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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended Commission File Number
December 31, 1996 0-23490

VIVUS, INC.
(Exact name of Registrant as specified in its charter)

Delaware 94-3136179
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)

545 Middlefield Road, Suite 200, Menlo Park, California 94025
(Address of principal executive offices and zip code)

(415) 325-5511
(Registrant's telephone number, including area code)

Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ____

As of February 28, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $632,342,107 (based upon the closing sales
price of such stock as reported by The Nasdaq Stock Market on such date).
Shares of Common Stock held by each officer, director, and holder of 5% or more
of the outstanding Common Stock on that date have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

As of February 28, 1997, the number of outstanding shares of the Registrants'
Common Stock was 16,426,606.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Items 6, 7 and 8 of Form 10-K is incorporated by
reference from the Registrant's annual report to security holders furnished
pursuant to Rule 14a-3 (the "Annual Report"). Certain information required by
Items 10, 11, 12 and 13 of Form 10-K is incorporated by reference from the
Registrant's proxy statement for the 1997 Annual Stockholders' Meeting (the
"Proxy Statement"), which will be filed with the Securities and Exchange
Commission within 120 days after the close of the Registrant's fiscal year ended
December 31, 1996.
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This Form 10-K contains forward looking statements that involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward looking statements. Factors that might
cause such differences include, but are not limited to, the risk factors
described beginning on page 15, in addition to the other information
contained in this Form 10-K.

PART I

Item 1. BUSINESS.

OVERVIEW

VIVUS, Inc. ("VIVUS" or the "Company") is a leader in the development
of advanced therapeutic systems for the treatment of erectile dysfunction.
Erectile dysfunction, commonly referred to as impotence, is the inability to
achieve and maintain an erection of sufficient rigidity for sexual intercourse.
The Company's transurethral system for erection is a non-invasive, easy to use
system that delivers pharmacologic agents topically to the urethral lining. In
November 1996, the Company obtained regulatory marketing clearance by the U.S.
Food and Drug Administration (the "FDA") to manufacture and market its first
product, MUSE(R) (alprostadil). The Company commenced product shipments to
wholesalers in December 1996 and commercially introduced MUSE (alprostadil) in
the United States through its direct sales force beginning in January 1997. In
addition, the Company submitted applications for regulatory approval to market
MUSE (alprostadil) in the United Kingdom and Sweden in 1996 and Norway in
January 1997. These applications will be subject to rigorous approval
processes, and there can be no assurance such approval will be granted in a
timely manner, if at all. Furthermore, the Company received FDA clearance in
December 1996 for ACTIS(R), an adjustable elastomeric venous flow control
device designed for those patients who suffer from veno-occlusive dysfunction
(commonly referred to as venous leak syndrome). ACTIS is currently being
studied for adjunctive use with MUSE.

In May 1996, the Company entered into an international marketing
agreement with Astra AB ("Astra"). Astra will purchase the Company's products
for resale in Europe, South America, Central America, Australia and New
Zealand. As consideration for execution of the international marketing
agreement, Astra paid the Company $10 million in June 1996. In September 1996,
the Company received a $10 million milestone payment from Astra upon filing an
application for marketing authorization for MUSE (alprostadil) in the United
Kingdom. The Company will be paid up to an additional $10 million in the event
certain other milestones are achieved. However, there can be no assurance that
such milestones will be achieved. In January 1997, the Company entered into an
international marketing agreement with Janssen Pharmaceutica International
("Janssen"), a subsidiary of Johnson & Johnson. Janssen will purchase the
Company's products for resale in China, multiple Pacific Rim countries
(excluding Japan), Canada, Mexico and South Africa. As consideration for
execution of the international marketing agreement, Janssen paid the Company $5
million. The Company will receive additional payments in the event certain
other milestones are achieved. However, there can be no assurance that such
milestones will be achieved. The Company began generating revenues from
product sales in January 1997.

The Company has sought and will continue to seek pharmacologic agents
suitable for transurethral delivery for which significant safety data already
exists. The Company believes that such agents may progress rapidly through
clinical development and the regulatory process due to the

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preexisting safety data. The Company expects to begin a Phase III multi-center
trial in 1997 for its second product candidate, a combination of alprostadil
and prazosin delivered via the Company's transurethral system for erection.
The Company has several other product candidates in preclinical development.

The Company has limited experience in manufacturing and selling MUSE
(alprostadil) in commercial quantities. Whether the Company can successfully
manage the transition to a large scale commercial enterprise will depend upon
successful further development of its manufacturing capability and its
distribution network, and attainment of foreign regulatory approvals for MUSE
(alprostadil). Failure to make such a transition successfully would have a
material adverse effect on the Company's business, financial condition and
results of operations.

Based on a published study of more than 1,200 men in Massachusetts,
the Company estimates that more than 30% of males in the United States between
the ages of 40 and 70 suffer from moderate to complete erectile dysfunction.
The Company believes that similar rates of erectile dysfunction prevail outside
the United States. An estimate from the National Institute of Health ("NIH")
Consensus Statement on Impotence (1992) suggests that the number of men in the
United States with erectile dysfunction may be 10 to 20 million. The rate of
erectile dysfunction increases significantly with age. In addition to the
Company's transurethral system for erection, the primary medical therapies
currently used to treat erectile dysfunction are needle injection of
pharmacologic agents into the penis, vacuum constriction devices, penile
implants and oral medications. Despite the detrimental effect erectile
dysfunction may have on a couple's quality of life, the Company believes that,
due in part to the limitations of other therapies, less than 10% of men
suffering from erectile dysfunction currently receive medical treatment. The
Company believes that MUSE (alprostadil) could become first line therapy for
erectile dysfunction and increase the number of men who will seek and receive
medical treatment for erectile dysfunction.

BACKGROUND

Erectile dysfunction results from (i) an inadequate supply of blood to
the penis, (ii) a failure to relax the smooth muscle tissue in the penis so it
can become engorged with blood, or (iii) a failure to retain blood in the
penis. Blood is carried to the penis in two large arteries that terminate in a
maze of blood vessels contained in the three erectile bodies of the penis, the
corpus spongiosum, which surrounds the urethra, and two corpora cavernosa.
Smooth muscle tissue surrounds each individual blood vessel in the erectile
bodies. When the penis is flaccid, the smooth muscle tissue is in a contracted
state, which constricts the blood vessels resulting in reduced blood flow.
During stimulation, a signal is sent to nerve endings in the penis that causes
the smooth muscle tissue to relax. This relaxation allows the blood vessels to
expand, and, as arterial blood fills the erectile bodies, the penis becomes
engorged with blood and erect. As the erectile bodies expand, the venous
outflow of blood is restricted so that the erection can be maintained.

Causes of Erectile Dysfunction

Historically, psychological factors were considered the primary cause
of erectile dysfunction. It is now widely understood that a substantial
majority of all cases have a physiological cause. The Company believes that its
therapeutic treatments of erectile dysfunction can be effective, whether the

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cause is psychological or physiological. The primary physiological causes of
erectile dysfunction fall into the following general categories:

Vascular Diseases. Atherosclerosis, hypertension and other
diseases can impede or obstruct the flow of blood to the penis.

Neurological Diseases. Multiple sclerosis, Parkinson's disease
and other diseases can interrupt nerve impulses to the penis.

Diabetes. Diabetes mellitus can alter both nerve function and
vascular flow, inhibiting the ability to achieve an erection.

Prescription Drugs. Certain antihypertensive and cardiac
medications, as well as a number of other prescription drugs,
can affect nerve function in the penis by altering
neurotransmitter levels.

Spinal Injury. Injury to the spinal column can interrupt nerve
impulses from the spinal cord to the penis.

Pelvic Surgery. Radical prostatectomies, cystoprostatectomies
and colectomies may traumatize or cut nerves or blood vessels
to the penis.

Other Causes. Hormonal imbalance, renal failure and dialysis,
and drug and substance abuse (particularly smoking) can also
impair the neurovascular system and cause erectile
dysfunction.

Market Size

Based on a published study of more than 1,200 men in Massachusetts,
the Company estimates that over 30% of males in the United States between the
ages of 40 to 70 suffer from moderate to complete erectile dysfunction. The
Company believes that similar rates prevail outside the United States. An
estimate from the NIH Consensus Statement on Impotence (1992) suggests that the
number of men in the United States with erectile dysfunction may be 10 to 20
million men. The rate of erectile dysfunction increases significantly with age.

Current Therapies

Despite the detrimental effect erectile dysfunction may have on a
couple's quality of life, the Company believes that, due in part to the
limitations of other therapies, a large number of men suffering from erectile
dysfunction currently do not seek medical treatment. In addition to the
Company's recently introduced first product, MUSE (alprostadil), the primary
physiological therapies currently utilized for the treatment of erectile
dysfunction are:

Needle Injection Therapy. This form of treatment involves the
needle injection of pharmacologic agents directly into the
penis. These agents are generally vasoactive compounds such as
alprostadil alone or in combination with phentolamine and
papaverine. This form of treatment requires a prescription
from a physician and

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instruction on self-injection. Side effects may include pain
associated with injection, local pain and aching, priapism
(persistent prolonged erections), fibrosis (build-up of scar
tissue) and bleeding.

Vacuum Constriction Devices. This form of treatment involves
the use of a mechanical system that creates a vacuum around
the penis, causing the erectile bodies to fill with blood. A
constriction band is then placed around the base of the penis
to impede blood drainage and maintain the erection. Vacuum
constriction devices are large, mechanical devices that can be
unwieldy and somewhat difficult to use. In addition, the
erection may not seem natural since only the part of the penis
beyond the constriction band is rigid, and the penis can
become cold and discolored due to the constriction of blood
flow. Complications encountered by some users of vacuum
constriction devices include pain and difficulty ejaculating.

Penile Implants. This therapy involves the surgical
implantation of a semi-rigid, rigid or inflatable device into
the penile structure to mechanically simulate an erection. In
addition to the risks associated with surgical procedures,
there is a significant rate of complication with implants such
as infection and mechanical failure of the device. This may
necessitate a second surgical procedure to remove or
reposition the device. In addition, due to the scarring
associated with the implant procedure, the patient may no
longer be a viable candidate for less radical therapies.

Oral Medications. Yohimbine is the primary oral medication
currently prescribed in the United States for the treatment of
erectile dysfunction. While easily administered, yohimbine
must be taken multiple times daily and may cause irritability,
sweating, nausea and possibly hypertension. The Company
believes that, for patients with physiologic erectile
dysfunction, the efficacy of currently available oral
medications is not significantly greater than placebo. See
"Business - Competition" for discussion about oral medications
under development by other companies for the treatment of
erectile dysfunction.

THE VIVUS SOLUTION

VIVUS intends to address the significant market opportunity for
erectile dysfunction therapy with its transurethral system for erection. The
Company's transurethral system for erection represents a unique approach to
treating erectile dysfunction and is based on the discovery that the urethra,
although an excretory duct, can absorb certain pharmacologic agents into the
surrounding erectile tissues. This results in enhanced blood flow to the penis.
The Company believes that MUSE (alprostadil), recently introduced in the United
States, could become first line therapy and increase the number of men who seek
and receive treatment for erectile dysfunction. The Company's transurethral
system for erection is designed to overcome the limitations of other available
therapies through its unique product attributes which include:

Ease of Administration. The Company's transurethral system for
erection is easy to use with minimal instruction, unlike
needle injection therapy that requires precise injection into
a corpus cavernosum.

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Non-invasive. The Company's transurethral system for erection
utilizes urethral delivery, permitting topical application to
the urethral lining.

Discreet. The Company's transurethral system for erection
utilizes a small, easily carried, single-use disposable
applicator that can be discreetly applied and is easily
integrated into the normal sexual life of the patient.
Administration takes less than a minute.

Quality of Erection. The Company's transurethral system for
erection therapy mimics the normal vasoactive process,
producing an erection that is more natural than those
resulting from needle injection therapy, vacuum constriction
devices or penile implants.

THE TRANSURETHRAL SYSTEM FOR ERECTION

Administration. Administration of the transurethral system for
erection is an easy and painless procedure. The end of the applicator is less
than half the diameter of a man's urine stream and is inserted approximately
three centimeters into the urethra. To use the transurethral system for
erection, a patient urinates, shakes the penis to remove excess urine, inserts
the transurethral system for erection into the urethra, releases the medication
and then rolls the penis between the hands for 10 seconds to distribute the
medication.

The application process takes less than a minute. Once administered,
the pharmacologic agent dissolves in the small amount of urine that remains in
the urethra. The pharmacologic agent is absorbed by the urethral mucosa and
moves across the adjacent tissue and into the erectile bodies. When
successful, an erection is produced within 15 minutes of administration and
lasts approximately 30-60 minutes. Many patients experience transient penile
pain and/or local aching after administration and during intercourse.

Initial Pharmacologic Agent. Alprostadil is the first pharmacologic
agent used in the transurethral system for erection. Alprostadil is the generic
name for the synthetic version of prostaglandin E1, a naturally occurring
vasodilator present throughout the body and at high levels in seminal fluid.

Other Pharmacologic Agents. The Company is also engaged in the
evaluation and development of additional pharmacologic agents to treat erectile
dysfunction either alone or in combination with other agents. One such agent is
prazosin, a generic alpha-blocker that can be delivered by the transurethral
system for erection, both alone and in combination with alprostadil. The
Company has several other product candidates in preclinical development.

THE VIVUS STRATEGY

The Company's objective is to become the leading developer,
manufacturer and supplier of products for the treatment of erectile
dysfunction. The Company is pursuing this objective with the following
strategies:

Focus on Clinical Development and Regulatory Review. The
Company has sought and plans to continue to seek additional
pharmacologic agents suitable for transurethral

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delivery for which significant safety data already exists.
The Company believes that such agents may progress rapidly
through the clinical development and regulatory process due to
the preexisting safety data.

Expand the Market. The Company is seeking to increase the
number of men receiving treatment for erectile dysfunction by
developing safe, effective, discreet, easy to use,
non-invasive products and by heightening physician and
consumer awareness of erectile dysfunction through education.

Maintain Proprietary Technology. The Company has sought and
will continue to seek a strong proprietary position for the
Company's transurethral system for erection by pursuing patent
protection in the United States and key international
countries.

Develop Novel Pharmacologic Agents. The Company is engaged in
the research and development of and may seek to license novel
pharmacologic agents that may provide an enhanced therapeutic
benefit in the treatment of erectile dysfunction, either alone
or in combination with other agents.

Achieve Broad Distribution. The Company is initially
marketing and selling its products through a direct sales
force in the United States, and through distribution,
co-promotion or license agreements with corporate partners in
foreign markets. In May 1996, the Company completed an
international marketing agreement with Astra AB (Astra) where
Astra will purchase the Company's products for resale in
Europe, South America, Central America, Australia and New
Zealand. In January 1997, the Company signed an international
marketing agreement with Janssen, a subsidiary of Johnson &
Johnson, where Janssen will purchase the Company's products
for resale in China, multiple Pacific Rim countries (excluding
Japan), Canada, Mexico and South Africa.

MANUFACTURING AND RAW MATERIALS

The Company has limited experience in manufacturing MUSE (alprostadil)
in commercial quantities. Since the commercial launch of its product in
January 1997, the Company has experienced shortages on certain dosage strengths
due to higher than expected demand. The Company has leased two adjacent
buildings in New Jersey, totalling 90,000 square feet, that will be built out
to support expansion of the Company's manufacturing capabilities. If the
Company encounters any manufacturing difficulties, including problems involving
production yields, quality control and assurance, supplies of components or raw
materials or shortages of qualified personnel, regulatory approval of its new
facility, it could have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company obtains its supply of alprostadil from two sources. The
first is Spolana Chemical Works AS in Neratovice, Czech Republic ("Spolana")
pursuant to a supply agreement that expires at the end of 1997. A renewal
agreement is currently being negotiated. In January 1996, the Company entered
into a long-term alprostadil supply agreement with CHINOIN Pharmaceutical and
Chemical Works Co., Ltd. ("Chinoin"). Chinoin is the Hungarian subsidiary of
the French pharmaceutical company Sanofi Winthrop.

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While the Company is seeking additional sources of alprostadil, there
can be no assurance that it will be able to identify and qualify such sources.
Alprostadil, a generic drug, is extremely difficult to manufacture and is only
available to the Company from a limited number of other suppliers, none of
which currently produce it in commercial quantities. The Company is required to
identify its suppliers to the FDA. The FDA may require additional clinical
trials or other studies prior to accepting any new supplier. Unless the
Company secures and qualifies additional sources of alprostadil, it will be
entirely dependent upon Spolana and Chinoin for the delivery of alprostadil. If
interruptions in the supply of alprostadil were to occur for any reason,
including, but not limited to, a decision by Spolana and/or Chinoin to
discontinue manufacture, political unrest, labor disputes, or a failure of
Spolana and/or Chinoin to follow regulatory guidelines, the development and
commercial marketing of MUSE (alprostadil) and other potential products could
be delayed or prevented. An interruption in the Company's supply of
alprostadil would have a material adverse effect on the Company's business,
financial condition and results of operations.

The formulation, filling, packaging and testing of the MUSE
(alprostadil) is performed by Paco Pharmaceutical Services, Inc. ("Paco") at
its facility in Lakewood, New Jersey. In April 1995, Paco was acquired by The
West Company. In June 1995, the Company completed construction of its
approximately 6,000 square feet of dedicated manufacturing and testing space
within Paco's facility. This space is dedicated to manufacturing and testing
activities for the Company. Until the Company develops an in-house
manufacturing capability, it will be entirely dependent upon Paco for the
manufacture of its products. There can be no assurance that the Company's
reliance on Paco will not result in problems with product supply. Interruptions
in the availability of MUSE (alprostadil) and other potential products could
have a material adverse effect on the Company's business, financial condition
and results of operations.

The Company obtains the necessary raw materials and components for the
manufacture of MUSE (alprostadil) from third parties. The Company currently
contracts with contract manufacturing organizations, including foreign
manufacturers, that are required to comply with strict standards established by
the Company. All contract manufacturers are required by the Federal Food, Drug,
and Cosmetic Act, as amended, and by FDA regulations to follow current Good
Manufacturing Practices ("cGMP") and are subject to routine periodic inspections
by the FDA and certain state and foreign regulatory agencies for compliance with
cGMPs and other applicable regulations. The FDA stringently applies regulatory
standards for manufacturing. The Company's third party contract manufacturers
were inspected for cGMP compliance as part of the approval process. However,
upon routine re-inspection of the manufacturing facilities, there can be no
assurance that the FDA will find the manufacturing process or facilities to be
in compliance with cGMPs and other regulations. Failure to achieve satisfactory
cGMP compliance as confirmed by routine inspections could become a significant
adverse effect on the Company's ability to continue to manufacture and
distribute its products and, in the most serious case, result in the issuance of
a regulatory warning letter or seizure or recall of products, injunction and/or
civil fines.

The Company's New Jersey manufacturing facility at Paco Pharmaceutical
Services Inc. was inspected by the FDA for the first time after the preapproval
inspection during 12 days in February and March 1997. That inspection resulted
in the issuance by the FDA of an extensive Form FDA 483, which detailed specific
areas where the FDA inspector observed that the Company's operations were not in
full compliance with some areas of the cGMP regulations. A corrective action
plan addressing all identified cGMP deficiencies was initiated immediately, and
the Company submitted a written response to the Form FDA 483 and requested a
meeting with the FDA District Office officials to discuss the matter. There can
be no assurance that the FDA will accept the Company's corrective action plan or
the time frame for completing the corrective action plan. If the corrective
action plan is accepted it is likely that the FDA would reinspect the facility
shortly after completion of the corrective action plan. The scope of any FDA
reinspection could be more comprehensive than the initial inspection. Failure
to adequately address these cGMP deficiencies within a reasonable time frame
would have an adverse effect on the Company's ability to supply its product,
which would have a material adverse effect on the Company's business, financial
condition and results of operations. Accordingly, the Company has undertaken a
complete review of its cGMP compliance. However, there can be no assurance that
the FDA will deem the Company's corrective action or the timing for the
corrective action to be adequate or that additional corrective action, in areas
not addressed by Form FDA 483, will not be required. Failure to achieve
satisfactory cGMP compliance would have a material adverse effect on the
Company's ability to continue to market and distribute its products and in the
most serious cases, could result in the issuance of a Warning Letter, seizure or
recall of products, civil fines or closure of the Company's New Jersey
manufacturing facility until cGMP compliance is achieved.

SALES AND MARKETING

Before commercially launching its first product, MUSE (alprostadil),
in January 1997, the Company had no experience in the sale, marketing and
distribution of pharmaceutical products. The Company is marketing and selling
its products initially through a direct sales force in the United States. There
can be no assurance that the Company's domestic sales and marketing efforts
will be successful.

The Company intends to market and sell its products in other foreign
markets through distribution, co-promotion or license agreements with corporate
partners. To date, the Company has

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entered into international marketing agreements with Astra and Janssen. There
can be no assurance that the Company will be able to successfully enter into
additional agreements with corporate partners upon reasonable terms, if at all.
To the extent that the Company enters into distribution, co-promotion or
license agreements for the sale of its products, the Company will be dependent
upon the efforts of third parties. There can be no assurance that such efforts
will be successful.

In February 1996, the Company entered into a distribution agreement
with CORD Logistics, Inc. ("CORD"), a wholly-owned subsidiary of Cardinal
Health, Inc. Under this agreement, CORD warehouses the Company's finished
goods, takes customer orders, picks, packs and ships its product, invoices
customers and collects related receivables. The Company also has access to
CORD information systems that support these functions. As a result of this
distribution agreement with CORD, the Company is heavily dependent on CORD's
efforts. There can be no assurance such efforts will be successful.

In May 1996, the Company entered into an international marketing
agreement with Astra to purchase the Company's products for resale in Europe,
South America, Central America, Australia and New Zealand. As consideration for
execution of the marketing agreement, Astra paid the Company $10 million in
June 1996. In September 1996, the Company received a $10 million milestone
payment from Astra upon filing an application for marketing authorization for
MUSE (alprostadil) in the United Kingdom. The Company will be paid up to an
additional $10 million in the event certain other milestones are achieved.
However, there can be no assurance that such milestones will be achieved. As a
result of this marketing agreement with Astra, the Company is dependent on
Astra's efforts to market, distribute and sell the Company's products
effectively in the above mentioned markets. There can be no assurance that
such efforts will be successful.

In July 1996, the Company entered into a distribution agreement with
Alternate Site Distributors, Inc. ("ASD"), a subsidiary of Bergen Brunswig
Corporation. ASD provides "direct-to-physician" distribution, telemarketing
and customer service capabilities in support of the U.S. marketing and sales
efforts. Pursuant to the terms of this agreement, ASD developed a customer
service organization to respond to all the Company's sales representative and
physician inquiries. A central feature of this customer service is a dedicated
Company owned toll free number with an automated response menu covering various
options. As a result of this distribution agreement with ASD, the Company is
dependent on ASD's efforts to distribute, telemarket, and provide customer
service effectively. There can be no assurance that such efforts will be
successful.

In January 1997, the Company signed an international marketing
agreement with Janssen, a subsidiary of Johnson & Johnson. Janssen will
purchase the Company's products for resale in China, multiple Pacific Rim
countries (excluding Japan), Canada, Mexico and South Africa. As consideration
for execution of the international marketing agreement, Janssen paid the
Company $5 million. The Company will receive additional payments in the event
certain other milestones are achieved. However, there can be no assurance that
such milestones will be achieved. As a result of this distribution agreement
with Janssen, the Company is dependent on Janssen's efforts to distribute and
sell the Company's products effectively in the above mentioned markets. There
can be no assurance that such efforts will be successful.

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CLINICAL STUDIES

In mid-1995, the Company completed its Phase III Confirmatory studies
for MUSE (alprostadil) that were used as a basis for the New Drug Application
("NDA") submitted to the FDA in March 1996. MUSE (alprostadil) was cleared
for marketing by the FDA in November 1996. Successful intercourse was reported
by 64.9 percent of participants using MUSE (alprostadil) versus 18.6 percent
receiving placebo. Of all active doses administered, 50.2 percent resulted in
intercourse, compared to 10.4 percent of placebo doses. No increased risk of
serious adverse events due to MUSE (alprostadil) was found, and there were no
reports of priapism (persistent abnormal erection) or penile scarring.
Eighty-eight (88) percent of patient couples that commenced the pivotal Phase
III Confirmation Study completed it. The most common side effect reported was
transient penile pain and less than one percent of participants discontinued
use due to discomfort. In patients who responded to treatment with MUSE
(alprostadil), there was a statistically significant improvement in the
patient's perception of his emotional well-being (p<0.004) and in his
relationship with his partner (p<0.001) compared to patients treated with
placebo. From the partner's perspective, there also was a statistically
significant improvement in her relationship with the patient (p<0.001) compared
to partners in the placebo group. The Company has continued open label Extended
Maintenance studies for those patients electing to continue treatment.

The Company's ongoing clinical trials will evaluate the long-term
safety of MUSE (alprostadil) for both the patient and his partner. Additional
adverse side effects may arise during the course of ongoing clinical trials.
There can be no assurance that additional adverse side effects will not arise
that result in the FDA requiring limitations on use or warnings that make the
Company's products not commercially viable. Any additional adverse side
effects could have a material adverse effect on the Company's business,
financial condition and results of operations.

LICENSED PATENTS AND PROPRIETARY RIGHTS

The Company's policy is to aggressively maintain its patent protection
and to enforce all of its intellectual property rights.

The Company is the exclusive licensee of United States and Canadian
patents originally filed in the name of Dr. Gene Voss. These patents claim
methods of treating erectile dysfunction by the topical application of an
ointment containing a vasodilator. There are also claims to methods of
treatment involving the insertion of a catheter into the urethra to deliver
vasodilators.

The Company is the exclusive licensee of patents and patent
applications filed in the name of Dr. Nils Kock in numerous countries. Patents
have issued in Australia, Canada, Japan, New Zealand, Sweden, South Africa and
Europe (Austria, Belgium, Germany, France, Great Britain, Ireland, Italy,
Luxembourg, Netherlands, Sweden, Greece and Spain). Patent applications are
pending in Denmark, Finland, and the United States. The European patents claim
compositions for the treatment of erectile dysfunction through the urethra of
certain active substances including alpha-receptor blockers, vasoactive
polypeptides, prostaglandins or nitroglycerin dispersed in a hydrophilic
vehicle. A competitor has filed a patent opposition against this patent with
the European Patent Office. The Company is vigorously defending this patent,
however, an adverse decision could affect the Company's ability, based on its
patent rights, to prevent potential competition in Europe.

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The Company is the exclusive assignee of two United States patents and
divisional patent applications from Alza Corporation ("Alza"), covering
inventions of Dr. Virgil Place made while he was an employee of Alza. The
patents and patent applications describe dosage forms for administering a
therapeutic agent to the urethra, methods for treating erectile dysfunction and
specific drug formulations that can be delivered transurethrally for the
treatment of erectile dysfunction. Five additional divisional or continuation
applications claiming subject matter disclosed but not claimed in the issued
patents or applications were filed in the United States on June 7, 1995. Patent
applications filed before June 8, 1995, if approved, will have a patent life of
17 years from the patent issue date. Patent applications filed after June 8,
1995, if approved, will have a patent life of 20 years from the filing date.
Foreign patents have been issued in South Africa and Australia and foreign
applications are pending in Canada, Finland, Ireland, Mexico, Portugal, New
Zealand, Japan, South Korea, Norway and Europe (Austria, Belgium, Switzerland,
Germany, Denmark, Spain, France, United Kingdom, Italy, Luxembourg,
Netherlands, Sweden and Greece).

The Company's license and assignment agreements for these patents
and patent applications are royalty bearing and do not expire until the
licensed patents expire. These license and assignment agreements provide that
the Company may assume responsibility for the maintenance and prosecution of
the patents and bring infringement actions.

In addition, the Company filed two patent applications in the United
States, eleven patent applications in foreign jurisdictions, and two patent
cooperation treaty applications in 1996. These patents further address the
treatment and diagnosis of erectile dysfunction.

The Company's success will depend in large part on the strength of its
current and future patent position relating to the transurethral delivery of
pharmacologic agents for the treatment of erectile dysfunction. The Company's
patent position, like other pharmaceutical companies, is highly uncertain and
involves complex legal and factual questions. Claims made under patent
applications may be denied or significantly narrowed and the issued patents may
not provide significant commercial protection to the Company. The Company could
incur substantial costs in proceedings before the United States Patent Office,
including interference proceedings. These proceedings could also result in
adverse decisions as to the priority of the Company's licensed or assigned
inventions. There is no assurance that the Company's patents will not be
successfully challenged or designed around by others. The Company is aware of a
patent application involving the transurethral application of prostaglandin E2.
However, the Company believes that its licensed patents will block the issuance
of such patent.

There can be no assurance that the Company's products do not or will
not infringe on the patent or proprietary rights of others. The Company may be
required to obtain additional licenses to the patents, patent applications or
other proprietary rights of others. There can be no assurance that any such
licenses would be made available on terms acceptable to the Company, if at all.
If the Company does not obtain such licenses, it could encounter delays in
product introductions while it attempts to design around such patents, or the
development, manufacture or sale of products requiring such licenses could be
precluded. The Company believes there will continue to be significant
litigation in the pharmaceutical industry regarding patent and other
intellectual property rights.

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12
by failing to compensate him for the technology in the manner allegedly
promised. The Company has filed a complaint for declaratory judgment against
the former consultant in the United States District Court for the Northern
District of California, which seeks a declaration from the court that the
former consultant is not an inventor of any of the technology disclosed in the
patents. The former consultant has filed a counterclaim that seeks unspecified
monetary damages and to have two of the Company's patents declared invalid on
the grounds that they fail to list him as an inventor.

In a separate matter, licensors in an agreement by which the Company
acquired a patent license have filed a lawsuit in the United States District
Court for the Western District of Texas that alleges that they were defrauded
in connection with the renegotiation of the license agreement between the
Company and the licensors. In addition to monetary damages, the licensors seek
to return to the terms of the original license agreement.

The Company has conducted a review of the circumstances surrounding
these two matters and believes that the allegations are without merit.
Although the Company believes that it should prevail, the uncertainties
inherent in litigation prevent the Company from giving any assurances about the
outcome of such litigation.

The Company also relies on trade secrets and other unpatented
proprietary technology. No assurance can be given that the Company can
meaningfully protect its rights in such unpatented proprietary technology or
that others will not independently develop substantially equivalent proprietary
products and processes or otherwise gain access to the Company's proprietary
technology. The Company seeks to protect its trade secrets and proprietary
know-how, in part, with confidentiality agreements with employees and
consultants. There can be no assurance that the agreements will not be
breached, that the Company will have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be independently
developed by competitors. In addition, protracted and costly litigation may be
necessary to enforce and determine the scope and validity of the Company's
proprietary rights.

COMPETITION

Competition in the pharmaceutical and medical products industries is
intense and characterized by extensive research efforts and rapid technological
progress. Certain treatments for erectile dysfunction exist, such as needle
injection therapy, vacuum constriction devices, penile implants and oral
medications, and the manufacturers of these products will continue to improve
these therapies. In July 1995, the FDA approved the use of alprostadil in The
Upjohn Company's needle injection therapy product for erectile dysfunction.
Previously, Upjohn had obtained approval in a number of European countries.
Additional competitive therapies under development include an oral medication
by Pfizer, Inc., which is currently in Phase III clinical trials. Other large
pharmaceutical companies are also actively engaged in the development of
therapies for the treatment of erectile dysfunction. These companies have
substantially greater research and development capabilities as well as
substantially greater marketing, financial and human resources than the
Company. In addition, these companies have significantly greater experience
than the Company in undertaking preclinical testing, human clinical trials and
other regulatory approval procedures. There are also small companies, academic
institutions, governmental agencies and other research organizations that are
conducting research in the area of erectile dysfunction. For instance, Zonagen,
Inc. and Pentech Pharmaceutical, Inc. have oral medications under development.
These entities may also market commercial products either on their own or
through

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13
collaborative efforts. The Company's competitors may develop technologies and
products that are more effective than those being developed by the Company. Such
developments would render the Company's products less competitive or possibly
obsolete. The Company is also competing with respect to marketing capabilities
and manufacturing efficiency, areas in which it has limited experience.

GOVERNMENT REGULATION

The production and marketing of the Company's proposed products and
its research and development activities are subject to regulation for safety,
effectiveness and quality by numerous governmental authorities in the United
States and other countries. In the United States, drugs are subject to rigorous
FDA regulation. The Federal Food, Drug, and Cosmetic Act, as amended, the
regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things, the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, advertising and promotion of
the Company's products. Product development and approval within this regulatory
framework takes a number of years and involves the expenditure of substantial
resources.

The steps required before a pharmaceutical agent may be marketed in
the United States include (i) preclinical laboratory tests, in vivo preclinical
studies and formulation studies, (ii) the submission to the FDA of an
Investigational New Drug ("IND") application for human clinical testing, which
must become effective before human clinical trials commence, (iii) adequate and
well-controlled human clinical trials to establish the safety and effectiveness
of the drug, (iv) the submission of an NDA to the FDA, and (v) the FDA
clearance for marketing of the NDA prior to any commercial sale or shipment of
the drug. In addition to obtaining FDA approval for each product, each domestic
drug manufacturing establishment must be registered with, and approved by, the
FDA. Domestic manufacturing establishments are subject to biennial inspections
by the FDA and must comply with cGMP for both drugs and devices. To supply
products for use in the United States, foreign manufacturing establishments
must comply with cGMP and are subject to periodic inspection by the FDA or by
corresponding regulatory agencies in such countries under reciprocal agreements
with the FDA. The Company's contract manufacturing site, located in New Jersey,
must also be licensed by the State of New Jersey and must comply with New
Jersey's separate regulatory requirements.

Preclinical tests include laboratory evaluation of product chemistry
and formulation, as well as animal studies to assess the potential safety and
effectiveness of the product. Compounds must be adequately manufactured and
preclinical safety tests must be conducted by laboratories that comply with FDA
regulations. The results of the preclinical tests are submitted to the FDA as
part of an IND and are reviewed by the FDA prior to the commencement of human
clinical trials. There can be no assurance that submission of an IND will
result in FDA authorization to commence clinical trials.

Clinical trials involve the administration of the investigational new
drug to patients, under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the effectiveness criteria to be evaluated. Each protocol
must be submitted to the FDA as part of the IND. Further, each clinical study
must be conducted under the auspices of an independent Institutional Review
Board ("IRB") at the institution at which the study will be conducted. The IRB
will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution.

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14
Clinical trials are typically conducted in three sequential phases,
but the phases may overlap. In Phase I, the initial introduction of the drug
into healthy subjects, the drug is tested for safety, dosage tolerance,
absorption, distribution, metabolism, excretion and pharmacodynamics (clinical
pharmacology). Phase II involves studies in a limited patient population to (i)
determine the effectiveness of the drug for specific, targeted indications,
(ii) determine dosage tolerance and optimal dosage and (iii) identify possible
adverse effects and safety risks. When a compound is found to be effective and
to have an acceptable safety profile in Phase II evaluations, Phase III trials
are undertaken to further evaluate clinical effectiveness and to further test
for safety within an expanded patient population at geographically dispersed
clinical study sites. There can be no assurance that Phase I, Phase II or Phase
III testing will be completed within any specific time period, if at all, with
respect to any of the Company's products subject to such testing. Furthermore,
the Company or the FDA may suspend clinical trials at any time if it is
believed that the patients are being exposed to an unacceptable health risk.

The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the drug. The Company submitted an NDA
for MUSE (alprostadil) in March 1996, and the FDA approved the NDA in November
1996. Although MUSE (alprostadil) received FDA approval, the testing and
approval process for the Company's other potential products will require
substantial time and effort, and there can be no assurance that any approval
will be granted on a timely basis, if at all. The FDA may deny an NDA if
applicable regulatory criteria are not satisfied, require additional testing or
information, or require postmarketing testing and surveillance to monitor the
safety of the Company's products if they do not view the NDA as containing
adequate evidence of the safety and effectiveness of the drug. Notwithstanding
the submission of such data, the FDA may ultimately decide that the application
does not satisfy its regulatory criteria for approval. Moreover, if regulatory
approval of a drug is granted, such approval may entail limitations on the
indicated uses for which it may be marketed. Finally, approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing.

Among the conditions for an NDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to cGMP. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the area of
production and quality control to ensure full technical compliance.

The Company and all its third party contract manufacturers are subject
to routine periodic inspections by the FDA and certain state and foreign
regulatory agencies for compliance with cGMPs and other applicable regulations.
The FDA stringently applies regulatory standards for manufacturing. The
Company's third party contract manufacturers were inspected for cGMP compliance
as part of the approval process. However, upon routine re-inspection of its
contract manufacturers, there can be no assurance that the FDA will find the
manufacturing process or facilities to be in compliance with cGMPs and other
regulations. Failure to achieve satisfactory cGMP compliance as confirmed by
routine regulatory inspections could become a significant adverse effect on the
Company's ability to continue to manufacture and distribute its products and, in
the most serious cases, result in the issuance of regulatory warning letter or
seizure or recall of products, injunction and/or civil fines.

The Company's New Jersey manufacturing facility at Paco Pharmaceutical
Services Inc. was inspected by the FDA for the first time after the preapproval
inspection during 12 days in February and March 1997. That inspection resulted
in the issuance by the FDA of an extensive Form FDA 483, which detailed specific
areas where the FDA inspector observed that the Company's operations were not in
full compliance with some areas of the cGMP regulations. A corrective action
plan addressing all identified cGMP deficiencies was initiated immediately, and
the Company submitted a written response to the Form FDA 483 and requested a
meeting with the FDA District Office officials to discuss the matter. There can
be no assurance that the FDA will accept the Company's corrective action plan or
the time frame for completing the corrective action plan. If the corrective
action plan is accepted it is likely that the FDA would reinspect the facility
shortly after completion of the corrective action plan. The scope of any FDA
reinspection could be more comprehensive than the initial inspection. Failure
to adequately address these cGMP deficiencies within a reasonable time frame
would have an adverse effect on the Company's ability to supply its product,
which would have a material adverse effect on the Company's business, financial
condition and results of operations. Accordingly, the Company has undertaken a
complete review of its cGMP compliance. However, there can be no assurance that
the FDA will deem the Company's corrective action or the timing for the
corrective action to be adequate or that additional corrective action, in areas
are not addressed by Form FDA 483, will not be required. Failure to achieve
satisfactory cGMP compliance would have a material adverse effect on the
Company's ability to continue to market and distribute its products and in the
most serious cases, could result in the issuance of a Warning Letter, seizure or
recall of products, civil fines or closure of the Company's New Jersey
manufacturing facility until cGMP compliance is achieved.

For clinical investigation and marketing in Europe, the Company also
is subject to foreign regulatory requirements governing human clinical trials
and marketing approval for drugs. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely for
European countries both within and outside the European Union ("EU"). The
Company's approach to the European regulatory process involved the
identification of respected clinical investigators in the member states of the
EU and other European countries to conduct clinical studies. The Company
designed these studies to meet FDA, EU and other European countries' standards.
Within the EU, while marketing authorizations must be supported by clinical
trial data of a type and extent set out by EU directives and guidelines, the
approval process for the commencement of clinical trials is just beginning to
be harmonized by EU law, and still varies from country to country. The system
for obtaining marketing authorizations within the EU changed on January 1, 1995
pursuant to recently adopted EU legislation. The new EU registration system is
a dual one in which certain products, such as

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biotechnology and high-technology products and those containing new active
substances, have access to a central regulatory system that provides
registration throughout the entire EU. Other products will be registered by
national authorities in individual EU member states, operating on a principle
of mutual recognition. As far as possible, the Company's studies were designed
to develop a regulatory package sufficient for multi-country approval in the
European markets without the need to duplicate studies for individual country
approvals. The Company submitted applications for approval of MUSE
(alprostadil) in the United Kingdom and Sweden in 1996 and Norway in 1997.
These applications will be subject to rigorous approval processes, and there
can be no assurance such approval will be granted in a timely manner, if at all.

Outside the United States and Europe, the Company's ability to market
a product is contingent upon receiving a marketing authorization from the
appropriate regulatory authority. This foreign regulatory approval process
includes all of the risks associated with FDA approval previously discussed.

EMPLOYEES

As of March 1, 1997 the Company employed 107 persons, of whom two are
part-time. Of these employees, seven are in manufacturing, twelve are in
clinical and regulatory affairs, three are in research and development, three
are in development and preclinical studies, three are in quality assurance, 66
are in sales and marketing, one is in corporate development and twelve are in
finance and administration. None of the Company's current employees are
represented by a labor union or are the subject of a collective bargaining
agreement. The Company believes that it maintains good relations with its
employees.

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This Annual Report on Form 10-K contains forward looking statements
that involve risks and uncertainties. The Company's actual results could
differ from those set forth in such forward looking statements as a result of
certain factors, including those set forth in this Risk Factors section.

RISK FACTORS

LIMITED MANUFACTURING EXPERIENCE AND DEPENDENCE ON SOLE CONTRACT MANUFACTURER

The Company has only limited experience in manufacturing MUSE
(alprostadil) in commercial quantities. Since the commercial launch of its
product in January 1997, the Company has experienced shortages on certain
dosage strengths due to higher than expected demand. If the Company encounters
any manufacturing difficulties, including problems involving production yields,
quality control and assurance, supplies of components or raw materials or
shortages of qualified personnel, it could have a material adverse effect on
the Company's business, financial condition and results of operations.

The formulation, filling, packaging and testing of MUSE (alprostadil)
is performed by Paco Pharmaceutical Services, Inc. ("Paco"), a wholly owned
subsidiary of The West Company, at its facility in Lakewood, New Jersey. In
June 1995, the Company completed construction of its approximately 6,000 square
feet of dedicated manufacturing and testing space within Paco's facility. Due
to higher than expected demand, the Company has leased two adjacent buildings
in New Jersey, totalling 90,000 square feet, that will be built out to support
expansion of the Company's manufacturing capabilities. Until the Company
develops an in-house manufacturing capability, it will be entirely dependent
upon Paco for the manufacture of its products. There can be no assurance that
the Company's reliance on Paco for the manufacture of its products will not
result in problems with product supply, and there can be no assurance that the
Company will be able to establish a second manufacturing facility.
Interruptions in the availability of products could delay or prevent the
development and commercial marketing of MUSE (alprostadil) and other potential
products and would have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company and all its third party contract manufacturers are subject
to routine periodic inspections by the FDA and certain state and foreign
regulatory agencies for compliance with cGMPs and other applicable regulations.
The FDA stringently applies regulatory standards for manufacturing. The
Company's third party contract manufacturers were inspected for cGMP compliance
as part of the approval process. However, upon routine re-inspection of its
contract manufacturers, there can be no assurance that the FDA will find the
manufacturing process or facilities to be in compliance with cGMPs and other
regulations. Failure to achieve satisfactory cGMP compliance as confirmed by
routine regulatory inspections could become a significant adverse effect on the
Company's ability to continue to manufacture and distribute its products and, in
the most serious cases, result in the issuance of regulatory warning letter
seizure or recall of products, injunction and/or civil fines.

LIMITED SALES AND MARKETING EXPERIENCE

In February 1996, the Company entered into a distribution agreement
with CORD Logistics, Inc. ("CORD"), a wholly owned subsidiary of Cardinal
Health, Inc. Under this agreement, CORD warehouses the Company's finished
goods, takes customer orders, picks, packs and ships its product, invoices
customers and collects related receivables. The Company also has access to
CORD's information systems that support these functions. As a result of this
distribution agreement with CORD, the Company is heavily dependent on CORD's
efforts to fulfill orders and warehouse its products effectively. There can be
no assurance such efforts will be successful.

In May 1996, the Company entered into an international marketing
agreement with Astra to purchase the Company's products for resale in Europe,
South America, Central America, Australia and

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17
New Zealand. As consideration for execution of the international marketing
agreement, Astra paid the Company $10 million in June 1996. In September 1996,
the Company received a $10 million milestone payment from Astra upon filing an
application for marketing authorization for MUSE (alprostadil) in the United
Kingdom. The Company will be paid up to an additional $10 million in the event
certain other milestones are achieved. However, there can be no assurance that
such milestones will be achieved. The marketing agreement does not have minimum
purchase commitments, and Astra may take up to twelve months to introduce a
product in a given country following regulatory approval in such country. As a
result of this marketing agreement with Astra, the Company is dependent on
Astra's efforts to market, distribute and sell the Company's products
effectively in the above mentioned markets. There can be no assurance that such
efforts will be successful.

In July 1996, the Company entered into a distribution agreement with
ASD, a subsidiary of Bergen Brunswig Corporation. ASD provides
"direct-to-physician" distribution, telemarketing and customer service
capabilities in support of the U.S. marketing and sales efforts. Pursuant to
the terms of this agreement, ASD developed a customer service organization to
respond to all the Company's sales representative and physician inquiries. A
central feature of this customer service is a dedicated Company owned toll free
number with an automated response menu covering various options. As a result of
this distribution agreement with ASD, the Company is dependent on ASD's efforts
to distribute, telemarket, and provide customer service effectively. There can
be no assurance that such efforts will be successful.

The Company intends to market and sell its products in other foreign
markets through distribution, co-promotion or license agreements with corporate
partners. To date, the Company has entered into international marketing
agreements with Astra and Janssen. There can be no assurance that the Company
will be able to successfully enter into additional agreements with corporate
partners upon reasonable terms, if at all. To the extent that the Company
enters into distribution, co-promotion or license agreements for the sale of
its products, the Company will be dependent upon the efforts of third parties.
These third parties may have other commitments, and there can be no assurance
that they will commit the necessary resources to effectively market, distribute
and sell the Company's product.

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DEPENDENCE ON THE COMPANY'S TRANSURETHRAL SYSTEM FOR ERECTION

The Company currently relies upon a single therapeutic approach to
treat erectile dysfunction, its transurethral system for erection. Certain
side effects have been found to occur with the use of MUSE (alprostadil). Mild
to moderate transient penile/perineal pain was suffered by 21% to 42% of
patients (depending on dosage) treated with MUSE (alprostadil) in the Company's
Phase II/III Dose Ranging study. Moderate to severe (i.e., syncope) decreases
in blood pressure were experienced by 1% to 4% of patients (depending on
dosage) treated with MUSE (alprostadil) in such study. The existence of side
effects or dissatisfaction with product results may impact a patient's decision
to use or continue to use, or a physician's decision to recommend, MUSE
(alprostadil) as a therapy for the treatment of erectile dysfunction thereby
affecting the commercial viability of MUSE (alprostadil). In addition,
technological changes or medical advancements could diminish or eliminate the
commercial viability of the Company's products. As a result of the Company's
single therapeutic approach and its current focus on MUSE (alprostadil), the
failure to successfully commercialize such product would have an adverse effect
on the Company and could threaten the Company's ability to continue as a viable
entity.

GOVERNMENT REGULATION AND UNCERTAINTY OF PRODUCT APPROVALS

The Company's research, preclinical development, clinical trials,
manufacturing and marketing of its products are subject to extensive regulation
by numerous governmental authorities in the United States and other countries.
Clinical trials, manufacturing and marketing of the Company's products will be
subject to the rigorous testing and approval processes of the FDA and
equivalent foreign regulatory agencies. The process of obtaining FDA and other
required regulatory approvals is lengthy and expensive. The Company completed
pivotal clinical trials in 1995 and submitted an NDA for its first product,
MUSE (alprostadil), to the FDA in March 1996. In November 1996, the Company
received final marketing clearance from the FDA for MUSE (alprostadil). In
addition, the Company submitted applications for approval of MUSE (alprostadil)
in the United Kingdom and Sweden in 1996 and Norway in January 1997. These
applications will be subject to rigorous approval processes. There can be no
assurance that approval in these or other countries will be granted on a timely
basis, if at all, or if granted, that such approval will not contain
significant limitations in the form of warnings, precautions or
contraindications with respect to condition of use. Any delay in obtaining, or
failure to obtain, such approval would adversely affect the Company's ability
to generate product revenue.

The Company's clinical trials for future products will seek safety
data as well as efficacy data and will require substantial time and significant
funding. There is no assurance that clinical trials related to future products
will be completed successfully within any specified time period, if at all.
Furthermore, the FDA may suspend clinical trials at any time if it is believed
that the subjects participating in such trials are being exposed to
unacceptable health risks. There can be no assurance that FDA or other
regulatory approvals for any products developed by the Company will be granted
on a timely basis, if at all, or if granted, that such approval will not
contain significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use. Any delay in obtaining,
or failure to obtain, such approvals would adversely affect the Company's
ability to generate product revenue. Failure to comply with the applicable
regulatory requirements can, among other things, result in fines, suspensions
of regulatory approvals, product recalls, operating restrictions and criminal
prosecution. In addition, the marketing and manufacturing of pharmaceutical
products are subject to continuing FDA review, and later discovery of
previously unknown problems with a product, manufacturer or facility may result
in the FDA requiring further clinical research or restrictions on the product
or the

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19
manufacturer, including withdrawal of the product from the market. The
restriction, suspension or revocation of regulatory approvals or any other
failure to comply with regulatory requirements would have a material adverse
effect on the Company's business, financial condition and results of
operations.

The Company obtains the necessary raw materials and components for the
manufacture of MUSE (alprostadil) from third parties. The Company currently
contracts with contract manufacturing organizations, including foreign
manufacturers, that are required to comply with strict standards established by
the Company. All contract manufacturers are required by the Federal Food, Drug,
and Cosmetic Act, as amended, and by FDA regulations to follow current Good
Manufacturing Practices ("cGMP") and are subject to routine periodic
inspections by the FDA and certain state and foreign regulatory agencies for
compliance with cGMPs and other applicable regulations. The FDA stringently
applies regulatory standards for manufacturing. The Company's third party
contract manufacturers were inspected for cGMP compliance as part of the
approval process. However, upon routine re-inspection of the manufacturing
facilities there can be no assurance that the FDA will find the manufacturing
process or facilities to be in compliance with cGMPs and other regulations.
Failure to achieve satisfactory cGMP compliance as confirmed by routine
inspections could become a significant adverse effect on the Company's ability
to continue to manufacture and distribute its products and, in the most serious
case, result in the issuance of a regulatory warning letter or seizure or recall
of products, injunction and/or civil fines.

INTENSE COMPETITION

Competition in the pharmaceutical and medical products industries is
intense and is characterized by extensive research efforts and rapid
technological progress. Certain treatments for erectile dysfunction exist, such
as needle injection therapy, vacuum constriction devices, penile implants and
oral medications, and the manufacturers of these products will continue to
improve these therapies. In July 1995, the FDA approved the use of alprostadil
in The Upjohn Company's needle injection therapy product for erectile
dysfunction. Previously, Upjohn had obtained approval in a number of European
countries. Additional competitive therapies under development include an oral
medication by Pfizer, Inc., which is currently in Phase III clinical trials.
Other large pharmaceutical companies are also actively engaged in the
development of therapies for the treatment of erectile dysfunction. These
companies have substantially greater research and development capabilities as
well as substantially greater marketing, financial and human resources than the
Company. In addition, these companies have significantly greater experience than
the Company in undertaking preclinical testing, human clinical trials and other
regulatory approval procedures. There are also small companies, academic
institutions, governmental agencies and other research organizations that are
conducting research in the area of erectile dysfunction. For instance, Zonagen,
Inc. and Pentech Pharmaceutical, Inc. have oral medications under development.
These entities may also market commercial products either on their own or
through collaborative efforts. The Company's competitors may develop
technologies and products that are more effective than those being developed by
the Company. Such developments would render the Company's products less
competitive or possibly obsolete. The Company is also competing with respect to
marketing capabilities and manufacturing efficiency, areas in which it has
limited experience.

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PROPRIETARY RIGHTS AND RISK OF LITIGATION

The Company's success will depend, in large part, on the strength of
its current and future patent position relating to the transurethral delivery
of pharmacologic agents for the treatment of erectile dysfunction. The
Company's patent position, like that of other pharmaceutical companies, is
highly uncertain and involves complex legal and factual questions. Claims made
under patent applications may be denied or significantly narrowed and issued
patents may not provide significant commercial protection to the Company. The
Company could incur substantial costs in proceedings before the United States
Patent Office, including interference proceedings. These proceedings could
also result in adverse decisions as to the priority of the Company's licensed
or assigned inventions. There is no assurance that the Company's patents will
not be successfully challenged or designed around by others. The Company is
aware of a patent application involving the transurethral application of
prostaglandin E2. The corresponding application in Europe has been abandoned.
Failure of the Company's licensed patents to block issuance of such patent
could have a material adverse effect on the Company's business, financial
condition and results of operations.

There can be no assurance that the Company's products do not or will
not infringe on the patent or proprietary rights of others. A patent opposition
to the Company's exclusively licensed European patents has been filed with the
European Patent Office. The Company is vigorously defending the patents,
however an adverse decision could affect the Company's ability, based on its
patent rights, to limit potential competition in Europe. The Company may be
required to obtain additional licenses to the patents, patent applications or
other proprietary rights of others. There can be no assurance that any such
licenses would be made available on terms acceptable to the Company, if at all.
If the Company does not obtain such licenses, it could encounter delays in
product introductions while it attempts to design around such patents, or the
development, manufacture or sale of products requiring such licenses could be
precluded. The Company believes there will continue to be significant
litigation in the pharmaceutical industry regarding patent and other
intellectual property rights.

A former consultant to the Company has claimed that he is the inventor
of certain technology disclosed in two of the Company's patents. The former
consultant further claims that the Company defrauded him by allegedly failing
to inform him that it intended to use and patent this technology and by failing
to compensate him for the technology in the manner allegedly promised. The
Company has filed a complaint for declaratory judgment against the former
consultant in the United States District Court for the Northern District of
California, which seeks a declaration from the court that the former consultant
is not an inventor of any of the technology disclosed in the patents. The
former consultant has filed a counterclaim that seeks unspecified monetary
damages and to have two of the Company's patents declared invalid on the
grounds that they fail to list him as an inventor.

The Company has conducted a review of the circumstances surrounding
these two matters and believes that the allegations are without merit.
Although the Company believes that it should prevail,

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the uncertainties inherent in litigation prevent the Company from giving any
assurances about the outcome of such litigation.

The Company also relies on trade secrets and other unpatented
proprietary technology. No assurance can be given that the Company can
meaningfully protect its rights in such unpatented proprietary technology or
that others will not independently develop substantially equivalent proprietary
products and processes or otherwise gain access to the Company's proprietary
technology. The Company seeks to protect its trade secrets and proprietary
know-how, in part, with confidentiality agreements with employees and
consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be independently
developed by competitors. In addition, protracted and costly litigation may be
necessary to enforce and determine the scope and validity of the Company's
proprietary rights.

DEPENDENCE ON DUAL SOURCE OF SUPPLY

To date, the Company has obtained its supply of alprostadil from two
sources. The first is Spolana Chemical Works AS ("Spolana") pursuant to a
supply agreement that expires at the end of 1997. A renewal agreement is
currently being negotiated. In January 1996, the Company entered into a
long-term alprostadil supply agreement with Chinoin. Chinoin is the Hungarian
subsidiary of the French pharmaceutical company Sanofi Winthrop. Alprostadil, a
generic drug, is extremely difficult to manufacture and is only available to
the Company from a limited number of other suppliers, none of which currently
produce it in commercial quantities. While the Company is seeking additional
sources, there can be no assurance that it will be able to identify and qualify
such sources. The Company is required to identify its suppliers to the FDA.
The FDA may require additional clinical trials or other studies prior to
accepting a new supplier. Unless the Company secures and qualifies additional
sources of alprostadil, it will be entirely dependent upon Spolana and Chinoin
for the delivery of alprostadil. If interruptions in the supply of alprostadil
were to occur for any reason, including a decision by Spolana and/or Chinoin to
discontinue manufacturing, political unrest, labor disputes or a failure of
Spolana and/or Chinoin to follow regulatory guidelines, the development and
commercial marketing of MUSE (alprostadil) and other potential products could
be delayed or prevented. An interruption in the Company's supply of
alprostadil would have a material adverse effect on the Company's business,
financial condition and results of operations.

HISTORY OF LOSSES AND LIMITED OPERATING HISTORY

The Company has generated a cumulative net loss of $66.2 million for
the period from its inception through December 31, 1996. To achieve
profitability, the Company must successfully manufacture and market MUSE
(alprostadil). The Company is subject to a number of risks including its
ability to scale-up manufacturing capabilities and secure adequate supplies of
raw materials, its ability to successfully market, distribute and sell its
product, its reliance on a single therapeutic approach to erectile dysfunction
and intense competition. There can be no assurance that the Company will be
able to achieve profitability on a sustained basis. Accordingly, there can be
no assurance of the Company's future success.

The Company began generating revenues from product sales in January
1997. The Company has limited experience in manufacturing and selling MUSE
(alprostadil) in commercial quantities. Whether

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22
the Company can successfully manage the transition to a large scale commercial
enterprise will depend upon successful further development of its manufacturing
capability and its distribution network and attainment of foreign regulatory
approvals for MUSE (alprostadil). Failure to make such a transition
successfully would have a material adverse effect on the Company's business,
financial condition and results of operations.

FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING

The Company expects to incur substantial additional costs, including
expenses related to building its marketing and sales organization, a second
manufacturing plant in the United States and one in Europe, new product
preclinical and clinical costs, ongoing research and development activities,
and general corporate purposes. The Company anticipates that its existing
capital resources will be sufficient to support the Company's operations
through commercial introduction of MUSE (alprostadil) in Europe but may not be
sufficient for the introduction of any additional future products. Accordingly,
the Company anticipates that it may be required to issue additional equity or
debt securities and may use other financing sources including, but not limited
to, corporate alliances and lease financings to fund the future development and
possible commercial launch of its products. The sale of additional equity
securities would result in additional dilution to the Company's stockholders.
There can be no assurance that such funds will be available on terms
satisfactory to the Company, or at all. Failure to obtain adequate funding
could cause a delay or cessation of the Company's product development and
marketing efforts and would have a material adverse effect upon the Company's
business, financial condition and results of operations. The Company's working
capital and additional funding requirements will depend upon numerous factors,
including: (i) the level of resources that the Company devotes to sales and
marketing capabilities; (ii) the level of resources that the Company devotes to
expanding manufacturing capacity; (iii) the activities of competitors; (iv)
the progress of the Company's research and development programs; (v) the timing
and results of preclinical testing and clinical trials; and (vi) technological
advances.

DEPENDENCE ON KEY PERSONNEL

The Company's progress to date has been highly dependent upon the
skills of a limited number of key management personnel. To reach its future
business objectives, the Company will need to hire numerous other qualified
personnel in the areas of sales, manufacturing, clinical trial management and
preclinical testing. There can be no assurance that the Company will be able to
hire such personnel, as the Company must compete with other companies, academic
institutions, government entities and other agencies. The loss of any of the
Company's key personnel or the failure to attract or retain necessary new
employees could have an adverse effect on the Company's research, product
development and business operations.

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23
RISKS RELATING TO INTERNATIONAL OPERATIONS

In the event the Company receives necessary foreign regulatory
approvals, the Company plans to market its products internationally. Changes
in overseas economic and political conditions, currency exchange rates, foreign
tax laws or tariffs or other trade regulations could have a material adverse
effect on the Company's business, financial condition and results of
operations. The anticipated international nature of the Company's business is
also expected to subject it and its representatives, agents and distributors to
laws and regulations of the foreign jurisdictions in which they operate or the
Company's products are sold. The regulation of drug therapies in a number of
such jurisdictions, particularly in the European Union, continues to develop,
and there can be no assurance that new laws or regulations will not have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the laws of certain foreign countries do
not protect the Company's intellectual property rights to the same extent as do
the laws of the United States.

PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE

The use of the Company's products in clinical trials and commercially
may expose the Company to product liability claims and possible adverse
publicity. The Company currently maintains product liability insurance
coverage. There can be no assurance that the Company's present or future
insurance will provide adequate coverage or be available at a reasonable cost
or that product liability claims would not adversely affect the business or
financial condition of the Company.

UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT

In the United States and elsewhere, sales of pharmaceutical products
currently are dependent, in part, on the availability of reimbursement to the
consumer from third party payors, such as government and private insurance
plans. Third party payors are increasingly challenging the prices charged for
medical products and services. There can be no assurance that the Company's
products will be considered cost effective and that reimbursement to the
consumer will be available or sufficient to allow the Company to sell its
products on a competitive basis.

In addition, certain health care providers are moving towards a managed
care system in which such providers contract to provide comprehensive health
care services, including prescription drugs, for a fixed cost per person. The
Company hopes to further qualify its transurethral system for erection for
reimbursement in the managed care environment. However, the Company is unable
to predict the reimbursement policies employed by third-party health
care payors. Furthermore, attempts at qualifying its transurethral system for
erection for reimbursement could be adversely affected by changes in
reimbursement policies of governmental or private health care payors.

UNCERTAINTY AND POSSIBLE NEGATIVE EFFECTS OF HEALTHCARE REFORM

The healthcare industry is undergoing fundamental changes that are the
result of political, economic and regulatory influences. The levels of revenue
and profitability of pharmaceutical companies may be affected by the continuing
efforts of governmental and third party payors to contain or reduce healthcare
costs through various means. Reforms that have been and may be considered
include mandated basic healthcare benefits, controls on healthcare spending
through limitations on the

-22-
24
increase in private health insurance premiums and Medicare and Medicaid
spending, the creation of large insurance purchasing groups and fundamental
changes to the healthcare delivery system. Due to uncertainties regarding the
outcome of healthcare reform initiatives and their enactment and
implementation, the Company cannot predict which, if any, of the reform
proposals will be adopted or the effect such adoption may have on the Company.
There can be no assurance that future healthcare legislation or other changes
in the administration or interpretation of government healthcare or third-party
reimbursement programs will not have a material adverse effect on the Company.
Healthcare reform is also under consideration in some other countries.

CONTROL BY EXISTING STOCKHOLDERS

As of March 1, 1997, the Company's executive officers and current
directors and certain of their affiliates, beneficially owned approximately
11.1% of the Company's outstanding Common Stock. Such concentration of ownership
may have the effect of delaying, defining or preventing a change in control of
the Company. Additionally, these stockholders will have significant influence
over the election of directors of the Company. This concentration of ownership
may allow significant influence and control over Board decisions and corporate
actions.

POTENTIAL VOLATILITY OF STOCK PRICE

The stock market has recently experienced significant price and volume
fluctuations unrelated to the operating performance of particular companies.
In addition, the market price of the Company's Common Stock, like the
securities of other therapeutic companies without approved products, has been
highly volatile and is likely to continue to be so. Factors such as variations
in the Company's financial results, comments by security analysts, the
Company's ability to scale up its manufacturing capability to commercial
levels, the Company's ability to successfully sell its product in the United
States and Europe, any loss of key management, the results of the Company's
clinical trials or those of its competition, adverse regulatory actions or
decisions, announcements of technological innovations or new products by the
Company or its competition, changing governmental regulations, patents or other
proprietary rights, product or patent litigation or public concern as to the
safety of products developed by the Company, may have a significant effect on
the market price of the Company's Common Stock.

ANTI-TAKEOVER EFFECT OF SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BYLAW
PROVISIONS

In February 1996, the Company's Board of Directors authorized its
reincorporation in the State of Delaware (the "Reincorporation") and adopted a
Shareholder Rights Plan. The Shareholder Rights Plan provides for a dividend
distribution of one Preferred Shares Purchase Right (a "Right") on each
outstanding share of the Company's Common Stock. The Rights will become
exercisable following the tenth day after a person or group announces
acquisition of 20% or more of the Company's Common Stock, or announces
commencement of a tender offer, the consummation of which would result in
ownership by the person or group of 20% or more of the Company's Common Stock.
The Company will be entitled to redeem the Rights at $0.01 per Right at any
time on or before the tenth day following acquisition by a person or group of
20% of more of the Company's Common Stock. The Company's reincorporation into
the State of Delaware was approved by its stockholders and effective in May
1996.

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25
The Shareholder Rights Plan and certain provisions of the Company's
Certificate of Incorporation and Bylaws may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. The Company's Certificate of
Incorporation allows the Company to issue Preferred Stock without any vote or
further action by the stockholders, and certain provisions of the Company's
Certificate of Incorporation and Bylaws eliminate the right of stockholders to
act by written consent without a meeting, specify procedures for director
nominations by stockholders and submission of other proposals for consideration
at stockholder meetings, and eliminate cumulative voting in the election of
directors. Certain provisions of Delaware law could also delay or make more
difficult a merger, tender offer or proxy contest involving the Company,
including Section 203, which prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years unless certain conditions are met. The Shareholder Rights Plan, the
possible issuance of Preferred Stock, the procedures required for director
nominations and stockholder proposals and Delaware law could have the effect of
delaying, deferring or preventing a change in control of the Company, including
without limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of the Company's Common Stock. These
provisions could also limit the price that investors might be willing to pay in
the future for shares of the Company's Common Stock.

Item 2. PROPERTIES

The Company currently occupies 18,316 square feet of administrative
space in Menlo Park, California under a lease which expires in December 1997.
The Company's facility serves as the principal site for administration,
clinical trial management, regulatory affairs and monitoring of product
production and quality control. In March 1997, the Company signed a fifteen
year lease (expected to commence in December 1997) for a 53,361 square foot
building in Mountain View, California that will become its new principal
administrative and research and development laboratory facility.

In June 1995, the Company completed constructing and equipping to its
specifications approximately 6,000 square feet of manufacturing and testing
space within Paco's facility in Lakewood, New Jersey. In January and February
1997, the Company executed a five year lease for two buildings in New Jersey
totalling 90,000 square feet that will be built out to support expansion of the
Company's manufacturing capabilities.

The Company is currently leasing 6,228 square feet of laboratory space
in Sunnyvale, California under a lease which expires in September 1999.

-24-
26
Item 3. LEGAL PROCEEDINGS

A former consultant to the Company has claimed that he is the
inventor of certain technology disclosed in two of the Company's patents. The
former consultant further claims that the Company defrauded him by allegedly
failing to inform him that it intended to use and patent this technology and by
failing to compensate him for the technology in the manner allegedly promised.
The Company has filed a complaint for declaratory judgment against the former
consultant in the United States District Court for the Northern District of
California, which seeks a declaration from the court that the former consultant
is not an inventor of any of the technology disclosed in the patents. The
former consultant has filed a counterclaim that seeks unspecified monetary
damages and to have two of the Company's patents declared invalid on the
grounds that they fail to list him as an inventor.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's stockholders
during the quarter ended December 31, 1996.

-25-
27
PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

The Company's Common Stock trades publicly on The Nasdaq Stock Market
under the symbol "VVUS." The following table sets forth for the periods
indicated the quarterly high and low closing sales prices of the Common Stock
on The Nasdaq Stock Market.

THREE MONTHS ENDED
--------------------------------------------------------------------------
1996 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- --------------------------------- -------- ------- ------------ -----------

High . . . . . . . . . . . . . . $31.25 $34.00 $42.00 $40.25
Low . . . . . . . . . . . . . . 23.50 25.25 28.00 27.88

1995
- ---------------------------------
High . . . . . . . . . . . . . . $19.00 $17.50 $24.00 $31.25
Low . . . . . . . . . . . . . . 13.00 11.25 14.00 16.75

As of February 28, 1997, there were no outstanding shares of Preferred
Stock and 456 holders of record of 16,426,606 shares of outstanding Common
Stock. The Company has not paid any dividends since its inception and does not
intend to pay any dividends on its Common Stock in the foreseeable future.

Item 6. SELECTED FINANCIAL DATA

The information required by this item is incorporated by reference
from the section captioned "Selected Financial Data" of the Registrant's Annual
Report. Such information is also set forth in Exhibit 13.1 attached hereto.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The information required by this item is incorporated by reference
from the section captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of the Registrant's Annual Report. Such
information is also set forth in Exhibit 13.1 attached hereto.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The information required by this item is incorporated by reference
from the sections captioned "Consolidated Balance Sheets", "Consolidated
Statements of Operations", "Consolidated Statements of Shareholders' Equity",
"Consolidated Statements of Cash Flows", "Notes to Consolidated Financial
Statements" and "Report of Independent Public Accountants" of the Registrant's
Annual Report. Such information is also set forth in Exhibit 13.1 attached
hereto.

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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

Not applicable.

PART III

Item 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

The information required by this item is incorporated by reference
from the discussion in the Proxy Statement captioned "Proposal One: Election of
Directors."

Item 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference
from the discussion in the Proxy Statement captioned "Executive Compensation."

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference
from the discussion in the Proxy Statement captioned "Record Date and Share
Ownership."

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This information required by this item is incorporated by reference
from the discussion in the Proxy Statement captioned "Certain Transactions and
Reports."

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON
FORM 8-K

(a) The following documents are filed as part of this Report:

1. FINANCIAL STATEMENTS

Financial statements have been incorporated by reference to the
Registrant's Annual Report.

-27-
29
2. FINANCIAL STATEMENT SCHEDULES

Schedules have been omitted because the information required to
be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto incorporated
by reference herein.

3. EXHIBITS

Number
------

#3.1 Certificate of Incorporation of the Company, as currently in
effect
3.2 Form of Amended and Restated Certificate of Incorporation of the
Company, to be filed immediately following the Company's
Annual Meeting of Stockholders if the stockholders approve
Proposal 2 in the Company's Proxy
#3.3 Bylaws of the Registrant, as amended
*4.1 Specimen Common Stock Certificate of the Registrant
*4.2 Registration Rights, as amended
**4.3 Form of Agreement Not to Sell by and between the Registrant and
certain shareholders and option holders
*4.4 Form of Preferred Stock Purchase Warrant issued by the Registrant
to Invemed Associates, Inc., Frazier Investment Securities,
L.P. and Cristina H. Kepner
*+10.1 Assignment Agreement by and between Alza Corporation and the
Registrant dated December 31, 1993
*+10.2 Memorandum of Understanding by and between Ortho Pharmaceutical
Corporation and the Registrant dated February 25, 1992
*10.3 Assignment by and between Ortho Pharmaceutical Corporation and
the Registrant dated June 9, 1992
*+10.4 License Agreement by and between Gene A. Voss, M.D., Allen C. Eichler,
M.D., and the Registrant dated December 28, 1992
*+10.5 License Agreement by and between Ortho Pharmaceutical
Corporation and Kjell Holmquist AB dated June 23, 1989
*+10.5B Amendment by and between Kjell Holmquist AB and the Registrant
dated July 3, 1992
*10.5C Amendment by and between Kjell Holmquist AB and the Registrant
dated April 22, 1992
*+10.5D Stock Purchase Agreement by and between Kjell Holmquist AB and
the Registrant dated April 22, 1992
*+10.6A License Agreement by and between AMSU, Ltd., and Ortho Pharmaceutical
Corporation dated June 23, 1989
*+10.6B Amendment by and between AMSU, Ltd., and the Registrant dated
July 3, 1992
*10.6C Amendment by and between AMSU, Ltd., and the Registrant dated
April 22, 1992
*+10.6D Stock Purchase Agreement by and between AMSU, Ltd., and the
Registrant dated July 10, 1992
*10.7 Supply Agreement by and between Paco Pharmaceutical Services,
Inc., and the Registrant dated November 10, 1993
*+10.8 Agreement by and among Pharmatech, Inc., Spolana Chemical Works AS, and
the Registrant dated June 23, 1993
*10.9 Master Services Agreement by and between the Registrant and
Teknekron Pharmaceutical Systems dated August 9, 1993
*10.10 Lease by and between McCandless-Triad and the Registrant dated
November 23, 1992, as amended
***10.11 Form of Indemnification Agreements by and among the Registrant
and the Directors and Officers of the Registrant
**10.12 1991 Incentive Stock Plan and Form of Agreement, as amended

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30

*10.13 1994 Director Option Plan and Form of Agreement
*10.14 Form of 1994 Employee Stock Purchase Plan and Form of
Subscription Agreement
*10.15 Stock Restriction Agreement between the Company and Virgil A.
Place, M.D. dated November 7, 1991
*10.16 Stock Purchase Agreement between the Company and Leland F.
Wilson dated June 26, 1991, as amended
*10.17 Letter Agreement between the Registrant and Leland F. Wilson dated
June 14, 1991 concerning severance pay
*10.18 Letter Agreement between the Registrant and Paul C. Doherty
dated January 26, 1994 concerning severance pay
**10.19 Guaranteed Maximum Price Contract by and between the Registrant
and Marshall Contractors, Inc. dated January 27, 1995
**10.20 Sub-sublease by and among the Registrant, Argonaut
Technologies, Inc., ESCAgenetics Corp. and Tanklage
Construction Co. dated January 31, 1995
****+10.21 Distribution Services Agreement between the Registrant and
Synergy Logistics, Inc. (a wholly-owned subsidiary of
Cardinal Health, Inc.) dated February 9, 1996
****+10.22 Manufacturing Agreement between the Registrant and CHINOIN
Pharmaceutical and Chemical Works Co., Ltd. dated December
###+10.23 Distribution and Services Agreement between the Registrant and
Alternate Site Distributors, Inc. dated July 17, 1996
##+10.24 Distribution Agreement made as of May 29, 1996 between the
Registrant and Astra AB
###10.25 Menlo McCandless Office Lease made as of August 30, 1996 by and
between Registrant and McCandless - Triad
###10.26 Sublease Agreement made as of August 22, 1996 by and between
Registrant and Plant Research Technologies
++10.27 Distribution Agreement made as of January 22, 1997 between the
Registrant and Janssen Pharmaceutica International, a
division of Cilag AG International
10.28 Lease Agreement made as of January 1, 1997 between the
Registrant and Airport Associates
10.29 Lease Amendment No. 1 as of February 15, 1997 between Registrant
and Airport Associates
10.30 Lease Agreement by and between 605 East Fairchild Associates,
L.P. and Registrant dated as of March 7, 1997
11.1 Computation of net loss per share
13.1 Portions of the 1996 Annual Report to Security Holders
**16.1 Letter regarding change in independent public accountants
*21.1 Certificate of Incorporation of VIVUS International Limited
21.2 List of Subsidiaries
23.1 Consent of Independent Public Accountants
24.1 Power of Attorney (See "Power of Attorney")
27.1 Financial Data Schedule
- ---------------

* Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 No. 33-75698.

** Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 No. 33-90390,
filed with the Securities and Exchange Commission on March 16,
1995.

*** Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Form 8-B filed with the Commission on June 24, 1996

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31

**** Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.

# Incorporated by reference to the Registrant's Amendment No. 1 to
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.

## Incorporated by reference to the same numbered exhibit filed
with the Registrant's Current Report on Form 8-K/A filed with the
Commission on June 21, 1996.

### Incorporated by reference to the same-numbered exhibit filed
with the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.

+ Confidential treatment granted.

++ Confidential treatment requested.

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32
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized:

VIVUS, INC.,
a Delaware Corporation

By: /s/ David C. Yntema
_________________________________________
DAVID C. YNTEMA
Vice President of Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer)

Date: March 28, 1997

-31-
33
EXHIBIT 24.1

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Leland F. Wilson and David C.
Yntema as his attorney-in-fact for him, in any and all capacities, to sign each
amendment to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact or his substitute or substitutes may lawfully do or cause to
be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Leland F. Wilson President, Chief Executive Officer (Principal
- ---------------------------- Executive Officer) and Director March 28, 1997
Leland F. Wilson

/s/ Virgil A. Place
- ---------------------------- Chairman of the Board and Chief Scientific
Virgil A. Place Officer and Director March 28, 1997

/s/ David C. Yntema
- ---------------------------- Vice President of Finance and Chief Financial
David C. Yntema Officer (Principal Financial and Accounting
Officer) March 28, 1997

/s/ Richard L. Casey
- ---------------------------- Director March 28, 1997
Richard L. Casey

/s/ Samuel D. Colella
- ---------------------------- Director March 28, 1997
Samuel D. Colella

/s/ Brian H. Dovey
- ---------------------------- Director March 28, 1997
Brian H. Dovey

/s/ Linda Jenckes
- ---------------------------- Director March 28, 1997
Linda Jenckes

/s/ Peter Barton Hutt
- ---------------------------- Director March 28, 1997
Peter Barton Hutt

/s/ Elizabeth A. Fetter
- ---------------------------- Director March 28, 1997
Elizabeth A. Fetter

-32-
34

VIVUS, INC.

Report on form 10-K for
the year ended December 31, 1996

INDEX TO EXHIBITS*

EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NAME NUMBERED PAGE
------ ------------ -------------

3.2 Form of Amended and Restated Certificate of Incorporation of the
Company, to be filed immediately following the Company's Annual
Meeting of Stockholders if the stockholders approve Proposal 2
in the Company's Proxy
++10.27 Distribution Agreement made as of January 22, 1997 between the
Registrant and Janssen Pharmaceutica International, a division
of Cilag AG International
10.28 Lease Agreement made as of January 1, 1997 between the Registrant
and Airport Associates
10.29 Lease Amendment No. 1 as of February 15, 1997 between Registrant
10.30 Lease Agreement by and between 605 East Fairchild Associates, L.P.
and Registrant dated as of March 7, 1997
11.1 Computation of net loss per share
13.1 Portions of the 1996 Annual Report to Security Holders
21.2 List of Subsidiaries
23.1 Consent of Independent Public Accountants
24.1 Power of Attorney (see "Power of Attorney")
27.1 Financial Data Schedule

* Only exhibits actually filed are listed. Exhibits incorporated by
reference are set forth in the exhibit listing included in Item 14 of
the Report on Form 10-K.

++ Confidential treatment requested.