Prepared by MERRILL CORPORATION









Exhibit 10.78




 




PROMISSORY NOTE




 




$512,000.00




 




	

  Dated: July

  23, 2001


  	

  At: South El

  Monte, California


  





 




                FOR VALUE RECEIVED, the undersigned LEE

PHARMACEUTICALS INC., a California corporation with its principal place of

business 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 principal

place of business located at 123 Saginaw Drive, Redwood City, California 94063

("Lender"), the principal sum of Five Hundred Twelve Thousand

Dollars ($512,000.00) (the "Principal Sum"), with interest

thereon at the rate equal to the prime rate as it may exist from time to time

which is equal to the highest prime rate reported from time to time by

Citibank, 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 States

of America, at Lender's address set forth above or such other place as Lender

may from time to time designate in writing. All references to Lender in this

Note shall be deemed to mean and include any subsequent holder hereof




 




                1.             Payment

of Principal and Interest. The indebtedness evidenced hereby shall be

repaid in equal monthly installments of principal in the amount of Twelve

Thousand Dollars ($12,000.00) each, commencing on July 25, 2001 and continuing

monthly thereafter until and including September 25, 2001 whereupon the

indebtedness evidenced hereby shall be repaid in equal monthly installments of

principal in the amount of Twenty Two Thousand Dollars ($22,000.00) each,

commencing on October 25, 2001 and continuing monthly thereafter until December

25, 2002, whereupon the remaining principal and interest on this Note shall be

due and payable in full. Interest shall accrue on all of the unpaid outstanding

principal balance of this Promissory Note and shall be paid monthly commencing

July 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 due

and continuing, until the entire outstanding principal amount of this

Promissory Note shall have been paid in full. In no case, however, shall the

interest rate be higher than that rate permitted by applicable law.




 




                2.             Security.

This Note and all the obligations of Maker hereunder are secured by the

security interests granted pursuant to the original Security Agreement, dated

as of June 29, 1999 and executed by Maker, as amended and restated by the

Amended and Restated Security Agreement dated as of July 23, 2001 (the "Security

Agreement"). This Note, and the Security Agreement, together, with all

other documents now or at any time hereafter creating, evidencing or securing,

the indebtedness evidenced by this Note, are herein referred to collectively as

the "Loan Documents."




 




                3.             Application

of Proceeds. Maker is giving this Note to Lender pursuant to that certain

Restructuring and Offset Agreement dated as of July 23, 2001 to replace the

promissory notes originally issued pursuant to the Asset Purchase and Sale

Agreement dated as of June 29, 1999 among Maker, Lender and Premier Consumer

Products, Inc. (the "Asset Purchase Agreement") in connection

with the purchase of Assets (as that term is defined in the Asset Purchase

Agreement).













 




                4.             Prepayment

Rights. Maker shall have the right to prepay at any time and from time to

time all or any portion of the entire principal balance of this Note and

interest 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 and

unpaid interest thereon and all other fees and costs, if any, due to Lender

under this Note. Any partial prepayment will be applied first against any fees

or charges due under the Loan Documents, if applicable, and then against

accrued and unpaid interest and then against the principal of this Note.

No partial prepayment will excuse any future payment of principal or interest

as long as any amounts remain unpaid.




 




                5.             Default

Provision. The occurrence of any one or more of the following events shall

constitute an Event of Default under this Note: (a) failure of Maker to pay

when due any amount required to be paid; (b) the Maker shall be adjudicated a

bankrupt or insolvent, or admit in writing its inability to pay its debts as

they mature, or make an assignment for the benefit of creditors, or the Maker

shall apply for or consent to the appointment of a receiver, trustee, or

similar officer for it or for all or any substantial part of its property, or

such receiver, trustee or similar officer shall be appointed without the

application or consent of the Maker and such appointment shall continue

undischarged for a period of ninety (90) days, or the Maker shall institute (by

petition, 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 any

jurisdiction, or any such proceeding shall be instituted (by petition,

application or otherwise) against the Maker and shall remain undismissed for a

period 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) there

continues to exist a good faith disagreement between Maker and with respect to

the proper amount payable by Maker in respect of this Note or (b) if there

exists a good faith disagreement during the term of this Note regarding the

Assets conveyed to Maker as purchaser under the Asset Purchase and Sale

Agreement. Whenever there is an Event of Default under this Note, Lender shall

give Maker written notice of such Event of Default and if such Event of Default

is not cured within thirty (30) days of receipt of such written notice, Lender

may, at its option, declare the unpaid balance of the principal amount,

together with all accrued and unpaid interest and all other indebtedness

evidenced hereby, to be immediately due and payable, and exercise any and all

rights and remedies available to Lender hereunder, under applicable laws and

under any of the other Loan Documents, all of which rights and remedies are

cumulative.




 




                6.             Payment

of Collection Costs. If Lender required the services of an Attorney to

enforce the payment of this Note or the performance of the other Loan

Documents, or if this Note is collected through any lawsuit, bankruptcy, or

other proceeding, Maker agrees to pay Lender reasonable attorneys' fees and

other actual collection costs.













 




                7.             Waiver

of Certain Rights of Maker. As to this Note and the Security Agreement, and

all other Loan Documents, the undersigned waives all applicable exemption

rights, whether under any State Constitution or otherwise, and also waives

valuation and appraisement, presentment, protest and demand, notice of protest,

demand and dishonor and nonpayment of this Note, and expressly agrees that the

maturity of this Note, or any payment hereunder, may be extended from time to

time without in any way affecting the liability of Maker.




 




                8.             Non–Waiver

of Certain Rights of Holder. Any failure by the holder hereof to insist

upon the strict performance of any of the terms and provisions of this Note or

of any of the other Loan Documents shall not be deemed to be a waiver of any of

the terms and provisions hereof, and the holder hereof, notwithstanding any

such failure, shall have the right thereafter to insist upon the strict

performance by maker of any and all of the terms and provisions of this Note

and the other Loan Documents.




 




                9.             Invalidity

of Provisions. In the event that any one or more of the provisions

contained in this Note or any of the other Loan Documents shall for any reason

be held to be invalid, illegal or unenforceable in any respect, such

invalidity, illegality or unenforceability shall not affect any other provision

of this Note or any of the other Loan Documents, and each term and provision of

this Note and the other Loan Documents shall be valid and enforceable to the

fullest extent permitted by law.




 




                10.           Amendments

Must be in Writing. This Note may not be changed orally, but only by an

agreement in writing signed by Maker.




 




                11.           Governing

Law. This Note is to be construed according to the laws of the State of

California and shall be binding upon and inure to the benefit of Maker and

Lender and their respective successors and assigns.




 




                12.           Captions.

The captions of this Note are for convenience only and shall neither limit nor

enlarge the provisions hereof.




 




Executed as of the day and year

first above written.




 




LEE PHARMACEUTICALS, INC.




 




	

  By:


  	

  /s/ Ronald

  G. Lee


  
	

   


  	

   


  
	

  Date:


  	

  9/4/01