Document:

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                                                                    EXHIBIT 10.8

                       COMPANY GENERAL SECURITY AGREEMENT

         This Company General Security Agreement (the "Agreement") is dated as
of February 6, 2004 by and among Halsey Drug Co., Inc., a New York corporation
with its principal place of business at 695 North Perryville Road, Rockford,
Illinois, 61107 ("Debtor"), 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, acting in its capacity as agent for the
Purchasers, as defined below (the "Agent"), for the benefit of the Purchasers.

                             PRELIMINARY STATEMENTS

         Debtor has entered into a Debenture and Share Purchase Agreement of
even date herewith (as the same may be amended, modified, supplemented or
restated from time to time, the "Purchase Agreement;" terms which are
capitalized in this Agreement and not otherwise defined shall have the meanings
ascribed to them in the Purchase Agreement) with the Purchasers listed on
Exhibit B thereto (the "Purchasers"). The Purchasers have required, as a
condition precedent to the effectiveness of the Purchase Agreement, that the
Debtor (a) grant to the Agent, for the ratable benefit of the Purchasers, a
security interest in and to the Collateral (as defined in Section 2.1 below) and
(b) execute and deliver this 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").

                                    AGREEMENT

         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:

                                   ARTICLE 1

                          CREATION OF SECURITY INTEREST

1.1      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 (as
defined in Section 2.1 below) in order to secure the payment and performance of
all Obligations owing by the Debtor.

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1.2      DEBTOR REMAINS LIABLE

         Anything herein to the contrary notwithstanding, (a) the Debtor shall
remain liable under the contracts and agreements included in the Collateral to
the extent set forth therein to perform all of its duties and obligations
thereunder to the same extent as if this Agreement had not been executed, (b)
the exercise by the Agent 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 (c) 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 Agreement, the Purchase Agreement or any other
Transaction Document (as defined in the Subordination Agreement), 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.

                                   ARTICLE 2

                                   COLLATERAL

2.1      COLLATERAL

         For purposes of this Agreement, the term "Collateral" shall mean all of
the kinds and types of property described in clauses (a) through (g) of this
Section 2.1, 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 (as defined in Section 2.2 below) of
Collateral:

         (a)      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 the 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) all deposit accounts, (vii) all letter-of-credit rights,
(viii) all 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)      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; (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 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)      all of the equipment owned or leased by the Debtor, including,
without limitation,

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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)      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, and contract rights which are
permitted to be assigned or pledged (all of the foregoing property being
hereinafter referred to as "Intangibles");

         (e)      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 DEA or the Attorney General of the
United States pursuant to the CSA, 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's 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 2.1(e) (all of the foregoing property being hereinafter
referred to as "Intellectual Property");

         (f)      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; and

         (g)      All of the shares of stock or other securities of Houba, Inc.
and Axiom Pharmaceutical Corporation, 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 thereto, and all investment property, all, to the
extent applicable, as further set forth in the Stock Pledge Agreement.

2.2      PROCEEDS

         For purposes of this Agreement, the term "Proceeds" shall include (a)
whatever is now or hereafter received by the Debtor upon the sale, exchange,
collection or other disposition of any item

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of Collateral, whether such proceeds constitute Inventory, Accounts,
Intangibles, royalties, 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 (b) any such items which are now or hereafter acquired by the
Debtor with any proceeds of Collateral hereunder.

                                   ARTICLE 3

                         REPRESENTATIONS AND WARRANTIES

         The Debtor represents and warrants as follows:

3.1      ORGANIZATION AND EXISTENCE

         The Debtor is a corporation duly organized, validly existing and in
good standing under the laws of the State of New York and is qualified to do
business in such other jurisdictions as the nature or conduct of its operations
or the ownership of its properties require such qualification. The Debtor does
not own or lease any property or engage in any activity in any jurisdiction that
might require qualification to do business as a foreign corporation in such
jurisdiction and where the failure to so qualify could reasonably be expected to
have a Material Adverse Effect or subject the Debtor to a material liability.

3.2      AUTHORIZATION

         (a)      The Debtor has all requisite corporate power and authority (i)
to execute and deliver, and to perform and observe its obligations under, the
Transaction Documents (as defined in the Subordination Agreement) to which it is
a party, and (ii) to consummate the transactions contemplated hereby and
thereby, including, without limitation, the grant of any security interest,
mortgage, payment trust, guaranty or other security arrangement by the Debtor
in, on or in respect of the Collateral.

         (b)      All corporate action on the part of the Debtor and its
directors and stockholders necessary for the authorization, execution, delivery
and performance by the Debtor of this Agreement and the transactions
contemplated herein or in any other Transaction Document (as defined in the
Subordination Agreement) to which it is a party, has been taken.

3.3      PLACES OF BUSINESS

         The Debtor has no places of business, or warehouses in which it leases
space, other than those set forth on Section 3.3 of Schedule A, a copy of which
is attached hereto and made a part hereof ("Schedule A").

3.4      LOCATION OF COLLATERAL

         Except for the movement of Collateral from time to time from one place
of business or warehouse listed on Section 3.3 of Schedule A to another place of
business or warehouse listed on Section 3.3 of Schedule A, the Collateral is
located at the Debtor's chief executive office or other places of business or
warehouses listed on Section 3.3 of Schedule A, and not at any other location.

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3.5      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 (a) the rights of Watson under the Watson Term Loan and the documents
executed in connection therewith, including, without limitation, the Watson
Security Agreement dated as of March 29, 2000 (the "Watson Security Agreement");
and (b) the rights of the Existing Debentureholders.

3.6      STATUS OF ACCOUNTS

         Each Account is based on an actual and bona fide rendition of services
or sale of goods or products to customers, made by the Debtor in the ordinary
course of its business. The Accounts created are the Debtor's exclusive property
and are not and shall not be subject to any lien, consignment arrangement,
encumbrance, security interest or financing statement whatsoever, except (a) the
lien in favor of Watson under the Watson Term Loan and the documents executed in
connection therewith, including, without limitation, the Watson Security
Agreement, and (b) the liens in favor of the Existing Debentureholders. 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.

3.7      COPYRIGHTS, TRADEMARKS AND PATENTS

         (a)      The 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 Liens and pays no royalty to anyone under or with respect to any of
them.

         (b)      The 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
Debtor or any Guarantor of any Intellectual Property Rights of third parties.

         (c)      The Debtor has no knowledge, nor has it received any notice
(i) 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 Debtor and the Guarantors or with respect to any
license under which the Debtor or a Guarantor is licensor or licensee; or (ii)
that the Intellectual Property Rights infringe upon the rights of any third
party.

         (d)      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.

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3.8      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, 2003. 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.

3.9      OWNERSHIP

         The Debtor is the legal and beneficial owner of its Collateral free and
clear of any lien, claim, option or right of others, except for the security
interest created under this Agreement, the Watson Security Agreement and the
security agreements executed by the Debtor or the Guarantors in connection with
the Existing 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 Term Loan and the
Existing 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.

                                   ARTICLE 4

                                    COVENANTS

         The Debtor agrees as follows:

4.1      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.

4.2      CHANGE IN COLLATERAL LOCATION

         The Debtor will not (a) change its corporate name, (b) change the
location of its chief executive office or establish any place of business other
than those specified in Section 3.3 of Schedule A, or (c) 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 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 4.3 of this Agreement, all in form and substance satisfactory to the
Agent.

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4.3      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 Agreement. The Debtor will pay the
costs incurred in connection with any of the foregoing.

4.4      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 Term Loan and documents relative thereto and the
Existing Debentureholders, and the 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.

4.5      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.

4.6      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, or the value of, the Collateral.
The Debtor hereby agrees to reimburse the Agent for all payments made and
expenses incurred under this 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 Agreement, and
agrees it shall be bound by any payment made or act taken by the Agent hereunder

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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.

4.7      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 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 such Accounts and other Collateral as the Agent may
reasonably require. Furthermore, upon the 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.

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

4.9      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 ERISA 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 GAAP.

4.10     COMPLIANCE WITH LAWS

         The Debtor agrees to comply in all material respects with all Legal
Requirements applicable to the Collateral or any part thereof, or to the
operation of its business or its assets generally, unless

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the Debtor contests in good faith, by appropriate legal, administrative or other
proceedings promptly instituted and diligently conducted, any such Legal
Requirements 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.

4.11     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.

4.12     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 Legal
Requirements 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 Legal Requirement; provided, further, that the
Debtor shall comply with the order of any court or other governmental authority
relating to such Legal Requirements 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.

4.13     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 (a) maintain the validity and
enforceability of such Intellectual Property and maintain such Intellectual
Property in full force and effect, and (b) pursue the registration and
maintenance of each patent, trademark, or copyright registration or application,
now or hereafter included in such Intellectual Property 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. The Debtor shall not, without the prior written
consent of the Agent, discontinue use of or otherwise abandon any Intellectual
Property, 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.

4.14     FURTHER ASSURANCES

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         The Debtor 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 Agreement, and to perfect or protect the liens (and the priority
status thereof) of the Agent in the Collateral.

                                   ARTICLE 5

                                    REMEDIES

5.1      OBTAINING 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:

         (a)      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;

         (b)      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;

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

         (d)      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;

         (e)      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:

                  (1)      forthwith cause the same to be moved to the place or
         places so designated by the Agent and there delivered to the Agent,

                  (2)      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 5.2, and

                  (3)      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

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         the Collateral in good condition;

         it being understood that the Debtor's obligation to so deliver the
         Collateral is of the essence of this 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 the
         Debtor of said obligation.

5.2      DISPOSITION OF COLLATERAL

         Subject to the Subordination Agreement, any Collateral repossessed by
the Agent under or pursuant to Section 5.1 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 5.2 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, the Debtor shall
remain liable to Agent and Purchasers therefor.

5.3      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

                                       11
<PAGE>

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:

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

         (b)      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;

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

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

         (e)      give any notices or record any liens under Section 4.3 hereof;
and

         (f)      make any payments or take any acts under Section 4.6 hereof.

         The Agent's authority under this 5.3 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 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 the 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 Agreement. This power of
attorney is coupled with an interest and is irrevocable by the Debtor.

5.4      WAIVER OF CLAIMS

         Except as otherwise provided in this 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:

         (a)      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;

         (b)      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

         (c)      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

                                       12
<PAGE>

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.

         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.

5.5      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 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.

                                   ARTICLE 6

                            MISCELLANEOUS PROVISIONS

6.1      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 Debtor, then to the attention of Mr. Andrew D.
Reddick, 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, New
Jersey, 07105, fax no. (973) 491-3555.

6.2      HEADINGS

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

6.3      SEVERABILITY

                                       13
<PAGE>

         The provisions of this 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 Agreement in any jurisdiction.

6.4      AMENDMENTS, WAIVERS AND CONSENTS

         Any amendment or waiver of any provision of this Agreement and any
consent to any departure by the Debtor from any provision of this Agreement
shall be effective only if made or given in writing signed by the Agent.

6.5      INTERPRETATION OF AGREEMENT

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

6.6      CONTINUING SECURITY INTEREST

         This Agreement shall create a continuing security interest in the
Collateral and shall (a) remain in full force and effect until the Security
Interest Termination Date, (b) be binding upon the Debtor, and its successors
and assigns and (b) inure to the benefit of the Agent and its successors and
assigns.

6.7      REINSTATEMENT

         To the extent permitted by law, this 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.

6.8      SURVIVAL OF PROVISIONS

         All representations, warranties and covenants of the Debtor contained
herein shall survive the execution and delivery of this Agreement, and shall
terminate only upon the full and final indefeasible payment and performance by
the Debtor of the Obligations secured hereby.

6.9      SETOFF

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

6.10     POWER OF ATTORNEY

         In addition to the powers granted to the Agent under Section 5.3, 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

                                       14
<PAGE>

powers, which being coupled with an interest, shall be irrevocable until all of
the Obligations shall have been indefeasibly paid and satisfied in full:

         (a)      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

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

6.11     INDEMNIFICATION; AUTHORITY OF 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 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.

6.12     RELEASE; TERMINATION OF AGREEMENT

         Subject to the provisions of Section 6.7 of this Agreement, this
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, 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.

6.13     COUNTERPARTS

         This 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.

6.14     GOVERNING LAW

         This 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 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.

                                       15
<PAGE>

6.15     SUBMISSION TO JURISDICTION

         (a)      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 Agreement or any of the other
Transaction Documents (as defined in the Purchase 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 Agreement or any of the other
Transaction Documents (as defined in the Purchase Agreement) in the courts of
any other jurisdiction.

         (b)      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 Agreement or any
other Transaction Document (as defined in the Purchase Agreement) 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.

6.16     SERVICE OF PROCESS

         THE DEBTOR HEREBY IRREVOCABLY AGREES THAT SERVICE OF PROCESS IN ANY
LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS 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 6.1 HEREOF.

6.17     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 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.

6.18     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

                                       16
<PAGE>

Agent of any right or remedy shall preclude any other or further exercise
thereof, or preclude any other right or remedy.

6.19     JURY TRIAL

         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.

6.20     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 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 General Security
Agreement to be duly executed and delivered as of the date first written above.

                                           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:

<PAGE>

                                   SCHEDULE A

SECTION 3.3 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

                                     - 19 -<PAGE>

                                                                    EXHIBIT 10.9

                    CONTINUING UNCONDITIONAL SECURED GUARANTY

         This Continuing Unconditional Secured Guaranty ("Guaranty") is made as
of February 6, 2004 by Houba, Inc., an Indiana corporation ("Guarantor") in
favor of Galen Partners III, L.P., a Delaware limited partnership, acting in its
capacity as agent for the Lenders, as defined below ("Agent"), for the benefit
of the Lenders.

                             PRELIMINARY STATEMENTS

         Halsey Drug Co., Inc., a New York corporation (the "Borrower"), entered
into a Debenture and Share Purchase Agreement dated February 6, 2004 (the
"Purchase Agreement;" terms used in this Guaranty and not otherwise defined
shall have the meanings given to them in the Purchase Agreement) with the
Purchasers listed on Exhibit B thereto (each a "Lender" and collectively, the
"Lenders"). Pursuant to the Purchase Agreement, the Lenders have made financial
accommodations to the Borrower in accordance with the terms of the Purchase
Agreement. The Guarantor will continue to receive certain benefits from such
accommodations and is therefore willing to guaranty the prompt payment and
performance of the obligations of the Borrower, on the terms set forth in this
Guaranty. 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.

                                    AGREEMENT

         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 Grantor hereby agrees as follows:

                                   ARTICLE 1

                                    GUARANTY

1.1      GUARANTY

         The Guarantor unconditionally guarantees to the Agent for the benefit
of the Lenders (a) 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 (b) 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
(a) and (b), 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

<PAGE>

therewith or pursuant thereto (which, together with the liabilities described in
clause (a) of this Section 1.1, are collectively referred to in this Guaranty 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), 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.

1.2      NO FRAUDULENT CONVEYANCE

         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, will 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 defined herein) or a fraudulent conveyance or fraudulent
transfer 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.

1.3      GUARANTY UNCONDITIONAL

         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 (a) 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, (b) 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, (c) 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, (d) the 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, (e) 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, (f) any borrowing or grant of a
security interest by the Borrower as debtor-in-possession, under Section 364 of
the Bankruptcy Code, (g) 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 (h) any other circumstance which might otherwise
constitute a legal or equitable discharge or defense of a guarantor.

                                       2
<PAGE>

1.4      WAIVERS

         (a)      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 at least 60%
of the then 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 any other Person, or against any
security or collateral for the Borrower's Liabilities.

         (b)      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.

1.5      NO SUBROGATION

         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

                                       3
<PAGE>

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.

1.6      LENDERS' RIGHTS WITH RESPECT TO BORROWER'S LIABILITIES

         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 (a) 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; (b) accept partial payments on the Borrower's Liabilities; (c) 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 60% the then 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 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).

1.7      INFORMATION

         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.

1.8      REINSTATEMENT

         The Guarantor consents and agrees that neither the Agent nor the
Lenders shall be under any obligation to marshal 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

                                       4
<PAGE>

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").

1.9      ASSIGNMENTS BY LENDERS

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

                                   ARTICLE 2

                         REPRESENTATIONS AND WARRANTIES

         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) the 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.

                                   ARTICLE 3

                                  MISCELLANEOUS

3.1      SUCCESSORS AND ASSIGNS; ASSIGNMENT BY 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.

                                       5
<PAGE>

3.2      TERM OF GUARANTY; SUBORDINATION AGREEMENT

         (a)      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.

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

3.3      SEVERABILITY

         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.

3.4      GOVERNING LAW

         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.

3.5      CONSENT TO JURISDICTION

         (a)      The Guarantor 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 Guaranty or any of the other Transaction Documents (as such
term is defined in the Purchase 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. 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
(as such term is defined in the Purchase Agreement) in the courts of any other
jurisdiction.

         (b)      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

                                       6
<PAGE>

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.

3.6      WAIVER OF JURY TRIAL

         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]

                                       7
<PAGE>

                  IN WITNESS WHEREOF, this Guaranty has been duly executed by
the undersigned as of the date first written above.

                                               HOUBA, INC.

                                               By:____________________________
                                                   Name:
                                                   Title:

                                       8

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