**Exhibit 10.78**

** **

**PROMISSORY NOTE**

 

$512,000.00

 
| Dated: July  23, 2001 | At: South El  Monte, California |
|-----------------------|---------------------------------|

 

                FOR VALUE RECEIVED, the undersigned LEEPHARMACEUTICALS INC., a California corporation with its principal place ofbusiness located at 1444 Santa Anita Avenue, South El Monte, California 91733("Maker"), promises to pay to the order of AP PHARMA, INC.(formerly Advanced Polymer Systems, Inc.), a corporation with its principalplace of business located at 123 Saginaw Drive, Redwood City, California 94063("Lender"), the principal sum of Five Hundred Twelve ThousandDollars ($512,000.00) (the "Principal Sum"), with interestthereon at the rate equal to the prime rate as it may exist from time to timewhich is equal to the highest prime rate reported from time to time byCitibank, N.A. (but in no case more than any interest rate permitted by law)from the date set forth above, to be paid in lawful money of the United Statesof America, at Lender's address set forth above or such other place as Lendermay from time to time designate in writing. All references to Lender in thisNote shall be deemed to mean and include any subsequent holder hereof

 

                1.             Paymentof Principal and Interest. The indebtedness evidenced hereby shall berepaid in equal monthly installments of principal in the amount of TwelveThousand Dollars ($12,000.00) each, commencing on July 25, 2001 and continuingmonthly thereafter until and including September 25, 2001 whereupon theindebtedness evidenced hereby shall be repaid in equal monthly installments ofprincipal in the amount of Twenty Two Thousand Dollars ($22,000.00) each,commencing on October 25, 2001 and continuing monthly thereafter until December25, 2002, whereupon the remaining principal and interest on this Note shall bedue and payable in full. Interest shall accrue on all of the unpaid outstandingprincipal balance of this Promissory Note and shall be paid monthly commencingJuly 25, 2001, at a rate equal to the highest prime rate published by Citibank,N.A. during the month preceding the month in which the interest payment is dueand continuing, until the entire outstanding principal amount of thisPromissory Note shall have been paid in full. In no case, however, shall theinterest rate be higher than that rate permitted by applicable law.

 

                2.             Security.This Note and all the obligations of Maker hereunder are secured by thesecurity interests granted pursuant to the original Security Agreement, datedas of June 29, 1999 and executed by Maker, as amended and restated by theAmended and Restated Security Agreement dated as of July 23, 2001 (the "SecurityAgreement"). This Note, and the Security Agreement, together, with allother documents now or at any time hereafter creating, evidencing or securing,the indebtedness evidenced by this Note, are herein referred to collectively asthe "Loan Documents."

 

                3.             Applicationof Proceeds. Maker is giving this Note to Lender pursuant to that certainRestructuring and Offset Agreement dated as of July 23, 2001 to replace thepromissory notes originally issued pursuant to the Asset Purchase and SaleAgreement dated as of June 29, 1999 among Maker, Lender and Premier ConsumerProducts, Inc. (the "Asset Purchase Agreement") in connectionwith the purchase of Assets (as that term is defined in the Asset PurchaseAgreement).

 

                4.             PrepaymentRights. Maker shall have the right to prepay at any time and from time totime all or any portion of the entire principal balance of this Note andinterest thereon, together with all other indebtedness evidenced hereby,without penalty, provided that Lender shall have received at least ten (10)days prior written notice of prepayment and Maker shall pay all accrued andunpaid interest thereon and all other fees and costs, if any, due to Lenderunder this Note. Any partial prepayment will be applied first against any feesor charges due under the Loan Documents, if applicable, and then againstaccrued and unpaid interest and then against the principal of this Note.No partial prepayment will excuse any future payment of principal or interestas long as any amounts remain unpaid.

 

                5.             DefaultProvision. The occurrence of any one or more of the following events shallconstitute an Event of Default under this Note: (a) failure of Maker to paywhen due any amount required to be paid; (b) the Maker shall be adjudicated abankrupt or insolvent, or admit in writing its inability to pay its debts asthey mature, or make an assignment for the benefit of creditors, or the Makershall apply for or consent to the appointment of a receiver, trustee, orsimilar officer for it or for all or any substantial part of its property, orsuch receiver, trustee or similar officer shall be appointed without theapplication or consent of the Maker and such appointment shall continueundischarged for a period of ninety (90) days, or the Maker shall institute (bypetition, application, answer, consent or otherwise) any bankruptcy,insolvency, reorganization, arrangement, readjustment of debt, dissolution,liquidation or similar proceeding relating to it under the laws of anyjurisdiction, or any such proceeding shall be instituted (by petition,application or otherwise) against the Maker and shall remain undismissed for aperiod of ninety (90) days, or (c) any default under the Security Agreement; provided,however, that no Event of Default shall be deemed to have occurred if (a) therecontinues to exist a good faith disagreement between Maker and with respect tothe proper amount payable by Maker in respect of this Note or (b) if thereexists a good faith disagreement during the term of this Note regarding theAssets conveyed to Maker as purchaser under the Asset Purchase and SaleAgreement. Whenever there is an Event of Default under this Note, Lender shallgive Maker written notice of such Event of Default and if such Event of Defaultis not cured within thirty (30) days of receipt of such written notice, Lendermay, at its option, declare the unpaid balance of the principal amount,together with all accrued and unpaid interest and all other indebtednessevidenced hereby, to be immediately due and payable, and exercise any and allrights and remedies available to Lender hereunder, under applicable laws andunder any of the other Loan Documents, all of which rights and remedies arecumulative.

 

                6.             Paymentof Collection Costs. If Lender required the services of an Attorney toenforce the payment of this Note or the performance of the other LoanDocuments, or if this Note is collected through any lawsuit, bankruptcy, orother proceeding, Maker agrees to pay Lender reasonable attorneys' fees andother actual collection costs.

 

                7.             Waiverof Certain Rights of Maker. As to this Note and the Security Agreement, andall other Loan Documents, the undersigned waives all applicable exemptionrights, whether under any State Constitution or otherwise, and also waivesvaluation and appraisement, presentment, protest and demand, notice of protest,demand and dishonor and nonpayment of this Note, and expressly agrees that thematurity of this Note, or any payment hereunder, may be extended from time totime without in any way affecting the liability of Maker.

 

                8.             Non–Waiverof Certain Rights of Holder. Any failure by the holder hereof to insistupon the strict performance of any of the terms and provisions of this Note orof any of the other Loan Documents shall not be deemed to be a waiver of any ofthe terms and provisions hereof, and the holder hereof, notwithstanding anysuch failure, shall have the right thereafter to insist upon the strictperformance by maker of any and all of the terms and provisions of this Noteand the other Loan Documents.

 

                9.             Invalidityof Provisions. In the event that any one or more of the provisionscontained in this Note or any of the other Loan Documents shall for any reasonbe held to be invalid, illegal or unenforceable in any respect, suchinvalidity, illegality or unenforceability shall not affect any other provisionof this Note or any of the other Loan Documents, and each term and provision ofthis Note and the other Loan Documents shall be valid and enforceable to thefullest extent permitted by law.

 

                10.           AmendmentsMust be in Writing. This Note may not be changed orally, but only by anagreement in writing signed by Maker.

 

                11.           GoverningLaw. This Note is to be construed according to the laws of the State ofCalifornia and shall be binding upon and inure to the benefit of Maker andLender and their respective successors and assigns.

 

                12.           Captions.The captions of this Note are for convenience only and shall neither limit norenlarge the provisions hereof.

 

Executed as of the day and yearfirst above written.

 

LEE PHARMACEUTICALS, INC.

 
| By:    | /s/ Ronald  G. Lee |
|--------|--------------------|
|   |               |
| Date:  | 9/4/01             |