000.
The Company utilized $1,100,000 of such proceeds to repurchase 500,000 shares of
Common Stock (the "RPI Shares") from a former stockholder of the Company. The
Company used approximately an additional $1,000,000 of such net proceeds to
repay a portion of its bank debt. The Company intends to utilize the balance of
the net proceeds of the Private Offerings for the following purposes: for
working capital; for the purchase of equipment; for research and development
expenses; and for the registration of the Underlying Shares under the Securities
Act. See "The Private Offerings."

22
<PAGE>
As a result of the decline in shipments of solid dosage products from the
Company's Brooklyn plant following the entry of the consent decree, and as a
result of the lack of available borrowings under the Company's credit agreement,
the Company's liquidity position has been materially adversely affected since
June 30, 1993 and the Company's capital resources have been severely limited.
The Company has actively sought to reduce its operating costs at the Brooklyn
plant, where it has made significant reductions in personnel. In addition, the
Company's liquidity position has been affected during the second half of 1994 by
the discontinuance of shipments of liquid products from its Cenci subsidiary as
a result of review completed by the Company of this liquid operation. In an
effort to reduce the loss from lower revenues at this subsidiary, the Company
has reduced its operating costs at Cenci through significant reductions of
personnel and other expenses.

Under the terms of the plea agreement with the DOJ, the Company agreed to
pay a $2,500,000 fine, payable in quarterly installments of $125,000 over five
years. Two installments have been paid to date. From April 1995 through July
1996, the Company made additional partial payments to the DOJ aggregating
$100,000. The agreement with the DOJ stipulates if any payments are not made in
a timely fashion, the entire amount of the fine shall become due and payable
immediately. As a result, the entire outstanding amount of the settlement has
been classified as current as of December 31, 1994. As of the current date, no
action has been initiated to require immediate payment of the entire amount;
however, the Company has recently made several partial payments.

In March 1995, the Company and its banks restructured the Company's amended
credit agreement to include an extension of the due date to August 31, 1995,
modification of the financial covenants, reduction of the exercise prices of all
warrants granted to the banks in excess of $2.375 per share to $2.375 per share
and extension of the expiration date of the warrants to December 1999. As
consideration for these modifications, the banks received $1,500,000 of the
proceeds received from the transaction with Mallinckrodt. Funds have been
applied to reduce outstanding principal by approximately $1,105,000 to
approximately $3,777,000, to pay accrued interest (approximately $162,000) and
fees and expenses (approximately $233,000). In addition, if the outstanding
borrowings were not repaid by August 31, 1995, the Company has been required to
pay an additional 3% ($102,000) of the then outstanding principal due to the
banks. $100,000 of such amount was paid in January 1996 and the balance has been
deferred until December 31, 1996.

In July 1995, the Company and its banks (the "Banks") amended the Credit
Agreement as a result of the consummation of the July Private Offering. As
consideration for waiving any breach or default under the Credit Agreement as a
result of the July Private Offering, the Banks received $500,000 of the proceeds
as payment for interest, fees, expenses and principal and an extension of the
warrant exercise period to July 17, 2005, subsequently extended to June 30,
2006. The Banks now hold warrants to purchase 699,696 shares of the Company's
Common Stock at prices ranging from $1.98 to $2.07, with an average weighted
exercise price of $2.05.

The Credit Agreement with the Banks expired in March 1996, at which time
the Company was required to repay all outstanding principal plus any accrued
interest, or approximately $3,395,000 of principal and $31,000 of accrued
interest, which interest was in an escrow account, plus accrued fees and
expenses. In August 1996 the Company and the Bank further amended the Credit
Agreement in connection with the consummation of the August Private Offering. As
consideration for waiving any breach or default of the Credit Agreement through
the date of such amendment, including breaches or defaults resulting from the
August Private Offering, and extending the due date of the Credit Agreement to
December 31, 1996, the Banks received $391,614 of the proceeds of the August
Private Offering as payment for interest, fees, expenses and principal. When the
Credit Agreement, as extended, expires on December 31, 1996, the Company will be
required to repay all outstanding principal plus any accrued interest, or an
aggregate of approximately $3,281,000 of such principal and interest. The
Company currently does not have available sufficient funds to repay this
indebtedness.

23
<PAGE>
On March 21, 1995, the Company sold its Tablets ANDA for 5mg Oxycodone
HCl/325mg Acetaminophen tablets and certain pieces of equipment utilized in
connection with the production activities under the Tablets ANDA for up to $5.4
million to Mallinckrodt. Mallinckrodt paid the Company $2 million of the
purchase price on the closing date, having previously paid $500,000 in July
1994. The balance of the purchase price is payable as follows: Mallinckrodt will
pay $1 million when the Company receives general clearance from the FDA for
unrestricted operations at it facility in Brooklyn, New York and written notice
from the FDA that it is in compliance with certain provisions of the consent
order dated July 9, 1993. Mallinckrodt will pay the Company $1.9 million balance
of the Deferred Payment when Mallinckrodt receives certain authorizations from
the FDA, but in no event later than September 21, 1997. See
"Business-Dispositions" for additional information regarding this transaction.

On March 30, 1995, the Company signed the Zatpack Agreement with Zatpack
which provides for the purchase of 500,000 shares of Common Stock of the Company
by Zatpack in consideration of $1,000,000. See "Business-Other
Transactions--Agreements with Zatpack, Inc." for additional information
regarding the Zatpack Agreement.

The DOJ could move at any time to seize the Company's assets for
non-payment of the obligations due to it. If the DOJ took such action, investors
who purchase the shares offered hereby might lose their entire investment in the
Company.

The Company has insufficient resources to meet both its current obligations
at June 30, 1996 and its long-term obligations. The maximum proceeds to be
derived from this offering (approximately $1,936,000 if all outstanding Bank
Warrants, Redeemable Warrants and Options are exercised) will not be sufficient
to satisfy these obligations. To meet such obligations and to pursue the
development of new generic drug products the Company must find alternative
sources of funding. As previously indicated, the Company has continued to
actively pursue financing. At the current time, the Company is discussing with
several parties obtaining financing which will replace the Company's banks and
provide additional working capital. There can be no assurance that the Company
will be able to obtain any such financing on commercially acceptable terms. In
addition, the report of the Company's independent certified public accountants
contains an explanatory paragraph as to the Company's ability to continue as a
going concern. Among the factors cited by the accountants as raising substantial
doubt as to the Company's ability to continue as a going concern are: the loss
incurred by the Company of approximately $2,203,000 during the year ended
December 31, 1995; the Company's working capital deficiency of approximately
$7,393,000 at that date; the expiration of the Credit Agreement on March 31,
1996 (which subsequently was extended to December 31, 1996, as described above);
and the uncertainties concerning the FDA consent decree and the ongoing inquiry
by the Commission. See Note A of Notes to Consolidated Financial Statements.

CAPITAL EXPENDITURES

The Company's capital expenditures during 1995, 1994 and 1993 were
$536,000, $216,000 and $1,688,000, respectively. The decrease in capital
expenditures in 1995 and 1994 as compared to 1993 is attributable to the
Company's cash conservation measures.

24
<PAGE>
BUSINESS

GENERAL

Halsey, a New York corporation established in 1935, and its subsidiaries,
are engaged in the manufacture, sale and distribution of generic drugs. 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. The Company sells its generic
drug products under its Halsey label and under private-label arrangements with
drugstore chains and drug wholesalers. 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.

Halsey's wholly-owned subsidiaries include Blue Cross Products, Inc., a New
York corporation (currently inactive), Houba, Inc. ("Houba"), an Indiana
corporation, Halsey Pharmaceutical, Inc. ("Halsey Pharmaceutical"), a Delaware
corporation, The Medi-Gum Corporation, a Delaware corporation (currently
inactive), and Indiana Fine Chemicals Corporation ("Indiana Chemicals"), a
Delaware corporation. Halsey has two additional subsidiaries: Cenci, a
California corporation (51% owned), and Cenci Powder Products, Inc. ("Cenci
Powder"), a Delaware corporation (51% owned).

The Company manufactures its products at facilities in New York, Indiana
and California. During 1995, in connection with the sale of its Oxycodone with
Acetaminophen Tablet business, the Company began manufacturing Oxycodone with
Acetaminophen Tablets for a third party. See "Business-- Dispositions," below.
During the last several years, the Company has sought to diversify its
businesses through strategic acquisitions and through the development,
manufacture and sale of bulk chemical products used by others as raw materials
in the manufacture of finished drug forms. The Company's ability to develop and
manufacture bulk chemical products was enhanced by the acquisition in 1990 of
100% of the capital stock of Houba and the completion by Houba in late 1991 of a
new 15,000-square-foot manufacturing facility. Houba currently produces and
markets raw materials intended for pharmaceutical and food supplements, as well
as solid dosage forms of generic drug products. In October and December 1991,
the Company acquired majority interests in Cenci and Cenci Powder, respectively.
These acquisitions gave the Company a greater presence on the West Coast of the
United States, and added new products. Cenci and Cenci Powder manufacture liquid
and powder preparations, respectively, of pharmaceutical products in various
dosage forms. The Company's Indiana Chemicals subsidiary is engaged in the
manufacture of the specialty vitamin Biotin. Halsey Pharmaceutical is a trading
company engaged exclusively in sales operations.

On June 21, 1993, the Company entered into a plea agreement with the DOJ to
resolve the DOJ's investigation into the manufacturing and recordkeeping
practices at the Company's Brooklyn plant. Under the terms of the plea
agreement, the Company agreed to plead guilty to five counts of adulteration of
a single drug product shipped in interstate commerce and related recordkeeping

25
<PAGE>
violations. The plea agreement also requires the Company to pay a fine of
$2,500,000 over five years in quarterly installments of $125,000 commencing in
September 1993. Two installments have been paid to date. From April 1995 through
July 1996, the Company made additional partial payments to the DOJ aggregating
$100,000. The agreement with the DOJ stipulates that if any payments are not
made in a timely fashion the entire amount of the fine shall become due and
payable immediately. Such nonpayment also constituted a default under the
Company's Credit Agreement with its banks (which has expired). As a result, the
entire amount of the settlement has been classified as current. As of the date
of this Prospectus, no action has been initiated to require payment of the
entire outstanding amount of the fine.

On June 29, 1993, the Company entered into a consent decree with the U.S.
Attorney for the Eastern District of New York on behalf of the FDA that resulted
from the FDA's investigation into the Brooklyn plant's compliance with the FDA's
CGMP regulations. Under the terms of the consent decree, the Company was
enjoined from shipping any solid dosage drug products (i.e., excluding liquid
drug formulations) manufactured at the Brooklyn plant until the Company
established, to the satisfaction of the FDA, that the methods used in, and the
facilities and controls to be used for, manufacturing, processing, packing,
labeling and holding any drug, are established, operated, and administered in
conformity with the Federal Food, Drug, and Cosmetic Act and all CGMP
regulations. As part of satisfying these requirements, the Company is required
to validate the manufacturing processes for each solid dosage drug product prior
to manufacturing and shipping the drug product. The Company, however, was
permitted under the terms of the consent decree to manufacture and ship from the
Brooklyn plant six identified solid dosage drug products, the Brooklyn Solid
Dosage Products, at its own risk provided that: (i) at least twice per month,
the Company's independent expert certifies that each batch of drug product upon
validation will have been manufactured in accordance with the CGMP Regulations
and the formulation described in the drug product's approved New Drug
Application ("NDA") or ANDA, until such time as validation is completed for
these products; and (ii) for any batches of these products that have already
been manufactured, such certification will include a certification by a Company
representative with personal knowledge of the records relating to such drug that
such records are accurate and complete and a certification signed by an
independent expert that he has personally reviewed the records, and that in his
professional opinion the foregoing requirement concerning validation has been
met.

At the beginning of August 1993, the Brooklyn plant resumed shipments of
two drug products (Class II narcotics), Oxycodone with Acetaminophen Capsules
5mg/500mg and Oxycodone with Acetaminophen Tablets 5mg/325mg, and thereafter
resumed shipments of a third solid dosage drug product, Acetaminophen,
Butalbital and Caffeine Tablets 325mg, 50mg, 40mg. During 1995, the Company sold
its Oxycodone with Acetaminophen Tablet business to Mallinckrodt. Under a
tolling arrangement with Mallinckrodt, the Company will continue to manufacture
such tablets for Mallinckrodt for at least two years. See
"Business--Dispositions," below. In September 1993, the Company resumed
shipments of two other solid dosage drug products, Isoniazid 300mg and
Tetracycline 250mg and 500mg capsules, from the Brooklyn plant. After review by
the Company of one of the Brooklyn Solid Dosage Products which the Company was
permitted to continue to manufacture and ship under the terms of the consent
decree, Hydrocodone Bitartrate 5mg and Acetaminophen 500mg Tablets,
discrepancies were discovered with some of the data in the Company's ANDA. This
resulted in a voluntary recall of this product in November 1993 and the
withdrawal of the ANDA. As a result of such recall and the transaction with
Mallinckrodt the Company manufactures and ships four solid dosage products from
its Brooklyn plant on its own behalf and manufactures one solid dosage product
on behalf of Mallinckrodt.

PRODUCTS AND PRODUCT DEVELOPMENT

Generic Drug Products

The Company historically has manufactured and sold a broad range of
prescription and over-the-counter drug products. The Company's pharmaceutical
product list currently includes a total of

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approximately 31 products, consisting of 20 dosage forms and strengths of
prescription drugs and 11 dosage forms and strengths of over-the-counter drugs.
Each dosage form and strength of a particular drug is considered in the industry
to be a separate drug product. The Company's drug products are sold in various
forms, including liquid and powder preparations, compressed tablets and
two-piece, hard-shelled capsules.

Most of the generic drug products manufactured by the Company can be
classified within one of the following categories:

1. Antibiotics,

2. Anti-infective and anti-tubercular drugs,

3. Neuropharmacological drugs,

4. Antihistamines and antihistaminic decongestants, or

5. Antitussives.

In October 1991, the FDA suspended review of all of the parent company's
(i.e., Halsey's) applications for new drug approvals. It is unlikely that Halsey
will receive any new approvals to market any generic drugs from the FDA in 1996,
and the Company is unable to predict with reasonable certainty when the FDA
suspension will be lifted. See "Government Regulation" below. The Company's
Houba subsidiary is not subject to the FDA suspension and is preparing to submit
ANDAs to the FDA for its review. Houba does anticipate receiving approvals from
the FDA to market any new products during 1996.

The Company's development strategy for new drug products has been to focus
on the development of a broad range of generic form drugs, each of which (i) has
developed a solid market acceptance with a wide base of customers, (ii) can be
sold on a profitable basis notwithstanding intense competition from other drug
manufacturers, and (iii) is no longer under patent protection. The Company has
also diversified its current product line to include some less widely prescribed
drugs as to which limited competition might be expected. As a result of the FDA
consent decree, the Company's strategy at the Brooklyn plant has been to
concentrate on conforming the operations of the plant to the FDA's CGMP
regulations and to satisfy the conditions for the resumption of shipments of the
remaining four Brooklyn Solid Dosage Products described above. However, during
1996, the Company, through its Houba subsidiary, may continue to apply for ANDA
approvals. In addition, the Company will continue to pursue the development of
its existing pharmaceutical business as well as the development of Houba's
chemical products business.

Development activities for each new generic drug product begin several
years in advance of the patent expiration date of the brand-name drug
equivalent. This is because the profitability of a new generic drug usually
depends on the ability of the Company to obtain FDA approval to market that drug
product upon or immediately after the patent expiration date of the equivalent
brand-name drug so that the Company will be among the first to market the new
generic drug product. As other off-patent drug manufacturers receive FDA
approvals on competing products, prices and revenues typically decline.
Accordingly, the Company's ability to attain its previous levels of
profitability depends on the Company's ability to develop and introduce new
products, the resumption of FDA review of Halsey's application for new drug
approvals at its Brooklyn plant, the timing of FDA approval of such products and
the number and timing of FDA approvals for competing products.

Bulk Chemical Products

In the last few years, the Company has sought to develop, manufacture and
market bulk chemical products. The development and sale of bulk chemicals is
generally not subject to the same level of regulation as is the development and
sale of drug products; accordingly, chemicals may be brought to market
substantially sooner than drug products.

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Dispositions

On March 21, 1995 (the "Closing Date"), the Company sold its Tablets ANDA
for 5 mg Oxycodone HCl/325 mg Acetaminophen tablets ("Tablets"), and certain
pieces of equipment utilized in connection with its production activities under
the Tablets ANDA for up to $5.4 million (the "Purchase Price") to Mallinckrodt.
Mallinckrodt paid the Company $2 million of the Purchase Price on the Closing
Date, having previously paid $500,000 in July 1994. The balance (the "Deferred
Payment") of the Purchase Price is payable as follows. Mallinckrodt will pay $1
million when the Company receives general clearance from the FDA for
unrestricted operations at its Brooklyn facility and written notice from the FDA
that the Company is in compliance with certain provisions of the consent order
dated July 2, 1993. Mallinckrodt will pay the Company the $1.9 million balance
of the Deferred Payment when Mallinckrodt receives certain authorizations (the
"Mallinckrodt Authorizations") from the FDA, but in no event later than
September 21, 1997.

In connection with the transaction, Mallinckrodt agreed to defer $1.2
million of the Company's trade debt due to an affiliate of Mallinckrodt. The
deferred indebtedness is evidenced by a promissory note (the "Note") with
interest accruing at a rate of 8% per annum. The Note, which may be prepaid at
any time, is due and payable on the earlier of the date of the Mallinckrodt
Authorization or September 21, 1997. Mallinckrodt may offset its Deferred
Payment obligations against the amount due on the Note, provided certain
conditions are met. The Company may also offset the amount due to Mallinckrodt
on the Note against the Deferred Payment obligations when such obligations
mature. However, the Company has agreed with its banks (See "Management's
Discussion and Analysis of Financial Condition and Results of Operation") not to
exercise its right of offset until the Company has repaid in full the amounts
due to its banks. The Note, which is subordinate to future bank indebtedness of
up to $8,000,000, is secured by substantially all of the Company's and Houba's
assets.

In connection with the sale of the Tablets ANDA, the Company agreed to
manufacture Tablets for Mallinckrodt for a period of three years and
Mallinckrodt agreed to order a minimum number of Tablets from the Company for
the two year period following the Closing Date. Mallinckrodt may terminate the
manufacturing agreement after two years. The Company and Mallinckrodt also
entered into a non-competition agreement pursuant to which the Company agreed
not to compete with Mallinckrodt and its affiliates in the United States with
respect to the Tablets ANDA until March 21, 2000. If, prior to the time it is
possible for Mallinckrodt to commence production under the Tablets ANDA or any
new Tablets ANDA at its own facility, the Company ceases or is forced to cease
or substantially curtail production under the Tablets ANDA, as a consequence of
(i) any action or communication by the FDA or any other regulatory or
governmental authority or (ii) any financial or other business difficulty, then
Mallinckrodt has the right to cancel payment of any yet unpaid portion of the
Deferred Payment ($1.9 million) and shall further have the right to a full
refund of any portion of the Deferred Payment already made to the Company.

During the fiscal years ended December 31, 1994, 1993 and 1992, the Company
derived net revenues from Tablets of approximately $6,600,000, $5,600,000 and
$4,200,000, respectively. Management anticipated that Tablet sales would decline
during 1995 as a result of increasing competition. Management's determination
that an integrated supplier such as Mallinckrodt would be better suited to
increasingly competitive market conditions than the Company was an important
factor in the decision to proceed with the sale of the Tablets ANDA.

In connection with the sale of the Tablets ANDA, the Company issued to
Mallinckrodt an option exercisable at any time until March 21, 1998, to purchase
the ANDA for acetaminophen/oxycodone capsules at an exercise price (the "Option
Price") equal to 75% of Net Capsule Revenue, subject to downward adjustment in
the event of a decline in pricing levels. Net Capsule Revenue is defined to mean
all revenue (net of rebates, adjustments, discounts, allowances, expenses
incurred in product recalls and similar items) derived from sales of
acetaminophen/oxycodone capsules during the twelve month period immediately
prior to the date the option is exercised. The Option Price is payable as
follows: $200,000 on the later of (i) exercise and (ii) the date when
Mallinckrodt or an affiliate qualifies as the new source for certain raw
materials, with the remainder of the Option Price due when

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<PAGE>
Mallinckrodt obtains certain authorizations from the FDA or such earlier date as
the parties agree. Upon exercise Mallinckrodt will purchase from the Company
equipment used to manufacture the capsules for the greater of $250,000 or the
appraised value of the equipment. At such time the Company and Mallinckrodt will
enter into agreements pursuant to which the Company will (a) manufacture
acetaminophen/oxycodone capsules for Mallinckrodt for a period of time and (b)
be prohibited from competing with Mallinckrodt and its affiliates with respect
to the production of capsules.

Acquisitions

The Company has engaged Penick Corporation ("Penick") to process certain of
the raw materials utilized in the production of acetaminophen/oxycodone
capsules. In order to ensure the continued viability of Penick, the Company's
Houba subsidiary purchased a 25% equity interest in Penick in mid-1993. In
addition, in September 1995, Houba purchased an 8.3% equity interest in Penick
Pharmaceutical, Inc., which owns the other 75% of Penick. In June 1994 both
Penick Corporation and Penick Pharmaceutical, Inc, filed petitions under Chapter
11 of the United States Bankruptcy Code. If Penick were to cease operations,
there can be no assurance that the Company would be able to enter into a
relationship with another entity licensed by the FDA to process such raw
materials on commercially acceptable terms.

OTHER TRANSACTIONS

Agreements with Zatpack, Inc.

On March 30, 1995, the Company signed an agreement (the "Zatpack
Agreement") with Zatpack, Inc. ("Zatpack"), an affiliate of Zuellig Group N.A.,
Inc. ("Zuellig"). The Zatpack Agreement provides for the purchase of 500,000
shares of Common Stock (the "Zatpack Shares") by Zatpack, a British Virgin
Islands Company, in consideration of $1,000,000. The $1,000,000 purchase price
was comprised of a combination of cancellation of indebtedness (primarily
incurred by subsidiaries of Halsey for the purchase of raw materials previously
delivered and in the process of being delivered from affiliates of Zuellig),
purchase of inventory, and surrender of shares of Indiana Chemicals. The Zatpack
Shares are included in the Registration Statement of which this Prospectus is a
part. As a result of this transaction, the Company owns 100% of Indiana
Chemicals.

Pursuant to the Zatpack Agreement, the Company issued the Zatpack Note to
Zatpack as consideration for cancellation of additional indebtedness. This
indebtedness resulted from trade payables and advances to the Company by Zuellig
and certain of its subsidiaries. The Zatpack Note is in the original principal
amount of $1,292,242, with interest accruing at a rate of 8%, compounded
annually. The Zatpack Note is convertible into Common Stock (the "Note Shares")
at an adjusted conversion price of $2.39 per share, subject to further
adjustment. The Zatpack Note is subordinate to all bank and institutional
indebtedness of the Company, and may be prepaid by the Company, in whole but not
in part, upon 30 days notice to the holders thereof without penalty. The Note
Shares are included in the Underlying Shares registered hereby.

In connection with the transactions contemplated by the Zatpack Agreement,
a subsidiary of Zuellig agreed to supply a subsidiary of the Company with
Methacycline HCl for a three year period.

Sale of Stock to Ranbaxy

On October 27, 1994, the Company signed a Letter of Intent ("LOI") with
Ranbaxy Pharmaceuticals, Inc. ("RPI"), a wholly owned United States subsidiary
of Ranbaxy Laboratories Ltd. of New Delhi, India. The Company received $1
million from RPI in payment for 500,000 shares of Common Stock in accordance
with the terms of the LOI. The LOI provided for completion of due diligence by
RPI within a period of 30 days, after which the parties would negotiate and
finalize a definitive agreement. After execution of a definitive agreement, RPI
was to have purchased an additional 5,000,000 newly issued shares of Common
Stock for $10 million. On November 29, 1994, the Company announced that RPI had
decided not to proceed with its second purchase of the Company's Common Stock.
In August 1995, the Company repurchased the RPI Shares from RPI for an aggregate
purchase price of $1,100,000, which funds were derived from the proceeds of the
July Private Offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Certain Transactions."

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GOVERNMENT REGULATION

General

All pharmaceutical manufacturers, 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. 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 generally. The
Federal Food, Drug, and Cosmetic Act, the Generic Drug Enforcement Act of 1992,
the Controlled Substance Act and other federal statutes and regulations govern
or influence the testing, manufacture, safe labeling, storage, recordkeeping,
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 refusal of the government to enter into supply
contracts or to approve new drug applications. The FDA also has the authority to
revoke approvals of new drug applications. Recent changes in FDA procedures have
increased the time and expense involved in obtaining ANDA approvals and in
complying with the FDA's CGMP standards. The ANDA drug development and approval
process now averages approximately two to five years. The approval procedures
are generally costly and time consuming.

FDA approval is required before any "new drug," 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. Generally, a drug which is the generic equivalent of a
previously approved prescription drug will be treated as a new drug requiring
FDA approval. Furthermore, each dosage form of a specific generic drug product
requires separate approvals by the FDA. However, as discussed below, less costly
and time consuming approval procedures may be used for generic equivalents.

Among the requirements for drug approval is that the prospective
manufacturer's methods must conform to the CGMPs. CGMPs apply to the
manufacture, receiving, holding and shipping of all drugs, whether or not
approved by the FDA. CGMPs must be followed at all times during which the drug
is manufactured. To ensure full compliance with the 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 action such as an injunction
against shipment of the Company's products or the seizure of noncomplying drug
products, and/or, in serious cases, criminal prosecution. See also "Government
Regulation--FDA Investigations" below and "Legal Proceedings."

In addition, products marketed outside the United States, but which are
manufactured inside the United States, are subject to certain FDA regulations,
as well as regulation by the country in which the products are to be sold.

The Company also is governed by federal, state and local laws of general
applicability, such as those regulating working conditions. In addition, the
Company is subject, as are manufacturers generally, to various federal, state
and local environmental protection laws and regulations, including those
governing the discharge of materials into the environment. Compliance with these
laws is not expected to have any material effect upon the Company's capital
expenditures, earnings or competitive position.

Drug Approvals

There are currently three ways to obtain FDA approval of a new drug.

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

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<PAGE>
studies discussed below, and must also submit to the FDA information about
manufacturing practices, the chemical make-up of the drug and labeling.

2. Abbreviated New Drug Applications ("ANDA"). 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, 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. 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
relevant product and use patents for the equivalent brand name drug have expired
or have been determined to be invalid. The only exceptions are situations in
which the ANDA applicant challenges the validity or applicability of the patent
and either the patentholder 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 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. Alternative New Drug Applications. An alternative NDA procedure is
provided by the 1984 Act whereby the applicant may rely on published literature
and more limited testing requirements. That alternative seldom provides
advantages over the ANDA procedure, however, and is accordingly rarely used.

Generic Drug Enforcement Act

As a result of hearings and investigations concerning the activities of the
generic drug industry and the FDA's generic drug approval process, Congress
enacted the Generic Drug Enforcement Act of 1992 (the "Generic Drug Act"). The
Generic Drug Act confers significant new authority upon the FDA to impose
debarment and civil penalties for individuals and companies who commit certain
illegal acts relating to the generic drug approval process.

The Generic Drug Act requires the mandatory debarment of companies or
individuals convicted of a federal felony for conduct relating to the
development or approval of any ANDA, and gives the FDA discretion to debar
corporations or individuals for similar conduct resulting in a federal
misdemeanor or state felony conviction. The FDA may not accept or review during
the period of debarment (one to ten years in the case of mandatory, or up to
five years in the case of permissive, debarment of a corporation) any ANDA
submitted by or with the assistance of the debarred corporation or individual.
The Generic Drug Act also provides for temporary denial of approval of generic
drug applications during the investigation of crimes that could lead to
debarment. In addition, in more limited circumstances, the

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Generic Drug Act provides for suspension of the marketing of drugs under
approved generic drug applications sponsored by affected companies. The Generic
Drug Act also provides for fines and confers authority on the FDA to withdraw,
under certain circumstances, approval of a previously granted ANDA if the FDA
finds that the ANDA was obtained through false or misleading statements. The
Company has not been debarred as a result of the FDA investigation and
settlement and the consent decree with the FDA makes no provision therefor. The
Company does not know when the FDA will resume review of the Company's new drug
applications, but such review can begin after the FDA finds that the Company is
in compliance with CGMP regulations. To date, the FDA has not made such a
finding. See "Legal Proceedings--Government Consent Decrees."

Healthcare Reform

FDA Investigations

In April and May of 1990, the FDA conducted a pre-approval inspection of
the Company's Brooklyn plant, certain pending ANDAs relating to one drug product
(in four dosages) and the Company's compliance with the CGMPs. The FDA issued
Inspectional Observations concerning, and made further investigation of, the
Company's recordkeeping practices and the accuracy of certain research and
development stage batch records maintained by the Company for one drug product.
As a result, the Company voluntarily withdrew the pending ANDAs relating to this
product, and shortly thereafter for one other product, which have never been
marketed by the Company. At that time, the FDA also inspected ten then currently
marketed drug products (23 dosages) and issued no Inspectional Observations with
respect to such products.

In late 1991, the Company was notified that the FDA had undertaken a
validity assessment, pursuant to which the FDA suspended review of all of
Halsey's new drug applications, including four pending ANDAs. At the FDA's
suggestion, the Company voluntarily undertook an internal audit and retained an
outside consultant to review pending and various filed and approved ANDAs, the
results of which were provided to the FDA. Based on this initial review, the
Company voluntarily withdrew in 1991 three ANDAs for the drug fenoprofen
calcium.

PRODUCT RECALLS

In March 1993, the Company stopped production and sale of five products
previously manufactured at the Company's Brooklyn plant as a result of various
problems identified with these products, which related primarily to the addition
of unapproved inactive ingredients, processing deviations and recordkeeping
discrepancies. The disclosures regarding the affected products, Quinidine
Gluconate, Propylthiouracil, Acetaminophen with Codeine, Propoxyphene Napsalate
with Acetaminophen and Metronidazole, resulted from investigations by the
Company, the FDA and DOJ into the Company's existing and pending ANDA drug
approvals and recordkeeping practices.

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<PAGE>
In response to these problems, the Board of Directors adopted, and informed
the FDA that the Board would enact, a series of measures designed to address the
specific problems identified with the affected products and to avoid the
recurrence of similar problems. The Company notified the FDA that the Company
had indefinitely suspended the manufacture and sale of the affected products,
and that it had initiated a recall of those products from distributors and
retail sellers. In addition, the Company agreed to withdraw its ANDAs for
Propoxyphene Napsalate with Acetaminophen. A number of personnel and related
changes at the Brooklyn plant were instituted as part of the plan proposed to
the FDA directed at the Company's oversight of regulatory affairs. The plan
proposed to the FDA called for, among other things, the hiring of new
supervisors in the production department at the Brooklyn plant, including a new
head of production. The Company also extended its internal audit of the
Company's products at the Brooklyn plant to determine if any other problems
existed and to determine the causes of the identified problems. The Company
retained an additional qualified outside consultant to assist the Company's then
current outside consultant.

In June 1993, the Company entered into a plea agreement with the DOJ and a
consent decree with the U.S. Attorney for the Eastern District of New York on
behalf of the FDA with respect to the DOJ and FDA investigations of the Company.
As a direct result of the consent decree and a subsequent product recall, the
Company is limited to manufacturing and shipping five identified solid dosage
drug products from its Brooklyn plant (the consent decree does not affect the
Company's ability to manufacture and ship liquid dosage drug products or affect
the Company's operations in its Indiana or California facilities), one of which
is being manufactured on behalf of Mallinckrodt. The Company has charged an
aggregate of approximately $5,935,000 to operations with respect to the plea
agreement and the consent decree. This amount was comprised of inventory
write-offs, product recalls and fines. See "Legal Proceedings--Government
Consent Decrees" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

RESEARCH AND DEVELOPMENT

The Company conducts research and development activities at each of its
Brooklyn and Indiana facilities. The Company's research and development
activities consist primarily of new generic drug product development efforts and
manufacturing process improvements, as well as the development for sale of new
chemical products. New drug product development activities are primarily
directed at conducting research studies to develop generic drug formulations,
reviewing and testing such formulations for therapeutic equivalence to brand
name products and additional testing in areas such as bioavailability,
bioequivalence and shelf-life. For fiscal years 1995, 1994 and 1993, total
research and development expenditures were $818,000, $491,000 and $2,140,000,
respectively. During 1996 the Company intends to concentrate its research and
development efforts in the following areas:

1. Reintroduction of products suspended as a result of the consent
decree which require prior FDA validation;

2. Reintroduction of products which will require changes in
formulation and submission for prior approval from the FDA;

3. Reintroduction of the products withdrawn in 1993 and resubmission
of the related ANDAs to the FDA; and

4. Development of new products.

There can be no assurance that the FDA will grant the requisite approvals
for any such product introductions.

The Company currently maintains a full-time staff of eight in its Research
and Development Departments.

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MARKETING AND CUSTOMERS

A key element of the Company's marketing strategy is to maintain sufficient
raw material and finished good inventories to enable the Company to fill
customer orders promptly. This strategy requires a substantial amount of working
capital to maintain inventories at a level sufficient to meet anticipated
demand.

The Company sells its products primarily through three salaried employees
and to a lesser extent through two independent sales representatives, each of
whom are compensated on a commission basis. Sales of drugs in dosage form are
made primarily to drug wholesalers, drugstore chains, distributors and other
manufacturers and are not concentrated in any specific region.

During 1995, the Company had net sales to two customers in excess of 10% of
total sales, each aggregating 25% and 11% of total sales, respectively. During
1994, the Company had net sales to three customers in excess of 10% of total
sales, each aggregating 12% of total sales. During 1993, the Company had net
sales to two customers in excess of 10% of total sales, each aggregating 12% of
total sales. Balances due from these customers were approximately 25% and 7% of
total accounts receivable at December 31, 1995 and 1994, respectively. The
Company believes that the loss of either of these customers could have a
material adverse effect on the Company.

The estimated dollar amount of the backlog of orders for future delivery as
of June 30, 1996 was approximately $1,121,000 as compared with approximately
$1,722,000 as of June 30, 1995. Although these orders are subject to
cancellation, management expects to fill substantially all orders as of June 30,
1996 during the third quarter of 1996.

COMPETITION

The Company competes in varying degrees with numerous companies in the
health care industry, including other manufacturers of generic drugs (among
which are divisions of several major pharmaceutical companies) and manufacturers
of brand-name drugs. Many of the Company's competitors have substantially
greater financial and other resources and are able to expend more money and
effort than the Company in areas such as marketing and product development.
Although a company with greater resources will not necessarily receive FDA
approval for a particular generic drug before its smaller competitors,
relatively large research and development expenditures enable a company to
support many FDA applications simultaneously, thereby improving the likelihood
of being among the first to obtain approval of at least some generic drugs.

One of the principal competitive factors in the generic pharmaceutical
market is the ability to introduce generic versions of brand-name drugs promptly
after a patent expires. The Company believes that it will be at a competitive
disadvantage until the FDA resumes review of ANDAs submitted by the Company's
Brooklyn plant. See "Government Regulation--Generic Drug Enforcement Act" above.
Other competitive factors in the generic pharmaceutical market are price,
quality and customer service (including maintenance of sufficient inventories
for timely deliveries).

RAW MATERIALS

The raw materials essential to the Company's business are bulk
pharmaceutical chemicals purchased from numerous sources. Raw materials are
generally available from several sources. During 1995, the Company purchased
approximately $2,741,000 of its raw materials (constituting 38.4% of its
aggregate purchases of raw materials) from Mallinckrodt, and as of December 31,
1995 more than 29.7% of the Company's trade payables was owed to this supplier.
If the Company became unable to continue to purchase raw materials from this
supplier, there can be no assurance that the Company will not face difficulties
in obtaining raw materials on commercially acceptable terms, which could have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial

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Condition and Results of Operations--Liquidity and Capital Resources." The
federal drug application process requires specification of raw materials
suppliers. If raw materials from a supplier specified in a drug application were
to become unavailable on commercially acceptable credit terms, FDA supplemental
approval of any new supplier would be required. In view of the FDA consent
decree and the suspension of review of the Company's ANDAs by the FDA, the
Company would be unable to obtain FDA supplemental approval at the Brooklyn
plant for a new supplier except in very limited circumstances.

The DEA limits the quantity of the Company's inventories of certain raw
materials used in the production of controlled substances based on historical
sales data. These limitations could increase the likelihood of raw material
shortages and of manufacturing delays in the event the Company was required to
find new suppliers of these raw materials.

In 1994, one of the Company's suppliers, Penick and its parent, filed a
Chapter 11 petition under the United States Bankruptcy Code. Penick continues to
supply the Company but there can be no assurance it will continue to do so. See
"--Products and Product Developments--Acquisitions."

EMPLOYEES

As of December 31, 1995, the Company had approximately 247 full-time
employees. Approximately 120 are administrative and professional personnel and
the balance are in production and shipping. Among the professional personnel,
eight are engaged in product development. Approximately 90 employees at the
Company's Brooklyn plant are represented by a local collective bargaining unit
whose agreement with the Company expires on July 1, 1997. Management believes
that its relations with its employees and unions are generally satisfactory;
however, the Company has been involved in litigation with respect to certain
aspects of its collective bargaining agreement. See "Legal Proceedings--Other
Pending Legal Proceedings."

PROPERTIES

Halsey leases, as sole tenant, a total of approximately 112,300 square
feet, in three buildings on Pacific Street and Dean Street in Brooklyn, New
York. Each of these leases is between Halsey and unaffiliated lessors. The
approximate aggregate minimum rental commitments under these operating leases
are as follows: $884,000 for the year 1995, $928,000 for the year 1996 and
$975,000 for the year 1997. These leases expire on December 31, 2005. The
buildings leased by Halsey in Brooklyn house research and development and
manufacturing facilities and corporate offices.

Houba owns approximately 45,000 square feet of building space on
approximately 30 acres of land in Culver, Indiana, which includes a modern
15,000 square foot manufacturing facility. This manufacturing complex houses
separate plants for the production of Doxycycline raw materials, Doxycycline
capsules and tablets and Biotin raw materials. In 1996, in conjunction with a
settlement with two former employees, the Company acquired real property,
improved by a residential property, in Culver, Indiana adjacent to the
manufacturing facility. The Company became the lessor of the residential
property upon closing of the acquisition.

Cenci and Cenci Powder together own approximately 6,700 square feet of
manufacturing and distribution building space on approximately one-half acre of
land in Fresno, California. In early 1992, the Company acquired additional land
adjoining this property for the purpose of expanding the manufacturing
facilities and distribution space located on such property. In addition, Cenci
and Cenci Powder lease approximately 18,000 square feet of space in a building
located in Fresno, California used for manufacturing and corporate offices.
During the years ended December 31, 1995, 1994 and 1993, Cenci and Cenci Powders
paid an aggregate of $86,000, $99,000 and $91,000, respectively, to minority
shareholders in respect to this lease.

The Company also leases office space in Westwood, New Jersey for its
marketing and sales departments on a year-to-year basis.

35
<PAGE>
LEGAL PROCEEDINGS

GOVERNMENT CONSENT DECREES

On June 21, 1993, the Company entered into a plea agreement with the DOJ to
resolve the DOJ's investigation into the manufacturing and recordkeeping
practices of the Company's Brooklyn plant. Under the terms of the plea
agreement, the Company agreed to plead guilty to five counts of adulteration of
drug products shipped in interstate commerce. Each count involved product
adulteration and recordkeeping deficiencies relating to a single drug product,
Quinidine Gluconate (324mg tablets), manufactured at the Brooklyn plant. The
plea agreement also requires 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. The Company's plea was entered in and the terms of the plea agreement
approved by the United States District Court for the District of Maryland on
July 16, 1993. Two installments have been paid to date. Only additional partial
payments have been paid in the amount of $100,000. The agreement with the DOJ
stipulates that if any payments are not made in a timely fashion the entire
amount of the fine shall become due and payable immediately. As a result, the
entire amount of the settlement has been classified as current. Such nonpayment
also constituted a default under the Company's Credit Agreement with its banks.
As of the date of this Prospectus, no action has been initiated to require
payment of the entire outstanding amount of the fine.

On June 29, 1993, the Company entered into a consent decree with the U.S.
Attorney for the Eastern District of New York on behalf of the FDA that resulted
from the FDA's investigation into the Brooklyn plant's compliance with the FDA's
CGMP regulations. Under the terms of the consent decree, the Company is enjoined
from shipping any solid dosage drug products (i.e., excluding liquid drug
formulations) manufactured at the Brooklyn plant until the Company establishes
to the satisfaction of the FDA that the methods used in, and the facilities and
controls to be used for manufacturing, processing, packing, labeling and holding
any drug, are established, operated, and administered in conformity with the
Federal Food, Drug, and Cosmetic Act and all CGMP regulations. As part of
satisfying the foregoing requirements, the Company will be required to validate
the manufacturing processes for each solid dosage drug product prior to
manufacturing and shipping the drug product. The Company, however, is permitted
under the terms of the consent decree to manufacture and ship from the Brooklyn
plant certain identified drug products at its own risk provided that: (i) at
least twice each month, the Company's independent expert certifies that each
batch of drug products upon validation will have been manufactured in accordance
with the CGMP Regulations and the formulation described in the drug products
approved NDA or ANDA, until such time as validation is completed for these
products; and (ii) for any batches of these products that have already been
manufactured, such certification will include certification by a Company
representative with personal knowledge of the records relating to such drug that
such records are accurate and complete and a certification signed by an
independent expert that he has personally reviewed the records provided and that
in his professional opinion the foregoing requirement concerning validation has
been met. The Company commenced shipments of five of the six solid dosage
products under the foregoing certification process. One of such five products
has since been sold to Mallinckrodt, on whose behalf the Company continues to
manufacture the product.

SHAREHOLDER AND DERIVATIVE ACTIONS

On March 31, 1993, and April 1, 1993, five class-action lawsuits were filed
in Federal Court by shareholders against the Company and certain of its then
directors. Each of the actions alleged that the Company and its directors had
made misleading statements and omissions relating to the prospects of the
Company's business and products, including products under development, as well
as relating to the status of DOJ and FDA investigations. On May 20, 1993 and
October 14, 1993, two separate shareholders derivative lawsuits were filed in
New York State Court against the Company and certain of its directors. Each of
these lawsuits alleged that the Company and its directors concealed certain

36
<PAGE>
government investigations by the FDA and the DOJ. These actions also alleged
that the directors breached their fiduciary duty in connection with the
dispositions by them of shares of Common Stock on the basis of material
information which was not publicly known. In June 1994, the Company agreed to a
settlement of these lawsuits. In November 1994, both the Federal and State
Courts approved the terms of the settlement, under which the Company agreed to
pay $1,000,000 in cash and, at the Company's option, either (i) to issue shares
of Common Stock having an aggregate market value, as of the date of
distribution, of $3,000,000, or (ii) to pay $3,000,000 in cash, or (iii) to
distribute any combination of shares or cash having a combined value as of the
date of distribution of $3,000,000. The initial payment of $1,000,000 was paid
by the Company's insurers. In November 1995 the Company satisfied the remainder
of its settlement obligations by issuing to approved class members a total of
824,742 shares of Common Stock at a per share price of $3.6375, or an aggregate
value of $3,000,000.

OTHER GOVERNMENTAL PROCEEDINGS

The Company received a federal grand jury subpoena in 1993 from the U.S.
District Court for the Eastern District of Pennsylvania for documents in
connection with an investigation of price fixing and bid rigging on government
contracts for Prednisone. The Company, which has not been identified as a target
of the investigation, has responded to the subpoena by making certain documents
available to the Government and, at this time, has received no further request
from the Government.

By letter dated November 12, 1993, the Staff of the Commission requested
that the Company provide to the Commission, on a voluntary basis, information
and documents regarding the ingredients and filings relating to the following
drugs: quinidine gluconate, propylthiourical, acetaminophen and codeine
phosphate, metronidazole, quinidine sulfate, and hydralazine hydrochloride. The
Staff advised the Company that the inquiry relates to public information
disseminated by the Company and trading in the Company's securities during the
period August 1987 through July 1993. The Company is cooperating with the Staff
and has made available various documents. These documents relate to the testing,
formulations and sale of these drugs which were maintained by the Company at a
facility in Maryland. In April, 1994, the Staff requested additional
documentation regarding these matters. The Company has complied with the
additional request. On July 5, 1994, the Company made a formal submission to the
Staff and outlined the parameters of a proposed settlement. An additional
submission was made on January 31, 1995, to bring additional information to the
attention of the Staff. In May 1995, a formal Order of Investigation was issued
by the Commission covering the foregoing matters. In June 1995, additional
documents were submitted. Officers and directors of the Company have also
testified before the SEC. On October 24, 1995, the SEC staff informed the
Company that it would recommend that the Commission authorize the institution of
an administrative proceeding pursuant to Section 21C of the Exchange Act against
the Company. Specifically the staff indicated it would seek an Order after
filing a complaint requiring the Company to cease and desist from violating
Section 17(a) of the Securities Act and Sections 10(b) and 13(a) of the Exchange
Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. The proposed action
would allege that the Company's December 31, 1990 and December 31, 1991 Annual
Reports on Form 10-K and March 31, 1991, June 30, 1991, September 30, 1991,
March 31, 1992, June 30, 1992, and September 30, 1992 quarterly reports on Form
10-Q were materially false and misleading. The SEC staff proposal conforms in
large part to the settlement proposal submitted by the Company. On August 14,
1996, the Staff forwarded an Offer of Settlement to the Company's counsel which
embodies the terms of the SEC staff proposal, and requires the Company to "cease
and desist from committing or causing any violation and any future violation" of
the securities laws. If the Offer of Settlement is approved by the Commission,
the Company will not be required to pay any additional fines.

By letter dated October 23, 1995, the Company was notified by the New York
State Education Department that the Professional Conduct Officer of the Office
of Professional Discipline had determined that there was sufficient evidence of
professional misconduct on the Company's part to warrant a disciplinary
proceeding pursuant to New York law. Upon contacting the Deputy Director of the
Office

37
<PAGE>
of Professional Discipline, counsel for the Company was advised that the alleged
misconduct related to the same activities that were the subject of the DOJ
investigation, indictment and plea. The Company submitted a written response on
November 16, 1995. The Company has been informed that the Office of Professional
Discipline would recommend to the Education Department a settlement that will
allow the Company's license to remain valid, but would require the payment of an
unspecified fine.

On November 9, 1995, the Company received two Notices of Charge of
Discrimination from the United States Equal Employment Opportunity Commission
relating to two claimed violations of Title VII of the Civil Rights Act of 1964.
The first charge of employment discrimination was filed on October 31, 1995 by a
female employee of the Company and alleges sexual discrimination and harassment.
A second separate charge of discrimination was also filed on October 31, 1995,
by another female employee alleging sexual harassment against the same
individual. On November 20, 1995, the EEOC terminated its process with respect
to the charges and issued Notices of Right to Sue to the claimants. In February
1996 two lawsuits were filed in the Eastern District of New York captioned
Golovatskaya v. Halsey Drug Co., 96 CIV 0662 and Petrakova v. Halsey Drug Co.,
96 CIV 0660 in connection with the above charges. The lawsuits seek unspecified
damages. At this early stage of the proceedings, the Company is unable to
predict with reasonable certainty the likely outcome of these claims.

CENCI PROCEEDING

The Company is a defendant in a lawsuit currently pending in the United
States District Court for the Eastern District of California entitled Cenci v.
Halsey Drug Co. The claims in this lawsuit relate to a 1991 Stock Purchase
Agreement whereby the Company agreed to purchase 51% of the stock of Cenci.

The plaintiff, both individually and as a shareholder of Cenci and Cenci
Powder, has sued the Company, one of the current officers and two former
officers of the Company. The complaint alleges that the Company has breached a
number of representations made during the course of the negotiations leading to
the stock purchase, including the representation that the Company would provide
financial assistance to both Cenci and Cenci Powder. The Complaint also alleges
misrepresentations relating to the scope of FDA's investigation of the Company.

The Complaint, which includes several causes of action, seeks unspecified
compensatory damages, as well as punitive damages, rescission, specific
performance, reformation and a declaration as to what amount, if any, is owed to
plaintiff.

The Company has retained California counsel to represent its interests.
Plaintiff filed its Fifth Amended Complaint, and the Company has filed its
Answer and Counterclaims in response to this latest amended complaint. The
parties have concluded discovery. At this preliminary stage, the Company is
unable to determine the outcome of this litigation with any reasonable
certainty.

OTHER PENDING LEGAL PROCEEDINGS

The Company was named as a defendant in an action commenced on August 19,
1995 by the Company's former product liability insurer ("Lexington") captioned
Lexington Insurance Company v. Halsey Drug Co., Inc., 95 Civ. 3403, pending in
the United States District Court for the Eastern District of New York. The
Complaint seeks the recovery of sums paid by Lexington to settle a lawsuit
brought by Linda K. Walton relating to the ingestion of quinidine gluconate
allegedly manufactured by the Company. The Complaint requests not less than
$75,000 in damages and payment by the Company of a $25,000 deductible, and a
declaration that the Walton claim, and other similar claims are not covered
under their policy. The Company and Lexington have agreed to a settlement
pursuant to which the Company is required to pay $25,000 with respect to the
Walton claim (not including an undisputed

38
<PAGE>
$25,000 deductible which the Company is also required to pay) over a three month
period. Lexington will dismiss the declaratory portion of the Complaint without
prejudice.

The Company was named as a defendant in an action captioned Union Mutual
Fund and Vacation Fringe Benefit Fund v. Halsey Drug Company, Inc., 95 Civ. 955,
pending in the United States District Court for the Eastern District of New
York. The Complaint seeks sums allegedly owed to two of the Company's labor
union funds under the Company's collective bargaining agreement. Plaintiffs seek
not less than $165,000.

On or about August 8, 1995, the Company and the plaintiffs agreed to settle
the action. The settlement obligated the Company to pay the alleged arrears in
monthly installments. The Company has paid in full the settlement amount.

The Company was named as a defendant in an action captioned Allied Welfare
Fund, Vacation Fringe Benefit Fund and Union Mutual Fund v. Halsey Drug Co., 96
Civ 3655, brought in the United States District Court for the Eastern District
of New York. The Complaint seeks sums allegedly owed to three of the Company's
labor union funds under the Company's collective bargaining agreement.
Plaintiffs seek approximately $272,000. On or about April 29, 1996, the Company
and the plaintiffs agreed to settle the action. The settlement obligates the
Company to remain current on its obligations and to pay portions of the alleged
arrearages in installments. The Company has paid the alleged arrearages under
the stipulation, but is not current on its obligations as of the date of this
filing.

In March 1985, the Company was named as a defendant in an action instituted
in the Court of Common Pleas, Bucks County, Pennsylvania entitled Mellon v.
Barre National Drug Co., et al. This suit was brought by a father as
administrator of his deceased daughter's estate, individually and on behalf of
her children, against 29 drug companies including the Company. The deceased's
death allegedly resulted from her use of the drug Ipecac, an expectorant
distributed by the Company, which she used in connection with her bulimia. The
plaintiff was unable to determine which of the defendants actually produced the
Ipecac used by the decedent. The complaint contained 12 counts, nine of which
set forth different theories of liability each seeking in excess of $5 million
in damages. The remaining three counts included a count to recover damages in
excess of $5 million under the Pennsylvania Wrongful Death Act, a count to
recover damages in excess of $5 million under the Pennsylvania Survival Act and
a count to recover punitive damages in excess of $10 million. The Company's
insurance carrier assumed the defense of this action. On November 13, 1987, the
court dismissed seven of the nine counts of the complaint which set forth
theories of liability. The two counts regarding theories of liability which
remain are theories based on claims of negligence and strict product liability.
A motion for summary judgment on behalf of all defendants was granted by the
trial court. The decision was affirmed on appeal. Plaintiff sought permission to
appeal in the Pennsylvania Supreme Court, and the court denied plaintiff's
request.

On March 4, 1992, an action was commenced against the Company and numerous
other pharmaceutical manufacturers in the Pennsylvania Court of Common Pleas,
Philadelphia Division, entitled captioned Ciavarelli and Ciavarelli v. Abbott
Laboratories, Inc., et al. The Complaint contains seven causes of action,
including negligence, strict liability and breach of warranty, among others, in
connection with the alleged exposure of Debra Ciavarelli in utero to
diethylstilbestrol ("DES"). The plaintiff was unable to determine which of the
defendants produced the DES used by Ms. Ciavarelli. The Complaint seeks in
excess of $25,000 in compensatory and punitive damages. This matter has been
referred to the Company's insurance carrier for defense, which has been assumed.
Twenty-two additional actions have been commenced and are still pending against
the Company along with numerous other pharmaceutical manufacturers in the
Pennsylvania Court of Common Pleas, Philadelphia Division, during 1992 and 1993.
Each of these actions alleges injury in connection with exposure to the drug
diethylstilbestrol (DES) and each seeks in excess of $25,000 in compensatory and
punitive

39
<PAGE>
damages. In each suit, the plaintiff was unable to determine which of the
defendants produced the DES that was used. Nineteen similar actions have already
been settled and dismissed.

Two DES claims referred to the Company's insurance carriers are pending in
other jurisdictions.

Each of the following matters have been referred to the Company's insurance
carrier for defense. The Company does not believe any of the actions will have a
material impact on the Company's financial condition.

The Company has been named as a defendant in three additional actions which
have been referred to the Company's insurance carrier and have been accepted for
defense. The first action, Alonzo v. Halsey Drug Co., Inc. and K-Mart Corp., No.
64DOT-95111-CT-2736 (Indiana Superior Court, Porter County), was commenced on
November 7, 1995 and involves a claim for unspecified damages relating to the
alleged ingestion of "Doxycycline 100". The second action, Files v. Halsey Drug
Co., Index No. 198787/93 (New York Supreme Court, Suffolk County), commenced on
September 16, 1993, seeks $10,000,000 in damages for wrongful death allegedly
caused by the ingestion of Isoniazid. The action is currently in discovery. The
third action, Hunt v. Halsey Drug Co., Inc. Index No. 33723/93 (New York Supreme
Court, Kings County), was commenced on October 21, 1993, and seeks the recovery
of $8,000,000 for alleged personal injuries suffered by a Wells Fargo security
guard who had responded to a triggered alarm and was shot by a perpetrator. The
action is currently in discovery.

40
<PAGE>
MANAGEMENT

Information about the directors and executive officers of the Company is
set forth immediately below.

<TABLE>
<S> <C> <C>
YEAR FIRST
ELECTED AS
NAME BACKGROUND INFORMATION A DIRECTOR
- --------------------------- --------------------------------------------------------------------------- -----------

Rosendo Ferran President and Chief Executive Officer since July 1993. From November 1988 1987
to June 1993, Mr. Ferran served as Senior Vice President and Chief
Financial Officer of the Company. From March 1987 to November 1988, Mr.
Ferran served as a financial consultant to the Company. Age: 56

Leonard H. Weiss Executive Vice President since 1986. From June 1968 to December 1985, Mr. 1969
Weiss served as Vice President of the Company, and from 1954 to May 1968,
as general manager in charge of administration. Age: 65

Richard H. Francis Retired since 1991. Presently serves as director of The Indonesian Fund 1995
(BEA Associates) and The Infinity Mutual Funds (BISYS Investment Services).
From 1988 until October 1991 Mr. Francis served as Executive Vice
President--Office of the Chairman and Chief Financial Officer of Pan Am
Corporation and as Executive Vice President--Finance and Chief Financial
Officer of Pan American World Airways(1). From 1985 through 1988 Mr.
Francis served as Senior Vice President and Chief Financial Officer of
American Standard, Inc. Age: 63

Alan J. Smith Ph.D. Since 1991 Dr. Smith has been a management consultant specializing in 1995
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. Age: 66

William G. Skelly Since 1990 Mr. Skelly has served as Chairman, President and Chief Executive 1996
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 manu-
facturer of human generic prescription pharmaceuticals. Age: 45
</TABLE>

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

(1) Pan Am Corporation and Pan American World Airways, Inc. filed petitions
under the United States Bankruptcy Code in January 1991.

COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS

The Board of Directors held seven meetings during 1995. In addition, there
were four actions taken through unanimous written consent. Each director
attended or participated in at least 75% of the aggregate of meetings held and
actions taken in 1995 by the Board of Directors.

Compensation Committee. In February 1993, the Board of Directors
established a Compensation Committee, composed of Joseph F. Limongelli, Jerome
Dubowy and Rosendo Ferran. Following Mr. Dubowy's resignation from the Board in
November 1995, and Messrs. Ferran's and Mr. Limongelli's resignations from the
Compensation Committee in November 1995, Alan J. Smith and

41
<PAGE>
Richard H. Francis were appointed to the Compensation Committee. The principal
functions of the Compensation Committee are to consult with and make
recommendations to the Board of Directors about executive compensation
arrangements and the compensation of employees, including the grant of options
under the Company's 1995 Stock Option and Restricted Stock Plan to individual
officers and key employees. The Compensation Committee met once in 1995. Mr.
Limongelli resigned from the Board effective August 9, 1996.

Nominating Committee. In March 1989, the Board of Directors established a
Nominating Committee which was composed of Alexander Marcus and Rosendo Ferran.
This Committee did not meet during 1995. Mr. Marcus resigned from the Board in
April 1996 and has not been replaced on the Nominating Committee. The principal
functions of the Nominating Committee are to establish criteria for procedures
of the election for directors and others, review the qualifications of and, in
appropriate cases, interview candidates proposed for nomination, and perform
such other duties in connection with the election or termination of directors
and officers as the Board of Directors may request.

Audit Committee. On April 30, 1993, the Board established an Audit
Committee composed of Joseph F. Limongelli, Jerome Dubowy and Rosendo Ferran.
Following Mr. Dubowy's resignation from the Board and Mr. Limongelli's and Mr.
Ferran's resignations from the Audit Committee in November 1995, Alan J. Smith
and Richard H. Francis were appointed to the Audit Committee. The Audit
Committee is responsible for nominating the Company's independent auditors,
working with the independent auditors and the internal auditing staff of the
Company and other corporate officials, reviewing the financial statements of the
Company and reporting on the results of the audits to the Board, and submitting
to the Board its recommendations relating to the Company's financial reporting,
accounting practices and policies, and financial accounting and operation
controls. The Audit Committee did not meet during 1995.

INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION

Rosendo Ferran, who was a member of the Compensation Committee until
November 1995, is President and Chief Executive Officer of the Company.

COMPENSATION OF DIRECTORS WHO ARE NOT EMPLOYEES OR OFFICERS

Directors who are not officers or employees of the Company are compensated
by payment of an annual retainer of $25,000 and an additional fee of $500 per
meeting attended, and are reimbursed for travel and other expenses incurred in
connection with their services to the Company.

In September 1993, the Company entered into an Independent Consulting
Agreement with Joseph F. Limongelli pursuant to which Mr. Limongelli provides
financial and business advisory services, including, without limitation, with
respect to proposed transactions considered by the Company from time to time.
The Company has agreed to pay Mr. Limongelli a consulting fee of $50,000 per
year, payable in equal monthly installments, to issue to Mr. Limongelli stock
options each year to acquire at least 10,000 shares of the Company's Common
Stock and to reimburse him for expenses incurred in connection with his
consulting services. The Consulting Agreement is for a term ending September 1,
1997, provided that either party may terminate the Agreement on 60 days' notice.
In the event the Company terminates the Agreement, the Company has agreed to pay
Mr. Limongelli the consulting fee for an additional 12 months following
termination. If the Company terminates the Consulting Agreement within six
months after a change in control, as defined, the Company has agreed to pay Mr.
Limongelli the consulting fee for the period from the date of termination
through September 1, 1997, plus an amount equal to 50% of all amounts paid and
payable to him under the Consulting Agreement. Although Mr. Limongelli resigned
as a director effective August 9, 1996, the parties have agreed to continue the
Consulting Agreement through its termination date.

42
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS

The following table sets forth, for the Company's last three fiscal years,
the cash salary, bonus and non-cash salary or bonuses earned or paid by the
Company, as well as certain other compensation paid or accrued for those years,
to the Company's President and Chief Executive Officer and to each of the
Company's executive officers whose compensation exceeded $100,000:
<TABLE>
<S> <C> <C> <C> <C> <C>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- -------------
SHARES OF
COMMON STOCK
SALARY OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR ($) BONUS ($) COMPENSATION STOCK OPTIONS
- --------------------------------------------- --------- --------- --------------- ------------- -------------
Rosendo Ferran............................... 1995 263,604 0 16,150 150,000
President and Chief Executive 1994 229,029 0 20,742 --
Officer 1993 214,989 0 20,324 --
Alexander Marcus (1)......................... 1995 100,000 0 15,321 --
Chairman of the Board 1994 100,000 0 26,412 --
(retired April 1996) 1993 108,660 0 27,345 --
Seymour Marcus (2)........................... 1995 46,154 0 18,771 --
Vice Chairman (retired 1994 89,423 0 21,756 --
December 1995) 1993 108,860 0 22,274 --
Leonard H. Weiss............................. 1995 141,750 0 8,397 75,000
Executive Vice President 1994 115,129 0 11,200 --
1993 125,041 0 10,927 --

ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION
- --------------------------------------------- -----------------
Rosendo Ferran............................... --
President and Chief Executive --
Officer --
Alexander Marcus (1)......................... --
Chairman of the Board --
(retired April 1996) --
Seymour Marcus (2)........................... --
Vice Chairman (retired --
December 1995) --
Leonard H. Weiss............................. --
Executive Vice President --
--

</TABLE>

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

(1) Alexander Marcus is the brother of Seymour Marcus. Alexander Marcus resigned
in April, 1996.

(2) Seymour Marcus is the brother of Alexander Marcus. Seymour Marcus resigned
in December, 1995.

OTHER COMPENSATORY ARRANGEMENTS

Benefits. Executive officers and key employees participate in medical and
disability insurance plans provided to all non-union employees of the Company.
During 1995, the Company maintained term life insurance policies on behalf of
Rosendo Ferran and Leonard H. Weiss, the benefits of which are payable to
beneficiaries designated by these individuals. Aggregate premiums paid by the
Company during 1995 on all such policies amounted to $21,159. The value of these
payments to the individual officers are reflected where applicable in the
summary compensation chart. The Company also provided automobiles to certain of
its executive officers. Although the Company is unable to assign any value to
possible personal benefits derived for use of the automobiles, the Company
believes that, as to each officer, such personal benefits amount to less than
the lesser of $50,000 or 10% of such officer's compensation reported above in
the summary compensation table and, with respect to all executive officers as a
group, amount to less than $90,000.

STOCK OPTION GRANTS

The Company maintains a stock option plan, as set forth below, but the
Company does not have any plan pursuant to which stock appreciation rights may
be granted.

1984 Stock Option Plan. In March 1984, the shareholders of the Company
approved the adoption of a stock option plan (the "1984 Stock Option Plan"). The
1984 Stock Option Plan, as amended provided for the grant of options to purchase
up to 1,000,000 shares. The 1984 Stock Option Plan terminated in March 1994.

Incentive stock options ("ISO's") to purchase 821,666 shares and
non-qualified options to purchase 120,363 shares had been granted under the 1984
Stock Option Plan. The average per share exercise price for all such outstanding
ISO's, of which there are approximately 138,900, is approximately $3.58

43
<PAGE>
and the per share price of the Company's Common Stock on the grant dates ranged
from $2.50 to $6.25 per share. No exercise price of an ISO was set less than
110% of the fair market value of the underlying Common Stock on the date of
grant to any person who owns stock possessing more than 10% of the total voting
power of the Company and no exercise price of an ISO was set less than 100% of
the fair market value of the underlying Common Stock on the date of grant to any
other person. There are no other options outstanding under the 1984 Stock Option
Plan.

1995 Stock Option Plan. In September 1995 the Company established the 1995
Halsey Drug Co., Inc. Stock Option and Restricted Stock Purchase Plan (the "1995
Stock Option Plan"). Under the Plan, the Company may grant options to purchase
up to 1,000,000 shares. Incentive stock options may be granted to employees of
the Company and its subsidiaries, and non-qualified options may be granted to
employees, directors and other persons employed by, or performing services for,
the Company and its subsidiaries. Subject to the Plan, the Compensation
Committee determines the employees to whom grants are made and the vesting,
timing, amounts and other terms of such grants. An employee may not receive
incentive stock options exercisable in 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 December 31, 1995, ISO's to purchase 461,600 shares had been granted
under the 1995 Stock Option Plan. The average per share exercise price for all
outstanding ISO's under the 1995 Stock Option Plan is approximately $3.19 and
the average per share exercise price of the Company's Common Stock on the grant
dates ranged from $3.00 to $3.44 per share. No exercise price of an ISO was set
less than 110% of the fair market value of the underlying Common Stock on the
date of grant to any person who owns stock possessing more than 10% of the total
voting power of the Company and no exercise price of an ISO was set less than
100% of the fair market value of the underlying Common Stock on the date of
grant to any other person. There are no other options outstanding under the 1995
Stock Option Plan.

The following table sets forth selected option grant information for the
fiscal year ended December 31, 1995 awarded to the Chief Executive Officer and
each of the executive officers of the Company whose compensation exceeded
$100,000.

OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
OF
% OF TOTAL STOCK PRICE
OPTIONS EXERCISE APPRECIATION
TYPE OF NUMBER OF GRANTED TO PRICE FOR OPTION TERM
OPTION OPTIONS EMPLOYEES PER EXPIRATION -----------------------
NAME GRANTED GRANTED (A) SHARE DATE 0% 5% (B)
- -------------------------------------- ----------- ----------- ------------- ----------- ---------- ----------- ----------
Rosendo Ferran........................ ISO 150,000(c) 32.5 $ 3.19 11/24/00 0 $ 132,097
Leonard Weiss......................... ISO 75,000(d) 16.2 3.19 11/24/00 0 66,049

NAME 10% (B)
- -------------------------------------- ----------
Rosendo Ferran........................ $ 291,900
Leonard Weiss......................... 145,950

</TABLE>

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

<TABLE>
<S> <C>
(a) Represents individual option grant as a percentage of total options issued in fiscal year 1995. Neither
Alexander Marcus nor Seymour Marcus, who retired as directors in April 1996 and December 1995, respectively,
were granted any options during fiscal year 1995.
(b) The hypothetical potential appreciation shown in these columns reflects the required calculations at
compounded annual rates of 5% and 10% set by the Securities and Exchange Commission, and therefore is not
intended to represent either historical appreciation or anticipated future price appreciation of the
Company's Common Stock.
(c) Options with respect to 30,000 shares were immediately exercisable. Remaining options become exercisable in
November 1996. Options for 6,000 shares were exercised in the second quarter of 1996.
</TABLE>

(Footnotes continued on following page)

44
<PAGE>
(Footnotes continued from preceding page)
<TABLE>
<S> <C>
(d) Options with respect to 15,000 shares were immediately exercisable. Options with respect to an additional
60,000 shares are exercisable in November 1996.
</TABLE>

STOCK OPTION EXERCISES AND HOLDINGS

The following table sets forth information related to options exercised
during 1995 by the Company's President and Chief Executive Officer and by each
of the Company's other three most highly compensated executive officers during
1995 and the number and value of options held at December 31, 1995 by such
individuals.

AGGREGATED OPTION EXERCISES IN 1995
AND OPTION VALUES AT DECEMBER 31, 1995

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN
OPTIONS AT THE MONEY OPTIONS AT
SHARES DECEMBER 31, 1995 DECEMBER 31, 1995
ACQUIRED VALUE -------------------------- --------------------------
NAME (1) ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------- ----------- --------- ----------- ------------- ----------- -------------
Rosendo Ferran.......................... -- -- 42,000 120,000 $ 11,250 $ 45,000
Leonard H. Weiss........................ 10,000 $ 11,800 20,000 60,000 9,375 18,750
</TABLE>

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

(1) Neither Alexander Marcus nor Seymour Marcus, who resigned as directors in
April 1996 and December 1995, respectively, (i) exercised any options during
fiscal year 1995 or (ii) held any options at December 31, 1995.

PENSION ARRANGEMENTS

The following table shows the estimated annual benefit payable under the
Halsey Drug. Co., Inc. Pension Trust (the "Pension Plan") for each of the
individuals named in the summary compensation table with payments at the
participant's normal retirement date and in the form of 10-year certain and life
annuity thereafter. The amounts shown are additionally based upon benefits as of
the plan year ending November 30, 1995:

<TABLE>
<S> <C>
ESTIMATED
NAME ANNUAL BENEFIT
- -------------------------------------------------------------------------- -----------------
Rosendo Ferran............................................................ $ 12,060
Leonard H. Weiss.......................................................... 14,184
</TABLE>

The following table shows estimated annual retirement benefits payable
under the Pension Plan as a straight life annuity to persons in specified
compensation and years-of-service classifications, assuming retirement in 1995
at age 65 (after at least 18 years of service).

ESTIMATED ANNUAL BENEFIT-YEARS OF SERVICE AT RETIREMENT

<TABLE>
<S> <C> <C> <C> <C> <C>
FIVE YEAR AVERAGE BASE SALARY 18 20 25 30 35
- ------------------------------------------------------- --------- --------- --------- --------- ---------
150,000................................................ $ 13,500 $ 13,500 $ 13,500 $ 13,500 $ 13,500
125,000................................................ $ 11,250 $ 11,250 $ 11,250 $ 11,250 $ 11,250
100,000................................................ $ 9,000 $ 9,000 $ 9,000 $ 9,000 $ 9,000
75,000................................................. $ 6,750 $ 6,750 $ 6,750 $ 6,750 $ 6,750
50,000................................................. $ 4,500 $ 4,500 $ 4,500 $ 4,500 $ 4,500
</TABLE>

Employees of the Company who are at least 20 1/2 years of age and have
completed at least one year of service are eligible to participate in the
Pension Plan. This defined benefits pension plan provides

45
<PAGE>
monthly benefits at a participant's normal retirement date (the participant's
65th birthday) equal to 9% of the participants' compensation. In order to
qualify for a full pension under this formula, the participant must have 18
years of service; the benefit under the formula is reduced pro-rata for each
year of service at the normal retirement date less than 18. For purposes of
determining the benefit at a participant's normal retirement date, compensation
is, in general, determined by averaging the participant's earnings as shown on
Federal Tax Form W-2 over the first five years of his last 10 years of
participation prior to his normal retirement date. The Pension Plan was amended,
effective December 1, 1984, to comply with the provisions of the Tax Equity and
Fiscal Responsibility Act of 1982, the Deficit Reduction Act of 1984, and the
Retirement Equity Act of 1984. The Internal Revenue Service issued, by letter
dated February 4, 1986, a favorable determination as to the qualification of the
Plan under the Internal Revenue Code.

Messrs. Ferran and Weiss have 7 and 12 years, respectively, of credited
service under the Pension Plan.

EMPLOYMENT AGREEMENTS

The Company entered into an employment agreement with Rosendo Ferran
effective as of January 1, 1993. Mr. Ferran's agreement has a term of five
years, subject to earlier termination. Mr. Ferran received a base salary of
$242,000 during 1995 (an increase over 10% over his 1994 contract and which will
automatically be increased by 10% in each succeeding year). Pursuant to the
agreement, Mr. Ferran is entitled to an annual car allowance and to life
insurance, in an amount determined by the Board of Directors, the benefits of
which are payable to beneficiaries designated by Mr. Ferran and the premiums for
which are paid by the Company.

The employment agreement also provides that Mr. Ferran will be entitled to
a cash severance payment equal to his annual base compensation then in effect
if, following the expiration of the term of his agreement, his employment with
the Company is not continued on the same or substantially similar terms, and
within six months of such expiration his employment with the Company is
terminated. Mr. Ferran's agreement further provides that in the event of his
death during the term of the agreement, his estate shall be entitled to the
value of six months' of Mr. Ferran's compensation at the then applicable rates.

Pursuant to the agreement, if Mr. Ferran is terminated without cause or if
there is a change in his responsibilities or a reduction in his base annual
salary following a change in control of the Company and, as a result, he
terminates his employment with the Company, he shall receive, as severance, a
lump sum equal to three times his base annual salary at the highest rate in
effect during the 12 months immediately preceding his date of termination and
all stock options then held by Mr. Ferran shall automatically become vested.

The employment agreement of Mr. Ferran also obligates the Company to use
its best efforts to cause Mr. Ferran to be nominated as a director at each
annual meeting of the Company's shareholders.

The Company entered into an employment agreement with Leonard H. Weiss
effective as of July 1, 1994, pursuant to which the Company agreed to employ Mr.
Weiss as the Executive Vice President of the Company. Mr. Weiss's agreement has
a term of three years, subject to earlier termination. Mr. Weiss received a base
salary of $141,750 during 1995 (an increase of 5% over his 1994 contract and
which will automatically be increased by 5% in each succeeding year). Pursuant
to the agreement, Mr. Weiss is entitled to an annual car allowance and to life
insurance, in an amount determined by the Board of Directors, the benefits of
which are payable to beneficiaries designated by Mr. Weiss and the premiums for
which are paid by the Company.

Pursuant to the agreement, if Mr. Weiss is terminated without cause or if
there is a change in his responsibilities or a reduction in his base annual
salary following a change in control of the Company and, as a result, he
terminates his employment with the Company, he shall receive, as severance, a
lump

46
<PAGE>
sum equal to his base annual salary remaining under the terms of the agreement
at the highest rate in effect during the 12 months immediately preceding his
date of termination and all stock options then held by Mr. Weiss shall
automatically become vested.

ADVANCES

From time to time the Company has made advances against anticipated bonuses
to Rosendo Ferran, the President, Chief Executive Officer and a director of the
Company. These advances, which do not bear interest, aggregated $48,500 at
December 31, 1992. In April 1993, the Company made an additional advance to Mr.
Ferran in the amount of $62,500. Mr. Ferran commenced repaying the advances by
means of payroll deductions beginning in April 1993. As a result of such
repayments, the amount outstanding under the advances aggregated $54,900 at
December 31, 1995.

CERTAIN TRANSACTIONS

On October 27, 1994, the Company signed a Letter of Intent ("LOI") with
RPI, a wholly owned United States subsidiary of Ranbaxy Laboratories Ltd. of New
Delhi, India. The Company received $1,000,000 from RPI in payment for 500,000
shares of Common Stock in accordance with the terms of the LOI. The LOI provided
for completion of due diligence by RPI within a period of 30 days, after which
the parties would negotiate and finalize a definitive agreement. After execution
of a definitive agreement, RPI was to have purchased an additional 500,000 newly
issued shares of Common Stock for $1,000,000. On November 29, 1994, the Company
announced that RPI had decided not to proceed with its second purchase of the
Company's Common Stock. Pursuant to the LOI, RPI had the right to have the RPI
Shares registered under the Securities Act. In August 1995, the Company
repurchased the RPI Shares for an aggregate purchase price of $1,100,000, which
funds were derived from the proceeds of the July Private Offering. See "The
Private Offerings."

In connection with the November Private Offering, the Company agreed to use
its best efforts to appoint two independent directors to its Board of Directors,
each of whom are reasonably acceptable to the holders of a majority in interest
(the "Majority in Interest") of the principal amount of the November Debentures.
The Board of Directors has agreed to nominate and appoint, subject to
shareholder approval, such individuals to the Board for so long as the
Debentures remain outstanding. In this regard, Seymour Marcus and Dr. Jerome
Dubowy resigned from the Board of Directors effective November 28, 1995, and
Richard H. Francis was appointed by the Board to serve as a director until the
1996 annual meeting of shareholders at which time he was elected to serve as a
director. In addition to Mr. Francis, William G. Skelly was elected at the
annual meeting of shareholders to serve as a director.

In connection with the August Private Offering, the Company agreed to use
its best efforts (i) to appoint an additional two independent directors to its
Board of Directors, each of whom are reasonably acceptable to the Majority in
Interest of the principal amount of the August Debentures and (ii) to maintain
the size of the Board of Directors at seven members. The Board of Directors has
agreed to nominate and appoint, subject to shareholder approval, such
individuals to the Board for so long as the Debentures remain outstanding.
Following the closing of the August Private Offering, Joseph F. Limongelli
resigned from the Board of Directors effective August 9, 1996.

As of the date of this Prospectus, the Board of Directors consists of five
members. Two directors are members of management of the Company, two directors
are designees of the Majority in Interest of the November Debentures and one
director is unaffiliated with either management or the holders of the November
or August Debentures. In addition, two vacancies exist on the Board. Although
the Majority in Interest of the August Debentures is entitled to fill these
vacancies, to date the Majority in Interest has not designated any nominees to
the Board of Directors. As a result of their contractual right to approve four
nominees to the Company's seven member Board of Directors, the Majority in
Interest of each of the November and August Debentures (the "Combined Majority
in Interest") may be deemed collectively to have acquired control of the
Company. Additionally, investors in the November and

47
<PAGE>
August Private Offerings may be deemed to have acquired control of the Company
through their beneficial ownership of approximately 36.6% of the Common Stock
issued and outstanding at August 16, 1996 (assuming (i) conversion of all
Debentures; and (ii) exercise of all Redeemable Warrants).

In connection with the November and August Private Offerings, the Company
agreed to use its best efforts to appoint a Chief Financial Officer reasonably
acceptable to the Combined Majority in Interest. For so long as the November and
August Debentures remain outstanding, any successor Chief Financial Officer
similarly must be reasonably acceptable to the Combined Majority in Interest. As
of the date of this Prospectus, the Company has not appointed a Chief Financial
Officer.

Rosendo Ferran, the Chief Executive Officer and a director of the Company,
Richard H. Francis, a director of the Company, and Alan J. Smith, a director of
the Company, purchased November Units in the November Private Offering on the
same terms as all other investors in the November Private Offering. The number
of November Units purchased by each such individual, and the purchase price
paid, are set forth below.

<TABLE>
<S> <C> <C>
NUMBER OF
NAME NOVEMBER UNITS PURCHASE PRICE
- ----------------------------------------------------------- --------------------- --------------
Rosendo Ferran............................................. 2 $ 20,000
Richard H. Francis......................................... 5 $ 50,000
Alan J. Smith.............................................. 1 $ 10,000
</TABLE>

HKS assisted the Company in the July, November and August Private
Offerings. For its services, the Company paid HKS a fee equal to 5% of the gross
proceeds of the Private Offerings, and reimbursed HKS for its out-of-pocket
expenses, or an aggregate of approximately $582,000. In addition, HKS received a
fee upon the exercise of the July and November Redeemable Warrants of
approximately $26,250.

In 1996, the Company issued 25,397 shares to Kahn Consultants, Inc.,
financial consultants, in lieu of $100,000 in compensation. The KCI Shares are
included in the Registration Statement of which this Prospectus is a part.

48
<PAGE>
PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the Common
Stock beneficially owned by (i) each person known by the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii)
each executive officer and director named in the summary compensation table and
(iii) all the directors and executive officers of the Company as a group. Except
as noted all amounts reflect ownership as at the close of business on September
30, 1996, as adjusted to reflect the issuance of 1,540,000 shares of Common
Stock upon the conversion of July Debentures in September 1996. Except as
otherwise noted, each of the persons named in the table below as beneficially
owning the shares set forth therein has sole voting power and sole investment
power with respect to such shares. Beneficial ownership has been determined in
accordance with Rule 13d-3 under the Exchange Act.

<TABLE>
<S> <C> <C> <C>
AMOUNT
BENEFICIALLY PERCENT OF
TITLE OF CLASS NAME OF BENEFICIAL OWNER OWNED(1) CLASS
- ----------------- ------------------------------------------------------- -------------------- -------------
Common Stock Rosendo Ferran......................................... 65,904(2) *
Common Stock Leonard H. Weiss....................................... 85,625(3) *
Common Stock Richard H. Francis..................................... 23,000(4) *
Common Stock Alan J. Smith.......................................... 4,600(5) *
Common Stock William G. Skelly...................................... 0(6) *
Common Stock Zatpack, Inc. ......................................... 1,107,859(7) 9.9
c/o Wilkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
Common Stock Harbour Investments, Ltd. ............................. 1,720,922(8) 14.7
Hemisphere House
9 Church Street
Hamilton, HM11, Bermuda
Common Stock Strong Special Investment Limited Partnership.......... 575,000(9) 5.0
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
Common Stock..... Strong Capital Management, Inc. ....................... 3,375,697(10) 24.6
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
Common Stock Strong Quest Limited Partnership....................... 35,861(11) *
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
Common Stock Strong Discovery Fund.................................. 215,044(12) 1.9
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
Common Stock..... William Marquard....................................... 701,500(13) 6.1
c/o BEA Associates
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Common Stock..... All directors and executive officers as a group (5
persons)............................................... 179,129 1.6
</TABLE>

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

* Less than one per cent of shares outstanding.

(1) The information with respect to Messrs. Marquard and Priest is based on the
total number of securities sold by the Company directly to such persons.
The Company has no knowledge whether such persons hold other securities of
the Company. The information with respect to Messrs. Ferran, Smith, Adams,
Francis and Zatpack, Inc., Harbour Investments, Ltd., Strong Special
Investment Limited Partnership and Strong Capital Managment, Inc. is based
upon filings with the Commission and/or information provided to the
Company. Prior to the date hereof Seymour

(Footnotes continued on following page)

49
<PAGE>
(Footnotes continued from preceding page)
Marcus filed a Statement of Changes in Beneficial Ownership on Form 4
indicating a reduction in holdings from 490,362 shares of Common Stock to
331,682 shares of Common Stock. Consequently, he is no longer a 5%
shareholder and does not appear in the table.

(2) Includes 36,000 shares subject to currently exercisable stock options and
8,000 shares issuable upon conversion of November Debentures. The November
Debentures are held jointly with Mr. Ferran's spouse and does not include
120,000 shares subject to options exercisable in November 1996.

(3) Includes 20,000 shares subject to currently exercisable stock options and
does not include 60,000 shares subject to options exercisable in November
1996.

(4) Includes 20,000 shares issuable upon conversion of the November Debentures.

(5) Includes 4,000 shares issuable upon conversion of the November Debentures
and 600 shares issuable upon exercise of November Redeemable Warrants.

(6) Mr. Skelly is a director of the Company.

(7) Includes 607,859 shares issuable upon conversion of the Zatpack Note,
including interest accruing thereon through June 30, 1996.

(8) Includes 300,000 shares issuable upon conversion of the November
Debentures, 246,154 shares issuable upon conversion of August Debentures
and 36,880 shares issuable upon exercise of August Redeemable Warrants. See
footnote 10 below.

(9) Includes 300,000 shares issuable upon conversion of the November
Debentures. See footnote 10 below.

(10) Strong Capital Management, Inc. ("SCMI") has and Richard Strong, a
principal of SCMI, may be deemed to have, beneficial ownership of 3,375,697
shares. Includes all shares beneficially owned by Harbour Investments Ltd
("Harbour") of which SCMI is the advisor and all shares beneficially owned
by Strong Special Investment Limited Partnership, Strong Quest Limited
Partnership and Strong Discovery Fund, entities advised by SCMI. The
information with respect to Mr. Strong and SCMI is based upon a Schedule
13-G dated April 26, 1996 filed by such persons and other information
provided to the Company.

(11) Includes 30,769 shares issuable upon conversion of August Debentures and
4,610 shares issuable upon exercise of the August Redeemable Warrants. See
footnote 10 above.

(12) Includes 184,615 shares issuable upon conversion of August Debentures and
27,660 shares issuable upon exercise of the August Redeemable Warrants. See
footnote 10 above.

(13) Includes 360,000 shares issuable upon conversion of the November
Debentures.

Although the Company's Banks have filed a Schedule 13-G with the Commission
with respect to the 699,696 shares underlying the Bank Warrants, which shares
constitute approximately 6.3% of the issued and outstanding Common Stock, the
Banks disclaim in such filing that they constitute a "group," as such term is
defined under the Exchange Act.

50
<PAGE>
SELLING SECURITYHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of September 30, 1996 by each Selling
Securityholder, as adjusted to reflect the sale by each Selling Securityholder
of the Common Stock, including the Underlying Shares, offered hereby. The table
assumes that (i) all Convertible Securities are exercised or converted, as the
case may be; (ii) holders of August Debentures who elected to have interest paid
in Common Stock receive such interest through the maturity of the August
Debentures and (iii) all shares of Common Stock offered hereby, including the
Underlying Shares, are sold. Except as set forth in the footnotes to the table
or the footnotes to the table under "Principal Shareholders", the Company
believes that each Selling Securityholder has sole voting power and investment
power with respect to the shares of Common Stock included herein.

<TABLE>
<S> <C> <C> <C> <C> <C>
BEFORE OFFERING NUMBER OF AFTER OFFERING
------------------------ SHARES ----------------------
NAME AMOUNT PERCENT BEING SOLD AMOUNT PERCENT
- ------------------------------------------- ----------- ----------- ----------- --------- -----------
Rosendo Ferran,
President, Chief Executive Officer and
Director................................... 65,904 * 9,200(1) 56,704 *
Joseph F. Limongelli....................... 37,500 * 30,000(2) 7,500 *
Zatpack, Inc............................... 1,107,859 9.9 1,181,737(3) 0 0
The Chase Manhattan Corporation............ 299,870 2.6 299,870(4) 0 0
The Bank of New York....................... 199,913 1.8 199,913(5) 0 0
Israel Discount Bank....................... 199,913 1.8 199,913(6) 0 0
William W. Priest.......................... 540,500 4.8 540,500(7) 0 0
HKS & Co., Inc............................. 309,350 2.8 309,350(8) 0 0
William A. Marquard........................ 701,500 6.1 701,500(9) 0 0
Matthew and Melinda Stepanski Investment
Trust Fund................................. 115,000 1.0 115,000 10) 0 0
Chateau Holding Co. Limited................ 368,000 3.2 368,000 11) 0 --
Harbour Investments, Ltd................... 1,846,461 15.6 1,527,361 12) 319,100 2.9
Kenneth J. Gimbel.......................... 108,264 1.0 108,264 13) 0 0
Strong Special Investment Limited
Partnership................................ 575,000 5.0 575,000 14) 0 0
Jane and Anthony Stepanski................. 182,500 1.6 172,500 15) 10,000 *
Michael Rainisch........................... 41,890 * 26,890 16) 15,000 *
Ilene Rainisch............................. 39,490 * 31,490 17) 8,000 *
R. H. Francis, Director.................... 23,000 * 23,000 18) 0 0
Peter and Carol Ann J. Daniels............. 9,200 * 9,200 19) 0 0
Alan J. Smith, Director.................... 4,600 * 4,600 20) 0 0
Strong Quest Limited Partnership........... 50,764 * 50,764 21) 0 0
Strong Discovery Fund...................... 304,583 2.7 304,583 22) 0 0
James and Linda C. Youmans................. 60,917 * 60,917 23) 0 0
John B. Hurford............................ 35,379 * 35,379 24) 0 0
St. John & Wayne........................... 15,229 * 15,229 25) 0 0
Bernard Selz............................... 152,292 1.3 152,292 26) 0 0
Katherine M. Bristor....................... 17,690 * 17,690 27) 0 0
Hemant K. Shah and Varsha H. Shah.......... 71,069 * 71,069 28) 0 0
Varsha H. Shah c/f Sachin H. Shah.......... 15,229 * 15,229 29) 0 0
Varsha H. Shah c/f Sumeet H. Shah.......... 15,229 * 15,229 30) 0 0
Kahn Consulting, Inc....................... * * 25,397 0 *
</TABLE>

(Footnotes on following page)

51
<PAGE>
(Footnotes for preceding page)

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

* Less than one percent of shares outstanding.

(1) Includes 8,000 shares of Common Stock issuable upon conversion of
Debentures.

(2) Includes 30,000 shares of Common Stock issuable upon exercise of Options at
a weighted average exercise price of $2.77 per share.

(3) Includes 681,737 shares issuable upon conversion of the Zatpack Note,
including interest accruing thereon through maturity on December 1, 1997.
Amount owned before offering reflects interest accrued through June 30,
1996.

(4) Includes 299,870 shares of Common Stock issuable upon exercise of Bank
Warrants at a weighted average exercise price of $2.05 per share. These
shares are held through The Chase Manhattan Bank, N.A., a subsidiary of The
Chase Manhattan Corporation.

(5) Includes 199,913 shares of Common Stock issuable upon exercise of Bank
Warrants at a weighted average exercise price of $2.05 per share.

(6) Includes 199,913 shares of Common Stock issuable upon exercise of Bank
Warrants at a weighted average exercise price of $2.05 per share.

(7) Includes 220,000 shares of Common Stock issuable upon conversion of
Debentures.

(8) Includes 104,000 shares of Common Stock issuable upon conversion of
Debentures.

(9) Includes 360,000 shares of Common Stock issuable upon conversion of
Debentures.

(10) Includes 100,000 shares of Common Stock issuable upon conversion of
Debentures. Anthony Stepanski is trustee of the trust.

(11) Includes 320,000 shares of Common Stock issuable upon conversion of
Debentures.

(12) Includes 546,154 shares of Common Stock issuable upon conversion of
Debentures, 119,385 shares issuable in payment of interest on August
Debentures and 36,880 shares issuable upon exercise of Redeemable Warrants.

(13) Includes 80,769 shares issuable upon conversion of Debentures, 14,903
shares issuable in payments of interest on August Debentures and 4,610
shares issuable upon exercise of Redeemable Warrants.

(14) Includes 300,000 shares of Common Stock issuable upon conversion of
Debentures.

(15) Includes 150,000 shares of Common Stock issuable upon conversion of
Debentures. Does not include 5,000 shares owned by the daughter of Anthony
Stepanski or 5,000 shares held directly by Mr. Stepanski. Columns labelled
Before Offering and After Offering reflect such shares.

(16) Includes 23,385 shares of Common Stock issuable upon conversion of
Debentures, and 2,305 shares issuable upon exercise of Redeemable Warrants.

(17) Includes 27,385 shares of Common Stock issuable upon conversion of
Debentures, and 2,305 shares issuable upon exercise of Redeemable Warrants.

(18) Includes 20,000 shares of Common Stock issuable upon conversion of
Debentures.

(19) Includes 8,000 shares of Common Stock issuable upon conversion of
Debentures.

(20) Includes 4,000 shares of Common Stock issuable upon conversion of
Debentures and 600 shares of Common Stock issuable upon exercise of
Redeemable Warrants.

(21) Includes 30,769 shares issuable upon conversion of Debentures, 14,903
shares issuable in payment of interest on August Debentures and 4,610
shares issuable upon exercise of Redeemable Warrants.

(Footnotes on following page)

52
<PAGE>
(Footnotes for preceding page)
(22) Includes 184,615 shares issuable upon conversion of Debentures, 89,539
shares issuable in payment of interest on August Debentures and 27,660
shares issuable upon exercise of Redeemable Warrants.

(23) Includes 36,923 shares issuable upon conversion of Debentures, 17,908
shares issuable in payment of interest on August Debentures and 5,532
shares issuable upon exercise of Redeemable Warrants.

(24) Includes 30,769 shares issuable upon conversion of Debentures and 4,610
shares issuable upon exercise of Redeemable Warrants.

(25) Includes 9,231 shares issuable upon conversion of Debentures, 4,477 shares
issuable in payment of interest on August Debentures and 1,383 shares
issuable upon exercise of Redeemable Warrants.

(26) Includes 92,308 shares issuable upon conversion of Debentures, 44,769
shares issuable in payment of interest on August Debentures and 13,830
shares issuable upon exercise of Redeemable Warrants.

(27) Includes 15,385 shares issuable upon conversion of Debentures and 2,305
shares issuable upon exercise of Redeemable Warrants.

(28) Includes 43,077 shares issuable upon conversion of Debentures, 20,892
shares issuable in payment of interest on August Debentures and 6,454
shares issuable upon exercise of Redeemable Warrants.

(29) Includes 9,231 shares issuable upon conversion of Debentures, 4,477 shares
issuable in payment of interest on August Debentures and 1,383 shares
issuable upon exercise of Redeemable Warrants.

(30) Includes 9,231 shares issuable upon conversion of Debentures, 4,477 shares
issuable in payment of interest on August Debentures and 1,383 shares
issuable upon exercise of Redeemable Warrants.

53
<PAGE>
PLAN OF DISTRIBUTION

The Underlying Shares offered hereby initially are being offered by the
Company for issuance to the Selling Securityholders upon exercise or conversion,
as the case may be, of the Convertible Securities. The Company will receive all
of the proceeds derived from such issuance.

In addition, all shares of Common Stock offered hereby (including the
Underlying Shares, upon the issuance thereof) are being offered directly by the
Selling Securityholders. The Company will not receive any of the proceeds from
the sale of shares by the Selling Securityholders. The Selling Securityholders
may sell such shares from time to time, provided a current registration
statement with respect to such securities is then in effect. The distribution of
shares of Common Stock offered hereby by the Selling Securityholders may be
effected in one or more transactions that may take place on the Exchange,
including ordinary broker's transactions, privately negotiated transactions or
through sales to one or more dealers for resale of such securities as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Selling
Securityholders may also pledge their shares to banks, brokers or other
financial institutions as security for margin loans or other financial
accommodations that may be extended to such Selling Securityholders, and any
such pledgee institution may similarly offer, sell and effect transactions in
such shares. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Securityholders (or their pledgees).

In order to comply with the securities laws of certain states, the shares
of Common Stock offered hereby may not be sold unless they have been registered
or qualified for sale in the applicable state or an exemption from the
registration or qualification requirement is available and is complied with by
the Company and the Selling Securityholders.

The Selling Securityholders and intermediaries through whom the shares
offered hereby are sold may be deemed to be "underwriters" within the meaning of
the Securities Act with respect to such securities.

Pursuant to applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of securities may not simultaneously engage in
market-making activities with respect to the securities for a period of two
business days prior to the commencement of such distribution. In addition, and
without limiting the foregoing, each Selling Securityholder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation, Rules 10b-6, 10b-6A and 10b-7, which
provisions may limit the timing of the purchases and sales of securities of the
Company by the Selling Securityholders.

The Company has agreed to pay all fees and expenses incident to the
registration of the Common Stock offered hereby, except fees and expenses of
counsel or other professionals or advisors, if any, to the Selling
Securityholders.

54
<PAGE>
DESCRIPTION OF SECURITIES

COMMON STOCK

The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, par value $.01 per share, of which 9,582,354 shares are issued
and outstanding as of June 30, 1996, including 474,603 treasury shares. Each
share of Common Stock entitles the holder to one vote on all matters submitted
to a vote of shareholders. All shares of Common Stock have equal rights and are
entitled to such dividends as may be declared by the Board of Directors out of
funds legally available therefor and to share ratably upon liquidation in the
assets available for distribution to shareholders. The Common Stock is not
subject to call or assessment, has no preemptive conversion or cumulative voting
rights and is not subject to redemption. All outstanding shares of Common Stock
are, and the shares of Common Stock offered hereby, will, upon issuance and
sale, be, fully paid and non-assessable with no personal liability attached to
the ownership thereof.

DEBENTURES

The Debentures are unsecured subordinated obligations of the Company and
will mature on July 18, 2000, with respect to the July Debentures, on November
29, 2000, with respect to the November Debentures, and on August 6, 2001, with
respect to the August Debentures (collectively, the "Due Date"). The Debentures
bear interest at the rate of 10% per annum, payable quarterly on January 1,
April 1, July 1 and October 1 of each year through the Due Date, commencing
October 1, 1995, with respect to the July Debentures, on January 1, 1996, with
respect to the November Debentures, and October 1, 1996, with respect to the
August Debentures. Interest on the Debentures will accrue from the most recent
date to which interest has been paid or, if no interest has been paid, from the
date of original issuance. Interest will be computed on the basis of a 360-day
year consisting of twelve 30-day months.

The Debentures were issued in the Private Offerings. As of the date of this
Prospectus, $7,160,000 principal amount of Debentures are outstanding, which are
convertible into an aggregate of 2,733,232 Underlying Shares (not including an
aggregate of 346,154 shares of Common Stock issuable in payment of interest on
August Debentures through the Due Date thereof).

Redemption

The Debentures will be subject to redemption, in whole or in part, at the
option of the Company at any time commencing July 18, 1996, with respect to the
July Debentures, on November 29, 1996, with respect to the November Debentures,
and on August 6, 1997, with respect to the August Debentures, at a redemption
price of 105% of the principal amount thereof plus accrued and unpaid interest,
if any, to the redemption date.

If less than all the Debentures are to be redeemed at any time, selection
of Debentures for redemption will be made by the Company on a pro rata basis,
provided that no Debentures of $1,000 or less will be redeemed in part. Notice
of redemption will be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each holder of Debentures to be redeemed
at its registered address. On and after the redemption date, interest will cease
to accrue on Debentures or portions of them called for redemption.

Conversion

Each Debenture is convertible, at the option of the holder, into Underlying
Shares at a conversion price of $2.00 per share, with respect to the July
Debentures, $2.50 per share, with respect to the November Debentures, and $3.25
per share with respect to the August Debentures, subject to adjustment in
certain circumstances, during the period commencing from the date of issuance
and ending on the Due Date.

55
<PAGE>
The Debentures will be automatically converted into Common Stock in the
event that, following the first anniversary (July 18, 1996, November 29, 1996
and August 6, 1997 with respect to the July Debentures, the November Debentures
and the August Debentures, respectively) of their issuance, the closing price of
the Common Stock on the Exchange exceeds $2.00 per share, with respect to the
July Debentures, $2.50 per share, with respect to the November Debentures, and
$3.25 per share, with respect to the August Debentures (the "Threshold"), for
each of the 20 consecutive trading days following such one year anniversary and
prior to conversion. In such event, the Company is required to provide written
notice to the Debenture holder of the effective date of the automatic
conversion.

The closing price of the Common Stock exceeded the Threshold for the 20
trading days immediately following the first anniversary of the issuance of the
July Debentures. Accordingly, the July Debentures were converted into Common
Stock effective August 19, 1996, and interest ceased to accrue thereon after
such date. In September 1996 the Company notified the holders of the July
Debentures of the conversion of their instruments. As of the date of this
Prospectus, $3,080,000 principal amount of July Debentures have been physically
presented to the Company for conversion into an aggregate of 1,540,000 shares of
Common Stock.

The exercise price, number of Underlying Shares issuable on conversion of
the Debentures and the conversion Threshold are subject to adjustment in certain
circumstances, including in the event of a stock dividend, recapitalization,
reorganization, merger or consolidation of the Company.

Subordination

The Debentures are be general, unsecured obligations of the Company,
subordinated in right of payment to all indebtedness to banks and other
institutional lenders ("Senior Debt") of the Company. The Debentures permit the
Company to incur a limited amount of Senior Debt. See "The Private Offerings."

Events of Default

In general, the Debentures may be declared to be immediately due and
payable if an Event of Default, as defined therein, occurs and is continuing. As
of the date of this Prospectus, the Company does not have sufficient funds to
repay the Debentures if an Event of Default were to occur.

REDEEMABLE WARRANTS

No July Redeemable Warrants remain outstanding.

Each Redeemable Warrant entitles the holder to purchase one share of Common
Stock at a price of $2.50 per share, with respect to the November Redeemable
Warrants, and of $3.25 per share, with respect to the August Redeemable
Warrants, subject to adjustment in certain circumstances, during the period
commencing November 29, 1995, with respect to the November Redeemable Warrants,
and commencing August 6, 1997, with respect to the August Redeemable Warrants
and ending five years thereafter.

The Redeemable Warrants (including the July Redeemable Warrants) were
issued in the Private Offerings. As of the date of this Prospectus, 115,850
Redeemable Warrants are outstanding.

Redemption

The Redeemable Warrants are redeemable, at the option of the Company, at a
price of $.01 per Redeemable Warrant at any time commencing November 29, 1996,
with respect to the November Redeemable Warrants, and commencing August 6, 1997,
with respect to the August Redeemable Warrants upon not less than 30 days'
written notice, provided that the last sales price of the Common Stock following
such one year anniversary equals or exceeds the Threshold for the 20 consecutive
trading days ending on the third day prior to the notice of redemption to
warrantholders. The

56
<PAGE>
warrantholders shall have the right to exercise the Redeemable Warrants until
the close of business on the date fixed for redemption.

Adjustment

The exercise price, number of shares of Common Stock issuable on exercise
of the Redeemable Warrants and the Threshold are subject to adjustment in
certain circumstances, including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation of the Company.

Exercise

The Redeemable Warrants may be exercised upon surrender of the Redeemable
Warrant Certificate representing the Redeemable Warrants on or prior to the
expiration date at the offices of the Company, with the exercise form
accompanying the Redeemable Warrant Certificate completed and executed as
indicated, accompanied by full payment of the exercise price (by certified
check, payable to the Company) for the number of Redeemable Warrants being
exercised. The warrantholders do not have the rights or privileges of holders of
Common Stock.

See "The Private Offerings" for further information about the Redeemable
Warrants and Debentures.

ZATPACK NOTE

See "Business--Other Transactions--Agreements with Zatpack, Inc." for a
description of the Zatpack Note.

BANK WARRANTS

The Company has issued a total of 699,696 Bank Warrants in connection with
the various amendments to the credit agreement with the Company's banks. The
Bank Warrants entitle the holders thereof to purchase an aggregate of 699,696
Underlying Shares at an average weighted exercise price of $2.05 per share,
subject to adjustment in certain circumstances, through July 30, 2006.

Adjustment

The exercise price and number of shares of Common Stock issuable on
exercise of the Bank Warrants are subject to adjustment in certain
circumstances, including in the event of a stock dividend, recapitalization,
reorganization, merger or consolidation of the Company.

Exercise

The Bank Warrants may be exercised upon surrender of the Bank Warrant
Certificate representing the Bank Warrants on or prior to the expiration date at
the offices of the Company, with the exercise form accompanying the Bank Warrant
Certificate completed and executed as indicated, accompanied by full payment of
the exercise price (by certified check, payable to the Company) for the number
of Bank Warrants being exercised. The warrantholders do not have the rights or
privileges of holders of Common Stock.

OPTIONS

One former director of the Company owns Options to purchase an aggregate of
30,000 Underlying Shares at an average weighted exercise price of $2.77 per
share, subject to adjustment in certain circumstances, at various dates through
July 2001. All of the Options were issued pursuant to either the 1984 Stock
Option Plan or the Consulting Agreement with Mr. Limongelli. See "Management--
Compensation of Directors Who Are Not Employees or Officers." The exercise price
of each Option was not less than the fair market value of the Common Stock on
the date such Option was granted.

57
<PAGE>
LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Coleman & Rhine LLP, 1120 Avenue of the Americas, New
York, New York 10036.

EXPERTS

The consolidated financial statements of the Company as of December 31,
1995 and 1994 and for each of the years in the three year period ended December
31, 1995 included herein and elsewhere in the Registration Statement have been
included herein and in the Registration Statement in reliance upon the report of
Grant Thornton LLP, independent certified public accountants, as set forth in
their report thereon appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.

58
<PAGE>
___________________________________INDEX TO FINANCIAL
STATEMENTS___________________________________

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

Report of Independent Certified Public Accountants......................................................... F-2

Consolidated Balance Sheets................................................................................ F-3

Consolidated Statements of Operations...................................................................... F-4

Consolidated Statements of Stockholders' Equity............................................................ F-5

Consolidated Statements of Cash Flows...................................................................... F-6

Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>

F-1
<PAGE>
__________________REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS__________________

605 Third Avenue
New York, New York
10580-0142
212 599-0100
Fax 212 379-4520
[LOGO]
GRANT THORNTON LLP
Accountants and
Management Consultants

The U.S. Member Firm of
Grant Thornton
International
Board of Directors
Halsey Drug Co., Inc.

We have audited the accompanying consolidated balance sheets of Halsey Drug
Co., Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. 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 generally accepted auditing
standards. 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 as of December 31, 1995 and 1994, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.

As more fully discussed in Note A, the accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. The
Company has incurred a loss of approximately $4,103,000 during the year ended
December 31, 1995 and as of that date has a deficiency in working capital of
approximately $7,393,000. In addition, the Company's current banking agreement
expires on March 31, 1996 and the Company is currently not in compliance with
the financial covenants of its banking agreement and its convertible
subordinated debentures agreements. These matters raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these conditions are described in Note A. The financial statements do
not include any adjustments that may result from the outcome of this
uncertainty.

As discussed in Note I, the financial statements for the year ended December
31, 1995 as previously reported have been restated in regards to the gain
recognized on the sale of assets.

GRANT THORNTON LLP

New York, New York
March 29, 1996 (except for Note I as to which the date
is September 25, 1996)

F-2
<PAGE>
___________________________________CONSOLIDATED BALANCE
SHEETS___________________________________

<TABLE>
<S> <C> <C> <C>
December 31, June 30,
(in thousands) 1994 1996
--------- -----------
1995
---------
(unaudited)
CURRENT ASSETS
Cash $ 353 $ 28 $ 111
Accounts receivable--trade, net of allowances
for doubtful accounts of $280 and $755
in 1995 and 1994, respectively, and
288 at June 30, 1996 1,689 2,326 1,672
Inventories 7,716 6,835 7,114
Prepaid insurance and other current assets 656 496 653
Deferred income taxes 296 --
--------- --------- -----------
Total current assets 10,414 9,981 9,550

PROPERTY, PLANT AND EQUIPMENT, NET 7,394 8,561 6,900

OTHER ASSETS 1,054 734 1,392
--------- --------- -----------
$ 18,862 $ 19,276 $ 17,842
--------- --------- -----------
--------- --------- -----------

CURRENT LIABILITIES
Bank overdraft $ 213 $ 218 $ 567
Due to banks 3,395 4,850 3,395
Current maturities of long-term debt 200 200
Convertible subordinated debentures 7,347 7,388
Department of Justice settlement 2,000 2,013 2,089
Accounts payable 2,546 4,414 3,401
Accrued expenses 1,867 1,823 2,654
Advances from minority stockholders 206 418 206
Income taxes payable 33 196 28
Deferred income 500
--------- --------- -----------
Total current liabilities 17,807 14,432 19,928

LONG-TERM DEBT 2,595 2,492 2,647

LITIGATION SETTLEMENT 3,000

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.01 par value; authorized,
20,000,000 shares; issued and outstanding,
8,973,459 shares and 7,609,537 shares in 1995
and 1994, respectively, 9,582,354 at June 30, 1996 90 76 95
Additional paid-in capital 14,459 10,162 15,954
Accumulated deficit (14,989) (10,886) (19,738)
--------- --------- -----------
(440) (648) (3,689)
Less treasury stock - at cost (500,000 shares in 1995) (1,100) (1,044)
--------- --------- -----------
(1,540) (648) (4,733)
--------- --------- -----------
$ 18,862 $ 19,276 $ 17,842
--------- --------- -----------
--------- --------- -----------
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE>
____________________________CONSOLIDATED STATEMENTS OF
OPERATIONS____________________________

<TABLE>
<S> <C> <C> <C> <C> <C>
Six Months Ended
(in thousands, except per share data) Year ended December 31, June 30,
1995 1994 1993 1996 1995
---------- ---------- ---------- ------------ ----------
(unaudited) (unaudited)
Net sales $ 20,225 $ 24,182 $36,024 $7,643 $ 11,756
Cost of goods sold 18,097 21,584 28,848 7,740 8,819
---------- ---------- ---------- ------------ ----------
Gross profit 2,128 2,598 7,176 (97) 2,937
Research and development 818 502 2,140 629 307
Selling, general and administrative
expenses 6,098 7,128 8,796 3,144 2,981
Provision for regulatory settlement 5,935
---------- ---------- ---------- ------------ ----------
(Loss) earnings from operations (4,788) (5,032) (9,695) (3,870) (351)
Interest expense 1,307 735 631 879 433
Gain on sale of assets 2,288 2,288
Provision for stockholders' litigation
settlement 3,000
---------- ---------- ---------- ------------ ----------
(Loss) earnings before income taxes,
minority interest
and cumulative effect of accounting
change (3,807) (5,767) (13,326) (4,749) 1,504
Provision (benefit) for income taxes 296 (2,540) 296
---------- ---------- ---------- ------------ ----------
(Loss) before minority interest and
cumulative
effect of accounting change......... (4,103) (5,767) (10,786) (4,749) 1,208
Minority interest in net loss of
subsidiaries 150
---------- ---------- ---------- ------------ ----------
(Loss) earnings before cumulative
effect of accounting change (4,103) (5,767) (10,636) (4,749) 1,208
Cumulative effect of accounting change (267)
---------- ---------- ---------- ------------ ----------
NET (LOSS) EARNINGS $(4,103) $(5,767) $(10,903) $(4,749) $1,208
---------- ---------- ---------- ------------ ----------
---------- ---------- ---------- ------------ ----------
(Loss) earnings per common share
(Loss) earnings before cumulative effect
of accounting change $(.52) $(.80) $(1.53) $(.47) $.15
Cumulative effect of accounting change (.04)
Net (loss) earnings $(.52) $(.80) $(1.57) $(.47) $.15
Average number of outstanding shares 7,886,101 7,173,908 6,954,713 10,179,172 7,884,986
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE>
____________________CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY____________________

Years ended December 31, 1995, 1994 and 1993
and six months ended June 30, 1996 (unaudited)
(in thousands)

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock, Retained Treasury stock,
$.01 par value Additional earnings at cost
----------------------- paid-in (accumulated --------------------
Shares Amount capital deficit) Shares Amount Total
---------- ----------- ----------- ------------- --------- --------- ---------
Balance at January 1, 1992 6,795,217 $ 68 $ 8,186 $ 5,784 $ 14,038
Exercise of stock options 314,320 3 781 784
Net loss (10,903) (10,903)
---------- --- ----------- ------------- --------- --------- ---------
Balance at December 31, 1993 7,109,537 71 8,967 (5,119) 3,919
Issuance of common stock 500,000 5 995 1,000
Issuance of warrants to banks 200 200
Net loss (5,767) (5,767)
---------- --- ----------- ------------- --------- --------- ---------
Balance at December 31, 1994 7,609,537 76 10,162 (10,886) (648)
Issuance of common stock 500,000 5 791 796
Issuance of common stock in connection
with litigation settlement 824,742 8 2,992 3,000
Repurchase of common stock 500,000 $ (1,100) (1,100)
Issuance of warrants with convertible
subordinated debentures 416 416
Exercise of stock options 39,180 1 98 99
Net loss (4,103) (4,103)
---------- --- ----------- ------------- --------- --------- ---------
Balance at December 31, 1995
(unaudited) 8,973,459 $ 90 $ 14,459 $ (14,989) 500,000 $ (1,100) $ (1,540)
Net earnings (loss) for the six months
ended June 30, 1996 (4,749) (4,749)
Issuance of shares as settlement 49,166 228 (25,397) 56 284
Exercise of stock options 35,329 113 113
Exercise of warrants 524,400 5 1,154 1,159
---------- --- ----------- ------------- --------- --------- ---------
BALANCE AT JUNE 30, 1996 (UNAUDITED) 9,582,354 $ 95 $ 15,954 $ (19,738) 474,603 $ (1,044) $ (4,733)
---------- --- ----------- ------------- --------- --------- ---------
---------- --- ----------- ------------- --------- --------- ---------
</TABLE>

The accompanying notes are an integral part of this statement.

F-5
<PAGE>
____________________________CONSOLIDATED STATEMENTS OF
CASHFLOWS____________________________

<TABLE>
<S> <C> <C> <C> <C> <C>
Six Months Ended June
(in thousands) Year ended December 31, 30,
1995 1994 1993 1996 1995
--------- --------- --------- ----------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net (loss) earnings $ (4,103) $ (5,767) $ (10,903) $ (4,749) $ 1,208
--------- --------- --------- ----------- -----------
Adjustments to reconcile net loss to net
Cash (used in) provided by operating activities
Depreciation and amortization 1,956 2,350 2,104 1,193 799
Provision for losses on accounts receivable 271 365
Gain on sale of assets (2,288) (92) (2,288)
Accrued Department of Justice interest 77 100 89 31
Deferred income taxes 296 (667) 296
Minority interest in net loss of subsidiaries (150)
Settlement of product recall (985)
Department of Justice settlement 2,060
Provision for stockholders' litigation settlement 3,000
Changes in assets and liabilities
Accounts receivable 637 2 4,374 17 723
Inventories (881) 2,389 4,085 602 (219)
Income taxes receivable 660 (660) -- --
Prepaid insurance and other current assets (160) 134 (25) 3 (41)
Accounts payable (1,868) (912) (1,126) 855 (1,332)
Accrued expenses 44 528 859 787 94
Income taxes payable (163) (83) (1,157) (5) (169)
--------- --------- --------- ----------- -----------
Total adjustments (2,350) 5,347 12,077 3,541 (2,106)
--------- --------- --------- ----------- -----------
Net cash (used in) provided by operating activities (6,453) (420) 1,174 (1,208) (898)
--------- --------- --------- ----------- -----------
Cash flows from investing activities
Capital expenditures (536) (216) (1,688) (360) (180)
Decrease (increase) in other assets 116 (169) (75) (574)
Net proceeds from sale of assets 1,889 125
Deferred income 500 2,000
--------- --------- --------- ----------- -----------
Net cash provided by (used in) investing activities 1,469 240 (1,763) (934) 1,820
--------- --------- --------- ----------- -----------
Cash flows from financing activities
(Decrease) increase in notes payable (1,192) (489) 28 (1,044)
Proceeds from issuance of common stock 796 1,000 1,556
Payments to Department of Justice (90) (86) (61) (10) (80)
Bank overdraft (5) (224) (486) 354 424
Repurchase of common stock (1,100)
Payments to minority stockholders (212) (25)
Advances from former minority shareholder -- -- -- -- (212)
Proceeds from issuance of converted subordination
debentures 7,740
Proceeds from exercise of stock options 99 784
Increase in other assets (727)
--------- --------- --------- ----------- -----------
Net cash (used in) provided by financing activities 5,309 176 450 1,900 (912)
--------- --------- --------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 325 (4) (139) 242 10
Cash and cash equivalents at beginning of year or period 28 32 171 353 28
--------- --------- --------- ----------- -----------
Cash and cash equivalents at end of year or period $ 353 $ 28 $ 32 111 38
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>

Supplemental disclosures of noncash activities:

1. The valuation of the warrants issued in 1995, $416,000, with the convertible
subordinated debentures is included in additional paid-in capital.

2. The issuance in 1995 of 824,742 shares of the Company's common stock is
valued at $3,000,000 in connection with the litigation settlement.

3. The valuation of the warrants issued in 1994, $200,000, to its banks, is
included in additional paid-in capital.

The accompanying notes are an integral part of these statements.

F-6
<PAGE>
________________________NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS________________________

December 31, 1995, 1994 and 1993 and June 30, 1996 and 1995 (unaudited)

NOTE A - SUMMARY OF ACCOUNTING POLICIES

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

1.
Principles of Consolidation and Basis of Presentation

The consolidated financial statements include 100% of the accounts of the
Company and its wholly-owned subsidiaries, Blue Cross Products Co., Inc., Houba,
Inc., Halsey Pharmaceuticals, Inc., and Indiana Fine Chemicals Corporation, The
Medi-Gum Corporation, its 51%-owned subsidiaries, H.R. Cenci Laboratories, Inc.
and Cenci Powder Products, Inc. The Medi-Gum Corporation and Halsey
Pharmaceuticals have not commenced operations. All material intercompany
accounts and transactions have been eliminated.

As of December 31, 1995, the Company has a working capital deficiency of
approximately $7,393,000, has an accumulated deficit of approximately
$14,989,000, has incurred a loss of approximately $4,103,000 during the year
ended December 31, 1995, and is not in compliance with its financial covenants
pursuant to its banking agreement and its convertible subordinated debenture
agreements. In addition the Company's credit agreement with its banks expires
March 31, 1996. These factors and the Food and Drug Administration ("FDA") and
other matters as discussed in Note M, raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments relative 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. Management's
plans with respect to those conditions include seeking alternative sources of
financing. In this regard, the Company (a) is reviewing several unsolicited
expressions of interest from prospective joint venture partners and investors,
(b) plans to refinance or extend the maturity date of the Company's bank debt,
and (c) has sold the rights to one of its products to a major vendor and has
received a commitment for future production of such product (Note I). There can
be no assurance that management can obtain alternative sources of financing.

2.
Inventories

Inventories are stated at the lower of cost or market; cost is determined
using the first-in, first-out method.

3.
Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. 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>
Buildings 25 years
Machinery and equipment 5-10 years
Leasehold improvements 5-10 years
</TABLE>

Leasehold improvements are amortized over the lives of the respective leases
or the service lives of the improvements, whichever is shorter.

4.
Income Taxes

The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"), as of January 1, 1993. The
standards for SFAS No. 109 require that the Company utilize an asset and
liability approach for financial accounting and reporting for income taxes. The
primary objectives of accounting for income taxes under SFAS No. 109 are to (a)
recognize the amount of tax payable for the current year and (b) recognize the
amount of deferred tax liability or asset based on management's assessment of
the tax consequences of events that have been reflected in the Company's
financial statements or tax returns. The cumulative effect of this change was to
increase the 1993 net loss by $267,000.

5.
Loss Per Share

The computation of loss per share of Common Stock is based upon the weighted
average number of common shares outstanding during the period plus (in periods
in which they have a dilutive effect) the effect of common shares contingently
issuable upon exercise of stock options and warrants. Fully diluted earnings per
share is considered equal to primary earnings per share for all years presented
as the effect of other potentially dilutive securities would be antidilutive.

F-7
<PAGE>
________________________NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS________________________

December 31, 1995, 1994 and 1993 and June 30, 1996 and 1995 (unaudited)

6.
Statement 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 income taxes for the
years ended December 31, 1995, 1994 and 1993 of $201,000, $39,000 and $199,000,
respectively, and interest of $786,000, $504,000 and $406,000, respectively.

7.
Costs in Excess of Net Assets Acquired

The Company amortizes its costs in excess of net assets acquired on a
straight-line basis over a five-year period. Amounts paid in excess of net
assets acquired of $1,127,000, net of accumulated amortization of $932,000 and
$707,000 in 1995 and 1994, respectively, are included in other assets in the
accompanying consolidated financial statements. On an ongoing basis, management
reviews the valuation and amortization of goodwill to determine possible
impairment by comparing the carrying value to the undiscounted cash flows of the
related assets.

8.
Use of Estimates in Consolidated Financial Statements

In preparing consolidated financial statements in conformity with generally
accepted accounting principles, 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.

9.
Reclassifications

Certain reclassifications have been made to the 1994 and 1993 presentation
to conform to the 1995 presentation.

10.
Accounting Pronouncements Not Yet Adopted

Adoption of Statement of Financial Accounting Standards No. 121 ("SFAS No.
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," is required for fiscal years beginning after December
15, 1995. The standards for SFAS No. 121 require that the Company recognize and
measure impairment losses of long-lived assets and certain identifiable
intangibles and value long-lived assets to be disposed of. The primary
objectives under SFAS No. 121 are to: (a) recognize an impairment loss of an
asset whenever events or changes in circumstances indicate that its carrying
amount may not be recoverable and (b) if planning to dispose of long-lived
assets or certain identifiable intangibles, such assets have been reflected in
the Company's consolidated balance sheet at the net asset value less cost to
sell. The Company has adopted SFAS No. 121 effective January 1, 1996. The
adoption of SFAS No. 121 had no effect on the Company's Consolidated Financial
Statements.

Adoption of Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation," is required for fiscal years
beginning after December 15, 1995 and allows for a choice of the method of
accounting used for stock-based compensation. Entities may use the "intrinsic
value" method currently based on APB No. 25 or the new "fair value" method
contained in SFAS No. 123. The Company intends to implement SFAS No. 123 in
fiscal 1996 by continuing to account for stock-based compensation under APB No.
25. As required by SFAS No. 123, the pro forma effects on net income and
earnings per share will be determined as if the fair value-based method had been
applied and disclosed in the notes to the consolidated financial statements.

11.
Interim Financial Information

The financial information presented as of March 31, 1996, for the three
months ended March 31, 1996 and 1995, are unaudited. In the opinion of
management, this unaudited financial information contains all adjustments (which
consist of normal recurring accrual adjustments) necessary for a fair
presentation for the interim periods presented. The results for the interim
periods are not necessarily indicative of results expected for the full year.

NOTE B - FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107 ("SFAS No. 107"), "Fair
Value of Financial Instruments," requires disclosure of the estimated fair value
of an entity's financial instrument assets and liabilities. For the Company,
financial instruments consist principally of cash and cash equivalents,
subordinated promissory notes and long-term debt.

F-8
<PAGE>
________________________NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS________________________

December 31, 1995, 1994 and 1993 and June 30, 1996 and 1995 (unaudited)

The following methods and assumptions are used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:

1.
Cash and Cash Equivalents

The carrying amount reasonably approximates fair value because of the short
maturity of those instruments.

2.
Long-term Debt and Convertible Subordinated Debentures

The carrying amount of long-term receivables and fair value of the above
financial instruments are as follows:

<TABLE>
<S> <C> <C> <C> <C>
December 31,
--------------------------------------------------
1995 1994
------------------------ ------------------------
CARRYING FAIR VALUE Carrying Fair value
AMOUNT AMOUNT amount amount
----------- ----------- ----------- -----------
(in thousands)
Cash and cash equivalents $ 353 $ 353 $ 28 $ 28
Long-term debt 6,190 6,190 7,342 7,342
Convertible subordinated debentures 7,347 7,347
</TABLE>

NOTE C - INVENTORIES

Inventories consist of the following:

<TABLE>
<S> <C> <C> <C>
December 31, June 30,
-------------------- -------------
1995 1994 1996
--------- --------- -------------
(in thousands) (unaudited)
Finished goods $ 2,491 $ 1,990 $ 1,996
Work-in-process 1,398 1,301 1,747
Raw materials 3,827 3,544 3,371
--------- --------- -------------
$ 7,716 $ 6,835 $ 7,114
--------- --------- -------------
--------- --------- -------------
</TABLE>

NOTE D - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are summarized as follows:

<TABLE>
<S> <C> <C>
December 31,
--------------------
1995 1994
--------- ---------
(in thousands)
Machinery and equipment $ 11,247 $ 10,989
Leasehold improvements 5,756 5,656
Building 1,203 1,203
Land 265 265
--------- ---------
18,471 18,113
Less accumulated depreciation and amortization 11,077 9,552
--------- ---------
$ 7,394 $ 8,561
--------- ---------
--------- ---------
</TABLE>

NOTE E - DEBT

a.
Line of Credit

In December 1992, the Company entered into a credit agreement providing for
borrowings of up to $7,000,000 at the prime rate plus an initial margin of 1/2%,
originally maturing in December 1994. Upon certain conditions, as defined in the
agreement, the margin rate increases by 2%. Borrowings under the line were
available for working capital purposes based upon a percentage of the parent
company's eligible accounts receivable and are collateralized by such accounts
receivable. The agreement contains certain financial covenants, including
minimum interest

F-9
<PAGE>
________________________NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS________________________

December 31, 1995, 1994 and 1993 and June 30, 1996 and 1995 (unaudited)
coverage and working capital ratios, tangible net worth, limitations on capital
expenditures, and maximum debt-to-equity ratios. As of December 31, 1995, the
Company was not in compliance with the above covenants.

In 1994, the Company and its banks amended the credit agreement to include
the stock of certain subsidiaries, the accounts receivable of Houba, Inc., and
the parent company's inventory and equipment as additional collateral, to
increase the initial margin rate to 2% (10.5% at December 31, 1995), to restrict
certain payments made by the Company, to require payment to be made by the
Company to the banks of any income tax refunds received by the Company, to
extend the maturity date to August 31, 1995, and to agree in principal to modify
the financial covenants at a later date. In addition, if the outstanding
borrowings were not repaid by August 30, 1995, the Company was required to pay
$102,000, which represented 3% of the then outstanding principal due to the
banks. Such amount was accrued in 1995 and partially paid in 1996.

As consideration for the above amendments and the Company's continued
borrowings in excess of the borrowing formula, the Company has issued to the
banks stock warrants, expiring December 31, 1999, to purchase up to 699,696
shares of the Company's common stock at exercise prices ranging from $1.98 to
$2.07 per share (subject to the antidilution provisions of the credit agreement,
as amended). The fair value of the warrants, $200,000, as determined by the
Company's Board of Directors, was recorded by the Company in 1994 as additional
paid-in capital and a discount to bank debt which was fully amortized through
the maturity date, August 31, 1995.

In addition, the Company and its banks amended the credit agreement as a
result of the Company having consummated private offerings of its securities on
July 18, 1995 and November 29, 1995. As consideration for waiving any breach or
default under the credit agreement as a result of these private offerings, the
Banks received approximately $600,000 of the proceeds as payment for interest,
fees, expenses and principal and an extension of the warrant exercise period to
July 17, 2000. In addition, the exercise prices of all warrants for 699,696
shares of the Company's common stock have been adjusted for antidilution to
prices ranging from $1.98 to $2.07.

b.
Convertible Subordinated Promissory Note

Pursuant to the Zatpack, Inc. ("Zatpack") agreement (Note N), the Company
issued a convertible subordinated promissory note dated December 1, 1994, to
Zatpack, for the cancellation of trade payables and advances by Zuellig Group
N.A., Inc. ("Zuellig") to the Company's subsidiaries, in the amount of
$1,292,000, bearing interest at 8% per annum, compounded annually, due December
1, 1997. The outstanding principal, plus all accrued and unpaid interest,
$1,395,000 at December 31, 1995, can be converted, at the option of Zatpack,
into the Company's common stock at the rate of one share of common stock for
every $2.50 of principal and interest being converted (the $2.50 is subject to
the antidilution provisions of the promissory note). The note is subordinated to
the bank debt.

c.
Subordinated Promissory Notes

On March 21, 1995 (see Note I), the Company satisfied certain accounts
payable by issuing a subordinated promissory note to Mallinckrodt Chemical
Acquisition, Inc. ("Mallinckrodt") for $1,200,000, bearing interest at 8% per
annum, with interest and principal payable at the earlier of: (i) receipt by
Mallinckrodt of all necessary authorizations from the FDA or (ii) September 21,
1997. The note is collateralized by substantially all of the assets of the
Company and is subordinated to future bank indebtedness of up to $8,000,000. The
$1,200,000 note represents the deferral of payment by the Company of a portion
of its trade accounts payable due to an affiliate of Mallinckrodt.

On July 14, 1995, the Company borrowed from and issued a $200,000
subordinated promissory note to Mallinckrodt, bearing interest at 8% per annum,
with principal and interest payable June 30, 1996. The principal and interest is
payable, at the option of Mallinckrodt, in the form of cash or a credit to the
Company's accounts receivable due from Mallinckrodt on June 30, 1996.

F-10
<PAGE>
________________________NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS________________________

December 31, 1995, 1994 and 1993 and June 30, 1996 and 1995 (unaudited)

Borrowings under long-term debt are as follows:

<TABLE>
<S> <C> <C>
December 31,
--------------------
1995 1994
--------- ---------
(in thousands)
Convertible subordinated promissory note $ 1,395 $ 1,292
Subordinated promissory notes 1,400 1,200
--------- ---------
2,795 2,492
Less; current maturities of long-term debt (200) -
--------- ---------
$ 2,595 $ 2,492
--------- ---------
--------- ---------
</TABLE>

NOTE F - CONVERTIBLE SUBORDINATED DEBENTURES

On July 18, 1995, the Company issued 408 units, at $10,000 per unit, in a
private placement of its securities ("July Private Placement"). Each unit
consists of: (i) a 10% convertible subordinated debenture due July 18, 2000 in
the principal amount of $10,000, interest payable quarterly, and convertible
into shares of the Company's common stock at a conversion price of $2.00 per
share, subject to dilution, and (ii) 750 redeemable common stock purchase
warrants ("warrants"). Each warrant entitles the holder to purchase one share of
common stock for $2.00, subject to adjustment during the five-year period
commencing July 18, 1995. The warrants are redeemable by the Company at a price
of $.01 per warrant at any time commencing July 18, 1996, provided that at July
18, 1996, the fair market value of the Company's common stock equals or exceeds
$2.00 per share for the 20 consecutive trading days ending on the third day
prior to the notice of redemption to the holders of the warrants.

On November 29, 1995, the Company issued 366 units, at $10,000 per unit, in
a private placement of its securities ("November Private Placement"). Each unit
consists of (i) a 10% convertible subordinated debenture due November 29, 2000
in the principal amount of $10,000, interest payable quarterly, and convertible
into shares of the common stock at a conversion price of $2.50 per share,
subject to dilution, and (ii) 600 redeemable common stock purchase warrants. The
terms and conditions of the warrants issued in connection with the November
Private Placement are similar to those issued in the July Private Placement,
except that the exercise price of the warrants issued in the November Private
Placement is $2.50 per share.

The Company received net proceeds from the July and November Private
Placements of $7,013,000, net of issuance costs of $727,000, and allocated the
market value of the warrants, as determined by the Company's Board of Directors,
$416,000, to additional paid-in capital with a corresponding adjustment to debt
discount. The net proceeds from such issuances have been or will be used for the
following purposes: repurchase of 500,000 shares of the Company's common stock,
registration of the underlying shares pursuant to the Private Placements, the
purchase of equipment, research and development costs and for working capital.
In addition, the Company was required to use $950,000 of the net proceeds to
repay a portion of its bank debt. At December 31, 1995, the Company was in
default of its convertible subordinated debentures agreements as a result of its
default with its banking agreement, and accordingly, the convertible
subordinated debentures are currently due.

NOTE G - ACCRUED EXPENSES

Accrued expenses are summarized as follows:

<TABLE>
<S> <C> <C>
December 31,
--------------------
1995 1994
--------- ---------
(in thousands)
Payroll related $ 850 $ 1,039
Professional fees 120 74
Interest 337 251
Other 560 459
--------- ---------
$ 1,867 $ 1,823
--------- ---------
--------- ---------
</TABLE>

F-11
<PAGE>
________________________NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS________________________

December 31, 1995, 1994 and 1993 and June 30, 1996 and 1995 (unaudited)

NOTE H - INCOME TAXES

The benefit for income taxes for the year ended December 31, 1993 is
composed of the following (in thousands):

<TABLE>
<S> <C>
Current - Federal $ (1,606)
Deferred - Federal, state and local (934)
---------
$ (2,540)
---------
---------
</TABLE>

Deferred income tax (benefits) provisions, resulting from differences
between accounting for financial statement purposes and tax purposes, were as
follows for the year ended December 31, 1993 (in thousands):

<TABLE>
<S> <C>
Depreciation $ 50
Provision for stockholders' litigation settlement (1,260)
Pension expense (116)
Provision for product recall 417
Provision for doubtful accounts (172)
Inventory reserve (168)
---------
Deferred benefit before net operating loss carrybacks (1,249)
Limitation of net operating loss carrybacks 315
---------
$ (934)
---------
---------
</TABLE>

The actual income tax (benefit) expense varies from the Federal statutory
rate applied to consolidated operations as follows:

<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
--------------------------------------------------------------------
1995 1994 1993
-------------------- ---------------------- ----------------------
AMOUNT % Amount % Amount %
--------- --------- ----------- --------- ----------- ---------
(in thousands)
Federal statutory rate $ (1,295) (34.0)% $ (1,961) (34.0)% $ (4,497) (34.0)%
Gain on sale of assets 546 14.3
LOSS OF WHICH NO TAX BENEFIT WAS
PROVIDED 280 7.4 1,223 21.2
Losses of subsidiaries with no tax
benefit 240 6.3 479 8.3 472 3.5
Goodwill amortization 77 2.0 77 1.3 77 .7
Department of Justice settlement 850 6.4
Change in valuation allowance 296 7.8
Other 152 4.0 182 3.2 558 4.2
--------- --------- ----------- --------- ----------- ---------
Actual (benefit) tax expense $ 296 2.8 $ - - $ (2,540) (19.2)%
--------- --------- ----------- --------- ----------- ---------
--------- --------- ----------- --------- ----------- ---------
</TABLE>

The Company has net operating loss carryforwards aggregating approximately
$6,613,000, expiring during the years 2009 through 2010. In addition, certain of
the Company's subsidiaries file separate Federal income tax returns and have
separate net operating loss carryforwards aggregating approximately $4,783,000,
expiring during the years 1998 through 2010.

The Company's tax loss carryforwards could be limited by Section 382 of the
Internal Revenue Code with respect to the amount utilizable each year. This
limitation would reduce the Company's ability to utilize net operating loss
carryforwards included above. The amount of the limitation has not been
quantified by the Company.

F-12
<PAGE>
________________________NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS________________________

December 31, 1995, 1994 and 1993 and June 30, 1996 and 1995 (unaudited)

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

<TABLE>
<S> <C> <C>
December 31,
--------------------
1995 1994
--------- ---------
(in thousands)
Deferred tax assets
Net operating loss carryforwards $ 4,792 $ 3,543
Allowance for doubtful accounts 117 318
Research and development tax credit 212
Reserve for inventory 65 92
Litigation settlement 1,260
Other 36 44
--------- ---------
Gross deferred tax assets 5,222 5,257
--------- ---------
Deferred tax liabilities
Depreciation (771) (517)
Other (165) (17)
--------- ---------
(936) (534)
--------- ---------
Net deferred tax assets before valuation allowance 4,286 4,723
Valuation allowance (4,286) (4,427)
--------- ---------
Net deferred tax assets $ - $ 296
--------- ---------
--------- ---------
</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, 1995 primarily pertains to uncertainties with respect to future
utilization of net operating loss carryforwards.

NOTE I - SALE OF ASSETS

(a) On March 21, 1995, the Company sold its Abbreviated New Drug Application
("ANDA") for 5mg Oxycodone HCL/325mg Acetaminophen Tablets ("Tablets") and
certain equipment used in the production of the Tablets for up to $5.4 million
to Mallinckrodt. The Company received $500,000 of the proceeds in July 1994,
which has been recorded as deferred income on the Company's 1994 consolidated
balance sheet. Mallinckrodt also paid the Company $2,000,000 on March 21, 1995
and the remainder will be payable as follows: (i) $1,000,000 upon the Company
receiving general clearance from the FDA for unrestricted operations at its
Brooklyn facility and written notice from the FDA that it is in compliance with
certain provisions of the consent degree dated June 29, 1993 (such $1,000,000
will be recorded by the Company when general clearance is obtained from the FDA)
and (ii) $1,900,000 at the earlier of (a) Mallinckrodt receiving certain
authorizations from the FDA or (b) September 21, 1997 ("Deferred Payments").
Mallinckrodt also agreed to defer $1,200,000 of the Company's trade debt due to
an affiliate of Mallinckrodt (Note E).

In connection with the agreement, the Company agreed to manufacture Tablets
for Mallinckrodt for a period of three years through March 31, 1998 and
Mallinckrodt agreed to order a minimum number of Tablets from the Company for
two years ending March 21, 1997. The Company and Mallinckrodt entered into a
noncompetition agreement pursuant to which the Company agreed not to compete
with Mallinckrodt and its affiliates with respect to the Tablets ANDA until
March 21, 2000. If, prior to the time it is possible for Mallinckrodt to
commence production under the Tablets ANDA or any new Tablets ANDA at its own
facility, and the Company ceases or is forced to cease or substantially curtail
production under the Tablets ANDA, as a consequence of (i) any action or
communication by the FDA or any other regulatory or governmental authority or
(ii) any financial or other business difficulty, then Mallinckrodt has the right
to cancel payment of any yet unpaid portion of the Deferred Payment ($1.9
million) and shall further have the right to a full refund of any portion of the
Deferred Payment already made to the Company.

F-13
<PAGE>
________________________NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS________________________

December 31, 1995, 1994 and 1993 and June 30, 1996 and 1995 (unaudited)

In addition, the Company issued to Mallinckrodt an option to purchase the
ANDA for acetaminophen/oxycodone capsules at an exercise price equal to 3/4 of
annual net capsule revenue, as defined. Upon exercise of the option, the Company
and Mallinckrodt would enter into agreements pursuant to which the Company would
(i) manufacture acetaminophen/oxycodone capsules for Mallinckrodt for a period
of time and (ii) be prohibited from competing with Mallinckrodt and its
affiliates with respect to the production of such capsules.

In connection with the filing of a Registration Statement with the
Securities and Exchange Commission, the Company has revised the gain recorded on
the sale of assets to Mallinckrodt and will not recognize the Deferred Payment
until the earlier of (a) Mallinckrodt receiving certain authorizations from the
FDA or (b) March 31, 1998. The effect of the adjustments on the accompanying
financial statements is as follows (In thousands, except per share amounts):

As of December 31, 1995:

<TABLE>
<S> <C> <C>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
Net loss $ (2,203) $ (4,103)
Net loss per common share (.28) (.52)
Long Term Receivable 1,900 --
Accumulated deficit (13,089) (14,989)
</TABLE>

As of June 30, 1995 (Unaudited):

<TABLE>
<S> <C> <C>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
Net earnings $ 3,108 $ 1,208
Net earnings per common share .39 .15
</TABLE>

NOTE J - PENSION EXPENSE

The Company maintains the following two pension plans:

1.
Management Pension Plan

The Company maintains a defined benefit pension plan covering substantially
all nonunion employees.

Historically, the Company's funding policy for the management pension plan
(the "Plan"), had been to contribute amounts equal to its liability as
determined under the Employee Retirement Income Security Act of 1974 ("ERISA").
Under this funding policy, contributions would be sufficient to maintain plan
assets in excess of the projected benefit obligation. As of December 31, 1995,
the Company has not funded its 1994 ERISA obligation of approximately $116,000
and the remaining balance of its 1993 and 1992 ERISA obligations of
approximately $191,000. Failure to timely fund these obligations may result in
the termination of the Plan and/or other monetary penalties. During 1993, the
Company (i) amended the Plan to reduce employee benefits, (ii) terminated
certain employees sooner than expected, and (iii) reduced the discount rate used
to determine the projected benefit obligations, all of which did not have a
material effect on the Company's 1993 consolidated results of operations.

Planned Company contributions over the next several years are expected to
improve the funded status of the Plan. The Plan's assets are diversified in
stocks, bonds, mutual funds and short-term and other investments.

F-14
<PAGE>
________________________NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS________________________

December 31, 1995, 1994 and 1993 and June 30, 1996 and 1995 (unaudited)

Net pension cost for the Plan consists of the following:

<TABLE>
<S> <C> <C> <C>
December 31,
-------------------------------------
1995 1994 1993
----- ----- -----
(in thousands)
Normal service cost $ 49 $ 50 $ 45
Interest cost 25 27 38
Actual return on plan assets (19) (18) (36)
Net amortization and deferral (9) (10) (10)
--- --- ---
Net pension cost $ 46 $ 49 $ 37
--- --- ---
--- --- ---
</TABLE>

The reconciliation of the funded status of the Plan to the amount reported
in the Company's balance sheet is as follows:

<TABLE>
<S> <C> <C>
Year ended December
31,
--------------------
1995 1994
--------- ---------
(in thousands)
Actuarial present value of benefit obligations at November 30, 1995 and 1994
Estimated present value of vested benefits $ 405 $ 307
Estimated present value of nonvested benefits 44 36
--------- ---------
Accumulated benefit obligation 449 343
Value of future pay increases 22 17
--------- ---------
Projected benefit obligation 471 360
Estimated market value of Plan assets at November 30, 1995 and 1994 456 402
--------- ---------
(Deficiency) excess of Plan assets over projected benefit obligation (15) 42
Unrecognized net gain 33 23
Unrecognized net asset at December 1, 1987 being amortized over 24 years (9) (9)
--------- ---------
$ 9 $ 56
--------- ---------
--------- ---------
</TABLE>

The assumptions used as of November 30, 1995 and 1994 in determining pension
expense and funded status shown above were as follows:

<TABLE>
<S> <C> <C>
1995 1994
----- -----
Discount rate 7.00% 7.00%
Rate of salary progression 4.00 4.00
Long-term rate of return on assets 7.00 7.00
</TABLE>

2.
Employees' Pension Plan

The Company contributed approximately $450,000, $462,000 and $515,000 in
1995, 1994 and 1993, respectively, to a multiemployer pension plan for employees
covered by collective bargaining agreements. This plan is not administered by
the Company and contributions are 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.

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."

NOTE K - STOCK OPTION PLAN

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 replaces the Company's existing stock option

F-15
<PAGE>
________________________NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS________________________

December 31, 1995, 1994 and 1993 and June 30, 1996 and 1995 (unaudited)
plan which expired in January 1994. 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.

A summary of activity of all options is as follows:

<TABLE>
<S> <C> <C> <C>
December 31,
----------------------------------------------
1995 1994 1993
-------------- -------------- --------------
Outstanding at beginning of year 222,150 413,881 794,857
Granted 471,600 10,000 66,000
Cancelled (54,070) (201,731) (132,656)
Exercised (39,180) (314,320)
-------------- -------------- --------------
Outstanding at end of year 600,500 222,150 413,881
-------------- -------------- --------------
-------------- -------------- --------------
Shares exercisable 183,900 144,742 239,610
-------------- -------------- --------------
-------------- -------------- --------------
Option prices per share
Granted $1.94 - $3.19 $2.00 $4.00 - $6.25
Cancelled 2.50 - 6.25 2.01 - 6.25 2.14 - 6.25
Exercised 2.50 2.01 - 5.50
Exercisable 2.50 - 6.25 2.50 - 6.25 2.01 - 6.25
</TABLE>

NOTE L - COMMITMENTS

The Company occupies plant and office facilities under noncancellable
operating leases which expired in December 1995. On October 31, 1994, the
Company entered into a new operating lease for the plant and office facilities
covering the period from January 1, 1996 to December 31, 2005. These new
operating leases provide for scheduled base rent increases over the term of the
lease, however, the total amount of the base rent payments will be charged to
operations using the straight-line method over the term of the lease. The leases
provide for payment of real estate taxes based upon a percentage of the annual
increase. The Company's subsidiaries, 51% H.R. Cenci Laboratories, Inc. ("Labs")
and Cenci Powder Products, Inc. ("Cenci"), lease plant and office facilities on
a month-to-month basis from an officer of the subsidiaries. Rent expense
relating to these leases amounted to approximately $86,000, $99,000 and $91,000
in 1995, 1994 and 1993, respectively. In addition, the Company rents certain
equipment under operating leases, generally for terms of four years. Total rent
expense for the years ended December 31, 1995, 1994 and 1993 was approximately
$659,000, $582,000 and $502,000, respectively.

The approximate minimum rental commitments under these operating leases are
as follows:

<TABLE>
<S> <C>
Twelve months ending December 31, (in thousands)
1996 $ 884
1997 928
1998 975
1999 1,023
2000 1,075
2001 and thereafter 6,234
---------------
Total minimum payments required $ 11,119
---------------
---------------
</TABLE>

On January 1, 1993, the Company entered into an employment agreement with an
officer having an initial term of five years. On July 1, 1994, the Company
entered into an employment agreement with another officer having an initial term
of three years. These employment agreements contain change in control provisions
that would entitle each officer to receive certain severance benefits if there
is a change in control in the Company, as

F-16
<PAGE>
________________________NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS________________________

December 31, 1995, 1994 and 1993 and June 30, 1996 and 1995 (unaudited)
defined, and a termination of employment. The maximum contingent liability as of
December 31, 1995 under these agreements is approximately $1,027,000.

NOTE M - CONTINGENCIES

The Company currently is a defendant in several lawsuits involving product
liability and other claims. The Company's insurance carriers have assumed the
defense for all product liability and other actions involving the Company. None
of the lawsuits is brought as a class action. The ultimate outcome of these
lawsuits cannot be determined at this time, and accordingly, no adjustment has
been made to the consolidated financial statements.

In April and May of 1990, the FDA conducted a pre-approval inspection of the
Company's facilities, certain pending approval applications and its
manufacturing procedures. The FDA issued "Inspectional Observations" and made
further investigations of the Company's recordkeeping practices and the accuracy
of certain records maintained by the Company during the research and development
stage for a single drug entity not being marketed by the Company. On July 29,
1991, the Company received a Federal grand jury subpoena for documents relating
to approved and unapproved ANDAs for various products and other documents
relating to the Company's operations.

The Company received a letter dated October 25, 1991 from the FDA advising
that the FDA, under its fraud policy, had undertaken a validity assessment with
respect to the Company's ANDAs, including four pending ANDAs and various ANDA
supplements, pursuant to which all reviews are suspended. The Company
voluntarily undertook an internal audit and retained an outside consultant to
review pending and various filed and approved ANDAs. As part of that process,
the Company withdrew its ANDAs for the drug product, fenoprofen calcium.

On June 29, 1993, the Company entered into a consent decree with the U.S.
Attorney for the Eastern District of New York on behalf of the FDA that resulted
from the FDA's investigation. Under the terms of the consent decree, the Company
was enjoined from shipping any solid dosage drug products (i.e., excluding
liquid drug formulations) manufactured at the Company's facilities until the
Company established, to the satisfaction of the FDA, that the methods used in,
and the facilities and controls to be used for, manufacturing, processing,
packing, labeling and holding any drug are established, operated and
administered in conformity with the Federal Food, Drug and Cosmetic Act and the
FDA's Current Good Manufacturing Practice regulations. As part of satisfying the
foregoing requirements, the Company is required to validate the manufacturing
processes for each solid dosage drug product prior to manufacturing and shipping
the drug product, except that the Company is permitted under the terms of the
consent decree to manufacture and ship from its facilities six identified drug
products at its own risk provided that: (i) at least twice per month, the
Company's independent expert certifies that each batch of drug product upon
validation will have been manufactured in accordance with the FDA Regulations
and the formulation described in the drug products approved NDA ("New Drug
Application") or ANDA, until such time as validation is completed for these
products; and (ii) for any batches of these products that have already been
manufactured, such certification will include certification by a company
representative with personal knowledge of the records relating to such drug that
they are accurate and complete and a certification signed by an independent
expert that he has personally reviewed the records provided and that in his
professional opinion, the foregoing requirement concerning validation has been
met. The Company commenced shipments of five of the six solid dosage products
under the foregoing certification process. After review by the Company and its
consultants of one of the Company's six core products, a hydrocone bitartrate
5mg and acetaminophen 500mg tablet, discrepancies were discovered with some of
the data in the Company's ANDA. This resulted in a voluntary recall of this
product and the withdrawal of the ANDA. For the fiscal years ended December 31,
1995, 1994 and 1993, the remaining five products accounted for approximately
61%, 63% and 49% of the total sales of the Company, respectively.

During 1992, the Company understood that the Department of Justice ("DOJ")
was continuing to conduct an ongoing criminal investigation into the Company's
ANDAs, and related manufacturing and recordkeeping practices. In March of 1993,
the Company received a second Federal grand jury subpoena for documents relating
to two specific products and any other products manufactured by the Company for
which improper records may have been kept. As a result of the government's
investigation, the Company discovered certain product adulterations and
recordkeeping problems with five products manufactured at the Company's Brooklyn
plant. As a result of the above, for certain products, the Company indefinitely
ceased production, initiated a product recall and recorded a charge to
operations of approximately $5,935,000 for the year ended December 31, 1993,
consisting of

F-17
<PAGE>
________________________NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS________________________

December 31, 1995, 1994 and 1993 and June 30, 1996 and 1995 (unaudited)
inventory write-offs ($2,925,000), a recall of products sold ($950,000) and the
DOJ settlement of $2,060,000, as discussed below. Included in 1993 net sales are
sales of discontinued products of approximately $4,806,000.

On June 21, 1993, the Company entered into a plea agreement with the DOJ to
resolve the government's investigation. Under the terms of the plea agreement,
the Company agreed to plead guilty to five counts of adulteration of a single
drug product shipped in interstate commerce and related recordkeeping
violations. The plea agreement also requires the Company to pay a fine of
$2,500,000 over five years in quarterly installments of $125,000 beginning
September 15, 1993. Accordingly, the Company has recorded a provision of
$2,060,000 (net of imputed interest). As of June 30, 1996, the Company has only
paid two quarterly installments and additional partial payments of $100,000. The
plea agreement stipulates that if the Company does not make timely payments, the
entire fine becomes due and payable. As a result, the entire DOJ settlement has
been reclassified as a current liability in the 1995 and 1994 consolidated
balance sheets. At the present time, no action has been initiated by the DOJ to
require immediate payment of the entire amount. Should the DOJ require immediate
payment, it could result in a material adverse impact on the financial condition
of the Company.

On March 31, 1993, and April 1, 1993, five lawsuits were filed by
shareholders against the Company and three or more of the Company's directors.
Each of the actions alleged that the Company and its directors made misleading
statements and omissions relating to the prospects of the Company's business and
products, including products under development, as well as relating to the
status of the Department of Justice and FDA investigations. Each of the actions
purported to be brought on behalf of a class of the Company's shareholders.
Also, on May 20, 1993 and October 14, 1993, two separate shareholders derivative
lawsuits were filed against the Company and three or more of the Company's
directors. Each of these lawsuits alleged that the Company and its directors
concealed certain government investigations by the FDA and the Department of
Justice. These actions also alleged that the directors breached their fiduciary
duty in connection with their dispositions of their share of the Company's
common stock on the basis of material information which was not publicly known.
In June 1994, the plaintiffs of the five lawsuits and the two
shareholder-derivative lawsuits and the Company agreed to a settlement of these
lawsuits. The Company agreed to pay to the plaintiffs $1,000,000 in cash, which
has been paid by the Company's insurance carrier and, at the Company's option,
either (i) the issuance of shares of the Company's common stock having a value,
as of the date of distribution, of $3,000,000 or (ii) the payment by the Company
of $3,000,000 in cash or (iii) any combination of issuance of shares or payment
of cash by the Company having a combined value as of the date of distribution of
$3,000,000. In November 1995, the Company satisfied the remainder of its
settlement obligation by issuing 824,742 shares of its common stock valued at
$3,000,000 or $3.6375 per share.

On November 12, 1993, the Securities and Exchange Commission ("SEC")
requested that the Company provide to the SEC, on a voluntary basis, information
and documents regarding the ingredients and filings relating to the following
drugs: quinidine gluconate, propylthiourical, acetaminophen and codeine
phosphate, metronidazole, quinidine sulfate, and hydraliazine hydrochloride. The
SEC advised the Company that the inquiry relates to public information
disseminated by the Company and trading in the Company's securities during the
period August 1987 through July 1993. The Company is cooperating with the SEC
and has made available various documents. These documents relate to the testing,
formulations and sale of these drugs which were maintained by the Company at the
offices of its counsel in Maryland. In April 1994, the SEC requested additional
documentation regarding these matters. The Company has complied with the
additional request. On July 5, 1994, the Company made a formal submission to the
SEC and outlined the parameters of a proposed settlement. An additional
submission was made on January 31, 1995 to bring additional information to the
SEC. In May 1995, a formal Order of Investigation was issued by the SEC covering
the foregoing matters. In June 1995, additional documents were submitted.
Officers and directors of the Company have also testified before the SEC. On
October 24, 1995, the SEC staff informed the Company that it would recommend
that the Commission authorize the institution of an administrative proceeding
pursuant to Section 21C of the Securities Exchange Act of 1934 (the "Exchange
Act") against the Company. Specifically the staff indicated it would seek an
Order after filing a complaint requiring the Company to cease and desist from
violating Section 17(a) of the Securities Act and Sections 10(b) and 13(a) of
the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. The
proposed action would allege that the Company's December 31, 1990 and December
31, 1991 Annual Reports on Form 10-K and March 31, 1991, June 30, 1991,
September 30, 1991, March 31, 1992, June 30, 1992 and September 30, 1992
quarterly reports on

F-18
<PAGE>
________________________NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS________________________

December 31, 1995, 1994 and 1993 and June 30, 1996 and 1995 (unaudited)
Form 10-Q were materially false and misleading. The SEC staff proposal conforms
in large part to the settlement proposal submitted by the Company.

A lawsuit has been filed by the minority shareholders of H.R. Cenci
Laboratories, Inc. and Cenci Powder Products, Inc. against the Company and
several of the officers of the Company. The lawsuit alleges that the Company has
breached several representations made during the course of negotiations leading
to the Company's purchase of 51% of the stock of H.R. Cenci Laboratories, Inc.
This action seeks unspecified compensatory damages, as well as punitive damages,
rescission, specific performance, reformation and a declaration as to what
amount, if any, is owed to plaintiff. Because of the early stage of this action,
it is not possible at this time to predict with reasonable certainty the
ultimate outcome of this matter and, accordingly, no provision has been made for
any potential costs relating to this matter.

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

(unaudited)

The Company was named a defendant in a complaint by the Company's labor
union funds which seeks sums, approximately $272,000, allegedly owed to these
funds under the Company's collective bargaining agreement. In April 1996, the
Company and the labor union funds agreed to settle the action which obligates
the Company to remain current on its obligations and to pay portions of the
alleged arrearages in installments. The Company has paid the alleged arrearages
under the stipulation, but is not current on its obligations as of the date of
this filing.

In April 1996, the Company received two complaints, seeking unspecified
damages, captioned Golovatskaya v. Halsey Drug Co., 96 Civ. 0662 and Petrakova
v. Halsey Drug, 96 Civ. 0660, both filed in the United States District Court for
the Eastern District of New York, alleging employment discrimination and
harassment against the Company. The Company has answered each of the complaints
and denied the material allegations asserted against it. No discovery has taken
place and the Company is unable to predict with reasonable certainty the outcome
of these actions.

On August 14, 1996, the staff forwarded an Offer of Settlement to the
Company's counsel which embodies the terms of the SEC staff proposal, and
requires the Company to "Cease and desist from committing or causing any
violation and any future violation" the Securities law. If the Offer of
Settlement is approved by the Commission, the Company will not be required to
pay any additional fines.

NOTE N - SALE OF COMMON STOCK

On March 30, 1995, the Company entered into an agreement with Zatpack which
provides for the purchase of 500,000 shares of common stock of the Company by
Zatpack, with registration rights, in consideration of $1,000,000. The
$1,000,000 consideration consists of the cancellation of indebtedness (incurred
by the Company's subsidiaries for the purchase of raw materials delivered from
affiliates of Zuellig) and shares of Indiana Fine Chemicals Corporation. As a
result of the above transaction, the Company owns 100% of Indiana Fine Chemical
Corporation (prior to the above transaction, the Company owned 70% of Indiana
Fine Chemical Corporation). In addition, the Company issued a convertible
promissory note to Zatpack, dated December 1, 1994 (Note E). Zatpack has
acquired the above assets from Zuellig and its subsidiaries.

On October 27, 1994, the Company sold 500,000 shares of its common stock in
exchange for $1,000,000 from Ranbaxy Pharmaceuticals, Inc. ("Ranbaxy"). In
connection with these shares, Ranbaxy had the right to have its shares of the
Company's common stock registered under the Securities Act of 1993. In July
1995, the Company repurchased the 500,000 shares from Ranbaxy for $1,100,000.

NOTE O - SIGNIFICANT CUSTOMERS AND SUPPLIERS

The Company sells its products to a large number of customers who are
primarily drug distributors, drug store chains and wholesalers and are not
concentrated in any specific region. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. During
1995, the Company had net sales to two customers in excess of 10% of total
sales, each aggregating 25% and 11% of total sales, respectively. During 1994,
the Company had net sales to three customers in excess of 10% of total sales,
each aggregating 12% of total sales. During 1993, the Company had net sales to
two customers in excess of 10% of total sales, each aggregating 12% of total
sales. Balances due from these customers were approximately 25% and 7% of total
accounts receivable at December 31, 1995 and 1994, respectively. The loss of any
of these customers could have a material adverse effect on the Company.

F-19
<PAGE>
________________________NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS________________________

December 31, 1995, 1994 and 1993 and June 30, 1996 and 1995 (unaudited)

During 1995, the Company purchased approximately $2,741,000 of its raw
materials from Mallinckrodt and amounts due this supplier represented
approximately 29.7% of accounts payable as of December 31, 1995. The federal
drug application process requires specification of raw materials suppliers. If
raw materials from a supplier specified in a drug application were to become
unavailable on commercially acceptable credit terms, FDA supplemental approval
of any new supplier would be required. In view of the FDA consent decree and the
suspension of review of the Company's ANDA by the FDA, the Company would be
unable to obtain FDA supplemental approval at the Brooklyn plant for a new
supplier except in very limited circumstances. The Drug Enforcement
Administration limits the quantity of the Company's inventories of certain raw
materials used in the production of controlled substances based on historical
sales data. These limitations could increase the likelihood of raw material
shortages and of manufacturing delays in the event the Company was required to
find new suppliers of these raw materials. There can be no assurance that the
Company will not face difficulties in obtaining raw materials on commercially
acceptable terms, which could have a material adverse effect on the Company.

F-20

<PAGE>

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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN IS CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<S> <C>
PAGE
-----------
Available Information............................ 2
Prospectus Summary............................... 3
Risk Factors..................................... 6
The Private Offerings............................ 12
Use of Proceeds.................................. 14
Dilution......................................... 14
Capitalization................................... 15
Stock Price and Dividend Policy.................. 16
Selected Financial Data.......................... 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 18
Business......................................... 25
Legal Proceedings................................ 36
Management....................................... 41
Certain Transactions............................. 47
Principal Shareholders........................... 49
Selling Securityholders.......................... 51
Plan of Distribution............................. 54
Description of Securities........................ 55
Legal Matters.................................... 58
Experts.......................................... 58
Index to Financial Statements.................... F-1
</TABLE>

<PAGE>
7,197,066 SHARES

OF
COMMON STOCK

HALSEY DRUG CO., INC.
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