**Exhibit 10.77**

** **

**AMENDED AND RESTATED**

**SECURITY AGREEMENT**

** **

                This AMENDED AND RESTATED SECURITY AGREEMENT(the "Agreement") is made as of July 23, 2001, by and betweenLEE PHARMACEUTICALS, INC., a California corporation ("Grantor")and AP PHARMA, INC. (formerly Advanced Polymer Systems, Inc.), a Delawarecorporation ("AP" or "Secured Party").

 

PRELIMINARY STATEMENT

 

                A.            Pursuantto the Asset Purchase and Sale Agreement dated as of June 29, 1999 (the "AssetPurchase Agreement") by and among Secured Party, Grantor and PremierConsumer Products, Inc., a Delaware corporation ("Premier"),Premier sold to Grantor its right, title and interest in and to the Assets(such terms, and all other capitalized terms used but not defined herein, shallhave the meanings assigned thereto in the Asset Purchase Agreement).

 

                B.            TheAsset Purchase Agreement provided for a Deferred Payment according to the termsand conditions of Promissory Notes executed by Grantor.

 

                C.            Pursuantto the Restructuring and Offset Agreement dated as of July 23, 2001 by andamong Grantor, Secured Party and Premier (the "Restructuring Agreement"),the indebtedness of Grantor to Premier and Secured party, as evidenced by thePromissory Notes, has been restructured and replaced with the New Note (asdefined in the Restructuring Agreement) issued in favor of Secured Party (suchpayment obligations on the part of Grantor under the New Note is referred to inthis Amended and Restated Security Agreement as the "Obligations").

 

                NOW THEREFORE, in order to induce SecuredParty to enter into the Restructuring Agreement and to agree to theaforementioned restructuring of its indebtedness, Grantor hereby agrees withSecured Party as follows:

 

                1.             Grantof Security. To secure the prompt and complete payment, observance andperformance of the Obligations, Grantor hereby creates a security interest withpower of sale, and the right and power to repossess, as hereinafter provided,to the extent permitted by law, and grants, bargains, assigns, mortgages,pledges, sells, transfers and conveys said security interest with power of saleand right and power to repossess to Secured Party, for its sole benefit, in andto all of Grantor's right, title, and interest in and to all of Grantor'sgeneral intangibles, licenses, copyrights, trademark rights, trade names, tradename rights and trade secrets, patents, and patent rights related to theProduct (defined in the Asset Purchase Agreement) and rights to payment of anykind and all proceeds arising at any time related in any way to the foregoing,whether such proceeds arise voluntarily or involuntarily (all of the foregoingshall hereinafter be referred to collectively as the "Collateral").

 

                2.             CertainCovenants. Grantor agrees that, for so long as any part of the Obligationsremain outstanding, it will:

 

                                (a)           Maintainthe Collateral in accordance with its customary practice and not voluntarilywithdraw the marketing of the Products, or lessen the permitted indications orlabeling requirements in any material respect, with respect to the Product,unless required to do so by law or by direction of any governmental agency orif the continued marketing of the Product does not make reasonable economicsense;

 

                                (b)           Notabandon any trademarks associated with the Product;

 

                                (c)           Notenter into any agreement or other consensual arrangement which is inconsistentwith Secured Parties' rights under this Agreement; and

 

                                (d)           Executeand deliver to Secured Party concurrently with the execution of this Agreement,and at any time or times hereafter at the request of Secured Party, allfinancing statements (including a UCC– 1 Financing Statement),continuations statements, security agreements, assignments, affidavits,reports, notices, and any other documents that Secured Party may reasonablyrequest in a form satisfactory to Secured Party, to maintain Secured Party'ssecurity interest in the Collateral and to consummate fully all of thetransactions contemplated under this Agreement.

 

                3.             Representationsand Warranties. Grantor hereby represents and warrants to Secured Party asfollows:

 

                                (a)           Grantorhas the full right and power to grant the security interest in the Collateral;and

 

                                (b)           Grantorhas not made any assignment, transfer or agreement in conflict herewith orconstituting a present or future assignment, transfer or encumbrance on anypart of the Collateral.

 

                4.             Termination.This Agreement is made for collateral purposes only. Upon payment in full ofthe Obligations, Secured Party shall execute and deliver to Grantor alltermination statements, assignments and other instruments as may be necessaryor proper to discharge all security interests, liens and encumbrances arisingfrom this Agreement and to revest in Grantor full title to the Collateral.

 

                5.             Rightto Sue. Upon the occurrence and during the continuance of an Event ofDefault, Secured Party shall have the right, but not the obligation, to bringsuit in its own name to enforce its rights hereunder, but only after giving written notice ofsuch Event of Default to Grantor and Grantor shall have failed to cure suchEvent of Default within 30 days after receipt of any such notice. If SecuredParty shall commence any such suit, Grantor shall do any and all lawful actsand execute any and all proper documents required in aid of such enforcement.As used in this Agreement, "Event of Default" shall have thesame meaning as set forth in the New Note which is part of the RestructuringAgreement; provided, however, that no Event of Default shall be deemed to haveoccurred if: (a) there continues to exist a good faith disagreement betweenGrantor and Secured Party with respect to the proper amount payable by Grantorin respect of the Obligation or (b) if there exists a good faith disagreementduring the period of the Obligation's existence regarding the Assets conveyedby Grantee as Seller to Grantor as Purchaser under the Asset Purchase and SaleAgreement.

 

                6.             Remedy;Power of Attorney.

 

                                (a)           Uponthe occurrence and during the continuance of any period Secured Party has theright to sue pursuant to the first sentence of Section 5 hereof, Grantor herebyauthorizes Secured Party to make, constitute and appoint any officer or agentof Secured Party as Secured Party may select in its sole discretion asGrantor's attorney–in–fact with power to endorse Grantor's name,and otherwise to act in the name and on behalf of Grantor, with respect to allapplications, documents, papers, instruments, transfers, assignment andconveyances as necessary or appropriate for Secured Party in the use of theAssets.

 

                                (b)           Followingany repossession by Secured Party of any part of the Collateral as provided inSection 6 (a) and the sale or other disposition of such repossessed Collateral,Secured Party shall apply the entire proceeds of such sale or otherdisposition, first, to the reimbursement of Secured Party for its expenses ofenforcement, and second, to pay the outstanding Obligation under the New Note,and third, to pay over to Grantor any and all excess amounts remaining.

 

                7.             Miscellaneous.

 

                                (a)           Assignment.This Agreement shall be binding upon the successors and permitted assigns ofthe parties.

 

                                (b)           Notices.All notices and other communications hereunder shall be in writing and shall bedeemed given if delivered personally or by facsimile transmission (receiptverified), mailed by registered or certified mail (return receipt requested),postage prepaid, or sent by overnight courier service to the parties at thefollowing addresses (or at such other address for a party as shall be specifiedby like notice; provided that notices of a change of address shall be effectiveonly upon receipt thereof):

 

If to Grantor,addressed to:

 

LEEPHARMACEUTICALS, INC.

1444 SantaAnita Ave. 

South ElMonte, CA 91733

Attn:

Fax:     626–575–0513

 

If to AP,addressed to:

 

AP PHARMA,INC. 

123 SaginawDrive 

Redwood City,CA 94063 

Attn: 

Fax:     650–365–6490

 

                                (c)           Amendment.No amendment, modification or supplement of any provision of this Agreementshall be valid or effective unless, made in writing and signed by all parties.

 

                                (d)           Waiver.No provision of this Agreement shall be waived by any act, omission orknowledge of a party or its agents or employees except by an instrument inwriting expressly waiving such provision and signed by the waiving party.

 

                                (e)           GoverningLaw. This Agreement shall be governed by, and interpreted, construed, andenforced in accordance with, the laws of the State of California, withoutgiving effect to conflict of laws principles.

 

                                (f)            Severability.Whenever possible, each provision of this Agreement will be interpreted in suchmanner as to be effective and valid under applicable law, but if any provisionof this Agreement is held to be prohibited by or invalid under applicable law,such provision will be ineffective only to the extent of such prohibition orinvalidity, without invalidating the remainder of this Agreement.

 

                IN WITNESS WHEREOF, the parties hereto havecaused this Agreement to be duly executed as of the date first above written.

 

LEE PHARMACEUTICALS, INC.

 

 
| By:    | /s/ Ronald  G. Lee |
|--------|--------------------|
|   |               |
| Name:  | Ronald G.  Lee     |
| Title: | Chairman           |

 

AP PHARMA, INC.

 
| By:    | /s/ Gordon  Sangster     |
|--------|--------------------------|
|   |                     |
| Name:  | Gordon  Sangster         |
| Title: | Chief  Financial Officer |