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                                                                    EXHIBIT 10.4

                      GUARANTORS GENERAL SECURITY AGREEMENT

         THIS GUARANTORS GENERAL SECURITY AGREEMENT ("Guarantors Security
Agreement") is made and entered into as of December 20, 2002, among Houba, Inc.
("Houba"), an Indiana corporation, with its principal place of business at 16235
State Road 17, Culver, Indiana 46511, Halsey Pharmaceuticals, Inc. ("HPI"), a
Delaware corporation, with its principal place of business at 695 North
Perryville Road, Rockford, Illinois 61107 (Houba and HPI are each hereinafter
referred to as a "Guarantor" and both of which are collectively referred to as
the "Guarantors"), and Galen Partners III, L.P., a Delaware limited partnership,
with its principal place of business at 610 Fifth Avenue, Fifth Floor, New York,
New York 10020 ("Galen" or "Agent"), acting in its capacity as agent for the
Purchasers (in such capacity, the "Agent") for the benefit of the Purchasers.

                               W I T N E S S E T H

         WHEREAS, Galen, certain other purchasers (together with Galen, the
"Purchasers") and Halsey Drug Co., Inc. (the "Company") have entered into a
Debenture Purchase Agreement dated as of the date hereof (as the same may be
amended, modified, supplemented or restated from time to time, the "Purchase
Agreement"; terms which are capitalized herein and not otherwise defined shall
have the meanings ascribed to them in the Purchase Agreement);

         WHEREAS, each of the Guarantors has executed and delivered to the
Purchasers a Continuing Unconditional Secured Guaranty dated the date hereof
(each a "Guaranty") of the Company's obligations under the Purchase Agreement
(collectively, the "Obligations"); and

         WHEREAS, the Purchasers have required, as a condition precedent to the
effectiveness of the Purchase Agreement, that each Guarantor (i) grant to the
Agent, for the ratable benefit of the Purchasers, a security interest in and to
the Collateral (as defined in Section II below) and (ii) execute and deliver
this Guarantors Security Agreement in order to secure the payment and
performance by such Guarantor of the Guaranty.

         NOW, THEREFORE, in consideration of the premises and in order to induce
the Purchasers to enter into and perform the Purchase Agreement, each Guarantor
hereby agrees as follows:

         SECTION I. CREATION OF SECURITY INTEREST.

         A.       Security Interest. Each Guarantor hereby pledges, assigns and
grants to the Agent a continuing perfected lien and security interest having
priority over any and all other security interest (except as otherwise provided
in the Subordination Agreement), in all of such Guarantor's right, title and
interest in and to the Collateral (as defined in Section II below) in order to
secure the payment and performance of all Obligations owing by such Guarantor.
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         B.       Guarantors Remains Liable. Anything herein to the contrary
notwithstanding, (i) the Guarantors shall remain liable under the contracts and
agreements included in the Guarantors' Collateral to the extent set forth
therein to perform all of their duties and obligations thereunder to the same
extent as if this Guarantors General Security Agreement had not been executed,
(ii) the exercise by the Agent of any of the rights hereunder shall not release
the Guarantors from any of their duties or obligations under the contracts and
agreements included in the Collateral and (iii) neither the Agent nor any
Purchaser shall have any obligation or liability under the contracts and
agreements included in the Collateral by reason of this Guarantors Security
Agreement, the Purchase Agreement or any other Transaction Document, nor shall
the Agent or any Purchaser be obligated to perform any of the obligations or
duties of the Guarantors thereunder or to take any action to collect or enforce
any claim for payment assigned hereunder.

         SECTION II. COLLATERAL.

         For purposes of this Guarantors Security Agreement, the term
"Collateral" shall mean, with respect to each Guarantor, all of the kinds and
types of property described in subsections A. through E. of this Section II,
whether now owned or hereafter at any time arising, acquired or created by such
Guarantor and wherever located, and includes all replacements, additions,
accessions, substitutions, repairs, proceeds and products relating thereto or
therefrom, and all documents, ledger sheets and files of such Guarantor relating
thereto and all Proceeds of Collateral. "Proceeds" hereunder include (i)
whatever is now or hereafter received by such Guarantor upon the sale, exchange,
collection or other disposition of any item of Collateral, whether such proceeds
constitute inventory, accounts, accounts receivable, general intangibles,
instruments, securities (including, without limitation, United States of America
Treasury Bills), credits, claims, demands, documents, letters of credit and
letter of credit proceeds, chattel paper, documents of title, certificates of
title, certificates of deposit, warehouse receipts, bills of lading, leases,
deposit accounts, money, tax refund claims, contract rights, royalties, goods,
equipment, payment under insurance (whether or not the Agent is the loss payee
thereof, or any indemnities, warranties or guaranties, payable by reason of loss
or damage to or otherwise with respect to any or the foregoing Collateral, and
(ii) any such items which are now or hereafter acquired by such Guarantor with
any proceeds of Collateral hereunder.

         A.       Accounts. All of such Guarantor's accounts, whether now
existing or existing in the future, including without limitation (i) all
accounts receivable (whether or not specifically listed on schedules furnished
to the Agent), including, without limitation, all accounts created by or arising
from all of such Guarantor's sales of goods or rendition of services made under
any of such Guarantor's trade names, or through any of its divisions, (ii) all
unpaid seller's rights (including rescission, replevin, reclamation and stoppage
in transit) relating to the foregoing or arising therefrom, (iii) all rights to
any goods represented by any of the foregoing, including returned or repossessed
goods, (iv) all reserves and credit balances held by such Guarantor with respect
to any such accounts receivable or account debtors, (v) all
health-care-insurance receivables, (vi) deposit accounts, (vii) letter-of-credit
rights, (viii) instruments (including, without limitation, promissory notes) and
(ix) all guarantees or collateral for any of the foregoing (all of the foregoing
property and similar property being hereinafter referred to as "Accounts");

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         B.       Inventory. All of such Guarantor's inventory, including
without limitation (i) all raw materials, work in process, parts, components,
assemblies, supplies and materials used or consumed in such Guarantor's
businesses, wherever located and whether in the possession of such Guarantor or
any other Person (for the purposes of this Guarantors General Security
Agreement, the term "Person" means any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, limited liability company, institution, entity, party or
government, including any division, agency or department thereof); (ii) all
goods, wares and merchandise, finished or unfinished, held for sale or lease or
leased or furnished or to be furnished under contracts of service, wherever
located and whether in the possession of such Guarantor or any other person or
entity; and (iii) all goods returned to or repossessed by such Guarantor (all of
the foregoing property being hereinafter referred to as "Inventory");

         C.       Equipment. All of the equipment owned or leased by such
Guarantor, including, without limitation, machinery, equipment, office equipment
and supplies, computers and related equipment, furniture, furnishings, tools,
tooling, jigs, dies, fixtures, manufacturing implements, fork lifts, trucks,
trailers, motor vehicles, and other equipment (all of the foregoing property
being hereinafter referred to as "Equipment");

         D.       Intangibles. All of such Guarantor's general intangibles
(including, without limitation, payment intangibles) instruments, securities
(including without limitation United States of America Treasury Bills), credits,
claims, demands, documents, letters of credit and letter of credit proceeds,
chattel paper, documents of title, certificates of title, certificates of
deposit, warehouse receipts, bills of lading, leases which are permitted to be
assigned or pledged, deposit accounts, money, tax refund claims, contract rights
which are permitted to be assigned or pledged (all of the foregoing property
being hereinafter referred to as "Intangibles"); and

         E.       Intellectual Property. All of each Guarantor's intellectual
property, including, without limitation, New Drug Applications, Investigatory
New Drug Applications, Abbreviated New Drug Applications, Alternative New Drug
Applications, registrations and quotas as issued by the Drug Enforcement
Administration and/or the Attorney General of the United States pursuant to the
Controlled Substances Act, certifications, permits and approvals of federal and
state governmental agencies, patents, patent applications, trademarks, trademark
applications, service marks, service mark applications, trade names, domain
names, technical knowledge and processes, formal or informal licensing
arrangements which are permitted to be assigned or pledged, blueprints,
technical specifications, computer software, programs, databases, copyrights,
copyright applications and all confidential and proprietary information,
including, without limitation, know-how, trade secrets, manufacturing and
production processes and techniques, inventions, research and development
information, databases and data, including, without limitation, technical data,
financial and marketing and business data, pricing and cost information and
business and marketing plans, and all embodiments thereof, and rights thereto,
including, without limitation, all of such Guarantor' rights to use the patents,
trademarks, copyrights, service marks, or other property of the aforesaid nature
of other Persons now or hereafter licensed to such Guarantor, together with the
goodwill of the business symbolized by or connected with such Guarantor's
trademarks, copyrights, service marks, licenses and the other rights included in
this Section II(E).

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         F.       Distributions. All interest, dividends, distributions, cash,
instruments and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of the then
existing Collateral.

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         SECTION III. THE GUARANTORS' REPRESENTATIONS AND
                      WARRANTIES.

         Each Guarantor severally represents and warrants as follows:

         A.       Places of Business. Such Guarantor has no places of business,
or warehouses in which it leases space, other than those set forth on Section
IIIA of Schedule A, a copy of which is attached hereto and made a part hereof
("Schedule A").

         B.       Location of Collateral. Except for the movement of Collateral
from time to time from one place of business or warehouse listed on Section IIIA
of Schedule A to another place of business or warehouse listed on Section IIIA
of such Schedule A, the Collateral is located at such Guarantor's chief
executive offices or other places of business or warehouses listed on such
Section IIIA of Schedule A, and not at any other location.

         C.       Restrictions on Collateral Disposition. None of the Collateral
is subject to contractual obligations that may restrict or inhibit the Agent's
rights or ability to sell or dispose of the Collateral or any part thereof after
the occurrence of an Event of Default except (i) the rights of Watson under the
Watson Loan Agreement and the documents executed in connection therewith,
including, without limitation, the Watson Security Agreement dated as of March
29, 2000 (the "Watson Security Agreement"); (ii) the rights of the investors in
the 5% convertible senior secured debentures due March 31, 2006 issued pursuant
to a certain Debenture and Warrant Purchase Agreement dated March 10, 1998, as
amended, between the Company and the purchasers listed on the signature page
thereto (the "March 1998 Debentures"); and (iii) the rights of the investors in
the 5% convertible senior secured debentures due March 31, 2006 issued pursuant
to certain Debenture and Warrant Purchase Agreement dated May 26, 1999, as
amended, between the Company and the purchasers listed on the signature page
thereto (the "May 1999 Debentures").

         D.       Status of Accounts. Status of Accounts. Each Account is based
on an actual and bona fide rendition of services or sale of goods/products to
customers, made by such Guarantor in the ordinary course of its business; the
Accounts created are its exclusive property and are not and shall not be subject
to any lien, consignment arrangement, encumbrance, security interest or
financing statement whatsoever, except (i) the lien in favor of Watson under the
Watson Loan Agreement and the documents executed in connection therewith,
including, without limitation, the Watson Security Agreement, (ii) the lien in
favor of the investors in the March 1998 Debentures and (iii) the lien in favor
of the investors in the May 1999 Debentures, and to the best knowledge of such
Guarantor, such Guarantor's customers have accepted the goods/products and
services, and owe and are obligated to pay the full amounts stated in the
invoices according to their terms, without any dispute, offset, defense or
counterclaim.

         E.       Copyrights, Trademarks and Patents.

                  (i)      Each of the Guarantors owns outright all of the
Intellectual Property Rights listed on Section 4.12 of the Schedule of
Exceptions attached to the Purchase Agreement free

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and clear of all liens and encumbrances except for the Permitted Encumbrances
and pays no royalty to anyone under or with respect to any of them.

                  (ii)     Each of the Guarantors has not licensed to anyone
the use of any of such Intellectual Property Rights and has no knowledge of the
infringing use by the Company or any Guarantor of any intellectual property
rights of third parties.

                  (iii)    Each of the Guarantors has no knowledge, nor has it
received any notice (a) of any conflict with the asserted rights of others with
respect to any Intellectual Property Rights used in, or useful to, the operation
of the business conducted by the Company and the Guarantors or with respect to
any license under which the Company or a Guarantor is licensor or licensee; or
(b) that the Intellectual Property Rights infringe upon the rights of any third
party.

                  (iv)     Each of the Guarantors has made or performed all
filings, recordings and other acts and has paid all required fees and taxes to
maintain and protect its interest in each and every item of intellectual
property in full force and effect throughout the world, and to protect and
maintain its interest therein including, without limitation, recordations of any
of its interests in patents and trademarks with the U.S. Patent and Trademark
Office and in corresponding national and international patent offices, and
recordation of any of its interests in any copyrights with the U.S. Copyright
Office and in corresponding national and international copyright offices. Each
of the Guarantors has used proper statutory notice in connection with its use of
each patent, trademark and copyright.

         F.       Inventory. All inventory of the Guarantors consists of a
quality and quantity usable and salable in the ordinary course of business,
except for obsolete items and items of below-standard quality, all of which have
been or will be written off or written down to net realizable value on the
consolidated balance sheet of the Guarantors and its Subsidiaries as of June 30,
2002. The quantities of each type of inventory (whether raw materials,
work-in-process, or finished goods) are not excessive, but are reasonable and
warranted in the present circumstances of the Guarantors.

         G.       Ownership. Each of the Guarantors is the legal and beneficial
owner of the Collateral of the Guarantors free and clear of any lien, claim,
option or right of others, except for the security interest created under this
Guarantors General Security Agreement, the Watson Security Agreement and the
Company Security Agreements executed in connection with the March 1998
Debentures and the May 1999 Debentures. No effective financing statement or
other instrument similar in effect covering all or any part of such Collateral
or listing the Guarantors or any trade name of the Guarantors is on file in any
recording office, except such as may have been filed relating to the Watson Loan
Agreement, the March 1998 Debentures and the May 1999 Debentures. The Agent has,
for the benefit of the Purchasers, a valid and perfected security interest in
the Collateral which security interest has priority over any and all other
security interests (except as provided in the Subordination Agreement) in such
Collateral.

         SECTION IV. COVENANTS OF THE GUARANTORS.

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         Each Guarantor agrees (which agreements shall be several as to each
Guarantor except as otherwise provided) as follows:

         A.       Defend Against Claims. Such Guarantor will defend the
Collateral against all claims and demands of all Persons at any time claiming
the same or any interest therein unless both the Agent and such Guarantor
determine that the claim or demand is not material and that, consequently, such
defense would not be consistent with good business judgment. Such Guarantor will
permit any lien notices with respect to the Collateral or any portion thereof to
exist or be on file in any public office except for those in favor of the Agent
and those permitted under the terms of the Purchase Agreement.

         B.       Change in Collateral Location. Such Guarantor will not (i)
change its corporate name, (ii) change the location of its chief executive
office or establish any place of business other than those specified in Section
IIIA of Schedule A, or (iii) move or permit movement of the Collateral from the
locations specified thereon except from one such location to another such
location, unless in each case such Guarantor shall have given the Agent at least
thirty (30) days prior written notice thereof, and shall have, in advance,
executed and caused to be filed and/or delivered to the Agent any financing
statements or other documents required by the Agent to perfect the security
interest of the Agent in the Collateral in accordance with Section IV.C. hereof,
all in form and substance satisfactory to the Agent.

         C.       Additional Financing Statements. Promptly upon the reasonable
request of the Agent, such Guarantor will execute and deliver or use its best
efforts to procure any document, give any notices, execute and file any
financing statements, mortgages or other documents, all in form and substance
satisfactory to the Agent, mark any chattel paper, deliver any chattel paper or
instruments to the Agent and take any other actions that are necessary or, in
the opinion of the Agent, desirable to perfect or continue the perfection and
the first priority of the Agent's security interest in the Collateral, to
protect the Collateral against the rights, claims, or interests of third
persons, or to effect the purposes of this Guarantors Security Agreement. Such
Guarantor will pay the costs incurred in connection with any of the foregoing.

         D.       Additional Liens; Transfers. Without the prior written consent
of the Agent, such Guarantor will not, in any way, hypothecate or create or
permit to exist any lien, security interest, charge or encumbrance on or other
interest in the Collateral, other than those permitted under the terms of the
Purchase Agreement and the lien in favor of Watson pursuant to the Watson Loan
Agreement and documents relative thereto, the investors in the March 1998
Debentures and the investors in the May 1999 Debentures, and such Guarantor will
not sell, transfer, assign, pledge, collaterally assign, exchange or otherwise
dispose of the Collateral, other than the sale of Inventory in the ordinary
course of business and the sale of obsolete or worn out Equipment.
Notwithstanding the foregoing, if the proceeds of any such sale consist of
notes, instruments, documents of title, letters of credit or chattel paper, such
proceeds shall be promptly delivered to the Agent to be held as Collateral
hereunder. If the Collateral, or any part thereof, is sold, transferred,
assigned, exchanged, or otherwise disposed of in violation of these provisions,
the security interest of the Agent shall continue in such Collateral or part
thereof notwithstanding such sale, transfer, assignment, exchange or other
disposition, and such Guarantor will hold the proceeds thereof for the benefit
of the Agent, and promptly transfer such proceeds to the Agent in kind.

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         E.       Contractual Obligations. Such Guarantor will not enter into
any contractual obligations which may restrict or inhibit the Agent's rights or
ability to sell or otherwise dispose of the Collateral or any part thereof after
the occurrence or during the continuance of an Event of Default.

         F.       Agent's Right to Protect Collateral. Upon the occurrence or
continuance of an Event of Default, the Agent shall have the right at any time
to make any payments and do any other acts the Agent may deem necessary to
protect the security interests of the Purchasers in the Collateral, including,
without limitation, the rights to pay, purchase, contest or compromise any
encumbrance, charge or lien which, in the reasonable judgment of the Agent,
appears to be prior to or superior to the security interests granted hereunder,
and appear in and defend any action or proceeding purporting to affect its
security interests in, and/or the value of, the Collateral. The Guarantors
hereby jointly and severally agree to reimburse the Agent for all payments made
and expenses incurred under this Guarantors Security Agreement including
reasonable fees, expenses and disbursements of attorneys and paralegals acting
for the Agent, including any of the foregoing payments under, or acts taken to
protect its security interests in, the Collateral, which amounts shall be
secured under this Guarantors Security Agreement, and agree they shall be bound
by any payment made or act taken by the Agent hereunder absent the Agent's gross
negligence or willful misconduct. The Agent shall have no obligation to make any
of the foregoing payments or perform any of the foregoing acts.

         G.       Further Obligations With Respect to Accounts. In furtherance
of the continuing assignment and security interest in the Accounts of such
Guarantor granted pursuant to this Guarantors Security Agreement, upon the
creation of Accounts, upon the Agent's request, such Guarantor will execute and
deliver to the Agent in such form and manner as the Agent may require, solely
for its convenience in maintaining records of Collateral, such confirmatory
schedules of Accounts, and other appropriate reports designating, identifying
and describing the Accounts as the Agent may reasonably require. In addition,
upon the Agent's request, such Guarantor shall provide the Agent with copies of
agreements with, or purchase orders from, the customers of such Guarantor and
copies of invoices to customers, proof of shipment or delivery and such other
documentation and information relating to said Accounts and other Collateral as
the Agent may reasonably require. Furthermore, upon the Agent's request, such
Guarantor shall deliver to the Agent any documents or certificates of title
issued with respect to any property included in the Collateral, and any
promissory notes, letters of credit or instruments related to or otherwise in
connection with any property included in the Collateral, which in any such case
came into the possession of such Guarantor, or shall cause the issuer thereof to
deliver any of the same directly to the Agent, in each case with any necessary
endorsements in favor of the Agent. Failure to provide the Agent with any of the
foregoing shall in no way affect, diminish, modify or otherwise limit the
security interests granted herein. Each Guarantor hereby authorizes the Agent to
regard such Guarantor's printed name or rubber stamp signature on assignment
schedules or invoices as the equivalent of a manual signature by such
Guarantor's authorized officers or agents.

         H.       Insurance. Such Guarantor agrees to maintain public liability
insurance, third party property damage insurance and replacement value insurance
on the Collateral under such policies of insurance, with such insurance
companies, in such amounts and covering such risks as

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are at all times satisfactory to the Agent in its commercially reasonable
judgment. All policies covering the Collateral are to name the Agent as an
additional insured and the loss payee in case of loss, and are to contain such
other provisions as the Agent may reasonably require to fully protect the
Agent's interest in the Collateral and to any payments to be made under such
policies. Guarantor will provide notice to Agent prior to any change in
coverage.

         I.       Taxes. Such Guarantor agrees to pay, when due, all taxes
lawfully levied or assessed against such Guarantor or any of the Collateral
before any penalty or interest accrues thereon; provided, however, that, unless
such taxes have become a Federal tax or Employment Retirement Security Income
Act lien on any of the assets of such Guarantor, no such tax need be paid if the
same is being contested, in good faith, by appropriate proceedings promptly
instituted and diligently conducted and if an adequate reserve or other
appropriate provision shall have been made therefor as required in order to be
in conformity with generally accepted accounting principles and procedures in
effect in the United States of America.

         J.       Compliance with Laws. Such Guarantor agrees to comply in all
material respects with all requirements of law applicable to the Collateral or
any part thereof, or to the operation of its business or its assets generally,
unless such Guarantor contests in good faith, by appropriate legal,
administrative or other proceeding promptly instituted and diligently conducted,
any such requirements of law in a reasonable manner and in good faith. Such
Guarantor agrees to maintain in full force and effect, its respective licenses
and permits granted by any governmental authority as may be necessary or
advisable for such Guarantor to conduct its business in all material respects.

         K.       Maintenance of Property. Such Guarantor agrees to keep all
property useful and necessary to its business in good working order and
condition (ordinary wear and tear excepted) and not to commit or suffer any
waste with respect to any of its properties.

         L.       Environmental and Other Matters. Such Guarantor will conduct
its business so as to comply in all respects with all environmental, land use,
occupational, safety or health laws, regulations, directions, ordinances,
criteria and guidelines in all jurisdictions in which it is or may at any time
be doing business, except to the extent that such Guarantor is contesting, in
good faith by appropriate legal, administrative or other proceedings, promptly
instituted and diligently conducted, any such law, regulation, direction,
ordinance, criteria, guideline, or interpretation thereof or application
thereof; provided, further, that such Guarantor shall comply with the order of
any court or other governmental authority relating to such laws unless such
Guarantor shall currently be prosecuting an appeal, proceedings for review or
administrative proceedings and shall have secured a stay of enforcement or
execution or other arrangement postponing enforcement or execution pending such
appeal, proceedings for review or administrative proceedings.

         M.       Intellectual Property. With respect to each item of its
intellectual property, each of the Guarantors agrees to take, at its expense,
all necessary steps, including, without limitation, in the U.S. Patent and
Trademark Office, the U.S. Copyright Office and any other governmental
authority, to (i) maintain the validity and enforceability of such intellectual
property and maintain such intellectual property in full force and effect, and
(ii) pursue the registration and maintenance of each patent, trademark, or
copyright registration or application,

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<PAGE>
now or hereafter included in such intellectual property Collateral of the
Guarantors, including, without limitation, the payment of required fees and
taxes, the filing of responses to office actions issued by the U.S. Patent and
Trademark Office, the U.S. Copyright Office or other governmental authorities,
the filing of applications for renewal or extension, the filing of affidavits
under Sections 8 and 15 of the U.S. Trademark Act, the filing of divisional,
continuation, continuation-in-part, reissue and renewal applications or
extensions, the payment of maintenance fees and the participation in
interference, reexamination, opposition, cancellation, infringement and
misappropriation proceedings. Neither the Guarantors nor the Grantor shall,
without the prior written consent of the Agent, discontinue use of or otherwise
abandon any intellectual property Collateral, or abandon any right to file an
application for any patent, trademark or copyright, unless the Guarantors shall
have previously determined that such use or the pursuit or maintenance of such
intellectual property is no longer desirable in the conduct of the Guarantors'
business and that the loss thereof would not be reasonably likely to have a
Material Adverse Effect, in which case, the Guarantors will give prompt notice
of any such abandonment to the Agent.

         N.       Further Assurances. Such Guarantor shall take all such further
actions and execute all such further documents and instruments (including, but
not limited to, collateral assignments of Intellectual Property and Intangibles
or any portion thereof) as the Agent may at any time reasonably determine in its
sole discretion to be necessary or desirable to further carry out and consummate
the transactions contemplated by the Purchase Agreement and the documentation
relating thereto, including this Guarantors Security Agreement, and to perfect
or protect the liens (and the priority status thereof) of the Agent in the
Collateral.

         SECTION V. REMEDIES.

         A.       Obtaining the Collateral Upon Default. If any Event of Default
shall have occurred and be continuing, then and in every such case, subject to
any mandatory requirements of applicable law then in effect, the Agent, in
addition to any rights now or hereafter existing under applicable law and
subject to the Subordination Agreement, shall have all rights as a secured
creditor under the Uniform Commercial Code in all relevant jurisdictions and
may:

                  (i)      personally, or by agents or attorneys, immediately
         retake possession of the Collateral or any part thereof, from any
         Guarantor or any other Person who then has possession of any part
         thereof, with or without notice or process of law, and for that purpose
         may enter upon such Guarantor's premises where any of the Collateral is
         located and remove the same and use in connection with such removal
         any and all services, supplies, aids and other facilities of such
         Guarantor;

                  (ii)     instruct the obligor or obligors on any agreement,
         instrument or other obligation (including, without limitation, the
         Accounts) constituting the Collateral to make any payment required by
         the terms of such instrument or agreement directly to the Agent;

                  (iii)    withdraw all monies, securities and instruments held
         pursuant to any pledge arrangement for application to the Obligations;

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<PAGE>
                  (iv)     sell, assign or otherwise liquidate, or direct any
         Guarantor to sell, assign or otherwise liquidate, any or all of the
         Collateral or any part thereof, and take possession of the proceeds of
         any such sale or liquidation;

                  (v)      take possession of the Collateral or any part
         thereof, by directing any Guarantor in writing to deliver the same to
         the Agent at any place or places designated by the Agent, in which
         event such Guarantor shall at its own expense:

                           a.       forthwith cause the same to be moved to the
                  place or places so designated by the Agent and there delivered
                  to the Agent,

                           b.       store and keep any Collateral so delivered
                  to the Agent at such place or places pending further action by
                  the Agent as provided in Section V.B., and

                           c.       while the Collateral shall be so stored and
                  kept, provide such guards and maintenance services as shall be
                  necessary to protect the same and to preserve and maintain the
                  Collateral in good condition;

                  it being understood that any Guarantor's obligation to so
                  deliver the Collateral is of the essence of this Guarantors
                  Security Agreement and that, accordingly, upon application to
                  a court of equity having jurisdiction, the Agent shall be
                  entitled to a decree requiring specific performance by such
                  Guarantor of said obligation.

         B.       Disposition of the Collateral. Subject to the Subordination
Agreement any collateral repossessed by the Agent under or pursuant to Section
V.A. and any other Collateral whether or not so repossessed by the Agent, may be
sold, assigned, leased or otherwise disposed of under one or more contracts or
as an entirety, and without the necessity of gathering at the place of sale the
property to be sold, and in general in such manner, at such time or times, at
such place or places and on such terms as the Agent may, in compliance with any
mandatory requirements of applicable law, determine to be commercially
reasonable. Any of the Collateral may be sold, leased or otherwise disposed of,
in the condition in which the same existed when taken by the Agent or after any
overhaul or repair which the Agent shall determine to be commercially
reasonable. Any such disposition which shall be a private sale or other private
proceedings permitted by such requirements shall be made upon not less than ten
(10) days' written notice to such Guarantor specifying the time at which such
disposition is to be made and the intended sale price or other consideration
therefor, and shall be subject, for the ten (10) days after the giving of such
notice, to the right of such Guarantor or any nominee of such Guarantor to
acquire the Collateral involved at a price or for such other consideration at
least equal to the intended sale price or other consideration so specified. Any
such disposition which shall be a public sale permitted by such requirements
shall be made upon not less than ten (10) days' written notice to such Guarantor
specifying the time and place of such sale and, in the absence of applicable
requirements of law, shall be by public auction (which may, at the option of the
Agent, be subject to reserve), after publication at least once in The New York
Times not less than ten (10) days prior to the date of sale. If The New York
Times is not then being

                                      -11-
<PAGE>
published, publication may be made in lieu thereof in any newspaper then being
circulated in the City of New York, New York, as the Agent may elect. All
requirements of reasonable notice under this Section V.B. shall be met if such
notice is mailed, postage prepaid at least ten (10) days before the time of such
sale or disposition, to the Guarantor at its address set forth herein or such
other address as the Guarantor may have, in writing, provided to the Agent. The
Agent may, if it deems it reasonable, postpone or adjourn any sale of any
collateral from time to time by an announcement at the time and place of the
sale to be so postponed or adjourned without being required to give a new notice
of sale. The proceeds realized from the sale of any Collateral shall be applied
as follows: first, to the reasonable costs, expenses and attorneys' fees and
expenses incurred by Agent for collection and for acquisition, completion,
protection, removal, storage, sale and delivery of the Collateral; second, to
interest due on any of the Obligations and any fees payable under this
Agreement; and third, to the principal of the Obligations. If any deficiency
shall arise, Guarantors shall remain liable to Agent and Purchasers therefor.

         C.       Power of Attorney. Each Guarantor hereby irrevocably
authorizes and appoints the Agent, or any Person or agent the Agent may
designate, as such Guarantor's attorney-in-fact, at such Guarantor's cost and
expense, to exercise all of the following powers upon and at any time after the
occurrence and during the continuance of an Event of Default, which powers,
being coupled with an interest, shall be irrevocable until all of the
Obligations owing by such Guarantor shall have been paid and satisfied in full:

                  (i)      accelerate or extend the time of payment, compromise,
         issue credits, bring suit or administer and otherwise collect Accounts
         or proceeds of any Collateral;

                  (ii)     receive, open and dispose of all mail addressed to
         such Guarantor and notify postal authorities to change the address for
         delivery thereof to such address as the Agent may designate;

                  (iii)    give customers indebted on Accounts notice of the
         Agent's interest therein, and/or to instruct such customers to make
         payment directly to the Agent for such Guarantor's account;

                  (iv)     convey any item of Collateral to any purchaser
         thereof;

                  (v)      give any notices or record any liens under
         Section IV.C. hereof; and

                  (vi)     make any payments or take any acts under
         Section IV.F. hereof.

The Agent's authority under this Section V.C. shall include, without limitation,
the authority to execute and give receipt for any certificate of ownership or
any document, transfer title to any item of Collateral, sign such Guarantor's
name on all financing statements or any other documents deemed necessary or
appropriate to preserve, protect or perfect the security interest in the
Collateral and to file the same, prepare, file and sign such Guarantor's name on
any notice of lien, assignment or satisfaction of lien or similar document in
connection with any Account and prepare, file and sign such Guarantor's name on
a proof of claim in bankruptcy or similar document against any customer of such
Guarantor, and to take any other actions arising from or incident to the rights,
powers and

                                      -12-
<PAGE>
remedies granted to the Agent in this Guarantors Security Agreement. This power
of attorney is coupled with an interest and is irrevocable by such Guarantor.

         D.       Waiver of Claims. Except as otherwise provided in this
Guarantors Security Agreement, EACH GUARANTOR HEREBY WAIVES, TO THE EXTENT
PERMITTED BY APPLICABLE LAW, NOTICE AND JUDICIAL HEARING IN CONNECTION WITH THE
AGENT'S TAKING POSSESSION OF OR DISPOSING OF ANY OF THE COLLATERAL, INCLUDING,
WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT
REMEDY OR REMEDIES AND ANY SUCH RIGHT WHICH ANY GUARANTOR WOULD OTHERWISE HAVE
UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE, and
each Guarantor hereby further waives, to the extent permitted by law:

                  (i)      all damages occasioned by such taking of possession
                  except any damages which are the direct result of the Agent's
                  gross negligence or willful misconduct;

                  (ii)     all other requirements as to the time, place and
                  terms of sale or other requirements with respect to the
                  enforcement of the Agent's rights hereunder, except as
                  expressly provided herein; and

                  (iii)    all rights of redemption, appraisement, valuation,
                  stay, extension or moratorium now or hereafter in force under
                  any applicable law in order to prevent or delay the
                  enforcement of this Guarantors Security Agreement or the
                  absolute sale of the Collateral or any portion thereof, and
                  such Guarantor, for itself and all who may claim under it,
                  insofar as it or they now or hereafter lawfully may, hereby
                  waives the benefit of all such laws.

Any sale of, or the grant of options to purchase, or any other realization upon
any Collateral shall operate to divest all right, title, interest, claim and
demand, either at law or in equity, of such Guarantor therein and thereto, and
shall be a perpetual bar both at law and in equity against such Guarantor and
against any and all persons claiming or attempting to claim the Collateral so
sold, optioned or realized upon, or any part thereof, from, through and under
such Guarantor.

         E.       Remedies Cumulative. Each and every right, power and remedy
hereby specifically given to the Agent shall be in addition to every other
right, power and remedy specifically given under this Guarantors Security
Agreement, under the Purchase Agreement or under other documentation relating
thereto or now or hereafter existing at law or in equity, or by statute, and
each and every right, power and remedy whether specifically herein given or
otherwise existing may be exercised from time to time or simultaneously and as
often and in such order as may be deemed expedient by the Agent. All such
rights, powers and remedies shall be cumulative and the exercise or the
beginning of exercise of one shall not be deemed a waiver of the right to
exercise of any other or others. No delay or omission of the Agent in the
exercise of any such right, power or remedy and no renewal or extension of any
of the Obligations shall impair any such right, power or remedy or shall be
construed to be a waiver of any Default or Event of Default or any acquiescence
therein.

                                      -13-
<PAGE>
         SECTION VI. MISCELLANEOUS PROVISIONS.

         A.       Notices. All notices, approvals, consents or other
communications required or desired to be given hereunder shall be delivered in
person, by facsimile transmission followed promptly by first class mail, by a
nationally recognized courier service marked for next business day delivery or
by overnight mail, and delivered if to the Agent, then to the attention of Bruce
F. Wesson, c/o Galen Partners III, L.P., 610 Fifth Avenue, Fifth Floor, New
York, New York 10020, fax no. (212) 218-4990, with a copy to George N. Abrahams,
Esq., c/o Wolf, Block, Schorr and Solis-Cohen, 250 Park Avenue, New York, New
York 10177, fax no. (212) 986-0604, and if to the Guarantors, then to c/o Halsey
Drug Co., Inc., attention of Mr. Michael Reicher, 695 N. Perryville Road,
Rockford, Illinois 61107, with a copy to John P. Reilly, Esq., St. John & Wayne,
L.L.C., 2 Penn Plaza East, Newark, NJ 07105, fax no. (973) 491-3555.

         B.       Headings. The headings in this Guarantors Security Agreement
are for purposes of reference only and shall not affect the meaning or
construction of any provision of this Guarantors Security Agreement.

         C.       Severability. The provisions of this Guarantors Security
Agreement are severable, and if any clause or provision shall be held invalid or
unenforceable in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect, in that jurisdiction only, such clause or
provision, or part thereof, and shall not in any manner affect such clause or
provision in any other jurisdiction or any other clause or provision of this
Guarantors Security Agreement in any jurisdiction.

         D.       Amendments, Waivers and Consents. Any amendment or waiver of
any provision of this Guarantors Security Agreement and any consent to any
departure by any Guarantor from any provision of this Guarantors Security
Agreement shall be effective only if made or given in writing signed by the
Agent.

         E.       Interpretation of Agreement. All terms not defined herein
shall have the meaning set forth in the applicable Uniform Commercial Code.
Acceptance of or acquiescence in a course of performance rendered under this
Guarantors Security Agreement shall not be relevant in determining the meaning
of this Guarantors Security Agreement even though the accepting or acquiescing
party had knowledge of the nature of the performance and opportunity for
objection.

         F.       Continuing Security Interest. This Guarantors General Security
Agreement shall create a continuing security interest in the Collateral and
shall (i) remain in full force and effect until the Security Interest
Termination Date, (ii) be binding upon each Guarantor, and its successors and
assigns and (iii) inure to the benefit of the Agent and its successors and
assigns.

         G.       Reinstatement. To the extent permitted by law, this Guarantors
Security Agreement shall continue to be effective or be reinstated if at any
time any amount received by the Agent in respect of the Obligations owing by the
Guarantors is rescinded or must otherwise be restored or returned by the Agent
upon the occurrence or during the pendency of any Event of Default, all as
though such payments had not been made.

                                      -14-
<PAGE>
         H.       Survival of Provisions. All representations, warranties and
covenants of the Guarantors contained herein shall survive the execution and
delivery of this Guarantors Security Agreement, and shall terminate only upon
the full and final indefeasible payment and performance by the Guarantors of the
Obligations secured hereby.

         I.       Setoff. The Agent shall have all rights of setoff available at
law or in equity.

         J.       Power of Attorney. In addition to the powers granted to the
Agent under Section V.C., each Guarantor hereby irrevocably authorizes and
appoints the Agent, or any Person or agent the Agent may designate, as such
Guarantor's attorney-in-fact, at such Guarantor's cost and expense, to exercise
all of the following powers, which being coupled with an interest, shall be
irrevocable until all of the Obligations shall have been indefeasibly paid and
satisfied in full:

                  (i)      after the occurrence of an Event of Default, to
         receive, take, endorse, sign, assign and deliver, all in the name of
         the Agent or such Guarantor, any and all checks, notes, drafts, and
         other documents or instruments relating to the Collateral; and

                  (ii)     to request, at any time from customers indebted on
         Accounts, verification of information concerning the Accounts and the
         amounts owing thereon.

         K.       Indemnification; Authority of the Agent. Neither the Agent nor
any director, officer, employee, attorney or agent of the Agent shall be liable
to any Guarantor for any action taken or omitted to be taken by it or them
hereunder, except for its or their own gross negligence or willful misconduct,
nor shall the Agent be responsible for the validity, effectiveness or
sufficiency of this Guarantors Security Agreement or of any document or security
furnished pursuant hereto. The Agent and its directors, officers, employees,
attorneys and agents shall be entitled to rely on any communication, instrument
or document reasonably believed by it or them to be genuine and correct and to
have been signed or sent by the proper person or persons. Each Guarantor agrees
to indemnify and hold harmless the Agent and any other person from and against
any and all costs, expenses (including reasonable fees, expenses and
disbursements of attorneys and paralegals (including, without duplication,
reasonable charges of inside counsel)), claims or liability incurred by the
Agent or such person hereunder, unless such claim or liability shall be due to
willful misconduct or gross negligence on the part of the Agent or such person.

         L.       Release; Termination of Agreement. Subject to the provisions
of Section VI.G. hereof, this Guarantors Security Agreement shall terminate upon
full and final indefeasible payment and performance of all the Obligations owing
by each Guarantor. At such time, the Agent shall, at the request of any
Guarantor, reassign and redeliver to such Guarantor all of the Collateral
hereunder which has not been sold, disposed of, retained or applied by the Agent
in accordance with the terms hereof. Such reassignment and redelivery shall be
without warranty by or recourse to the Agent, except as to the absence of any
prior assignments by the Agent of its interest in the Collateral, and shall be
at the expense of such Guarantor.

                                      -15-
<PAGE>
         M.       Counterparts. This Guarantors Security Agreement may be
executed in one or more counterparts, each of which shall be deemed an original
but all of which shall together constitute one and the same agreement.

         N.       GOVERNING LAW. This Guarantors Security Agreement and the
rights of the parties hereunder shall be governed by, and construed in
accordance with, the laws of the State of New York wherein the terms of this
Guarantors Security Agreement were negotiated, excluding to the greatest extent
permitted by law any rule of law that would cause the application of the laws of
any jurisdiction other than the State of New York.

         O.       SUBMISSION TO JURISDICTION.

         (i)      Each of the parties hereto hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any New York State court or United States Federal court sitting
in New York City, and any appellate court from any thereof, in any action or
proceeding arising our of or relating to this Guarantors Security Agreement or
any of the other Transaction Documents (as such term is defined in the
Subordination Agreement) to which it is a party, or for recognition or
enforcement of any judgment, and each of the parties hereto irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in any such New York State court or, to
the fullest extent permitted by law, in such United States Federal court. Each
of the parties hereto agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the right that any party may otherwise have to bring any action or
proceeding relating to this Guarantors Security Agreement or any of the other
Transaction Documents in the courts of any other jurisdiction.

         (ii)     Each of the parties hereto irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or in relation to this Guarantors Security
Agreement or any other Transaction Document to which it is a party in any such
New York State or United States Federal court sitting in New York City. Each of
the parties hereto hereby irrevocably waives, to the fullest extent permitted by
law, the defense of an inconvenient forum to the maintenance of such action or
proceeding in any such court.

         P.       SERVICE OF PROCESS. EACH GUARANTOR HEREBY IRREVOCABLY AGREES
THAT SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
GUARANTORS SECURITY AGREEMENT MAY BE EFFECTED BY MAILING A COPY THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH GUARANTOR AT ITS ADDRESS
SET FORTH IN SECTION VI.A. HEREOF.

         Q.       LIMITATION OF LIABILITY. THE AGENT SHALL NOT HAVE ANY
LIABILITY TO ANY GUARANTOR (WHETHER SOUNDING IN TORT, CONTRACT, OR OTHERWISE)
FOR LOSSES SUFFERED BY ANY GUARANTOR IN CONNECTION WITH, ARISING OUT OF, OR IN
ANY WAY RELATED TO THE TRANSACTIONS OR RELATIONSHIPS CONTEMPLATED BY THIS
GUARANTORS SECURITY AGREEMENT,

                                      -16-
<PAGE>
OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, UNLESS IT IS
DETERMINED BY A FINAL AND NONAPPEALABLE JUDGMENT OR COURT ORDER BINDING ON THE
AGENT, THAT THE LOSSES WERE THE RESULT OF ACTS OR OMISSIONS CONSTITUTING GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT.

         R.       Delays; Partial Exercise of Remedies. No delay or omission of
the Agent to exercise any right or remedy hereunder, whether before or after the
happening of any Event of Default, shall impair any such right or shall operate
as a waiver thereof or as a waiver of any such Event of Default. No single or
partial exercise by the Agent of any right or remedy shall preclude any other or
further exercise thereof, or preclude any other right or remedy.

         S.       JURY TRIAL. EACH OF THE GUARANTORS AND THE AGENT HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO ANY TRANSACTION DOCUMENT OR THE ACTIONS OF ANY PARTY IN THE
NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT THEREOF.

         T.       Subject To Subordination Agreement. Notwithstanding anything
to the contrary contained herein, the rights and remedies of agent and the
purchases, and the obligations of the guarantors, under this guarantors general
security agreement are subject to the subordination agreement, as it may be
amended, supplemented or otherwise modified from time to time.

                           [SIGNATURE PAGE TO FOLLOW]

                                      -17-
<PAGE>
         IN WITNESS WHEREOF, each Guarantor has caused this Guarantors Security
Agreement to be duly executed and delivered as of the day and year first above
written.

                                                  HOUBA, INC.

                                                  By:___________________________
                                                  Name:
                                                  Title:

                                                  HALSEY PHARMACEUTICALS, INC.

                                                  By:___________________________
                                                  Name:
                                                  Title:

         By its acceptance hereof, as of the day and year first above written,
the Agent agrees to be bound by the provisions hereof applicable to it.

                                                  GALEN PARTNERS III, L.P.

                                                  By:___________________________
                                                  Name:
                                                  Title:
<PAGE>
                                   SCHEDULE A

SECTION III.A

-    Houba

             16235 State Road 17, Culver, Indiana 46511.

-    HPI

             695 N. Perryville Road, Rockford, Illinois 61107.

                                      -19-