<PAGE>
                                                                    EXHIBIT 10.2

                              HALSEY DRUG CO., INC.

                       COMPANY GENERAL SECURITY AGREEMENT

               THIS COMPANY GENERAL SECURITY AGREEMENT ("Company Security
Agreement") is made and entered into as of December 20, 2002 by and between
HALSEY DRUG CO., INC., a New York corporation (the "Debtor"), with its principal
place of business at 695 North Perryville Road, Rockford, Illinois 61107, and
GALEN PARTNERS III, L.P., a Delaware limited partnership ("Galen"), with its
principal place of business at 610 Fifth Avenue, 5th Floor, New York, New York
10020 acting in its capacity as agent for the Purchasers (as such term is
defined below) (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 the Debtor 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); and

               WHEREAS, the Purchasers have required, as a condition precedent
to the effectiveness of the Purchase Agreement, that the Debtor (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 Company Security Agreement in order to secure the payment and performance
by the Debtor of the obligations owing by the Debtor to the Purchasers under the
Purchase Agreement, the Debentures, the other Transaction Documents (as defined
in the Subordination Agreement) and each of the agreements, documents and
instruments delivered by the Debtor pursuant thereto or in connection therewith
(collectively, the "Obligations").

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

                  SECTION I. CREATION OF SECURITY INTEREST.

                  A.       Security Interest. The Debtor hereby pledges,
assigns and grants to the Agent a continuing perfected lien and security
interest, having priority over any and all other security interests (except as
otherwise provided in the Subordination Agreement), in all of the Debtor's
right, title and interest in and to the Collateral in order to secure the
payment and performance of all Obligations owing by the Debtor.

                  B.       Debtor Remains Liable. Anything herein to the
contrary notwithstanding, (i) the Debtor shall remain liable under the contracts
and agreements included in the Debtor's Collateral to the extent set forth
therein to perform all of its duties and obligations thereunder to the same
extent as if this Company Security Agreement had not been executed, (ii) the
exercise by the Agent
<PAGE>
of any of the rights hereunder shall not release the Debtor from any of its
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 Company 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 Debtor thereunder
or to take any action to collect or enforce any claim for payment assigned
hereunder.

                  SECTION II. COLLATERAL.

                  For purposes of this Company Security Agreement, the term
"Collateral" shall mean all of the kinds and types of property described in
subsections A. through G. of this Section II, whether now owned or hereafter at
any time arising, acquired or created by the Debtor 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 the Debtor relating thereto and all Proceeds of Collateral.
"Proceeds" hereunder include (i) whatever is now or hereafter received by the
Debtor 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 the Debtor with any proceeds of Collateral hereunder.

                  A.       Accounts. All of the Debtor'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 the Debtor's sales of goods or rendition of services made under any
of Debtor'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 the Debtor 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");

                  B.       Inventory. All of the Debtor's inventory, including
without limitation (i) all raw materials, work in process, parts, components,
assemblies, supplies and materials used or consumed in the Debtor's businesses,
wherever located and whether in the possession of the Debtor or any other Person
(for the purposes of this Company Security Agreement, the term "Person" "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,

                                       2
<PAGE>
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 the Debtor or any other Person or entity; and (iii) all goods
returned to or repossessed by the Debtor (all of the foregoing property being
hereinafter referred to as "Inventory");

                  C.       Equipment. All of the equipment owned or leased by
the Debtor, 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 the Debtor'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 the Debtor'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 the Debtor' rights to use
the patents, trademarks, copyrights, service marks, or other property of the
aforesaid nature of other Persons now or hereafter licensed to the Debtor,
together with the goodwill of the business symbolized by or connected with the
Debtor's trademarks, copyrights, service marks, licenses and the other rights
included in this Section II(E).

                  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.

                  G.       Subsidiaries. All of the shares of stock or other
securities of Houba, Inc. and Halsey Pharmaceuticals, Inc., and the
certificates, if any, representing such shares or other securities, and all
dividends, distributions, return of capital, 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 such shares or securities and all
subscription warrants, rights or options issued thereon or with respect

                                       3
<PAGE>
thereto, and all Investment Property, all, to the extent applicable, as further
set forth in the Stock Pledge Agreement.

                  SECTION III. THE DEBTOR'S REPRESENTATIONS AND WARRANTIES.

                  A.       Places of Business. The Debtor has no other place 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 the Debtor's chief
executive office 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 a curtain 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. Each Account is based on an
actual and bona fide rendition of services or sale of goods/products to
customers, made by the Debtor 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 the
Debtor, the Debtor'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)        Debtor owns outright all of the Intellectual
Property Rights listed on Section 4.12 of the Schedule of Exceptions attached to
the Purchase Agreement free 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.

                                       4
<PAGE>
                  (ii)       Debtor 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)      The Debtor 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)       The Debtor 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. The Debtor has used
proper statutory notice in connection with its use of each patent, trademark and
copyright.

                  F.       Inventory. All inventory of the Debtor 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 Debtor and its Subsidiaries as of September
30, 2001. 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 Debtor.

                  G.       Ownership. The Debtor is the legal and beneficial
owner of the Collateral of the Debtor free and clear of any lien, claim, option
or right of others, except for the security interest created under this Company
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 Debtor or any
trade name of the Debtor 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
otherwise provided in the Subordination Agreement) in such Collateral.

                                       5
<PAGE>
                  SECTION IV. COVENANTS OF THE DEBTOR.

                  A.       Defend Against Claims. The Debtor 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 the Debtor determine
that the claim or demand is not material and that, consequently, such defense
would not be consistent with good business judgment. The Debtor will not 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.

                                       6
<PAGE>
                  B.       Change in Collateral Location. The Debtor 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 therein except from one such location to another such
location, unless in each case the Debtor 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, the Debtor 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 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 Company Security Agreement. The Debtor will pay the costs incurred in
connection with any of the foregoing.

                  D.       Additional Liens; Transfers. Without the prior
written consent of the Agent, the Debtor 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 liens 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 Debtor
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 the Debtor will hold the proceeds thereof for the benefit of
the Agent, and promptly transfer such proceeds to the Agent in kind.

                  E.       Contractual Obligations. The Debtor 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

                                       7
<PAGE>
proceeding purporting to affect its security interests in, and/or the value of,
the Collateral. The Debtor hereby agrees to reimburse the Agent for all payments
made and expenses incurred under this Company 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 Company Security Agreement, and agrees it 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 the Debtor granted pursuant to this Company Security Agreement, upon the
creation of Accounts, upon the Agent's request, the Debtor 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, the Debtor shall provide the Agent with copies of
agreements with, or purchase orders from, the customers of the Debtor 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 Agent's request, the Debtor
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 the Debtor, 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. The Debtor hereby authorizes the Agent to regard the Debtor's
printed name or rubber stamp signature on assignment schedules or invoices as
the equivalent of a manual signature by the Debtor's authorized officers or
agents.

                  H.       Insurance. The Debtor 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 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. Debtor will
provide notice to Agent prior to any change in coverage.

                  I.       Taxes. The Debtor agrees to pay, when due, all taxes
lawfully levied or assessed against the Debtor 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 the Debtor, 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

                                       8
<PAGE>
in effect in the United States of America.

                  J.       Compliance with Laws. The Debtor 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 the Debtor contests, in good faith, by appropriate legal
administrative or other proceedings promptly instituted and diligently
conducted, any such requirements of law in a reasonable manner and in good
faith. The Debtor 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 the Debtor to conduct its business in all material respects.

                  K.       Maintenance of Property. The Debtor 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. The Debtor 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 the Debtor 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 the Debtor shall comply with the
order of any court or other governmental authority relating to such laws unless
the Debtor 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, the Debtor 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, now or hereafter included in such intellectual
property Collateral of the Debtor, 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 Debtor 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
Debtor 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 Debtor's business and that the loss thereof would not be reasonably
likely to have a Material Adverse Effect, in which case, the Debtor will give
prompt notice of any such abandonment to the Agent.

                  N.       Further Assurances. The Debtor shall take all such
further actions and

                                       9
<PAGE>
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 Company 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 the
         Debtor 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 the Debtor'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 the Debtor;

                  (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;

                  (iv)       sell, assign or otherwise liquidate, or direct the
         Debtor 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 the Debtor in writing to deliver the same to the
         Agent at any place or places designated by the Agent, in which event
         the Debtor 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 the Debtor's obligation to so deliver the
         Collateral is of the essence of this Company Security Agreement and
         that, accordingly, upon application to a court of

                                       10
<PAGE>
         equity having jurisdiction, the Agent shall be entitled to a decree
         requiring specific performance by the Debtor 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 the Debtor 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 the Debtor or any nominee of the Debtor
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 the Debtor
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 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 Debtor at its address set
forth herein or such other address as the Debtor 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. The Debtor hereby irrevocably
authorizes and appoints the Agent, or any Person or agent the Agent may
designate, as the Debtor's attorney-in-fact, at the Debtor'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 the Debtor 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;

                                       11
<PAGE>
                  (ii)       receive, open and dispose of all mail addressed to
         the Debtor 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 the Debtor'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,
transfer title to any item of Collateral, sign the Debtor'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 the Debtor'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 Debtor's name on a proof of claim in
bankruptcy or similar document against any customer of the Debtor, and to take
any other actions arising from or incident to the rights, powers and remedies
granted to the Agent in this Company Security Agreement. This power of attorney
is coupled with an interest and is irrevocable by the Debtor.

                  D.       Waiver of Claims. Except as otherwise provided in
this Company Security Agreement, the Debtor 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 THE DEBTOR WOULD OTHERWISE HAVE
UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE, and
the Debtor 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
         Company Security Agreement or the absolute sale of the Collateral or
         any portion thereof, and the Debtor, 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.

                                       12
<PAGE>
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 the Debtor therein and thereto, and shall
be a perpetual bar both at law and in equity against the Debtor 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 the Debtor.

                                       13
<PAGE>
                  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 Company 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.

                  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) 218-4999, with a copy to George N. Abrahams,
Esq., Wolf, Block, Schorr and Solis-Cohen, 250 Park Avenue, New York, New York
10177, fax no. (212) 986-0604 and if to Debtor, then to the 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 Company Security
Agreement are for purposes of reference only and shall not affect the meaning or
construction of any provision of this Company Security Agreement.

                  C.       Severability. The provisions of this Company 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
Company Security Agreement in any jurisdiction.

                  D.       Amendments, Waivers and Consents. Any amendment or
waiver of any provision of this Company Security Agreement and any consent to
any departure by the Debtor from any provision of this Company 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 Company Security Agreement shall not be relevant in determining the meaning
of this Company Security Agreement even though the accepting or acquiescing
party had knowledge of the nature of the performance and opportunity for
objection.

                                       14
<PAGE>
                  F.       Continuing Security Interest. This Company 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 the Debtor, 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
Company 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 Debtor 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.

                  H.       Survival of Provisions. All representations,
warranties and covenants of the Debtor contained herein shall survive the
execution and delivery of this Company Security Agreement, and shall terminate
only upon the full and final indefeasible payment and performance by the Debtor
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., the Debtor hereby irrevocably authorizes and
appoints the Agent, or any Person or agent the Agent may designate, as the
Debtor's attorney-in-fact, at the Debtor'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 the Debtor, 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 the Debtor 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 Company 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. The Debtor 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 Company Security Agreement shall
terminate upon full and final indefeasible payment and performance of all the
Obligations owing by the Debtor. At such time, the Agent shall,

                                       15
<PAGE>
at the request of the Debtor, reassign and redeliver to the Debtor 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 the Debtor.

                  M.       Counterparts. This Company 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 Company 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
Company 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 Company Security Agreement or any
of the other Transaction Documents (as such term is defined in the Purchase
Agreement) (the "Transaction Documents") 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 Company 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 Company
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. THE DEBTOR HEREBY IRREVOCABLY
AGREES THAT SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO
THIS COMPANY SECURITY AGREEMENT MAY BE EFFECTED BY MAILING A COPY THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE DEBTOR AT ITS ADDRESS SET
FORTH IN SECTION VI.A. HEREOF.

                                       16
<PAGE>
                  Q.       LIMITATION OF LIABILITY. THE AGENT SHALL NOT HAVE ANY
LIABILITY TO THE DEBTOR (WHETHER SOUNDING IN TORT, CONTRACT, OR OTHERWISE) FOR
LOSSES SUFFERED BY THE DEBTOR IN CONNECTION WITH, ARISING OUT OF, OR IN ANY WAY
RELATED TO THE TRANSACTIONS OR RELATIONSHIPS CONTEMPLATED BY THIS COMPANY
SECURITY AGREEMENT, 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 DEBTOR 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 the Agent
and the Purchasers, and the obligations of the Debtor, under this Company
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, the Debtor has caused this Company Security
Agreement to be duly executed and delivered as of the day and year first above
written.

                                                  HALSEY DRUG CO., 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:

                                       18
<PAGE>
                                   SCHEDULE A

IIIA      PLACES OF BUSINESS

          1.  695 N. Perryville Road, Rockford, Illinois 61107
          2.  77 Brenner Drive, Congers, New York
          3.  125 Wells Avenue, Congers, New York