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                                                                    EXHIBIT 10.3

                    CONTINUING UNCONDITIONAL SECURED GUARANTY
                                       BY
                                   HOUBA INC.

         WHEREAS, HALSEY DRUG CO., INC., a New York corporation (the
"Borrower"), entered into a Debenture Purchase Agreement dated as of December
20, 2002 (as amended through the date hereof, the "Purchase Agreement"; terms
used herein and not otherwise defined shall have the meanings given to them in
the Purchase Agreement) with the Purchasers listed on Exhibit A thereto (each a
"Lender" and collectively, the "Lenders");

         WHEREAS, pursuant to the Purchase Agreement, the Lenders have made
financial accommodations to the Borrower in accordance with the terms of the
Purchase Agreement;

         WHEREAS, Houba Inc. (the "Guarantor") will continue to receive certain
benefits from the accommodations hereinabove described and is therefore willing
to guaranty the prompt payment and performance of the obligations of the
Borrower, on the terms set forth in this Continuing Unconditional Secured
Guaranty ("Guaranty");

         WHEREAS, pursuant to the Purchase Agreement, the Lenders have required
that the Guarantor execute and deliver this Guaranty to Galen Partners III,
L.P., a Delaware limited partnership, acting in its capacity as agent for the
Lenders (the "Agent"), for the benefit of the Lenders, as a condition to the
effectiveness of the Purchase Agreement; and

         WHEREAS, the extension of credit by the Lenders to the Borrower is
necessary and desirable to the conduct and operation of the business of the
Borrower and will inure to the financial benefit of the Guarantor.

         NOW, THEREFORE, for value received and in consideration of any loan,
advance, or financial accommodation of any kind whatsoever heretofore, now or
hereafter made, given or granted to the Borrower by the Lenders (including,
without limitation, the loans evidenced by the Debenture as made by the Lenders
to the Borrower pursuant to, the Purchase Agreement) and other good and valuable
consideration (the sufficiency and receipt of which are hereby acknowledged),
the Guarantor unconditionally guarantees to the Agent for the benefit of the
Lenders (i) the full and prompt payment and performance when due, whether at
maturity or earlier, by reason of acceleration or otherwise, and at all times
thereafter, of all liabilities of the Borrower to the Lenders and (ii) the
prompt, full and faithful discharge by the Borrower of each and every term,
condition, agreement, representation, warranty or covenant now or hereafter made
by the Borrower to the Lenders, in each case, and the Agent under these clauses
(i) and (ii), pursuant to the Purchase Agreement, the Debentures, the other
Transaction Documents (as defined in the Subordination Agreement) or any
document or instrument delivered by the Borrower to the Lenders in connection
therewith or pursuant thereto (which, together with the liabilities described in
clause (i) hereof, are collectively referred to herein as the "Borrower's
Liabilities"). The Guarantor further agrees to pay all reasonable out-of-pocket
costs and expenses, including, without limitation, all court costs and
reasonable attorneys' and paralegals' fees paid or incurred by the Lenders and
the Agent (on behalf of the Lenders),
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in endeavoring to collect all or any part of the Borrower's Liabilities from, or
in prosecuting any action against the Guarantor or any other guarantor of all or
any part of the Borrower's Liabilities.

         Notwithstanding any provision of this Guaranty to the contrary, it is
intended that this Guaranty, and any liens and security interests granted by the
Guarantor to secure this Guaranty, not constitute a Fraudulent Conveyance (as
defined below). Consequently, the Guarantor agrees that if this Guaranty, or any
liens or security interests securing this Guaranty, would, but for the
application of this sentence, constitute a Fraudulent Conveyance, this Guaranty
and each such lien and security interest shall be valid and enforceable only to
the maximum extent that would not cause this Guaranty or such lien or security
interest to constitute a Fraudulent Conveyance, and this Guaranty shall
automatically be deemed to have been amended accordingly at all relevant times.
For purposes hereof, "Fraudulent Conveyance" means a transfer of property or the
incurrence of liability which would be avoidable under Section 548 or 544(b) of
the "Bankruptcy Code" (as hereinafter defined) or under the provisions of any
applicable fraudulent conveyance or fraudulent transfer law or similar law of
any state, nation or other governmental unit, as in effect from time to time.

         The Guarantor hereby agrees that, except as hereinafter provided, and
to the extent permitted by applicable law, its obligations under this Guaranty
shall be unconditional, irrespective of (i) the validity or enforceability of
the Borrower's Liabilities or any part thereof, or of any Debenture or other
document evidencing all or any part of the Borrower's Liabilities, (ii) the
absence of any attempt to collect the Borrower's Liabilities from the Borrower
or any other guarantor or other action to enforce the same, (iii) the waiver or
consent by the Agent, any Lender or Lenders with respect to any provision of any
instrument evidencing the Borrower's Liabilities, or any part thereof, or any
other agreement heretofore, now or hereafter executed by the Borrower and
delivered to the Agent, the Lender or Lenders, (iv) failure by the Agent or any
Lender to take any steps to perfect and maintain its security interest in, or to
preserve its rights to, any security or collateral for the Borrower's
Liabilities, (v) the institution of any proceeding under Chapter 11 of Title 11
of the United States Code (11 U.S.C. Section 101 et seq.), as amended (the
"Bankruptcy Code"), or any similar proceeding, by or against the Borrower, or
the Agent's or any Lender's election in any such proceeding of the application
of Section 1111(b)(2) of the Bankruptcy Code, (vi) any borrowing or grant of a
security interest by the Borrower as debtor-in-possession, under Section 364 of
the Bankruptcy Code, (vii) the disallowance, under Section 502 of the Bankruptcy
Code, of all or any portion of the Lenders' claim(s) for repayment of the
Borrower's Liabilities, or (viii) any other circumstance which might otherwise
constitute a legal or equitable discharge or defense of a guarantor.

         The Guarantor hereby waives diligence, presentment, demand of payment,
filing of claims with a court in the event of receivership or bankruptcy of the
Borrower, protest or notice with respect to the Borrower's Liabilities and all
demands whatsoever, and covenants that this Guaranty will not be discharged,
except by complete performance of the obligations and liabilities contained
herein. Upon the occurrence and during the continuance of an Event of Default
under the Purchase Agreement, Lenders holding a majority in outstanding
principal amount of the Debentures may, at their sole election, proceed directly
and at once, without notice, against the Guarantor to collect and recover the
full amount or any portion of the Borrower's Liabilities, without first
proceeding against

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any other person, firm, or corporation, or against any security or collateral
for the Borrower's Liabilities.

         The Guarantor hereby unconditionally and irrevocably agrees not to
exercise any rights that it may now have or hereafter acquire against the
Borrower or any other insider guarantor that arise from the existence, payment,
performance or enforcement of the Borrower's Liabilities under or in respect of
this Guaranty, the Purchase Agreement, the Debentures, the other Transaction
Documents or any document or instrument delivered by the Borrower to the Lenders
in connection therewith or pursuant thereto, including, without limitation, any
right of subrogation, reimbursement, exoneration, contribution or
indemnification and any right to participate in any claim or remedy of the Agent
or the Lenders against the Borrower or any other insider guarantor or any
Collateral, whether or not such claim, remedy or right arises in equity or under
contract, statute or common law, including, without limitation, the right to
take or receive from the Borrower or any other insider guarantor, directly or
indirectly, in cash or other property or by set-off or in any other manner,
payment or security on account of such claim, remedy or right, unless and until
the Security Interest Termination Date. If any amount shall be paid to any
Guarantor in violation of the immediately preceding sentence at any time prior
to the indefeasible payment in full in cash of the Borrower's Liabilities and
all other amounts payable under this Guaranty, such amount shall be received and
held in trust for the benefit of the Lenders, shall be segregated from other
property and funds of the Guarantor and shall forthwith be paid or delivered to
the Agent in the same form as so received (with any necessary endorsement or
assignment) to be credited and applied to the Borrower's Liabilities and all
other amounts payable under this Guaranty, whether matured or unmatured, in
accordance with the terms of the Debentures and the Purchase Agreement, or to be
held as collateral for any Borrower's Liabilities or other amounts payable under
this Guaranty thereafter arising. Upon the Security Interest Termination Date,
except in the case of a Reinstatement Event (as defined below), the Agent and
the Lenders will, at the Guarantor's request and expense, execute and deliver to
the Guarantor appropriate documents, without recourse and without representation
or warranty, necessary to evidence the transfer by subrogation to the Guarantor
of an interest in the Borrower's Liabilities resulting from such payment made by
the Guarantor pursuant to this Guaranty.

         The Lenders are hereby authorized, without notice or demand and without
affecting the liability of the Guarantor hereunder, at any time and from time to
time to (i) renew, extend, accelerate or otherwise change the time for payment
of, or other terms relating to the Borrower's Liabilities or otherwise modify,
amend or change the terms of any debenture, note or other agreement, document or
instrument now or hereafter executed by the Borrower and delivered to the
Lenders; (ii) accept partial payments on the Borrower's Liabilities; (iii) take
and hold security or collateral for the payment of the Borrower's Liabilities
guaranteed hereby, or for the payment of this Guaranty, or for the payment of
any other guaranties of the Borrower's Liabilities or other liabilities of the
Borrower, and exchange, enforce, waive and release any such security or
collateral; (iv) apply such security or collateral and direct the order or
manner of sale thereof as in their sole discretion they may determine; and (v)
settle, release, compromise, collect or otherwise liquidate the Borrower's
Liabilities and any security or collateral therefor in any manner, without
affecting or impairing the obligations of the Guarantor hereunder. The holders
of the majority of the outstanding principal amount of the Debentures shall have
the exclusive right to determine the time and manner of application of any
payments or credits, whether received from the Borrower or any other source, and
such determination shall be binding on the Guarantor. All such payments and
credits may be

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applied, reversed and reapplied, in whole or in part, to any of the Borrower's
Liabilities as the Lenders shall determine in their sole discretion without
affecting the validity or enforceability of this Guaranty (unless otherwise
required pursuant to the Purchase Agreement).

         The Guarantor hereby assumes responsibility for keeping itself informed
of the financial condition of the Borrower, and any and all endorsers and/or
other guarantors of any instrument or document evidencing all or any part of the
Borrower's Liabilities and of all other circumstances bearing upon the risk of
nonpayment of the Borrower's Liabilities or any part thereof that diligent
inquiry would reveal and the Guarantor hereby agrees that neither the Agent nor
the Lenders shall have any duty to advise the Guarantor of information known to
any of them regarding such condition or any such circumstances or to undertake
any investigation not a part of their respective regular business routines. If
the Agent or any Lender, in their respective sole discretions, undertake at any
time or from time to time to provide any such information to the Guarantor, the
Agent or such Lender, as the case may be, shall not be under any obligation to
update any such information or to provide any such information to the Guarantor
on any subsequent occasion.

         The Guarantor consents and agrees that neither the Agent nor the
Lenders shall be under any obligation to marshall any assets in favor of the
Guarantor or against or in payment of any or all of the Borrower's Liabilities.
The Guarantor further agrees that, to the extent that the Borrower makes a
payment or payments to the Lenders or the Lenders receive any proceeds of
collateral, which payment or payments or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to the Borrower, its estate, trustee, receiver or any
other party, including, without limitation, the Guarantor, under any bankruptcy
law or state or federal statutory or common law, then to the extent of such
payment or repayment, the Borrower's Liabilities or the part thereof which has
been paid, reduced or satisfied by such amount, and the Guarantor's obligations
hereunder with respect to such portion of the Borrower's Liabilities, shall be
reinstated and continued in full force and effect as of the date such initial
payment, reduction or satisfaction occurred. Notwithstanding anything else to
the contrary contained herein, the Guarantor consents and agrees that this
Guaranty shall continue to be effective or be reinstated, as the case may be, if
at any time any payment of any of the Borrower's Liabilities is rescinded or
must otherwise be returned by any Lender or any other Person upon the
insolvency, bankruptcy or reorganization of the Borrower or the Guarantor or
otherwise, all as though such payment had not been made (each such continuation
or reinstatement, a "Reinstatement Event").

         Until the Security Interest Termination Date, the Guarantor hereby
waives any and all claims (including, without limitation, any claim for
reimbursement, contribution or subrogation) of the Guarantor against the
Borrower, any endorser or any other guarantor of all or any part of the
Borrower's Liabilities, or against any of the Borrower's properties, arising by
reason of any payment by the Guarantor to the Lenders pursuant to the provisions
hereof.

         Each Lender may, to the extent and in the manner set forth in the
Purchase Agreement, sell or assign the Borrower's Liabilities or any part
thereof, or grant participations therein, and in any such event each and every
permitted assignee or holder of, or participant in, all or any of the Borrower's
Liabilities shall have the right to enforce this Guaranty, by suit or otherwise

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for the benefit of such assignee, holder, or participant, as fully as if herein
by name specifically given such right.

         The Guarantor hereby represents and warrants that: (a) it is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Indiana; (b) it is duly authorized and empowered to execute and
deliver this Guaranty; (c) all corporate action on the part of the Guarantor
requisite for the due execution and delivery of this Guaranty and the due
granting and creation of the security interests referred to herein has been duly
and effectively taken; (d) the Guarantor's chief executive office is located at
695 North Perryville Road, Rockford, Illinois 61107 and (e) execution, delivery
and performance of this Guaranty will not result in any violation of, conflict
with, or result in a breach of, any of the terms of, or constitute a default
under, any agreements, contracts, court orders or consent decrees, the
Certificate of Incorporation or the By-laws, as amended, of the Guarantor.

         This Guaranty shall be binding upon the Guarantor and upon the
successors (including without limitation, any receiver, trustee or debtor in
possession of or for the Guarantor) of the Guarantor and shall inure to the
benefit of the Lenders and their respective successors and permitted assigns.
Notwithstanding anything contained herein to the contrary, this Guaranty may not
be assigned by the Guarantor without the prior written consent of the Lenders.

         This Guaranty shall continue in full force and effect, and the Lenders
shall be entitled to make loans and advances and extend financial accommodations
to the Borrower on the faith hereof, until the Security Interest Termination
Date and the Purchase Agreement has been terminated and the Debentures canceled.
The Guarantor hereby unconditionally and irrevocably waives any right to revoke
this Guaranty and acknowledges that this Guaranty is continuing in nature and
applies to all Borrower's Liabilities, whether existing now or in the future.

         Notwithstanding anything to the contrary contained herein, the rights
and remedies of the Agent and the Lenders, and the obligations of the
Guarantors, under this Guaranty are subject to the Subordination Agreement, as
it may be amended, supplemented or otherwise modified from time to time.

         Wherever possible each provision of this Guaranty shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Guaranty shall be prohibited by or invalid under such law,
such provision shall be ineffective to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or the remaining
provisions of this Guaranty.

         THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK WHEREIN THE TERMS OF THIS GUARANTY WERE
NEGOTIATED, EXCLUDING TO THE GREATEST EXTENT PERMITTED BY LAW ANY RULE OF LAW
THAT WOULD CAUSE THE APPLICATION OF ANY JURISDICTION OTHER THAN THE STATE OF NEW
YORK.

         The Guarantor hereby irrevocably and unconditionally submits, for
itself and its

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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 Guaranty
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. The Guarantor 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 Guaranty or any of the other Transaction Documents
in the courts of any other jurisdiction.

         The Guarantor 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 Guaranty 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. The Guarantor 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.

         EACH OF THE PARTIES HERETO 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.

                           [SIGNATURE PAGE TO FOLLOW]

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         IN WITNESS WHEREOF, this Guaranty has been duly executed by the
undersigned as of this 20th day of December, 2002.

                                                  HOUBA, INC.

                                                  By:___________________________
                                                     Name:
                                                     Title:

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