<PAGE>   1
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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)


<TABLE>
<S>                                                               <C>
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
</TABLE>

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





                                      -1-

<PAGE>   3
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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<PAGE>   5
                 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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<PAGE>   6
                 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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<PAGE>   7
                 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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<PAGE>   8
         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

                                      -7-

<PAGE>   9
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.





                                      -8-

<PAGE>   10
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.




                                      -9-

<PAGE>   11
         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.

         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





                                      -10-

<PAGE>   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





                                      -11-

<PAGE>   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.





                                      -12-

<PAGE>   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 






                                      -13-

<PAGE>   15
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.





                                      -14-

<PAGE>   16
         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.

         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.

LIMITED SALES AND MARKETING EXPERIENCE

         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.

         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





                                      -15-

<PAGE>   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.

         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.

         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.





                                      -16-

<PAGE>   18
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





                                      -17-

<PAGE>   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. 

         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.

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.





                                      -18-

<PAGE>   20
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.

         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,





                                      -19-

<PAGE>   21
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





                                      -20-

<PAGE>   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.





                                      -21-

<PAGE>   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-

<PAGE>   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.





                                      -23-

<PAGE>   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.


I
tem 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-

<PAGE>   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.

         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.



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-

<PAGE>   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.


<TABLE>
<CAPTION>
                                                                    THREE MONTHS ENDED
                                              --------------------------------------------------------------------------
1996                                          MARCH 31              JUNE 30            SEPTEMBER 30          DECEMBER 31
- ---------------------------------             --------              -------            ------------          -----------
<S>                                             <C>                   <C>                  <C>                   <C>
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

</TABLE>




         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.


                                      -26-

<PAGE>   28

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-

<PAGE>   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


<TABLE>
<CAPTION>
   Number
   ------ 
       <S>           <C>

      #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
</TABLE>




                                      -28-

<PAGE>   30

<TABLE>
  <S>            <C>
      *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
- ---------------                         

</TABLE>

*        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






                                      -29-

<PAGE>   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.





                                      -30-

<PAGE>   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-

<PAGE>   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:


<TABLE>                         
<CAPTION>

          SIGNATURE                                TITLE                                   DATE        
          ---------                                 -----                                   ----       
<S>                               <C>                                                   <C>            
/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             
                                
</TABLE>



                                      -32-

<PAGE>   34

                                  VIVUS, INC.

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

                               INDEX TO EXHIBITS*



<TABLE>
<CAPTION>
  EXHIBIT                                                                                     SEQUENTIALLY
  NUMBER                                    EXHIBIT NAME                                      NUMBERED PAGE
  ------                                    ------------                                      -------------
  <S>               <C>
   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

</TABLE>

*        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.










<PAGE>   1



                        AMENDED AND RESTATED CERTIFICATE

                              OF INCORPORATION OF

                                  VIVUS, INC.


         VIVUS, INC., a corporation organized and existing under the laws of
the State of Delaware, hereby certifies that the following Amended and Restated
Certificate of Incorporation (i) has been duly adopted in accordance with the
provisions of Section 245 of the General Corporation Law, (ii) restates the
provisions of the Certificate of Incorporation of VIVUS, Inc. filed with the
Secretary of State of the State of Delaware on May 20, 1996 and (iii)
supersedes the original Certificate of Incorporation in its entirety.

                                   ARTICLE I

         The name of the corporation is VIVUS, Inc. (the "Corporation").


                                   ARTICLE II

         The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, City of Wilmington, County of New Castle,
Delaware 19801.  The name of its registered agent at such address is The
Corporation Trust Company.


                                   ARTICLE III

         The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.


                                   ARTICLE IV

         The Corporation is authorized to issue two classes of shares of stock
to be designated, respectively, Common Stock, $0.001 par value, and
 Preferred
Stock, $0.001 par value.  The total number of shares that the Corporation is
authorized to issue is 205,000,000 shares.  The number of shares of Common
Stock authorized is 200,000,000.  The number of shares of Preferred Stock
authorized is 5,000,000.

         Upon the filing of this Certificate of Amendment of Certificate of
Incorporation, each one outstanding share of Common Stock shall be subdivided
and converted into two shares of Common Stock.

         The Preferred Stock may be issued from time to time in one or more
series pursuant to a resolution or resolutions providing for such issue duly
adopted by the board of directors (authority to do

<PAGE>   2
         The foregoing amendment has been duly approved by the stockholders in
accordance with the provisions of section 242 of the General Corporation Law.

         IN WITNESS WHEREOF, the corporation has caused this Certificate to be
signed by Leland F. Wilson, its President and Chief Executive Officer, and
attested by Robert D. Brownell, its Assistant Secretary, this ____ day of

___________, 1997.

                                        VIVUS, INC.

                                        By:
                                           ----------------------------------
                                           Leland F. Wilson
                                           President and Chief Executive Officer

ATTEST:

______________________________________
Robert D. Brownell
Assistant Secretary





                                      -5-

<PAGE>   3
so being hereby expressly vested in the board).  The board of directors is
further authorized to determine or alter the rights, preferences, privileges
and restrictions granted to or imposed upon any wholly unissued series of
Preferred Stock and to fix the number of shares of any series of Preferred
Stock and the designation of any such series of Preferred Stock.  The board of
directors, within the limits and restrictions stated in any resolution or
resolutions of the board of directors originally fixing the number of shares
constituting any series, may increase or decrease (but not below the number of
shares in any such series then outstanding) the number of shares of any series
subsequent to the issue of shares of that series.

         The authority of the board of directors with respect to each such
class or series shall include, without limitation of the foregoing, the right
to determine and fix:

         (a)     the distinctive designation of such class or series and the
number of shares to constitute such class or series;

         (b)     the rate at which dividends on the shares of such class or
series shall be declared and paid, or set aside for payment, whether dividends
at the rate so determined shall be cumulative or accruing, and whether the
shares of such class or series shall be entitled to any participating or other
dividends in addition to dividends at the rate so determined, and if so, on
what terms;

         (c)     the right or obligation, if any, of the corporation to redeem
shares of the particular class or series of Preferred Stock and, if redeemable,
the price, terms and manner of such redemption;

         (d)     the special and relative rights and preferences, if any, and
the amount or amounts per share, which the shares of such class or series of
Preferred Stock shall be entitled to receive upon any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation;

         (e)     the terms and conditions, if any, upon which shares of such
class or series shall be convertible into, or exchangeable for, shares of
capital stock of any other class or series, including the price or prices or
the rate or rates of conversion or exchange and the terms of adjustment, if
any;

         (f)     the obligation, if any, of the corporation to retire, redeem
or purchase shares of such class or series pursuant to a sinking fund or fund
of a similar nature or otherwise, and the terms and conditions of such
obligation;

         (g)     voting rights, if any, on the issuance of additional shares of
such class or series or any shares of any other class or series of Preferred
Stock;

         (h)     limitations, if any, on the issuance of additional shares of
such class or series or any shares of any other class or series of Preferred
Stock; and

         (i)     such other preferences, powers, qualifications, special or
relative rights and privileges thereof as the board of directors of the
corporation, acting in accordance with this Restated





                                      -2-

<PAGE>   4
Certificate of Incorporation, may deem advisable and are not inconsistent with
law and the provisions of this Restated Certificate of Incorporation.

                                   ARTICLE V

         The Corporation reserves the right to amend, alter, change, or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon the
stockholders herein are granted subject to this right.

                                   ARTICLE VI

         The Corporation is to have perpetual existence.


                                  ARTICLE VII

         1.      Limitation of Liability.  To the fullest extent permitted by
the General Corporation Law of the State of Delaware as the same exists or as
may hereafter be amended, a director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director.

         2.      Indemnification.  The Corporation may indemnify to the fullest
extent permitted by law any person made or threatened to be made a party to an
action or proceeding, whether criminal, civil, administrative or investigative,
by reason of the fact that such person or his or her testator or intestate is
or was a director, officer or employee of the Corporation, or any predecessor
of the Corporation, or serves or served at any other enterprise as a director,
officer or employee at the request of the Corporation or any predecessor to the
Corporation.

         3.      Amendments.  Neither any amendment nor repeal of this Article
VII, nor the adoption of any provision of the Corporation's Certificate of
Incorporation inconsistent with this Article VII, shall eliminate or reduce the
effect of this Article VII, in respect of any matter occurring, or any action
or proceeding accruing or arising or that, but for this Article VII, would
accrue or arise, prior to such amendment, repeal, or adoption of an
inconsistent provision.


                                  ARTICLE VIII

         In the event any shares of Preferred Stock shall be redeemed or
converted pursuant to the terms hereof, the shares so converted or redeemed
shall not revert to the status of authorized but unissued shares, but instead
shall be canceled and shall not be re-issuable by the Corporation.





                                      -3-

<PAGE>   5
                                   ARTICLE IX

         Holders of stock of any class or series of this corporation shall not
be entitled to cumulate their votes for the election of directors or any other
matter submitted to a vote of the stockholders, unless such cumulative voting
is required pursuant to Sections 2115 and/or 301.5 of the California
Corporations Code, in which event each such holder shall be entitled to as many
votes as shall equal the number of votes which (except for this provision as to
cumulative voting) such holder would be entitled to cast for the election of
directors with respect to his shares of stock multiplied by the number of
directors to be elected by him, and the holder may cast all of such votes for a
single director or may distribute them among the number of directors to be
voted for, or for any two or more of them as such holder may see fit, so long
as the name of the candidate for director shall have been placed in nomination
prior to the voting and the stockholder, or any other holder of the same class
or series of stock, has given notice at the meeting prior to the voting of the
intention to cumulate votes.

                                   ARTICLE X

         1.      Number of Directors.  The number of directors which
constitutes the whole Board of Directors of the corporation shall be designated
in the Bylaws of the corporation.

         2.      Election of Directors.  Elections of directors need not be by
written ballot unless the Bylaws of the corporation shall so provide.


                                   ARTICLE XI

         In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend
or repeal the Bylaws of the corporation.


                                  ARTICLE XII

         No action shall be taken by the stockholders of the corporation except
at an annual or special meeting of the stockholders called in accordance with
the Bylaws of the corporation, and no action shall be taken by the stockholders
by written consent.


                                  ARTICLE XIII

         Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide.  The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.





                                      -4-



<PAGE>   1


                                                                   EXHIBIT 10.27





                             DISTRIBUTION AGREEMENT

<PAGE>   2
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                            Page
                                                                                                                            ----
<S>      <C>                                                                                                                 <C>
1.       DEFINITIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1

2.       GRANT OF DISTRIBUTION RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3

         2.1     Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3
         2.2     Janssen No Conflict  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3
         2.3     Sales Outside Territory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3
         2.4     Licenses.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4
         2.5     VIVUS No Conflict  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4

3.       DEVELOPMENT AND MARKETING  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4

         3.1     Joint Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4
         3.2     Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4
         3.3     Regulatory Approvals/MAAs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4
         3.4     Marketing Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5

                 3.4.1    General.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5
                 3.4.2    VIVUS Approval. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5

         3.5     Exchange of Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6
         3.6     Adverse Experiences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6

4.       COMMERCIALIZATION AND PROMOTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6

         4.1     Janssen Commercialization.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6

                 4.1.1    Diligence.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6
                 4.1.2    Failure to Sell.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6
                 4.1.3    Subsequent Products.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6

         4.2     Training.    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   7

5.       PRODUCT SUPPLY AND DISTRIBUTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   7

         5.1     Product Supply.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   7
         5.2     Samples.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   7
         5.3     [*].   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   7

                 5.3.1    Timing.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8

*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.



</TABLE>


<PAGE>   3

<TABLE>
<S>      <C>                                                                                                                <C>
                 5.3.2    [*].  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8
                 5.3.3    [*].  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8
                 5.3.4    [*] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8
                 5.3.5    [*]   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8
                 5.3.6    [*].  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8

         5.4     Forecasts.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8
         5.5     Orders.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8

                 5.5.1    Orders.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8
                 5.5.2    Form of Order. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  .   9

         5.6     Delivery.    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   9
         5.7     Product Rejection.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   9
         5.8     Suppliers.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   9
         5.9     VIVUS Cost of Goods.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10
         5.10    Shortage of Supply.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10

                 5.10.1   Allocation.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10
                 5.10.2   Joint Manufacturing Team.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10

         5.11    Modification of Specifications.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11

6.       PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11

         6.1     Initial Payments.
  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11
         6.2     Transfer Price.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12

                 6.2.1    Sale Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12
                 6.2.2    Samples and Obsolete Inventory.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 12
                 6.2.3    [*] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 13

         6.3     Discounting.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13
         6.4     Sales Records.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13
         6.5     Provisional Payments.    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13

                 6.5.1    Product Units.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13

         6.6     Reconciliation.    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14

                 6.6.1    Product Units.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14
                 6.6.2    Timing.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14

         6.7     [*]  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14

*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.




</TABLE>


<PAGE>   4

<TABLE>
<S>      <C>                                                                                                              <C>
         6.8     Payment.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14
         6.9     Taxes.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14
         6.10    U.S. Dollars.    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15

7.       CONFIDENTIALITY  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15

         7.1     Nondisclosure.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15
         7.2     Disclosure to Subdistributors.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15
         7.3     Terms of Agreement.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16
         7.4     Clinical Data.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16
         7.5     Product Data.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16

8.       PATENT PROSECUTION AND LITIGATION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16

         8.1     Ownership of Inventions.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16
         8.2     Maintenance of Patents.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16

                 8.2.1    Filings.    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16
                 8.2.2    Extensions.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17

         8.3     Infringement by Product.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17
         8.4     Third Party Infringement.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17
         8.5     Recovery.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17
         8.6     Status of Activities.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18

9.       TRADEMARKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18

         9.1     Display.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18
         9.2     License.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18
         9.3     Registration.    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18
         9.4     Recordation.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18
         9.5     Approval of Promotional Materials/Quality Control.   . . . . . . . . . . . . . . . . . . . . . . . . . .  18
         9.6     Termination of Rights.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  19
         9.7     Trademark Indemnity.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  19
         9.8     Trademark Enforcement.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  19

10.      TERM AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20

         10.1    Expiration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20
         10.2    Events of Termination  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20

                 10.2.1   Payment Obligation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20
                 10.2.2   Material Non-Performance  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20
                 10.2.3   Bankruptcy Proceedings  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20
</TABLE>


<PAGE>   5
                                                                             

<TABLE>
<S>      <C>                                                                                                              <C>
                 10.2.4   Termination by VIVUS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21
                 10.2.5   Termination by Janssen  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21

11.      RIGHTS AND DUTIES UPON TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21

         11.1    Payment  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21
         11.2    Sale of Remaining Inventory  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21
         11.3    Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21

12.      WARRANTIES, REPRESENTATIONS, AND INDEMNIFICATIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22

         12.1    General Representations  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22

                 12.1.1   Duly Organized  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22
                 12.1.2   No Third Party Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22

         12.2    Representations and Warranties of VIVUS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22

                 12.2.1   VIVUS Rights.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22
                 12.2.2   Good Manufacturing GMP Standards/Regulatory Standards.  . . . . . . . . . . . . . . . . . . . .  22

         12.3    Indemnification by Janssen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23
         12.4    Indemnification by VIVUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23
         12.5    Patent Warranties  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  24

13.      GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  24

         13.1    Force Majeure  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  24
         13.2    Governing Law and Arbitration  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  24
         13.3    Janssen Right of Inspection  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  25
         13.4    Waiver of Breach25
         13.5    Separability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  25
         13.6    Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26
         13.7    Approvals  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26
         13.8    Notices  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26
         13.9    Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26
         13.10   No Partnership or Joint Venture  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26
         13.11   Third Party Rights.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  27
         13.12   Limited Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  27

         13.13   Execution in Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  27
</TABLE>


<PAGE>   6
                             DISTRIBUTION AGREEMENT


         THIS DISTRIBUTION AGREEMENT (hereinafter "Agreement"), made as of the
22nd day of January, 1997 ("Effective Date"), between VIVUS International
Limited, a company organized under the laws of Bermuda and having a place of
business at Clarendon House, Church Street, Hamilton, Bermuda ("VIVUS"), a
wholly-owned subsidiary of VIVUS, Inc., a Delaware corporation ("VIVUS, Inc."),
and Janssen Pharmaceutica International, a division of Cilag AG International,
and having its registered office at Kollerstrasse 38, CH-6300, Zug.,
Switzerland ("Janssen").

                                    RECITALS

         A.      VIVUS has developed a Product for the transurethral delivery
of alprostadil for the treatment of erectile dysfunction (as defined below, the
"Product").

         B.      Janssen desires to obtain from VIVUS certain distribution
rights, [*], for such Product in the Territory (as defined below) and VIVUS is
willing to grant to Janssen such rights on the terms and conditions set forth
below.

                                   AGREEMENT

1.       DEFINITIONS

         1.1     "Affiliates" shall mean (i) any corporation, firm, partnership
or other entity, whether de jure or de facto, which directly or indirectly
owns, is owned by or is under common ownership with a party hereto to the
extent of at least fifty percent (50%) of the equity (or such lesser percentage
which is the maximum allowed to be owned by a foreign corporation in a
particular jurisdiction) having the power to vote on or direct the affairs of
the entity or, irrespective of such equity ownership, having the power to
direct or control the management of such entity, and (ii) any person, firm,
partnership, corporation or other entity actually controlled by, controlling or
under common control with such party.

         1.2     [*] delivery transurethrally to treat male erectile
dysfunction.  It is understood that, as used herein, the [*].

        1.3     [*]  It is understood that [*] shall not include standard, 
commercially available [*].

         1.4     "First Commercial Sale" shall mean, with respect to each
Product in each country, the first bona fide, arm's length sale of such Product
in such country by or under authority of Janssen or its Subdistributors.

         1.5     "Foil Pouch Package Form" shall mean Product in finished
dosage form, including its cap, packaged into an individual foil pouch. [*]



*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.

<PAGE>   7
         1.6     "MAA" shall mean a marketing authorization application filed
by or under authority from Janssen with the requisite health regulatory
authority of any country of the Territory requesting approval for
commercialization of a Product for a particular indication in such country.  It
is understood that MAA does not include applications for pricing or
reimbursement approval.

         1.7     "MAA Approval" shall mean, with respect to each country of the
Territory for a particular Product, approval of the MAA filed in such country
by the health regulatory authority in such country that is the counterpart of
the U.S. FDA.  It is understood that MAA Approval does not include pricing or
reimbursement approval.  In any event, MAA Approval shall be deemed to have
occurred in a country with respect to a Product no later than the date of the
First Commercial Sale of such Product in such country by or under authority of
Janssen or its Subdistributors.

         1.8     "Major Country" shall mean The People's Republic of China or
Canada.

         1.9     "Net Sales" shall mean the [*]

The amounts described in (a) and (b) above shall be deducted only to the extent
they are stated separately on the invoice and paid by the buyer, or to the
extent reflected on Janssen's books in accordance with GAAP.  [*]

         1.10    "Patents" shall mean all patents and patent applications
(including continuations, continuations-in-part, divisions, patents of
addition, reissues, renewals, and extensions) which are or become owned by
VIVUS or VIVUS Inc., or to which VIVUS or VIVUS Inc. has, now or in the future,
the right to grant licenses and distribution rights, which generically or
specifically claim Product, a process for manufacturing Product, an
intermediate used in such process or a use of Product.  With respect to any
such patents or applications which VIVUS or VIVUS Inc. acquires or has acquired
from a Third Party, the same shall be included within the "Patents" hereunder
to the extent that VIVUS or VIVUS Inc. has the right to license the same
hereunder.

         1.11    [*] meeting the applicable [*].

         1.12    "Product(s)" shall mean the VIVUS "MUSE" Product for which an
NDA has been approved in the U.S. as of the Effective Date for any indications
(hereinafter "First Product"), and any other product useful to treat male
erectile dysfunction in humans for any indications which is both delivered
locally to the penis and contains alprostadil, and that is owned or controlled
by VIVUS or VIVUS Inc or their Affiliates controlled by VIVUS or VIVUS, Inc.

         1.13    "Specifications" shall have the meaning set forth in Section
5.7 below.

         1.14    "Subdistributor" shall mean any Affiliate or Third Party to
whom Janssen has granted the right, directly or indirectly, to distribute
Product and such Affiliate or Third Party is responsible for marketing and/or
promotion of such Product within its distribution territory, but does not
include wholesalers and resellers of Product who do not engage in any marketing
or promotion of the Product.

                                       -2-


*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.

<PAGE>   8
         1.15    "Territory" shall mean Canada, Mexico (including those
Caribbean Islands listed in Exhibit A hereto) South Africa, The Peoples
Republic of China, South Korea, Taiwan, Malaysia, Indonesia, Philippines, Hong
Kong (including Macau) and Singapore (including Brunei), Thailand, Vietnam,
Myanmar, Cambodia and Laos.  The initial Janssen Subdistributors responsible
for each country within the Territory are listed in Exhibit A.

        1.16    "Third Party(ies)" shall mean any party other than Janssen, 
VIVUS and their Affiliates.

         1.17    "VIVUS Alternative Trademark" shall mean a Trademark other
than the VIVUS Trademark which VIVUS has designated and the parties agree to
use with the Product in those countries in the Territory where the VIVUS
Trademark is not used.

         1.18    "VIVUS Cost of Goods" shall mean [*].

         1.19    "VIVUS Know-How" shall mean all methods, procedures, data and
information in tangible form owned or controlled by VIVUS [*].

         1.20    "VIVUS Trademark" shall mean the "MUSE" Trademark which VIVUS
has used in connection with the Product.  The VIVUS Trademark will be used in
connection with the Product in the Territory unless the Parties agree otherwise
or unless otherwise provided herein.  Each Party agrees that it will consider,
in good faith, a request by the other Party to use a VIVUS Alternative
Trademark.

2.       GRANT OF DISTRIBUTION RIGHTS

         2.1     Appointment.  VIVUS hereby grants to Janssen the exclusive
(even as to VIVUS) right to package, label, distribute and market Product for
sale in and sell Product in the Territory for all indications, with the right
to grant subdistribution rights to subdistributors (Affiliates or otherwise)
who distribute other Janssen ethical pharmaceutical products, subject to all
the other terms and conditions of this Agreement.  Janssen may subdistribute
Products through other subdistributors with VIVUS' prior written approval.
Notwithstanding anything herein to the contrary, Janssen and each
subdistributor shall market, promote, sell and otherwise distribute Product in
accordance with all applicable laws and regulations.  VIVUS reserves all rights
not expressly granted herein.

         2.2     Janssen No Conflict.  During the term of this Agreement,
Janssen agrees that neither Janssen nor its Affiliates will develop, market or
distribute any products in the Territory for the treatment or prevention of
erectile dysfunction other than Products; provided that with VIVUS' prior
approval, Janssen may develop, market or distribute within the Territory
products for the treatment of erectile dysfunction that are complementary with
Products and that do not involve the transurethral delivery, local injection,
local topical application or other local delivery of a drug substance.

         2.3     Sales Outside Territory.  Subject to applicable laws and
regulations, Janssen agrees to take reasonable efforts to prevent Janssen or
its subdistributors from, directly or indirectly, offering for sale, selling,
or otherwise transferring Product for use outside the Territory.  Likewise,
subject to


                                      -3-



*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.

<PAGE>   9

applicable laws and regulations, VIVUS agrees to take reasonable efforts to
prevent VIVUS (except for through Janssen), its Affiliates or Third Parties
from, directly or indirectly, offering for sale, selling, or otherwise
transferring Product for use within the Territory.

         2.4     Licenses.  Subject to the terms and conditions of this
Agreement, VIVUS hereby grants to Janssen an exclusive, royalty-free, license,
without the right to grant or authorize sublicenses, under Patents and VIVUS
Know-How to package, label, distribute, market and sell Product in the
Territory during the term of this Agreement.

         2.5     VIVUS No Conflict.  VIVUS agrees that it will grant no rights
in the Territory to Third Parties which would conflict with the rights granted
to Janssen herein, except as permitted by Janssen.

3.       DEVELOPMENT AND MARKETING

         3.1     Joint Board.  Promptly after the Effective Date the parties
shall establish a Joint Development and Marketing Board ("JDMB") to oversee the
regulatory activities relating to the Product in the Territory, review and
discuss overall plans for the commercialization and marketing of the Product,
coordinate the exchange of information between the parties regarding the
marketing and sale of Product in the Territory and to undertake and/or approve
such other matters as are provided for the JDMB under this Agreement.  The JDMB
will consist of up to three (3) representatives from each party.  The JDMB
shall meet at least quarterly during the first two (2) years after the
Effective Date at mutually agreeable locations outside the United States or, if
mutually agreeable, by teleconference and thereafter as necessary.  Decisions
of the JDMB shall be by unanimous approval; provided, however, if the JDMB
cannot reach agreement on a matter, either party may refer the dispute to the
Chief Executive Officer of VIVUS and the President of Janssen-Ortho, Canada,
who shall meet promptly and negotiate in good faith to resolve any such dispute
within 30 days of any such referral.  If despite such good faith efforts, the
parties are unable to resolve such dispute, [*].

         3.2     Development.  The JDMB will discuss the design and
implementation of clinical trials for Product in the Territory.  For at least
the First Product in each country of the Territory and further Products that
Janssen intends to distribute hereunder at its discretion Janssen or its
Subdistributor shall, at their sole expense, carry out the remaining
preclinical and clinical development of the Products for the Territory to
achieve MAA Approval and shall keep the JDMB reasonably informed of its
activities.  [*]  Janssen shall not conduct, or authorize, encourage, assist or
contract with any Third Party to conduct any clinical testing of a Product
without VIVUS' prior approval, not unreasonably withheld, but subject to VIVUS'
right under Section 3.1 above to control the design and protocols of any such
clinical testing.

         3.3     Regulatory Approvals/MAAs.  For at least the First Product in
each country of the Territory and further Products that Janssen intends to
distribute hereunder at its discretion, Janssen shall be responsible, at its
sole expense, for filing MAAs for each Product in the Territory up to and
including MAA Approval and thereafter maintain such MAA Approvals.  All such
activity shall be done in full consultation with the JDMB.  Janssen shall use
reasonable efforts to obtain such MAA

                                      -4-



*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.

<PAGE>   10

Approvals for the First Product as soon as practicable in each country within
the Territory, consistent generally with the efforts it makes for its other
important products.  In connection with Janssen's filing of MAAs, VIVUS shall
provide Janssen with a copy in English or translations already completed by
VIVUS, of all available information and data required to prepare appropriate
regulatory submissions affecting approval to market or of product pricing.
Without limiting the foregoing, in the event that filing for the necessary MAAs
with the appropriate regulatory agency in any country within the Territory
requires access to VIVUS' new drug application for the Product filed with the
U.S. FDA ("NDA"), VIVUS shall at its option (i) to the extent legally possible
in such country, file the MAA on behalf of Janssen, in which case Janssen shall
reimburse VIVUS' reasonable out-of-pocket expenses related to such filing, or
(ii) provide the NDA to Janssen solely for the purpose of making such MAA
filing.  VIVUS agrees to reasonably assist Janssen in responding to any
questions raised by the regulatory authorities.  This support may include, but
not be limited to, attending meetings with Janssen and local regulators in
North America to address specific aspects of the Product as part of the review
process.  [*]  All MAA filings will be in the name of VIVUS and Janssen except
where otherwise required by local law.  Janssen shall ensure that of all
registration and regulatory approvals are assigned back and sole ownership
transferred to VIVUS promptly upon termination of Janssen's distribution rights
with respect to the Product in such country to the extent permitted by
applicable laws.

         3.4     Marketing Plans.

                 3.4.1    General.   Janssen shall prepare reasonably detailed
marketing plans for the Territory, generally including country- by-country
plans, such plans to include plans related to the prelaunch, launch, promotion
and sale of Product, and which plans shall be shared with the JDMB (the
"Marketing Plans").  The Marketing Plans shall be designed to fulfill Janssen's
undertakings pursuant to Section 4.1 below.  Notwithstanding anything herein to
the contrary, subject to Section 3.1 above, the Marketing Plan for Canada
except for pricing shall be subject to approval by the JDMB.  Subject to the
provisions of this Agreement, and subject to compliance with the Marketing
Plans, Janssen shall have full control and authority of commercialization of
Product in the Territory and implementation of the Marketing Plans, at
Janssen's expense.  Janssen shall implement the Marketing Plans, and the JDMB
will review the progress of Janssen's marketing efforts under the Marketing
Plans.  Janssen agrees to keep the JDMB informed of the activities of Janssen
and its Subdistributors with respect to Products in the Territory.  VIVUS
agrees to keep the JDMB informed of key marketing strategies or plans that it
has developed or experiences that it has gained in marketing the Product
outside the Territory to the extent VIVUS has the right to do so.

                 3.4.2    VIVUS Approval.  Any claim, message or other material
part of promotional materials, Samples, advertising and materials for training
sales representatives with respect to Product, relating to uses, properties,
efficacy or positioning of Product, which has not previously been approved or
used by VIVUS or VIVUS Inc. in its own promotional or training activities,
shall be provided by Janssen to VIVUS along with an English translation
thereof, as applicable, and subject to review and approval by VIVUS prior to
the use by Janssen and its Subdistributors.  VIVUS shall use reasonable efforts
to complete any such review and respond to Janssen within fourteen (14) days
from notification by Janssen to VIVUS of the relevant matter.


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*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.

<PAGE>   11

         3.5     Exchange of Information.  Each party shall keep appropriate
records relating to the activities contemplated by this Article 3, and shall
report to the other party on the status of such activities on a regular basis.
The parties shall exchange data and information relating to Product development
to the extent reasonably necessary or appropriate, and each party shall have
the right to use such information received from the other in connection with
exercising its rights and performing its obligations under this Agreement.  In
fulfilling its obligations to report or exchange information under this Article
3, delivery by a party in writing to a member of the JDMB of the other party
will be considered sufficient.

         3.6     Adverse Experiences.  With respect to adverse drug experiences
relating to the Product, the parties shall report to the appropriate regulatory
authorities in the countries in which the Product is being developed or
commercialized, in accordance with the appropriate laws and regulations of the
relevant countries and authorities and Janssen shall ensure that its
Subdistributors comply with such reporting obligations.  Such reporting
activities within the Territory shall be coordinated by the JDMB where time and
law permit.  A party shall simultaneously with reporting any adverse drug
experience relating to the Product to the appropriate regulatory authorities of
any country or learning that a Third Party has reported an adverse drug
experience relating to the Product to an appropriate regulatory authority of
any country, report such adverse drug experience to the other party.  As soon
as is reasonable after the Effective Date, VIVUS will report to Janssen any
adverse drug experience relating to the Product of which it is aware that has
been reported to the appropriate regulatory authorities of any country.

4.       COMMERCIALIZATION AND PROMOTION

         4.1     Janssen Commercialization.

                 4.1.1    Diligence.  Janssen shall [*] (a) to launch the First
Product in each country in the Territory as soon as possible after obtaining
MAA Approval for such Product; and (b) after the First Commercial Sale of a
Product in a country, to achieve high volume sales of Product in such country.
Without limiting the foregoing, Janssen agrees to spend within the Territory on
promotion of the First Product, [*] after the First Commercial Sale of the
First Product in the first Major Country.

                 4.1.2    Failure to Sell.  If Janssen fails to launch the
First Product in any country in the Territory [*] from the date of MAA Approval
for such Product in such country, then such country shall cease to be part of
the Territory for all purposes of this Agreement, and all rights to package,
label, market, sell and distribute Product in such country shall revert to
VIVUS.  In countries where price approval of the First Product is required,
then the requirement for launch [*] after MAA Approval in the case where the
failure to launch is due to lack of price approval at a level no greater than
the price charged in other countries of the Territory and Janssen is exerting
reasonable efforts to obtain such price approval.  [*]

                 4.1.3    Subsequent Products.  With respect to each Product
after the First Product (a "Subsequent Product"), Janssen shall, in its sole
discretion, within six (6) months of the approval of


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*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.

<PAGE>   12

an NDA in the United States or its equivalent in a country of European Union
for such Subsequent Product (i) file the appropriate MAAs necessary to market
and distribute such Subsequent Product in at least each of the Major Countries
and one (1) of Mexico, South Korea or Taiwan and use reasonable efforts to
obtain MAA Approvals for such Subsequent Product as soon as practicable in each
such country; or (ii) pay to VIVUS all amounts due for such Subsequent Product
under the appropriate clause of Section 6.1 that would otherwise be due upon
MAA Approval in both of the Major Countries and in Mexico; provided, however,
in the event that Janssen elects not to perform either (i) or (ii) above, then
such Subsequent Product shall be excluded from the definition of Product for
all purposes under this Agreement, including without limitation Sections 2.1
and 2.4 above, and VIVUS (itself or through an Affiliate or Third Party) shall
have the right to package, label, distribute, market and sell such Subsequent
Product in the Territory.

         4.2     Training.  VIVUS will provide a one-time training in English
for Janssen's English speaking sales and marketing management personnel with
respect to the Product at a first location of Janssen's choosing in the far
east and a second location of Janssen's choosing in Canada and will provide to
Janssen training materials for the Product prepared by VIVUS for use in
training VIVUS Inc.'s U.S. sales representatives.  Janssen may copy any
training materials provided by VIVUS for future training programs conducted by
Janssen in connection with the marketing and sales of the Product hereunder.
Janssen will at all times ensure that its sales force is fully trained with
respect to the Product.

5.       PRODUCT SUPPLY AND DISTRIBUTION

         5.1     Product Supply.  Subject to the terms and conditions of this
Article 5 (including Section 5.10 below) VIVUS shall supply Janssen with
Product for the Territory, in Foil Pouch Package Form or such other form as
mutually agreed, and Janssen shall exclusively purchase its requirements from
VIVUS, during the term of the Agreement, [*].  Janssen shall prepare all such
Product in final packaged form including without limitation all product
labeling and other package inserts and materials required by the applicable
regulatory agencies. [*].

         5.2     Samples.  VIVUS shall supply Janssen with quantities of
Product sales samples ("Promotional Samples"), and with quantities of Product
reasonably necessary for Janssen to conduct clinical trials ("Clinical Trial
Samples") and quality assurance testing to verify that lots of Product supplied
by VIVUS meet the applicable Specifications ("QA Samples") (collectively,
"Samples"), all in such amounts as are mutually agreed.  Such Product shall be
supplied in Foil Pouch Package Form or such other form as mutually agreed.
Janssen shall prepare all such Product in final packaged form, except QA
Samples utilized by Janssen.

         5.3     [*].  The parties acknowledge and agree that for legal and/or
business reasons it may become desirable to conduct certain [*] as set forth in
this Section 5.3.

                 5.3.1    Timing.  Although the parties may mutually agree to
undertake such activities earlier, [*] beginning five (5) years after the First
Commercial Sale of a Product [*].  It is understood, however, that [*] with
respect to a Product prior to the eighth anniversary of the First Commercial


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*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.

<PAGE>   13

Sale of such Product in the Territory, [*] under this Section 5.3 with respect
to such Product.  To the extent that the [*] does not otherwise undertake or
arrange for such additional [*] shall have the right to undertake such
additional [*] under the terms of this Section 5.3.

                 5.3.2    [*].  Promptly following mutual agreement [*] in
accordance with Section 5.3.1 above, [*] reasonable specifications).  In
addition, [*].  In connection with the [*] the cost of the travel and lodging
[*] cost to purchase the [*].  [*] under this Section 5.3.2, [*].

                 5.3.3    [*]. At such time as the [*], in accordance with this
Article 5.  As used in this Section 5.3, [*].

                 5.3.4    [*] agrees to use diligent efforts to protect against
and prevent the unauthorized use and disclosure of the [*].  Without limiting
the foregoing, [*].  Upon the expiration or any termination [*] that such
request has been satisfied.  In addition, in such event, upon request by [*]
for any purpose not expressly authorized under this Section 5.3, without [*]
prior written approval.

                 5.3.5    [*] a worldwide, irrevocable, royalty-free,
non-exclusive license, with the right to grant and authorize sublicenses, under
any and all [*] to make, use, sell, import, export and otherwise distribute
products and otherwise exploit such [*], and have the foregoing performed on
its behalf by one or more third parties.  For purposes of this Section 5.3.5
the term [*] shall promptly notify [*] and, as reasonably requested by [*] with
information and documentation necessary for [*].

                 5.3.6    [*]. Upon mutual agreement [*] in accordance with
Section 5.3.1 above, [*] in accordance with the terms of this Section 5.3
during the term of this Agreement for so long as [*] will be used solely for
this purpose.

         5.4     Forecasts.  During the term of this Agreement, at least [*]
prior to the start of [*], Janssen shall provide VIVUS with [*].  Each forecast
shall indicate [*].  Each forecast will also [*].

         5.5     Orders.

                 5.5.1    Orders.  Together with each forecast provided under
Section 5.4 above (the [*]), Janssen shall place its [*] order with VIVUS for
delivery in [*] of that quantity of Product, [*], reflected for [*] in the [*].
For ordering purposes, the forecast for [*].  Also, the forecasts for [*],
respectively, as each rolls to [*].  VIVUS shall accept such orders from
Janssen, subject to the remaining terms and condition of this Agreement,
provided that VIVUS shall not be obligated to accept orders to the extent the
quantity ordered exceeds the quantities forecasted for [*], but shall use good
faith efforts to fill orders for such excess quantities from available
supplies.  All orders placed hereunder shall be for [*] or as otherwise
mutually agreed.

                 5.5.2    Form of Order.  Janssen's orders shall be made
pursuant to a written purchase order which is in a form mutually acceptable to
the parties, and shall provide for shipment in accordance with reasonable
delivery schedules as may be agreed upon from time to time by VIVUS


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*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.

<PAGE>   14

and Janssen.  VIVUS shall use all reasonable efforts to notify
Janssen within five (5) days from receipt of an order of its ability to fill
any amounts of such order in excess of the quantities that VIVUS is obligated
to supply.  No terms contained in any purchase order, order acknowledgment or
similar standardized form shall be construed to amend or modify the terms of
this Agreement and in the event of any conflict, this Agreement shall control
unless expressly agreed in writing.

         5.6     Delivery.  Subject to Section 5.10 below, with respect to
exact shipping dates, VIVUS shall use its best efforts to ship quantities of
Product ordered in accordance with Section 5.5 above on the dates specified in
Janssen's purchase orders ("Shipping Date") submitted and accepted in
accordance with Section 5.5 above.  Product will be delivered F.C.A. (Incoterms
1990) shipping point designated by VIVUS.  The shipping packaging shall be in
accordance with good commercial practice with respect to protection of the
Product during transportation.  As of the Shipping Date, [*] Product to be
shipped to Janssen hereunder, unless otherwise mutually agreed.

         5.7     Product Rejection.  If the Product, [*] supplied by VIVUS
under this Agreement fail to conform at the time of delivery to the applicable
specifications, a current copy of which is attached hereto as Exhibit B (as
reasonably modified from time to time by VIVUS according to Section 5.11 below,
"Specifications") or if as to such Product, [*], VIVUS fails to meet the GMP
Standards/Regulatory practices as warranted in Section 12.2.2, Janssen shall
promptly notify VIVUS after its discovery of non-conformity and Janssen shall
present reasonable evidence to VIVUS of such nonconformity.  VIVUS shall
replace, at no additional expense to Janssen, such non-conforming Product with
new Product which does conform with the Specifications.  VIVUS may analyze any
unit of Product rejected by Janssen for nonconformity and if it is objectively
established that the Product was conforming, then Janssen shall be responsible
for payment for any such units of Product.  VIVUS shall give Janssen written
instructions as to how Janssen should, at VIVUS' expense, dispose of any
non-conforming material, and such instructions shall comply with all
appropriate governmental requirements.  With respect to any Products, [*] that
do not conform to the applicable Specifications, Janssen shall not have the
right to return the same if such non-conformity could have been detected upon
reasonable inspection when first delivered and Janssen fails to identify and
notify VIVUS of the non-conformity within forty-five (45) days after receipt by
Janssen of the goods.  In such event Janssen shall be responsible to purchase
such goods, and the price thereof shall be the same as accidentally destroyed
units under Section 6.2.2 below.

         5.8     Suppliers.  Without limiting VIVUS' responsibility under this
Agreement, VIVUS shall have the right at any time, to satisfy its supply
obligations to Janssen hereunder, either in whole or in part through
arrangements with Third Parties engaged to perform services or supply
facilities or goods in connection with the manufacture, testing, and/or
packaging of Product, [*].  VIVUS shall ensure that all such facilities comply
with applicable regulations and will give Janssen written notice sufficiently
in advance of any such arrangement to determine whether such arrangement would
require changes to an MAA Approval application filed in the Territory.  VIVUS
shall bear the costs related to changing the MAA Approval application required
as a result of any such change in manufacturing arrangements.  As a matter of
routine supply, VIVUS shall supply Product to Janssen for the Territory from a
single manufacturing facility.



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treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.

<PAGE>   15

         5.9     VIVUS Cost of Goods.  VIVUS shall keep complete and accurate
records of VIVUS Cost of Goods, such records to be in a form required under
U.S. Generally Accepted Accounting Principles (GAAP), consistently applied.
Janssen shall have the right, to the extent payments were made to VIVUS on the
basis of VIVUS Cost of Goods, at Janssen's expense, through a certified public
accountant or other representative acceptable to VIVUS, to examine such records
during regular business hours during the life of this Agreement and for one (1)
year after its termination; provided, however, that such examination shall not
take place more often than once a year and shall not cover such records for
more than the preceding three (3) years and provided further that such
accountant shall report to Janssen only as to the accuracy of the records.  If
such examination reveals that VIVUS has over reported the VIVUS Cost of Goods
by more than [*] for the period of the examination then VIVUS shall promptly
reimburse Janssen for its out-of-pocket costs related to such examination plus
interest at [*] on any amounts over paid to VIVUS hereunder due to such over
reporting.  In any case if either party discovers a miscalculation of VIVUS
Cost of Goods the parties shall correctly calculate such amount and make all
necessary and appropriate adjustments to amounts paid and/or payable hereunder.

         5.10    Shortage of Supply.

                 5.10.1   Allocation.  In the event that VIVUS is unable to
supply both worldwide requirements of Product and quantities ordered by Janssen
under Section 5.5 above due to force majeure or otherwise, VIVUS shall allocate
the quantities of Product that VIVUS has in inventory, and that VIVUS is able
to produce, so that Janssen receives at least its proportional share of
available supplies as determined based on reasonable forecasts of Janssen,
VIVUS, VIVUS Inc. and VIVUS' other distributors.  SUCH ALLOCATION SHALL BE
JANSSEN'S SOLE REMEDY FOR VIVUS' FAILURE TO SUPPLY TO JANSSEN QUANTITIES OF
PRODUCT VIVUS IS OTHERWISE OBLIGATED TO SUPPLY UNDER THIS ARTICLE 5.  During
such periods as supply of Product is subject to allocation pursuant to this
Section 5.10, VIVUS agrees to use its best efforts to resolve the situation
within a reasonable amount of time.

                 5.10.2   Joint Manufacturing Team.  Without limiting the
provisions of Section 5.10.1 above, if at any time VIVUS becomes unable to
supply, or becomes aware that it will be unable to supply, quantities of
Product ordered by Janssen in accordance with Section 5.5 above VIVUS shall
promptly notify Janssen in writing.  In such event, at Janssen's request, the
parties shall establish a committee (the "Joint Manufacturing Team") consisting
of two (2) representatives from each party and the Joint Manufacturing Team
shall immediately convene to address such shortage, including locating
alternative suppliers and facilities to increase production and identifying
other actions necessary to resolve the shortage.  VIVUS agrees to disclose to
the Joint Manufacturing Team current production capacity for the Product and
the total sales orders and forecasts for worldwide requirements for Product for
[*] (as defined in Section 5.4 above) for Janssen, VIVUS, VIVUS Inc. and Third
Party distributors without disclosing the identity of Third Parties.  Subject
to Section 6.9.1(b) of that certain Distribution Agreement between VIVUS and
Astra AB dated May 29, 1996, VIVUS agrees to implement all measures established
by the Joint Manufacturing Team to remedy the shortage; and if the Joint
Manufacturing Team is unable to agree upon the appropriate measures, and the
Chief Executive Officer of VIVUS and the President of Janssen-Ortho Canada are


                                      -10-


*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.

<PAGE>   16

unable to agree on how to resolve the problem after negotiating in good faith,
VIVUS agrees to implement any reasonable suggestions made by Janssen's senior
executive for resolving the shortage.  In any event, both parties agree to
respond with the level of speed and diligence commensurate with the severity of
the shortage.

         5.11    Modification of Specifications.  VIVUS may, from time to time,
with the approval of Janssen, not unreasonably withheld, reasonably modify the
Specifications attached as Exhibit B.  Notice of such modifications to the
Specifications must be sufficiently in advance to determine whether such
modifications would require changes to an MAA application filed in the
Territory.  Where such modifications requires changes to the MAA application
for any Product [*], then VIVUS will be responsible for the costs associated
with such modifications.

6.       PAYMENTS

         6.1     Initial Payments.  In consideration of the costs incurred by
VIVUS in connection with the research and development of the Product and in
exchange for the exclusive rights granted herein, Janssen shall pay VIVUS the
following non-refundable fees:

                 (a)      Five Million Dollars ($5,000,000) upon the Effective
Date;

                 (b)      [*]

                 (c)      [*]

                 (d)      [*]

                 (e)      [*]

                 (f)      For purposes of determining if a Product is a
different Product for which payments may be due under this Section 6.1, each
Product shall be deemed a different Product if such Product contains an active
ingredient different from (i.e., in addition to) that contained in previous
Products for which payments for MAA Approval have already been made to VIVUS
hereunder.  VIVUS is under no obligation to develop or market any follow on
products to the First Product.

Notwithstanding clauses (c), (d) and (e) above, in the event that [*]

         6.2     Transfer Price.

                 6.2.1    Sale Units.

                          (a)     For units of Product supplied by VIVUS under
Section 5.1 above, Janssen shall pay to VIVUS a price per unit equal to [*]


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*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.

<PAGE>   17

      (b)     For purposes of calculating the foregoing, [*] equal the following
                                               based upon the particular region:

                          [*]

                          (c)     Notwithstanding the foregoing:

                                  (i)      [*]

                                 (ii)      [*]1 [*]2

                          (d)     As used herein:

                                  (i)      [*]

                                 (ii)      [*]

        In any event, notwithstanding the application of the foregoing formula,
the VIVUS Percentage [*]

                                (iii)      [*]

                 6.2.2    Samples and Obsolete Inventory.  With respect to
units of Products supplied by VIVUS to Janssen for use as Samples in accordance
with Section 5.2 above, Janssen shall pay to VIVUS for such units an amount
equal to [*] except that a reasonable number of Samples supplied to Janssen to
be used in clinical trials to obtain MAA approval [*].  For purposes of
determining the transfer price to be paid to VIVUS, units of Products [*], and
the transfer price to be paid by Janssen to VIVUS for such units shall [*];
provided the total numbers of such units are within normal and customary levels
[*].

                 6.2.3    [*] the price paid to VIVUS shall equal VIVUS' cost
calculated in accordance with GAAP and in accordance with VIVUS' then
prevailing standard procedures for calculating Cost of Goods as reflected in
VIVUS' audited financial statements, together with royalties payable to third
parties.





__________________________________

     (1) For purposes of example see Exhibit C.

     (2) For purposes of example see Exhibit D.


                                      -12-


*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.


<PAGE>   18

         6.3     Discounting.  In the event that Janssen or its Subdistributor
sells Products to a Third Party who also purchases other products or services
from Janssen or its Affiliates, Janssen agrees not to, and to require its
Subdistributors not to, discount the purchase price of the Products to a
greater degree than Janssen or its Subdistributors, respectively, generally
discounts the price of its other products to such customer.  For purposes of
this provision "discounting" includes establishing the list price at lower than
Janssen's normal pricing level.  Without limiting the foregoing, Janssen agrees
not to, and to require its Subdistributors not to, treat Products in such a
manner that would disadvantage the Product in comparison with other products
offered for sale by Janssen or its Subdistributors.

         6.4     Sales Records.  Janssen shall keep and require its
Subdistributors to keep complete and accurate records of all Net Sales of
Product on a country-by-country basis.  VIVUS shall have the right, at VIVUS'
expense, through a certified public accountant or other representative, to
examine such records during regular business hours provided, however, that such
examination shall not take place more often than once a year and shall not
cover such records for more than the preceding three (3) years.  If such
examination reveals an underpayment to VIVUS in excess of [*] for any period
then Janssen shall promptly reimburse VIVUS for the costs of such examination
and pay the underpayment amount plus interest at [*].

         6.5     Provisional Payments.

                 6.5.1    Product Units.  Payments due to VIVUS under Sections
6.2.1 and 6.2.2 and 6.2.3 shall be provisionally made, on a per unit of
Product, [*] basis, as the case may be, within [*] of delivery to Janssen of
each unit of Product, [*].  The provisional payment shall be based on [*]
estimates by the parties of those variables necessary to calculate a
provisional transfer price in accordance with the provisions of the relevant
sections.  Such estimates will be made in good faith and shall be consistent
with internal estimates on which the party relies to plan capacity, gauge
performance or plan inventory.   [*] prior to the start of any relevant Janssen
accounting year, Janssen and VIVUS will make the estimates and supply to each
other the following data to establish a provisional transfer price for that
entire year.

        (a)     For Product supplied under 6.2.1, the provisional payment will
be based on the formula:

         [*]

where:
         [*]

or, the provisional payment will be based on a [*].

        (b)     For Product supplied under 6.2.2, the provisional payment will
be based on a [*].

        (c)     [*], the provisional payment will be based on a [*].


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*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.

<PAGE>   19

For avoidance of doubt, to the extent the transfer price of a unit of Product
is to be determined based on the [*] for purposes of calculating the
provisional transfer price above.

[*]

         6.6     Reconciliation.

                 6.6.1    Product Units.  The provisional transfer price under
which Product, and other materials supplied under Section 5.3 above, was
received will be reconciled to the actual transfer price as the required data
is available within sixty (60) days following the end of each Janssen
accounting quarter, provided that VIVUS provides Janssen with the actual cost
of good sold within thirty (30) days of the end of such quarter.  In the event
that the provisional payments by Janssen under Section 6.5 above were greater
than the amounts actually due under Section 6.2, Janssen shall be entitled to
credit such excess against future purchases of Product hereunder.

                 6.6.2    Timing.  No reconciliation shall be made under this
Section 6.6 with respect to units for which provisional payments were made
until the end of the quarter in which such units are sold or in the case of
Samples in the quarter they are distributed.

         6.7     [*] Janssen agrees to pay to VIVUS a running royalty of [*],
sold by Janssen or its Subdistributors.  Notwithstanding the foregoing, in the
event that a non-royalty payment method would, because of changed
circumstances, be more advantageous for either party with respect to Product
[*], the parties agree to discuss in good faith the implementation such other
method; it being understood, however, that neither party would incur any
disadvantage as a result of such other method.

         6.8     Payment.  Within [*] after the end of each calendar quarter,
Janssen shall provide VIVUS with a true accounting of all payment obligations,
if any, owed in accordance with this Article 6, together with a statement
setting out all details necessary to calculate the amounts actually due
hereunder with respect to Net Sales made in that calendar quarter, including
units of Product sold on a country-by-country basis, gross sales of Product in
that calendar quarter including units of Product sold on a country-by-country
basis, Net Sales in that calendar quarter on a country-by-country basis, all
relevant deductions, and all relevant exchange rate conversions.  Any payments
due shall accompany such statement.

         6.9     Taxes.  The parties hereto acknowledge and understand that as
of the Effective Date, no withholding taxes or similar governmental charges are
required to be withheld on amounts to be paid to VIVUS hereunder.  In the event
that after the Effective Date withholding taxes or similar charges are required
by law to be withheld on behalf of VIVUS from amounts due to VIVUS hereunder,
Janssen shall deduct said taxes or charges from amounts due to VIVUS hereunder
and promptly pay the same to the applicable taxing authority; provided, however
that to the extent such withholding taxes or other charges become due as a
result of Janssen's assignment or other transfer of this Agreement to an
Affiliate or otherwise pursuant to Section 13.8 below or other change in the
structure of or the way Janssen does business, Janssen shall gross up all
amounts due to VIVUS


                                      -14-


*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.

<PAGE>   20
hereunder so that the amounts paid to VIVUS are not reduced by said taxes or
other charges.  Notwithstanding the foregoing, all amounts to be paid to VIVUS
pursuant to Section 6.7 shall not be reduced by any withholding taxes or
similar governmental charges (not including U.S. or Bermuda income tax on
VIVUS' income).  In regard to taxes or charges paid on behalf of VIVUS, Janssen
shall furnish VIVUS with proper evidence of the taxes paid.

         6.10    U.S. Dollars.  All sums due under this Agreement shall be
payable in U.S. dollars.  Monetary conversion from the currency of a foreign
country in which Product is sold into United States currency shall be
calculated at the actual average of the buying and selling rates of exchange
for the quarter in which such sales were made as such rates are reported, as of
the last business day of such quarter, by the Wall Street Journal (U.S.,
Eastern Edition).

7.       CONFIDENTIALITY

         7.1     Nondisclosure.  "Confidential Information" means any
information, data, or know-how which the disclosing party treats
confidentially, is in writing and is identified as confidential, or if
disclosed orally is indicated to be confidential at the time of disclosure and
is confirmed in writing as confidential by the disclosing party within
forty-five (45) days after initial disclosure.  VIVUS and Janssen shall not
(and shall ensure that its Subdistributors do not) use or reveal or disclose to
Third Parties any Confidential Information received from the other party
without first obtaining the written consent of the disclosing party, except as
may be otherwise provided herein, or as may be required for purposes of
marketing Product or for securing essential or desirable authorizations,
privileges or rights from governmental agencies.  This confidentiality
obligation shall not apply to such information which (i) is or becomes a matter
of public knowledge through no fault of the receiving party or its Affiliates
or Subdistributors, or (ii) is already in the possession of the receiving
party, or (iii) is disclosed to the receiving party by a Third Party having the
legal right to do so, or (iv) is subsequently and independently developed by
employees of the receiving party or Affiliates thereof who had no knowledge of
the Confidential Information disclosed, or (v) is required by law to be
disclosed.  The parties shall take reasonable measures to assure that no
unauthorized use or disclosure is made by others to whom access to Confidential
Information of the other party is granted.

         7.2     Disclosure to Subdistributors.  Janssen may, to the extent
necessary, disclose information received from VIVUS to a Subdistributor of
Janssen, provided that each such Subdistributor has agreed in writing to
maintain the confidentiality of such information and not use such information
except as necessary to fulfill the purposes hereunder.  Janssen shall be fully
responsible for any breach by its Subdistributors of this Article 7.  Janssen
shall immediately notify VIVUS of any unauthorized use or disclosure of VIVUS'
information that it becomes aware of.  Without limiting the foregoing, Janssen
shall at its expense, upon request of VIVUS take all other steps necessary to
cease all unauthorized use or disclosure of VIVUS Confidential Information
obtained from Janssen or Subdistributor, or in the event VIVUS takes such
steps, Janssen shall reimburse all reasonable costs related thereto.

         7.3     Terms of Agreement.  No public announcement or other public
disclosure concerning the existence of or terms of this Agreement shall be
made, either directly or indirectly, by any party to





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<PAGE>   21

this Agreement, except as may be legally required or as may be required for
recording purposes, without first obtaining the written approval of the other
party and Agreement upon the nature and text of such announcement or
disclosure.  The party desiring to make any such public announcement or other
disclosure shall provide the other party with a copy of the proposed
announcement or disclosure for review and comment in reasonably sufficient time
prior to public release.  Each party agrees that it shall cooperate fully with
the other with respect to all disclosures regarding this Agreement to the
Securities Exchange Commission and any other governmental or regulatory
agencies, including requests for confidential treatment of proprietary
information of either party included in any such disclosure.  In addition, each
party agrees not to disclose this Agreement or its terms to Third Parties,
except to professional advisors and potential financing sources and under
conditions that reasonably protect the confidentiality thereof.  The parties
will mutually agree upon the contents of a press release (and accompanying Q&A)
which may be issued upon the Effective Date, and thereafter the parties may
publicly disclose information contained in such press release or Q&A without
further approvals.

         7.4     Clinical Data.  All clinical and preclinical data disclosed by
VIVUS shall be deemed Confidential Information of VIVUS.

         7.5     Product Data.  Janssen shall not submit for written or oral
publication any scientific or medical manuscript, abstract or the like which
includes data or other information relating to the Product without first
obtaining the prior written consent of VIVUS.  The contribution of each party
shall be noted in all publications or presentations by acknowledgment or
coauthorship, whichever is appropriate.

8.       PATENT PROSECUTION AND LITIGATION

         8.1     Ownership of Inventions.  Janssen shall have and retain sole
and exclusive title to all inventions, discoveries and know how ("Inventions")
which are made during the term of this Agreement by Janssen, its employees,
agents, or other Third Parties acting under authority from Janssen working on
matters relating to and made using or comprising a Product and Janssen hereby
grants to VIVUS a non- exclusive, worldwide license, with the right to
sublicense, to such Inventions to make, have made, use and sell products for
any indication.

         8.2     Maintenance of Patents.

                 8.2.1    Filings.  As between Janssen and VIVUS, VIVUS shall,
at its expense, have responsibility for filing, prosecution and maintenance of
all Patents in the Territory.  Janssen shall have the right to review pending
Patent applications and make recommendations to VIVUS concerning them.  VIVUS
will consider in good faith all reasonable suggestions of Janssen with respect
to such pending applications.  VIVUS agrees to keep Janssen informed of the
course of Patent prosecution or other proceedings with respect to the Patents
within the Territory.  Janssen shall provide such Patent consultation to VIVUS
at no cost to VIVUS.  All information disclosed to Janssen under this Section
8.2 shall be deemed Confidential Information of VIVUS.  In the event that





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<PAGE>   22

VIVUS does not file or discontinues the prosecution or maintenance of any
Patents in the Territory, then Janssen may, at its expense, choose to continue
the same with the cooperation of VIVUS.

                 8.2.2    Extensions.  Janssen shall have the right but not the
obligation to seek extensions of the terms of Patents in the Territory.  At
Janssen's request, VIVUS shall either authorize Janssen to act as VIVUS' agent
for the purpose of making any application for any extensions of the term of
Patents and provide reasonable assistance therefor to Janssen or shall
diligently seek to obtain such extensions, in either event, at Janssen's
expense.

         8.3     Infringement by Product.  In the event of the institution of
any suit by a Third Party against Janssen for patent infringement involving the
manufacture, use, sale, distribution or marketing of Product anywhere in the
Territory during the term of this Agreement, Janssen shall promptly notify
VIVUS in writing.  Janssen shall have the right but not the obligation to
defend such suit against it.  Except in the case of a breach under Section
12.5, Janssen will have the right to offset [*] of the out-of-pocket costs of
defending such suit against any sums due VIVUS hereunder; provided that VIVUS
shall have the right to reasonably approve the plan of defense under which such
costs are incurred.  VIVUS and Janssen shall assist one another and cooperate
in any such litigation at the other's reasonable request without expense to the
requesting party, and in any event VIVUS may participate in any such suit with
counsel of its choice at its own expense.  Without limiting the foregoing,
Janssen may offset from amounts due to VIVUS hereunder [*] of amounts finally
awarded against and paid by Janssen to a Third Party to the extent the same
arise out of the Product's infringement of Third Party patent rights within the
Territory during the term of this Agreement.

         8.4     Third Party Infringement.  In the event that VIVUS or Janssen
becomes aware of actual or threatened infringement of a Patent anywhere in the
Territory by the manufacture or sale or use of a Product for the transurethral
delivery of a formulation containing alprostadil to treat or prevent erectile
dysfunction in humans (the "Field"), that party shall promptly notify the other
party in writing.  VIVUS shall have the first right but not the obligation to
bring, at its own expense, an infringement action against any Third Party.  If
VIVUS does not commence a particular infringement suit within the Field within
[*] of receipt of a request by Janssen to do so, then Janssen, after notifying
VIVUS in writing shall be entitled to bring such infringement action at its own
expense and to include VIVUS as a nominal party plaintiff.  VIVUS shall keep
Janssen reasonably informed of its activities during the [*] period.  The party
conducting such action shall have full control over its conduct, including
settlement thereof subject to Section 8.6 below.  In any event, VIVUS and
Janssen shall assist one another and cooperate in any such litigation at the
other's reasonable request without expense to the requesting party.

         8.5     Recovery.  VIVUS and Janssen shall recover their respective
actual out-of-pocket expenses, or equitable proportions thereof, associated
with any litigation against infringers undertaken pursuant to Section 8.4 above
or settlement thereof from any resulting recovery made by any party.  Any
excess amount of such a recovery shall be shared between Janssen and VIVUS with
Janssen receiving [*] and VIVUS receiving [*] to the extent such recovery
relates to sales in the Territory during the term of this Agreement.


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have been filed separately with the Commission.

<PAGE>   23

         8.6     Status of Activities.  The parties shall keep one another
informed of the status of their respective activities regarding any litigation
or settlement thereof concerning Product within the Territory, provided however
that no settlement or consent judgment or other voluntary final disposition of
any suit defended or action brought by a party pursuant to this Article 8 may
be entered into without the consent of the other party if such settlement would
require the other party to be subject to an injunction or to make a monetary
payment or would otherwise adversely affect the other party's rights under this
Agreement.

9.       TRADEMARKS

         9.1     Display.  All packaging materials, labels and promotional
materials for the Product shall display the VIVUS Trademark (or the VIVUS
Alternative Trademark at Janssen's discretion) as appropriate. The Janssen
trade dress, style of packaging and the like with respect to each Product may
be determined by Janssen so as to be consistent with Janssen's standard trade
dress and style provided that the packaging and related materials shall display
the "VIVUS" tradename in [*] logo type.

         9.2     License.  VIVUS hereby grants to Janssen an exclusive,
royalty-free license, to use the VIVUS Trademark, or the VIVUS Alternative
Trademark in each country of the Territory for the term of this Agreement in
connection with the marketing and promotion of Product as contemplated in this
Agreement.  The ownership and all good will from the use of the VIVUS Trademark
and the VIVUS Alternative Trademark shall vest in and inure to the benefit of
VIVUS.

         9.3     Registration.  VIVUS agrees to file, register and maintain a
registration for the VIVUS Trademark in the countries of the Territory listed
on Exhibit E, as VIVUS is reasonably able under the circumstances, for the term
of this Agreement, at VIVUS' expense, for use with the Product.  In the event
that the VIVUS Trademark or VIVUS Alternative Trademark is unavailable for use
with the Product in one or more countries listed on Exhibit E, VIVUS agrees to
choose in consultation with Janssen a VIVUS Alternative Trademark.  Where VIVUS
agrees to the use of a VIVUS Alternative Trademark in a country, VIVUS agrees
to file, register and maintain a registration for the VIVUS Alternative
Trademark in such country, for the term of this Agreement, at VIVUS' expense,
for use with the Product in such country.

         9.4     Recordation.  In those countries where a trademark license
must be recorded, VIVUS will provide and record a separate trademark license
for the VIVUS Trademark and/or VIVUS Alternative Trademark.  Janssen shall
cooperate in the preparation and execution of such documents.

         9.5     Approval of Promotional Materials/Quality Control.  Janssen
shall submit representative promotional materials, packaging, [*] using the
VIVUS Trademark and/or VIVUS Alternative Trademark  to VIVUS for VIVUS'
reasonable approval prior to the first use of such items and prior to any
subsequent change or addition to such items, provided that if VIVUS has not
responded within four (4) weeks after such submissions, VIVUS' approval will be
deemed to have been received.  For purposes of quality control, Janssen agrees
that for the [*] shall meet sufficient


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<PAGE>   24

standards of quality.  In the event that, after review, VIVUS determines that
[*] to meet acceptable standards of quality within a reasonable time.

         9.6     Termination of Rights.  Janssen's right to use the VIVUS
Trademark and the VIVUS Alternative Trademark shall terminate in each country
of the Territory in which Janssen's rights to distribute the Product expire or
are terminated in accordance with this Agreement.  Janssen shall ensure the
cancellation of any Trademark licenses recorded or entered into in such
countries in favor of or by or under authority of, Janssen or its
Subdistributors to the extent legally possible.

         9.7     Trademark Indemnity.  VIVUS agrees to defend and/or settle any
claim brought against Janssen or its Subdistributor by a Third Party arising
out of or resulting from Janssen or its Subdistributor use of the VIVUS
Trademark or the VIVUS Alternative Trademark or the tradename VIVUS in the
Territory in accordance with the terms and conditions of this Agreement during
the term of this Agreement.  VIVUS shall pay all resulting damages or
settlement amounts finally awarded against Janssen or its Subdistributor
(including reasonable attorneys' fees and court costs) which are attributable
to such claim during the term of this Agreement.  Notwithstanding the
foregoing, if the VIVUS Trademark or VIVUS Alternative Trademark or the
tradename VIVUS becomes, or in VIVUS' reasonable judgment may become, the
subject of any claim as a result of Janssen or its Subdistributors use thereof
in any country within the Territory, VIVUS may, upon notice to Janssen, request
that Janssen and/or its Subdistributor cease using the VIVUS Trademark or VIVUS
Alternative Trademark or the tradename VIVUS, as applicable, in such country.
Ninety (90) days after such a request by VIVUS, VIVUS' obligation to defend and
settle claims under this Section 9.7 will terminate to the extent any claims,
damages or expenses arise out of or result from use after such ninety (90)-day
period of said VIVUS Trademark or VIVUS Alternative Trademark or the tradename
VIVUS in such country.  The termination of VIVUS' obligation to defend and
settle claims is contingent upon VIVUS making available to Janssen, where VIVUS
is obligated to supply, adequate supplies of alternately labeled Product in a
timely manner sufficient to satisfy Janssen's demand therefor after the end of
such ninety (90) day period.  After VIVUS' request to cease using a trademark,
upon Janssen's request, VIVUS agrees to register a new trademark for use in the
said country in accordance with Section 9.3 above.

         9.8     Trademark Enforcement.  In the event that either party becomes
aware that a Third Party is misappropriating or otherwise misusing the VIVUS
Trademark or VIVUS Alternative Trademark, as the case may be, within the
Territory such party shall promptly notify the other party.   In which case,
the parties agree to discuss such misappropriation or misuse and cooperate to
develop a reasonable enforcement plan to deal with the same.  VIVUS shall bear
[*] and Janssen shall bear [*] of the costs and expenses incurred to bring an
action to enforce the VIVUS Trademark or VIVUS Alternative Trademark, as
appropriate, in accordance with the mutually agreed upon enforcement plan.
Likewise, any recovery from such an action shall be shared between the parties,
with VIVUS receiving [*] and Janssen receiving [*] to the extent such recovery
relates to misappropriation or misuse in the Territory during the term of this
Agreement.

10.      TERM AND TERMINATION


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         10.1    Expiration.  Unless otherwise terminated, this Agreement shall
expire on the date [*] after the date of First Commercial Sale of a Product in
the Territory.  This Agreement may be extended for successive two (2) year
terms by mutual written consent of VIVUS and Janssen at least six (6) months
prior to expiration of the term hereof; provided however that VIVUS nor Janssen
shall not be obligated to approve any such extension and shall have no
liability whatsoever by reason of any failure to agree on any such extension.

         10.2    Events of Termination.  If any of the following events (an
"Event of Termination") occurs, the party not responsible for such event may
terminate this agreement by notice to the other party:

                 10.2.1   Payment Obligation.  If a party fails to pay any
amount properly due under this Agreement within thirty (30) days following
receipt of written notice of such default by the other party.

                 10.2.2   Material Non-Performance.  If a party defaults in any
other material respect in the performance or observance of any other material
term, covenant or provision of this Agreement, or if any representation by a
party contained in this Agreement proves to have been incorrect in any material
respect when made, resulting in material adverse consequences for the other
party (any such material default or material incorrect representation a
"Material Non-Performance"), and such Material Non-Performance is not cured
within sixty (60) days notice from the non-defaulting party.

                 10.2.3   Bankruptcy Proceedings.  Because each party
acknowledges that the services to be rendered by the other are personal in
nature, inasmuch as the respective capabilities of the parties hereto are
uniquely valuable and that the determination to enter into this Agreement was
based upon the unique ability of the other party to fulfil its respective
obligations hereunder, if (i) such party shall make an assignment of
substantially all of its assets for the benefit of creditors, file a petition
in bankruptcy, petitions or applies to any tribunal for the appointment of a
custodian, receiver or any trustee for such party or substantially all of such
party's assets, or shall commence any proceeding under any dissolution or
liquidation law or statute of any jurisdiction (provided that no entity
succeeds to the business of such party following such dissolution or
liquidation) whether now or hereafter in effect which is not dismissed within
sixty (60) days; or (ii) there shall have been filed any such petition or
application against such party, or any such proceeding shall have been
commenced against such party, in which an order for relief is entered or which
remains undismissed for a period of ninety (90) days or more; or (iii) such
party by an act or knowing failure to act shall indicate such party's consent
to, approval of or acquiescence in, any such petition, application or
proceeding or order for relief or the appointment of a custodian, receiver or
any trustee for such party, or any substantial part of any of such party's
properties, or shall suffer any such custodianship, receivership or trusteeship
to continue undischarged for a period of ninety (90) days or more.

                 10.2.4   Termination by VIVUS.  VIVUS may terminate this
Agreement on a country-by-country basis on thirty (30) days notice if MAA
Approval has not been received in such county within four (4) years from the
Effective Date; provided such notice is given prior to obtaining such MAA
Approvals.  In the event that this Agreement is terminated with respect to any
country such


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<PAGE>   26

country shall cease to be within the Territory for all purposes of this
Agreement and the threshold Net Sales levels [*].

                 10.2.5   Termination by Janssen.  Janssen may terminate this
Agreement on [*] notice to VIVUS.

11.      RIGHTS AND DUTIES UPON TERMINATION

         11.1    Payment.  Upon expiration or termination, of this Agreement,
Janssen and VIVUS shall each pay all sums accrued or credits owed hereunder
which are then due.

         11.2    Sale of Remaining Inventory.  Upon early termination of this
Agreement under Section 10.2 above, Janssen shall notify VIVUS of the amount of
Product Janssen and its Subdistributors then have on hand.  Janssen, its
Affiliates and its Subdistributors shall thereupon be permitted to sell that
amount of Product, within the ninety (90) day period following such
termination, subject to the reconciliation under Section 6.6 above and shall
destroy any remaining inventory.  Units that are so destroyed shall be treated
as accidentally destroyed units for purposes of Section 6.2.2 above.

         11.3    Survival.  Upon expiration or termination of this Agreement,
all rights and obligations of the parties under this Agreement shall terminate
except those described in the following:

         Article 1, Definitions
         Last Sentence of Section 3.3, Regulatory Approvals/MAAs
         Section 3.6, Adverse Experiences
         Section 5.3.4, [*]
         Section 5.3.5, [*]
         Section 5.9, VIVUS Cost of Goods
         Section 6.4, Sales Records
         Section 6.9, Taxes
         Article 7, Confidentiality for a period of 10 years
         Section 8.1, Ownership of Inventions
         Section 8.3, Infringement by Product
         Section 8.5, Recovery
         Section 9.6, Termination of Rights
         Section 9.7, Trademark Indemnity
         Article 10, Term and Termination
         Article 11, Rights and Duties Upon Termination
         Section 12.3, Indemnification by Janssen
         Section 12.4, Indemnification by VIVUS
         Article 13, General Provisions

It is understood that termination or expiration of this Agreement shall not
relieve a party from any liability which, at the time of such termination or
expiration, has already accrued to the other party or


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<PAGE>   27

which is attributable to a period prior to such termination.  Except as
otherwise expressly provided herein, termination of the Agreement in accordance
with the provisions hereof shall not limit remedies which may be otherwise
available in law or equity with respect to a breach hereof that occurred prior
to such termination.

12.      WARRANTIES, REPRESENTATIONS, AND INDEMNIFICATIONS

         12.1    General Representations.  Each party hereby represents and
warrants for itself as follows:

                 12.1.1   Duly Organized.  It is a corporation duly organized,
validly existing and is in good standing under the laws of the jurisdiction of
its incorporation, is qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which the conduct of its business
or the ownership of its properties requires such qualification and failure to
have such would prevent it from performing its obligations under this Agreement
and has all requisite corporate power and authority to conduct its business as
now being conducted, to own, lease and operate its properties and to execute,
deliver and perform this Agreement.

                 12.1.2   No Third Party Approval.  No authorization, consent,
approval, license, exemption of, or filing or registration with, any court or
governmental authority or regulatory body (other than health regulatory
authorities) is required for the due execution, delivery or performance by it
of this Agreement, except as provided herein.

         12.2    Representations and Warranties of VIVUS.  VIVUS represents and
warrants to Janssen that:

                 12.2.1   VIVUS Rights.  VIVUS has the right to grant the
rights granted in this Agreement and no provision in any third party agreement
to which VIVUS is a party will prevent VIVUS from performing its obligations
under this Agreement.

                 12.2.2   Good Manufacturing GMP Standards/Regulatory
Standards.  All manufacturing and quality control operations utilized by VIVUS
in the manufacture of Product supplied under Sections 5.1 and 5.2 above shall
be carried out according to the procedures and requirements set forth in the
then-current version of the VIVUS Plant Master File with respect to such
Product, and (as to each Product) in accordance with all applicable U.S. rules
governing medical products and or devices in the GMP for medical products
and/or devices and regulations issued by the health regulatory authorities in
the countries of the Territory for which such Product is to be sold as in
effect at the time, provided that the applicable rules and regulations imposed
by the various countries of the Territory are no more burdensome than those
imposed by the U.S. [*] shall be carried out according to the procedures and
requirements set forth in the then-current version of the VIVUS Plant Master
File, and regulations issued by the health regulatory authorities in the
countries of the Territory in which such [*] material is to be used as in
effect at the time, provided that the applicable rules and regulations imposed
by the various countries of the Territory are no more burdensome than those
imposed by the U.S.


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<PAGE>   28

         12.3    Indemnification by Janssen.  Janssen shall defend, indemnify
and hold harmless VIVUS, its officers, directors, shareholders, employees,
successors and assigns from any loss, damage, or liability, including
reasonable attorney's fees, resulting from any claim, complaint, suit,
proceeding or cause of action against any of them alleging physical injury or
death or otherwise arising out of the administration, utilization and/or
ingestion of Product manufactured, sold or otherwise provided to the injured
party by or under authority of Janssen (or its permitted subdistributor or
contractor); or otherwise with respect to Product supplied to, or sold or
distributed by, Janssen (or its permitted subdistributor or contractor),
provided:

                 (a)      Janssen shall not be obligated under this Section
12.3 if it is shown by evidence acceptable in a court of law having
jurisdiction over the subject matter and meeting the appropriate degree of
proof for such action, that the injury was the result of (i) the gross
negligence or willful misconduct of any employee or agent of VIVUS or (ii) the
supply by VIVUS of Product that fails to meet applicable Specifications;

                 (b)      Janssen shall have no obligation under this Section
12.3 unless VIVUS (i) gives Janssen prompt written notice of any claim or
lawsuit or other action for which it seeks to be indemnified under this
Agreement, (ii) Janssen is granted full authority and control over the defense,
including settlement, against such claim or lawsuit or other action, and (iii)
VIVUS cooperates fully with Janssen and its agents in defense of the claims or
lawsuit or other action; and

                 (c)      VIVUS shall have the right to participate in the
defense of any such claim, complaint, suit, proceeding or cause of action
referred to in this Section 12.3 utilizing attorneys of its choice, at its own
expense, provided, however, that Janssen shall have full authority and control
to handle any such claim, complaint, suit, proceeding or cause of action,
including any settlement or other disposition thereof, to the extent VIVUS
seeks indemnification under this Section 12.3.

         12.4    Indemnification by VIVUS.  VIVUS shall defend, indemnify and
hold harmless Janssen, its officers, directors, shareholders, employees,
successors and assigns from any loss, damage, or liability, including
reasonable attorney's fees, resulting from any claim, complaint, suit,
proceeding or cause of action by a Third Party against any of them alleging
physical injury or death or otherwise arising out of (a) the administration,
utilization and/or ingestion of Product, sold or otherwise provided to the
injured party by VIVUS (or its permitted subdistributor or contractor other
than by or under authority of Janssen or (b) the supply by VIVUS of Product
that fails to meet applicable Specifications, provided:

                 (a)      VIVUS shall not be obligated under this Section 12.4
if it is shown by evidence acceptable in a court of law having jurisdiction
over the subject matter and meeting the appropriate degree of proof for such
action, that the injury was the result of the gross negligence or willful
misconduct of any employee or agent of Janssen;

                 (b)      VIVUS shall have no obligation under this Section
12.4 unless Janssen (i) gives VIVUS prompt written notice of any claim or
lawsuit or other action for which it seeks to be indemnified under this
Agreement, (ii) VIVUS is granted full authority and control over the defense,





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<PAGE>   29
including settlement, against such claim or lawsuit or other action, and (iii)
Janssen cooperates fully with VIVUS and its agents in defense of the claims or
lawsuit or other action; and

                 (c)      Janssen shall have the right to participate in the
defense of any such claim, complaint, suit, proceeding or cause of action
referred to in this Section 12.4 utilizing attorneys of its choice, at its own
expense, provided, however, that VIVUS shall have full authority and control to
handle any such claim, complaint, suit, proceeding or cause of action,
including any settlement or other disposition thereof, to the extent Janssen
seeks indemnification under this Section 12.4.

         12.5    Patent Warranties.  To the best of its knowledge as of the
Effective Date, VIVUS represents and warrants that (i) Patents and VIVUS
Know-How are owned or controlled by VIVUS or VIVUS Inc., and are not currently
being infringed by a Third Party in the Territory, and (ii) that the practice
of such rights do not infringe any property right of any Third Party.

13.      GENERAL PROVISIONS

         13.1    Force Majeure. If either party fails to perform any part of
this Agreement due to any cause beyond the reasonable control of such party,
the party so affected shall, upon giving written notice to the other party, be
excused from such performance, provided that such party shall use its
reasonable efforts to avoid or remove such causes of non-performance and shall
continue performance with the utmost dispatch whenever such causes are removed.
When such circumstances arise, the parties shall discuss what, if any,
modification of the terms of this Agreement may be required in order to arrive
at an equitable solution.

         13.2    Governing Law and Arbitration.  This Agreement shall be
governed by the laws of the State of California without reference to conflict
of law principles.  In the event of any dispute under this Agreement, both
parties shall endeavor to settle such dispute amicably between themselves.  In
the event that the parties fail to agree, such dispute shall be settled by
arbitration as follows:  Either party may by notice in writing to the other
require any issue in dispute to be submitted to arbitration in accordance with
this Section 13.2.  From the date of the notice in writing and until such time
as any matter has been finally settled by arbitration hereunder, the running of
the time periods in which a party must cure a breach of  this agreement shall
be suspended as to the subject matter of the dispute.  Such notice shall
contain a statement of the arbitrable issue forming the basis of the dispute
and the position of the moving party as to the proper resolution of that issue.
Within thirty (30) days after receipt of such notice, the responding party
shall submit to the moving party a statement of its conception of the
arbitrable issue in question and of its position as to the proper resolution of
that issue.  Within thirty (30)-days of the responding party's response, each
party shall appoint an independent arbitrator and give the other party written
notice thereof.  In the event a party shall fail to appoint an arbitrator and
provide written notice thereof to the other party within such thirty (30) day
period, an arbitrator shall be appointed for such party by the American
Arbitration Association, as promptly as practicable after request by the other
party.  Thereafter, the two (2) appointed arbitrators shall select a third
arbitrator within thirty (30) days after receipt of a list of proposed
arbitrators having expertise in the pharmaceutical industry proposed by the
American Arbitration Association.  If the two (2) arbitrators designated by the
parties are unable to agreed on the third arbitrator within





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<PAGE>   30
thirty (30) days, then either party with notice to the other party, may call
for such appointment by the American Arbitration Association of the third
arbitrator.  Regardless of the manner of his or her selection, the third
arbitrator shall be one who is qualified by knowledge and experience in the
pharmaceutical field.  Each arbitrator shall agree prior to his or her
appointment to hear the dispute promptly and render a decision as soon as
practicable thereafter.  The arbitration shall be conducted in English in
Chicago, Illinois, in accordance with the commercial arbitration rules or
successor rules then obtaining of the American Arbitration Association to the
extent not inconsistent with this Section 13.2.  The Agreement of two (2) of
the three (3) arbitrators shall be sufficient to render a decision.  The
decision of the panel shall be final and binding upon the parties and
enforcement thereof may be obtained in any court of competent jurisdiction.
The arbitrators may award costs and expenses, including reasonable attorneys'
fees, to the successful party, as the arbitrators deem appropriate. WITH
RESPECT TO DISPUTES REGARDING AMOUNTS DUE HEREUNDER THE PARTIES AND ARBITRATORS
SHALL USE ALL REASONABLE EFFORTS TO CONCLUDE THE ARBITRATION WITHIN ONE HUNDRED
TWENTY (120) DAYS FROM THE INITIAL NOTICE.

         13.3    Janssen Right of Inspection.  During the term of this
Agreement, VIVUS shall, upon written request of Janssen, permit Janssen's
authorized representative to inspect (and if reasonably necessary to copy) the
following:  (i) all manufacturing and quality control records for all
manufacture of the Product supplied by VIVUS hereunder and (ii) quality control
records of all starting materials used in the manufacture of a Product supplied
by VIVUS hereunder.  In addition, during the term of this Agreement, upon the
written request of Janssen, VIVUS shall permit Janssen's authorized
representative to inspect, at mutually agreeable times and during normal
business hours, the facilities where Product is manufactured for delivery to
Janssen hereunder for the purpose of verifying compliance with GMP and other
applicable regulatory standards.  VIVUS shall remedy any deficiencies
discovered as a result of such inspections as soon as reasonably possible upon
receipt notice of the same from Janssen.

         13.4    Waiver of Breach.  The failure of either party at any time to
require performance of any provision hereof shall not affect its rights at a
later time to enforce the same.  No waiver by either party of any condition or
term in any one or more instances shall be construed as a further or continuing
waiver of such condition or term or of another condition or term.

         13.5    Separability.  If any portion of this Agreement is held to be
illegal, void or ineffective, the remaining portions shall remain in full force
and effect and the parties will renegotiate the terms and conditions of this
Agreement to resolve any inequities.

         13.6    Entire Agreement.  This Agreement constitutes the entire
Agreement between the parties relating to the subject matter hereof and
supersedes all previous writings and understandings.  No terms or provisions of
this Agreement shall be varied or modified by any prior or subsequent
statement, conduct or act of either of the parties, except that the parties may
amend this Agreement by written instruments specifically referring to and
executed in the same manner as this Agreement.





                                      -25-

<PAGE>   31

         13.7    Approvals.  Unless expressly required not to be withheld
unreasonably, it is understood that when approval of either party is required,
such approval may be withheld in such party's sole discretion, without regard
to the reason or basis for withholding such consent.

         13.8    Notices.  Any notice required or permitted under this
Agreement shall be sent by air mail, postage pre-paid, to the following
addresses of the parties:

                 VIVUS
                 VIVUS International Limited
                 Clarendon House
                 Church Street
                 Hamilton, Bermuda
                 Attention:  President

                 copies to:

                 Wilson, Sonsini, Goodrich & Rosati
                 650 Page Mill Road
                 Palo Alto, California 94304
                 Attention:  Kenneth A. Clark
                 Telephone: (415) 493-9300
                 Telecopy:   (415) 493-6811

Any notice required or permitted to be given concerning this Agreement shall be
effective upon receipt by the party to whom it is addressed or within seven (7)
days of mailing by certified U.S. Mail or by reputable overnight courier
service, receipt confirmed, whichever is earlier.

         13.9    Assignment.  Neither this Agreement nor any interest hereunder
shall be assignable by either party without the written consent of the other,
except that either party may assign this Agreement and its rights and
obligations hereunder to an Affiliate or to any corporation with which it may
merge or consolidate, or to which it may transfer all or substantially all of
its assets to which this Agreement relates, without obtaining the consent of
the other party; provided that the entity to whom this Agreement is assigned
agrees in writing to be bound by its terms.  This Agreement shall be binding
upon and inure to the benefit of the permitted successors in interest of the
respective parties.

         13.10   No Partnership or Joint Venture.  This Agreement shall not be
deemed to establish a joint venture or partnership between Janssen and VIVUS.

         13.11   Third Party Rights.  The obligations of VIVUS and the rights
of Janssen under this Agreement shall be subject to and limited by any
agreements pursuant to which VIVUS acquired rights to Patents from a Third
Party.

         13.12   Limited Liability.  Except in the case of a Third Party claim
against a party hereunder, the parties shall not be liable to each other under
any contract, negligence, strict liability or other legal





                                      -26-

<PAGE>   32

or equitable theory for any incidental or consequential damages for failure to
perform under this Agreement .

         13.13   Execution in Counterparts.  This Agreement may be executed in
any number of counterparts, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.


JANSSEN PHARMACEUTICA INTERNATIONAL,
A DIVISION OF CILAG AG INTERNATIONAL

BY:  /s/ HEINZ SCHMID                             BY: /s/ ERIK ROMBOUT 
     ----------------------------                     -------------------------
Heinz Schmid                                              Erik Rombout


TITLE:  General Manager                          TITLE:  Operations Director
        -------------------------                        ----------------------

VIVUS INTERNATIONAL LIMITED

BY:  /s/ TERRY NIDA                  
     ----------------------------
     Terry Nida

TITLE:  Vice President      
        ------------------------




                                      -27-

<PAGE>   33
                                   EXHIBIT A

                             JANSSEN AFFILIATES AND
                          COUNTRIES OF RESPONSIBILITY




<TABLE>
  <S>                                         <C>
  Canada                                      Janssen-Ortho Inc.
                                              19 Green Belt Drive
                                              North York, Ontario, Canada M3C IL9

  China                                       Xian-Janssen Pharmaceutical Co. Ltd.
                                              5th Floor, Ocean Building
                                              No. 44, Liang Jiu Road
                                              Chao Yang Dist.
                                              100016 Beijing, China


  Hong Kong                                   Janssen Pharmaceutical Division
                                              c/o Johnson & Johnson (HK) Ltd.
                                              12th Floor, Tower 3
                                              China Hong Kong City
                                              China Ferry Terminal
                                              33 Canton Road, Tsim Sha Tsui
                                              Kowloon, Hongkong
                                              (Responsible for Macau)

  Indonesia                                   Janssen Pharmaceutica Division
                                              c/o P.T. Johnson & Johnson Indonesia
                                              Wisma Mampang, 3rd Floor
                                              Jl. Mapang Prapatan Raya No. 1
                                              Jakarta Selatan, Indonesia

  Korea                                       Janssen Korea Ltd
                                              12th Floor, Sungwon Building
                                              141, Samsung-dong, Kangam-ku
                                              Seoul 135-090, Korea


  Malaysia                                    Janssen Pharmaceutica
                                              (A div. of Johnson & Johnson Sdn. Bhd.)
                                              Third Floor, Wisma Digital
                                              Jalan Bersatu 13/4
                                              46200 Petaling Jaya
                                              Selangor, Malaysia
                                              (responsible for Malaysia, Singapore, Brunei)
</TABLE>


<PAGE>   34

<TABLE>
  <S>                                         <C>
  Mexico                                      Janssen Farmaceutica, S.A. de C.V.
                                              Canoa No. 79
                                              Col. Tizapan - San Angel
                                              Delegacion Alvara Obregon
                                              01090 Mexico, D.F. Mexico
                                              (responsible for:
                                              Caribbean Area:
                                              Dominican Republic
                                              Bermuda
                                              Bahamas
                                              Jamaica
                                              Cayman Islands
                                              Trinidad
                                              Haiti
                                              Barbados
                                              Curacao
                                              Aruba
                                              Grenada
                                              Santa Lucia
                                              Antigua
                                              Tortola
                                              Saint Martin
                                              Saint Vincent
                                              Turks and Caicos Islands)

  Philippines                                 Janssen Pharmaceutica
                                              A Div. of Johnson & Johnson (Phil.), Inc.
                                              7th Floor Centerpoint Condominium
                                              Julia Vargas Cor. Garnet St.
                                              Ortigas Center, Pasig
                                              Metro Manila, Philippines

  South Africa                                Janssen-Cilag
                                              Janssen House - 2nd Floor
                                              c/o Norwich Close and 5th St.
                                              Santon 2146, Gauteng
                                              South Africa

  Taiwan                                      Janssen-Cilag Taiwan
                                              8th Floor, 319, Section 2
                                              Tunhwa South Road
                                              Taipei 106
                                              Taiwan R.O.C.
</TABLE>


<PAGE>   35

<TABLE>
  <S>                                         <C>
  Thailand                                    Janssen Pharmaceutica Ltd.
                                              1550 Grand Amarin Tower, 11 Fl.
                                              New Petchburi Road
                                              Makasan, Rachtevee
                                              Bangkok 10310
                                              Thailand
                                              (responsible for Thailand, Vietnam, Cambodia, Myanmar and
                                              Laos)
</TABLE>


<PAGE>   36
                                   EXHIBIT B

                                 SPECIFICATIONS


                             PRODUCT SPECIFICATIONS

The following release specifications are subject to regulatory review and
approval in the Territory.  They will be modified as required by regulatory
authorities, and all Product delivered to Janssen must comply with such
modified specifications.  Release Specifications

                          [*]
          TEST

 Appearance


 Identity

 Identity

 Assay, alprostadil


 Uniformity of Dosage
 Units

 Package Integrity

 Sterility


 Dissolution

 Degradation Products

[*]




*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.

<PAGE>   37
                                   EXHIBIT C

                  EXAMPLE MINIMUM TRANSFER PRICE CALCULATIONS


<TABLE>
<CAPTION>
                                                                    NET SELLING PRICE
 <S>                           <C>               <C>                <C>                <C>                <C>
                               [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

 VIVUS                         [*]               [*]                [*]                [*]                [*]

 COST                          [*]               [*]                [*]                [*]                [*]

 OF                            [*]               [*]                [*]                [*]                [*]

 GOODS                         [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.


</TABLE>


<PAGE>   38
                                   EXHIBIT D

                 EXAMPLE TRANSFER PRICE CALCULATION IN THE CASE
                         WHERE [*] FORMULA IS IN EFFECT


<TABLE>
<CAPTION>
                                                                    NET SELLING PRICE
 <S>                           <C>               <C>                <C>                <C>                <C>
                               [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

 VIVUS                         [*]               [*]                [*]                [*]                [*]

 COST                          [*]               [*]                [*]                [*]                [*]

 OF                            [*]               [*]                [*]                [*]                [*]

 GOODS                         [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

                               [*]               [*]                [*]                [*]                [*]

*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.

</TABLE>


<PAGE>   39
                                   EXHIBIT E


<TABLE>
<CAPTION>
                                     TRADEMARK COUNTRIES
                                     -------------------
 Country             Mark              Status               Filing No.         Filing Date           Class
 -------             ----              ------               ----------         -----------           ------
 <S>                 <C>                <C>                   <C>                 <C>                  <C>
 Cambodia            MUSE               Mailed                                                           5

 Canada              MUSE               Allowed                735,175            08/19/93

 Canada              MUSE               Filed                  802,814            01/29/96

 China               MUSE               Pending/IR                                11/07/96

 Hong Kong           MUSE               Filed                  1466/96            02/03/96               5

 Indonesia           MUSE               Filed                                     02/12/96               5

 Korea, South        MUSE               Filed                 1996-3661           01/31/96             5(10)

 Laos                MUSE               Mailed                                                           5

 Malaysia            MUSE               Filed                 MA/3176/96          03/28/96               5

 Mexico              MUSE               Filed                   175835            08/19/93               5

 Myanmar             MUSE               Ordered                                                          5

 Philippines         MUSE               Filed                   107779            04/29/96               5

 Singapore           MUSE               Filed                  1037/96            01/29/96               5

 South Africa        MUSE               Filed                  96/00968           01/26/96               5

 Taiwan              MUSE               Filed                  85006304           02/06/96               5

 Thailand            MUSE               Filed                   320906            10/30/96               5

 Vietnam             MUSE               Pending/IR                                11/07/96               5

*Confidential treatment requested pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission. Omitted portions
have been filed separately with the Commission.


</TABLE>





<PAGE>   1
                                                                   EXHIBIT 10.28






                                  LEASE BETWEEN


                               AIRPORT ASSOCIATES,

                                    LANDLORD,


                                       AND


                                  VIVUS, INC.,

                                     TENANT.


                                  FOR PREMISES

                                       AT

                                735 AIRPORT ROAD

                              LAKEWOOD, NEW JERSEY


                                            Prepared by:

                                            DAVID C. FREINBERG, ESQ.
                                            ST. JOHN & WAYNE, L.L.C.
                                            TWO PENN PLAZA EAST
                                            NEWARK, NEW JERSEY 07105-2249




                                            Dated As Of January 1, 1997






<PAGE>   2
                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                                   Page
                                                                                                                   ----
<S>      <C>                                                                                                        <C>
1.       DEMISE AND TERM OF DEMISE....................................................................................1
2.       RENT, TAXES, ASSESSMENTS AND OTHER CHARGES...................................................................1
3.       USE OF PREMISES, COMPLIANCE WITH LAWS........................................................................3
4.       LIMITED REPRESENTATIONS BY LANDLORD..........................................................................4
5.       INSURANCE....................................................................................................4
6.       DAMAGE OR DESTRUCTION........................................................................................6
7.       CONDEMNATION.................................................................................................8
8.       SUBORDINATION, ATTORNMENT, ESTOPPEL CERTIFICATE.............................................................10
9.       REPAIRS, MAINTENANCE, ALTERATIONS, ETC......................................................................11
10.      SECURITY DEPOSIT............................................................................................13
11.      ASSIGNMENTS, SUBLETTING AND MORTGAGING......................................................................13
12.      INDEMNITY...................................................................................................15
13.      DEFAULT PROVISIONS, LANDLORD'S REMEDIES.....................................................................16
14.      BANKRUPTCY AND INSOLVENCY...................................................................................19
15.      ENTRY BY LANDLORD, ETC......................................................................................20
16.      COVENANT OF QUIET ENJOYMENT.................................................................................21
17.      EFFECT OF CONVEYANCE; LIMITS OF LIABILITY OF LANDLORD,
           DEFINITION OF "LANDLORD"..................................................................................21
18.      SURRENDER, HOLDING OVER BY TENANT...........................................................................22
19.      CURING DEFAULTS, FEES AND EXPENSES..........................................................................22
20.      MECHANICS' AND OTHER LIENS..................................................................................23
21.      SIGNS, ADDRESS..............................................................................................24
22.      WAIVERS AND SURRENDERS TO BE IN WRITING; RIGHT TO TERMINATE.................................................24
23.      COVENANTS BINDING ON SUCCESSORS AND ASSIGNS.................................................................25
24.      RESOLUTION OF DISPUTES......................................................................................25
25.      NOTICES.....................................................................................................25

26.      DEFINITIONS; HEADINGS; CONSTRUCTION OF LEASE................................................................25
27.      FORCE MAJEURE...............................................................................................26
28.      BROKERAGE...................................................................................................27
29.      MISCELLANEOUS PROVISIONS....................................................................................27
30.      COMPLIANCE WITH ENVIRONMENTAL LAWS..........................................................................28
31.      ENVIRONMENTAL REPORTS.......................................................................................33
32.      OPTION TO RENEW.............................................................................................34
</TABLE>



                                       -i-


<PAGE>   3
         This Lease is entered into as of January 1, 1997, between AIRPORT
ASSOCIATES, a New Jersey general partnership, having an address at 999 Airport
Road, Lakewood, New Jersey 08701 (the "Landlord"), and VIVUS, INC., a Delaware
corporation, having an address at 545 Middlefield Road, Suite 200, Menlo Park,
California 94025 (the "Tenant").

                              W I T N E S S E T H:

         1.       DEMISE AND TERM OF DEMISE

                  1.1 Landlord demises and leases unto Tenant, and Tenant hires
and takes from Landlord, in consideration of the rents to be paid and the
covenants, agreements and conditions to be performed, observed and fulfilled by
Tenant, the Premises (hereinafter defined), including the building (consisting
of approximately 40,000 square feet) (the "Building") and land located at 735
Airport Road, Lakewood, New Jersey. The Building and the land on which the
Building is located and all other improvements thereon are sometimes hereinafter
collectively referred to as the "Premises".

                  1.2 The term of this Lease (the "Term") shall be five (5)
years, commencing as of January 1, 1997 (the "Commencement Date") and expiring
December 31, 2001. Tenant shall, at Landlord's request, execute a certificate as
to the Commencement Date of this Lease.

         2.       RENT, TAXES, ASSESSMENTS AND OTHER CHARGES

                  2.1 Tenant shall pay to Landlord, at the address set forth
above or at such other place of which Landlord shall have given Tenant written
notice, a basic annual rental of $202,000.00, in monthly installments of
$16,833.33 each.

                  2.2 Such rent shall be paid by Tenant to Landlord in advance,
on the first day of each calendar month during the Term (except the pro-rated
rent for the unexpired portion of the month in which the Commencement Date
occurs, which shall be due on the Commencement Date), without notice, demand,
abatement, deduction, counterclaim or set off of any kind. Tenant shall pay the
rent in lawful money of the United States which shall be legal tender for all
debts, public and private, at the time of payment. Any obligation of Tenant for
payment of rent which shall have accrued with respect to any period during the
Term shall survive the expiration or termination of this Lease.

                  2.3 Whenever under the terms of this Lease any sum of money is
required to be paid by Tenant in addition to the rental reserved, and said
additional amount so to be paid is not designated as "additional rent," then
said amount shall nevertheless, if not paid when due, be deemed "additional
rent" and collectible as such with any installment of rental thereafter falling
due hereunder, or, if no such installment thereunder shall fall due, on demand.

                  2.4 Tenant shall pay, to Landlord, monthly, or as Landlord may
otherwise demand, as additional rent, all real estate taxes, all special
assessments, all general assessments, all water and sewer charges, rates and
rents, water meter charges, and all such other taxes, levies and charges of any
kind, general and special, extraordinary as well as ordinary, and each and every
installment thereof which shall

                                       -1-


<PAGE>   4
or may during the Term be charged, levied, laid, assessed, imposed, become due
and payable, or liens upon or for or with respect to the Premises or by reason
of the use or occupancy of or any transaction or activity carried on or
conducted in the Premises, together with all interest and penalties thereon (but
not for any interest or penalty if Tenant timely pays any such imposition). If
any assessment is payable in installments, Landlord shall elect to pay such
assessments over the longest permissible period allowed without penalty and
Tenant shall be responsible for installments which are due and payable or accrue
during the Term (equitably pro-rated for installments which accrue during the
Term but are payable prior to the Commencement Date or after the expiration of
the Term). All taxes, assessments, levies and charges described in this Section
2.4 (including interest and penalties thereon) are sometimes herein referred to
as "impositions."

                  2.5 Nothing contained in this Lease shall require Tenant to
pay any federal, state, municipal or other income, gross receipts or excess
profits taxes assessed against Landlord, or any franchise, corporation, capital
levy, estate, succession, inheritance, devolution, payroll, stamp, gift or
transfer taxes of Landlord, or any similar tax, or any tax imposed solely
because of the nature of the entity of Landlord, or any tax imposed on rent
received by Landlord under this Lease; provided, however, that if at any time
during the Term the methods of taxation prevailing at the commencement of the
Term shall be altered so that in lieu of or as a substitute, in whole or in
part, for the taxes, assessments, levies, impositions or charges now or
hereafter levied, assessed or imposed on real estate and the improvements
thereon, there shall be levied, assessed or imposed any tax or other charge on
or in respect of the Premises or the rents, income or gross receipts of Landlord
therefrom (including any municipal, state, or federal levy), then such tax or
charge shall be deemed an imposition, but only to the extent that such
imposition would be payable if the Premises or the rent, income or gross
receipts received therefrom, were the only property of Landlord subject to such
imposition, and Tenant shall pay and discharge the same as herein provided in
respect of the payment of impositions.

                  2.6 Tenant shall pay monthly, or as Landlord may otherwise
demand, all HVAC maintenance contract charges (if any), stand-by fire
protection, sprinkler system and central station alarm charges charged with
respect to the Premises. Tenant shall also pay, when due, all charges for heat,
electricity, gas and other public and private utilities and services furnished
to the Premises during the Term.

                  2.7 If Tenant shall fail to pay, within ten (10) days of the
date when the same is due and payable, any rent or other charge pursuant to this
Lease, Tenant shall upon demand pay Landlord a late charge of five (5%) percent
of the amount past due, or, if such late charge shall exceed the maximum late
charge permitted by law, the Tenant shall pay the maximum late charge permitted
by law.

                  2.8 Except as otherwise expressly provided in this Lease, (a)
this Lease shall be deemed and construed to be a "net-net-net" Lease; (b)
Landlord shall receive all rent from Tenant free from any and all charges,
assessments, expenses or deductions of any and every kind or nature whatsoever,
to the end that this Lease shall yield net to Landlord the rent and additional
rent payable hereunder during each year of the Term; and (c) all costs, expenses
and obligations of every kind and nature whatsoever relating to the Premises
during the Term shall be paid or cause to be paid by Tenant.


                                       -2-


<PAGE>   5
         3.       USE OF PREMISES, COMPLIANCE WITH LAWS

                  3.1 Subject to Section 3.2, the Premises may be used only for
the manufacturing, packaging and distribution of pharmaceutical products and
related offices.

                  3.2 Tenant shall not use or occupy or permit anything to be
done in or on the Premises, in whole or in part, in a manner which would in any
way violate any certificate of occupancy affecting the Premises, make void or
voidable any insurance then in force with respect thereto, or which may make it
more costly (unless Tenant pays the increased cost therefor) or impossible to
obtain fire or other insurance thereon, cause or be apt to cause structural
injury to the Building or any part thereof, constitute a public or private
nuisance, or which may violate any present or future, ordinary or extraordinary,
foreseen or unforeseen Legal Requirements or Insurance Requirements, as
hereinafter defined. In addition, Tenant shall not allow any animals to be kept
on the Premises or use or allow the Premises to be used for residential or
dwelling purposes.

                  3.3 Tenant shall, at its expense, promptly comply or cause
compliance with, and not jeopardize or make more costly Landlord's compliance
with (but it being agreed that except as may otherwise be expressly set forth to
the contrary in this Lease, compliance with the following shall be the
obligation of Tenant at Tenant's expense):

                           3.3.1 the requirements of every statute, law,
ordinance, regulation, rule, requirement, order or directive, including but not
limited to the Americans with Disabilities Act of 1990, now or hereafter made by
any federal, state, city or county government or any department, political
subdivision, bureau, agency, office or officer thereof, or of any other
governmental authority having jurisdiction with respect to and applicable to (i)
the Premises, (ii) the condition, equipment, maintenance, use or occupation of
the Premises, including, without limitation, such of the foregoing applicable to
the making of any alteration or addition in or to any structure appurtenant
thereto and to pollution and environmental control; and (iii) the tenants or
subtenants thereof (all of the foregoing being herein referred to as "Legal
Requirements"); and

                           3.3.2 the rules, regulations, orders and other
requirements of the National and any local Board of Fire Underwriters, or other
body having the same or similar functions and having jurisdiction of, and which
are applicable to, the Premises and of any liability, fire or other insurance
policy which Tenant or Landlord is required hereunder to maintain (herein
referred to as "Insurance Requirements"), whether or not such compliance
involves changes in the use of the Premises or any part thereof, or be required
on account of any particular use to which the Premises, or any part thereof may
be put, and whether or not any such Legal Requirements or Insurance Requirements
be of a kind not now within the contemplation of the parties hereto.

                  3.4 Notwithstanding anything to the contrary contained in this
Section 3, Landlord shall be responsible for any alterations that should have
been made to the Building upon its completion in 1988 (the "Completion Date") in
order that the Building would have been in substantial compliance with Legal
Requirements on the Completion Date, however Landlord shall be obligated under
this Section 3.4 only if and to the extent that such alterations would, as of
the date hereof, be mandated by

                                       -3-


<PAGE>   6
the appropriate governmental authority(ies) with jurisdiction thereover but only
to the extent of compliance with Legal Requirements in effect as of the
Completion Date.

         4.       LIMITED REPRESENTATIONS BY LANDLORD

                  4.1 Tenant covenants and agrees that it will accept the
Premises in their existing "as is" state or condition as of the date of delivery
of possession and without any further representation or warranty, express or
implied, in fact or by law, by Landlord or its agents and without recourse to
Landlord or its agents, as to the nature, condition, or useability thereof, the
title thereto, or the use or occupancy which may be made thereof, except as
specifically provided in this Lease.

                  4.2 Landlord hereby makes the following representations and
warranties to Tenant:

                           4.2.1 Landlord has insurable title to the Property
and there is no outstanding tenancy, lease or right to possession of the
Premises.

                           4.2.2 For a period of one (1) year from and after the
Commencement Date, Landlord shall maintain the structure of the Building, the
roof of the Building, and the plumbing, electrical and sewer systems in good
working order, unless the repair is occasioned by (a) the act or omission of
Tenant, its agents, employees, guests, licensees, invitees, subtenants,
assignees, successors or independent contractors or (b) any alteration made to
the Building by or on behalf of Tenant, in which events Tenant shall be
responsible for such repairs.

                           4.2.3 The use of the Premises for the limited
purposes set forth in Section 3.1 of this Lease are, as of the date hereof,
permitted uses under the Lakewood Township Code.

         5.       INSURANCE

                  5.1 Landlord shall maintain the following types of insurance
in the amounts specified, and Tenant shall pay to Landlord, monthly, or as
Landlord may otherwise demand, all premiums therefor:

                           5.1.1 Fire and extended coverage insurance covering
the Building against loss or damage by fire and other risks now or hereafter
embraced by "all risk" coverage with vandalism and malicious mischief
endorsements in an amount not less than 100% of the full replacement value of
the Building, without deduction for depreciation (including coverage for
increased costs of construction, demolition and building ordinance casualties).

                           5.1.2 Rent or rental value insurance against loss of
rent or rental value due to fire, including extended coverage endorsement, with
vandalism and malicious mischief endorsements, in an amount equal to two years'
rent for the Building.

                           5.1.3 Such other insurance, and in such amounts, as
may from time to time be reasonably placed by the Landlord against other
insurable hazards which at the time are commonly insured against in the case of
premises similarly situated, including without limitation, flood hazard

                                       -4-


<PAGE>   7
insurance if the Building is located in a designated flood hazard area and
commercial general liability insurance.

                  5.2 During the Term, Tenant, at Tenant's sole cost and
expense, shall carry and maintain:

                           5.2.1 Commercial general liability insurance,
including property damage liability coverage, protecting and indemnifying
Tenant, Landlord (and naming Landlord as additional insured thereon) and any
designee of Landlord against damages to person or property, or for loss of life
or of property occurring in or about the Premises or arising out of the
ownership, maintenance, use or occupancy thereof. The coverage limits of the
policy shall be at least $3,000,000 combined single limit.

                           5.2.2 Fire and extended coverage insurance covering
Tenant's personal property, improvements and alterations, against loss or damage
by fire and other risks now or hereafter embraced by "all risk" coverage, with
vandalism and malicious mischief endorsements, to the extent of at least ninety
(90%) percent of their full replacement value. The proceeds from any such policy
shall be used by Tenant for the replacement of personal property or the
restoration of Tenant's improvements or alterations, unless this Lease is
terminated in which case such proceeds shall be paid to Tenant.

                  5.3 Upon the commencement of the Term and thereafter not less
than 30 days prior to the expiration dates of the expiring policies theretofore
furnished by Tenant pursuant to Section 5.2, Tenant shall deliver to Landlord
certificates of the insurers showing the requisite coverage to be in full and in
force for the pertinent period. All such insurance shall be in form, providing
coverage and be maintained with carriers, reasonably satisfactory to the
Landlord (Landlord hereby deeming Chubb Insurance Company to be acceptable to it
as of the date hereof).

                  5.4 Tenant shall not take out separate insurance concurrent in
form or contributing in the event of loss with that required to be furnished
pursuant to Section 5.1 unless such additional insurance is written on an excess
or contingency basis and does not reduce the amounts payable in the event of
loss covered by the insurance maintained pursuant to Section 5.1. If Tenant
takes out any such separate insurance, it shall immediately notify Landlord
thereof and shall deliver copies of the policies to Landlord.

                  5.5 All policies of insurance provided for in Section 5.1.1
shall name Landlord and any fee mortgagee as the insureds as their respective
interests may appear, as to any such mortgagee, by standard mortgagee clause
without contribution, but with proceeds payable to Landlord or as such fee
mortgagee may require. Any loss under such policy shall be adjusted with the
insurance company solely by Landlord. All policies of insurance provided for in
Section 5.1.2 shall name Landlord as the insured with proceeds payable to, and
to be adjusted by, Landlord.

                  5.6 Notwithstanding any provision to the contrary contained in
this Lease, Landlord and Tenant hereby release each other and each other's
officers, directors, employees and agents, from liability or responsibility for
any loss or damage to property covered by valid and collectible fire insurance
with standard extended coverage endorsement or which would have been covered
under insurance

                                       -5-


<PAGE>   8
required to be maintained pursuant to this Lease. This release shall apply not
only to liability and responsibility of the parties to each other, but shall
also extend to liability and responsibility for anyone claiming through or under
the parties by way of subrogation or otherwise. This release shall apply even if
the fire or other casualty shall have been caused by the fault or negligence of
a party or anyone for whom a party may be responsible. However, this release
shall apply only with respect to loss or damage actually recovered from an
insurance company or which would have been recovered had the insurance required
by this Lease been maintained. This release shall not apply to loss or damage of
property of a party unless the loss or damage occurs during the times the fire
or extended coverage insurance policies of a party contain a clause or
endorsement to the effect that any release shall not adversely affect or impair
the policies or prejudice the right of the party to recover thereunder; provided
that if any policy required to be covered under this Lease does not contain such
clause or endorsement, the party maintaining such insurance had so notified the
other party at least thirty (30) days prior to the casualty in question.
Landlord and Tenant each agree that any fire and extended coverage insurance
policies covering the Premises or contents shall include this clause or
endorsement as long as the same shall be obtainable without extra cost, or if
extra cost shall be charged therefor, so long as the other party pays the extra
cost. If extra cost shall be chargeable, the party whose policy is subject to
the extra cost shall advise the other thereof, and of the amount of the extra
cost.

                  5.7 Each policy or certificate therefor furnished by Tenant
pursuant to Section 5.3 shall contain an agreement by the insurer that should
such policy be canceled prior to its expiration date the insurer will endeavor
to give Landlord at least 30 days' prior written notice of cancellation.

                  5.8 No policy furnished by Tenant pursuant to Section 5.2
shall have a deductible or a self-insured amount in excess of $2,500.00
(provided Landlord shall not unreasonably withhold its consent to any increase
in such amount up to $50,000.00).

         6.       DAMAGE OR DESTRUCTION

                  6.1 In every case of fire, explosion, damage by the elements
or other casualty, Tenant shall immediately give notice to Landlord.

                  6.2 In the event the Building, or any portion thereof, is
damaged by fire or other perils covered by insurance maintained by Landlord
pursuant to Section 5.1, to an extent not exceeding fifty percent (50%) of the
full insurable value of the Building and if the damage thereto is such that the
repair or restoration thereof may, in Landlord's reasonable opinion, be
completed within one hundred twenty (120) days from the date of such casualty
and Landlord will receive insurance proceeds sufficient to cover the entire cost
of such repair and restoration, less the applicable deductible, Landlord shall
commence and proceed diligently with the work of repair and restoration and this
Lease shall continue in full force and effect. If such work of repair and
restoration requires a period longer than one hundred twenty (120) day to
complete, in Landlord's reasonable opinion (as evidenced by a written estimate
from a contractor selected by Landlord and reasonably acceptable to Tenant), or
exceeds fifty (50%) of the full insurable value of the Building, or if said
insurance proceeds will not be sufficient to cover the entire cost of such
repairs, or is not an insured peril, Landlord may either elect to so repair and
restore the Building and this Lease shall continue in full force and effect, or
Landlord may elect not to so repair and restore the

                                       -6-


<PAGE>   9
Building and this Lease shall in such event terminate. Under any of the
conditions contained in this Section 6.2, Landlord shall give written notice
(the "Restoration Notice") to Tenant of its intention with forty-five (45) days
from the date of such event of damage or destruction. In the event Landlord
elects not to restore the Building, this Lease shall be deemed to have been
terminated as of the date of such damage or destruction (except to the extent
that Tenant remains in possession of any part of the Building beyond the date of
such damage or destruction, in which case as to such occupied part of the
Building the Lease shall be deemed terminated as of the date Tenant surrenders
same to Landlord, and the basic annual rental hereunder shall be reduced on an
equitable basis from and after the date of damage or destruction). The
Restoration Notice shall provide an estimate of the time required, in Landlord's
reasonable business judgment, to repair or restore the damage and, if such
estimate is longer than one hundred twenty (120) days, the damage has materially
impaired Tenant's use of the Premises and the damage is not the result of the
willful misconduct of Tenant or Tenant's agents, employees, licensees, invitees,
contractors or subtenants, Tenant shall have the right to terminate this Lease
by written notice of such election to Landlord within fifteen (15) days after
receipt of the Restoration Notice. Tenant shall also have the right to terminate
this Lease effective as of the date of the damage or destruction (except to the
extent that Tenant remains in possession of any part of the Building beyond the
date of such damage or destruction, in which case as to such occupied part of
the Building the Lease shall be deemed terminated as of the date Tenant
surrenders same to Landlord, and the basic annual rental hereunder shall be
reduced on an equitable basis from and after the date of damage or destruction)
in the event that (i) Landlord shall not deliver the Restoration Notice within
the specified forty-five (45) day period, or (ii) Landlord, after having elected
to restore, shall not have substantially completed the restoration with the
specified one hundred twenty day (120) period (or such longer period specified
in the Restoration Notice); and Tenant's option to terminate specified in this
sentence shall be exercised by written notice to Landlord within sixty (60) days
after the casualty event as to clause (i) and within one hundred thirty-five
(135) days after the casualty event as to clause (ii).

                  6.3 Upon any termination of this Lease under any of the
provisions of Section 6.2, the parties shall be released without further
obligation to the other from the date possession of the Premises is surrendered
to Landlord except for items which have theretofore accrued and are then unpaid.

                  6.4 In the event of repair or restoration by Landlord as
herein provided, the rent payable under this Lease shall be abated
proportionately with the degree to which Tenant's use of the Premises is
impaired during the period of such repair or restoration. In no event shall
Tenant be entitled to any compensation or damages for loss in the use of the
whole or any part of the Premises and/or any inconvenience or annoyance
occasioned by such damage, repair or restoration.

                  6.5 Tenant shall not be released from any of its obligations
under this Lease in an event of casualty except to the extent and upon the
conditions expressly stated in this Section 6.

                  6.6 If Landlord is obligated to or elects to repair or restore
as herein provided, Landlord shall be obligated to make repair or restoration
only to those portions of the Premises which were originally provided at
Landlord's expense, and the repair and restoration of items within the Premises
not provided at Landlord's expense shall be the obligation of Tenant. Tenant
agrees to coordinate the restoration and repair of those items it is required to
restore or repair with Landlord's

                                       -7-


<PAGE>   10
repair and restoration work and in coordination with a work schedule prepared by
Landlord, or Landlord's contractor. Further, Tenant's work shall be performed in
accordance with the terms, standards and conditions contained in Article 9
hereof.

                  6.7 Notwithstanding anything to the contrary contained in this
Section 6, Landlord shall not have any obligation whatsoever to repair or
restore the Building when the damage thereto is the result of any casualty which
occurs during the last twelve (12) months of the term of this Lease or any
extension hereof. However, Landlord shall be required to give the Restoration
Notice to Tenant of its intention within thirty (30) days from the date of such
event of damage or destruction. In the event Landlord elects not to restore the
Building, Tenant shall have the right to terminate the Lease by delivering
notice thereof to Landlord within fifteen (15) days after receipt of such
notice, in which case this Lease shall be deemed to have been terminated as of
the date of such damage or destruction (except to the extent that Tenant remains
in possession of any part of the Building beyond the date of such damage or
destruction, in which case as to such occupied part of the Building the Lease
shall be deemed terminated as of the date Tenant surrenders same to Landlord,
and the basic annual rental hereunder shall be reduced on an equitable basis
from and after the date of damage or destruction). In addition, and
notwithstanding anything to the contrary contained in Section 6, in the event
the Building or any portion thereof is damaged by fire of other perils during
the last twelve (12) months of the term of this Lease or any extension hereof
such that the repair or restoration thereof may not, in Landlord's reasonable
opinion, be completed within sixty (60) days from the date of such casualty,
Landlord and Tenant shall have the right, upon written notice to the other, to
terminate this Lease. Notwithstanding the foregoing, this provision shall not be
applicable during the last twelve (12) months of the (a) original Term if Tenant
has properly exercised the option to extend the Term for the first Renewal Term
as provided in Section 32, and (b) first Renewal Term of Tenant has properly
exercised the option to further extend the Term for the second Renewal Term as
provided in Section 32.

                  6.8 Notwithstanding anything to the contrary contained in this
Lease, if (i) the damage or destruction results from the fault of Tenant or any
of its agents, employees, licensees, invitees, subtenants, guests, assigned or
contractors, and (ii) the insurance proceeds received by Landlord (or the
proceeds that would have been received by Landlord had it maintained the
insurance required under Section 5.1.1) are not sufficient (without regard to
any deductible) to cover the entire cost of repairs, the Tenant shall be
responsible for the cost to replace, repair or rebuild the damaged or destroyed
improvements to substantially their condition prior to the casualty event to the
extent of the insurance proceeds deficiency.

                  6.9 Tenant agrees that the foregoing provisions are in lieu of
any other rights or remedies that Tenant may have pursuant to N.J.S.A. 46:8-6 or
46:8-7, and Tenant waives any statutory rights of termination which may arise by
reason of any partial or total destruction of the Premises.

         7.       CONDEMNATION

                  7.1 If the whole of the Premises shall be taken under the
power of eminent domain by any public or private authority or in the event of
sale to such authority in lieu of formal proceedings of eminent domain, then
this Lease shall cease and terminate as of the date of such taking or sale,
which date

                                       -8-


<PAGE>   11
is defined, for all purposes of this Section 7, as the date the public or
private authority has the right to possession of the property being taken or
sold.

                  7.2 In the event of any taking or sale of all or any part of
the Premises, the entire proceeds of the award or sale shall be paid to
Landlord, and Tenant shall have no right to any part thereof, provided, however,
that nothing contained herein shall be construed to prevent Tenant from
recovering any allowance for its personal property, moving expenses and other
awards which the law permits to be made to tenants, so long as such allowance
does not diminish the award paid to Landlord.

                  7.3 If any public or private authority shall, under the power
of eminent domain, make a taking, or should a sale in lieu thereof occur, of
less than the whole of the Premises then Landlord may, at its election if
Landlord in its sole and reasonable discretion determines that it is not
commercially feasible for it to continue operating the Premises, terminate this
Lease by giving Tenant written notice of the exercise of its election within 20
days after the nature and extent of the taking or sale have been finally
determined. In the event of termination by Landlord under the provisions of this
Section 7.3, this Lease shall cease and terminate as of the date of such taking
or sale. If Landlord does not so terminate this Lease, subject to Section 7.5,
this Lease shall continue in full force and effect.

                  7.4 In the event of a partial taking or sale not resulting in
a termination of this Lease pursuant to Section 7.3, Landlord shall, if
Landlord's mortgagee consents thereto, effectuate all such repairs and
restoration as are necessary to restore the Premises for the operation of
Tenant's business, to the extent net proceeds of the award or sale are
available, but nothing contained herein shall be construed so as to require
Landlord to pay any cost of repair in excess of the net proceeds of the award or
sale price received from the condemning authority. In such case, as of the date
of the taking, the basic and additional rent reserved hereunder shall be
reduced, but only until such time as Landlord completes its repair or
restoration in accordance herewith, by an amount that is in the same ratio to
the rental then in effect as the value of the portion of the Premises taken or
sold bears to the total value of the Premises immediately before the date of
taking or sale (provided that an equitably determined abatement shall continue
to compensate Tenant for any loss of use or enjoyment of the Premises which
continues after such repair or restoration). If the net proceeds of the award or
sale are not sufficient to repair or restore the Premises, Tenant may, at its
own expense, complete such repairs or restoration, in accordance with the terms
of this Lease.

                  7.5 Tenant shall have the option, to be exercised by written
notice to Landlord within fifteen (15) days after such taking or sale, to
terminate this Lease in the event (i) more than 10% of the floor area of the
Building is taken in condemnation; (ii) (A)(1) more than 15% of the parking area
on the Premises is taken in condemnation, or (2) less than 15% of the parking
area is taken in condemnation and the Township of Lakewood revokes the
certificate of occupancy for the Building, and (B) Landlord (or an affiliate
thereof) shall not provide reasonable alternative parking to Tenant; or (iii)
the Lease continues notwithstanding a partial condemnation and within 120 days
after the condemnation, Landlord does not restore the balance of the Premises
substantially to their condition prior to the condemnation.

                  7.6 The taking of the Premises or any part thereof by military
or other public authority shall constitute a taking of the Premises under the
power of eminent domain only when the use and

                                       -9-


<PAGE>   12
occupancy by the taking authority has continued for longer than 90 consecutive
days. During the 90-day period all the provisions of this Lease shall remain in
full force and effect, except that rental reserved (including the additional
rent) shall be abated during such period of taking based on the extent to which
the taking interferes with Tenant's use of the Premises. Landlord shall be
entitled to whatever award may be paid for the use and occupation of the
Premises for the period involved.

         8.       SUBORDINATION, ATTORNMENT, ESTOPPEL CERTIFICATE

                  8.1 Provided Landlord obtains a Non-Disturbance Agreement
(hereinafter defined), this Lease is and shall be subject to all mortgages which
may now or hereafter affect the Premises, to each and every advance made or
hereafter to be made under such mortgages, and to all renewals, modifications,
consolidations, replacements, and extensions of such mortgages irrespective of
the date of recording thereof. In confirmation of such subordination, Tenant
agrees, without payment to Tenant of any consideration therefor, to promptly
(but in any event, with ten (10) days of request) execute and deliver any
Non-Disturbance Agreement that Landlord or the holder of any such mortgage or
any of their respective successors in interest may request to evidence such
subordination. The mortgages to which this Lease is, at the time referred to,
subject and subordinate shall sometimes be collectively called "superior
mortgages." Landlord shall, upon the request of Tenant, use its good faith
efforts to obtain from the holder of any superior mortgage an agreement (a
"Non-Disturbance Agreement") in a commercially reasonable form, to the effect
that provided Tenant is not in default under this Lease Tenant's possession of
the Premises shall not be disturbed in the event that the holder of a superior
mortgage forecloses its superior mortgage; provided, however, Landlord (i) shall
not be required to incur any costs or liabilities in connection therewith and
(ii) shall not have any liability to Tenant if Landlord shall fail to procure
such Non-Disturbance Agreement.

                  8.2 In the event of any act or omission of Landlord which
would give Tenant the right, immediately or after lapse of a period of time, to
cancel or terminate this Lease, or to claim a partial or total eviction, Tenant
shall not exercise such right: (i) until it has given written notice of such act
or omission to the holder of each superior mortgage whose name and address shall
previously have been furnished to Tenant in writing and (ii) unless such act or
omission shall be one which is not capable of being remedied by Landlord or such
mortgage holder within thirty (30) days, until a thirty (30) day period for
remedying such act or omission shall have elapsed following the giving of such
notice), provided such holder shall with due diligence give Tenant written
notice of intention to, and commence and continue to, remedy such act or
omission.

                  8.3 If the holder of a superior mortgage shall succeed to the
rights of Landlord, then at the request of such party so succeeding to
Landlord's rights (herein sometimes called successor-landlord) and upon such
successor-landlord's written agreement to accept Tenant's attornment, Tenant
shall attorn to and recognize such successor-landlord as Tenant's landlord under
this Lease and shall promptly, without payment to Tenant of any consideration
therefor, execute and deliver any commercially reasonable instrument that such
successor-landlord may request to evidence such attornment. Upon such
attornment, this Lease shall continue in full force and effect as, or as if it
were, a direct lease between the successor-landlord and Tenant upon all of the
terms, conditions, and covenants as are set forth in this Lease and shall be
applicable after such attornment, except that the

                                      -10-


<PAGE>   13
successor-landlord shall not: (i) be obligated to repair, restore, replace, or
rebuild the Property, in case of total or substantially total damage or
destruction, beyond such repair, restoration or rebuilding as can reasonably be
accomplished with the net proceeds of insurance actually received by, or made
available to, the successor-landlord; (ii) be liable for any previous act or
omission of Landlord; (iii) be subject to any prior defenses or offsets; (iv) be
bound by any modification of this Lease not expressly provided for in this Lease
or by any previous prepayment of more than one month's rent (except to the
extent received by such successor-landlord), unless such modification or
prepayment shall have been expressly approved in writing by the holder of the
superior mortgage through or by reason of which the successor-landlord shall
have succeeded to the rights of Landlord; or (v) be liable for the performance
of Landlord's covenants and agreements contained in this Lease to any extent
other than to the successor-landlord's ownership in the Premises, and no other
property of such successor-landlord shall be subject to levy, attachment,
execution or other enforcement procedure for the satisfaction of Tenant's
remedies,

                  8.4 In the event that a bona fide institutional lender shall
request reasonable modifications to this Lease, then Tenant shall not
unreasonably withhold or delay its written consent to such modifications
provided that the same do not (and Tenant shall not demand the payment to Tenant
of any consideration for consent thereto), increase in any material manner the
obligations of Tenant hereunder or materially adversely affect the leasehold
interest hereby created or Tenant's use and enjoyment of the Premises.

                  8.5 Tenant agrees, at any time, and from time to time (and
without payment to Tenant of any consideration therefor), upon not less than ten
(10) days' prior notice by Landlord, to execute, acknowledge and deliver to
Landlord, a statement in writing addressed to Landlord (and/or Landlord's
designee) certifying that this Lease is unmodified and in full force and effect
(or if there have been modifications, that the same is in full force and effect
as modified and stating the modifications), stating the dates to which the rent
has been paid, stating such other information concerning this Lease and Tenant's
tenancy as Landlord reasonably shall request, and stating whether or not there
exists any default in the performance by Landlord of any term, covenant or
condition contained in this Lease and, if so, specifying each such default, it
being intended that any such statement delivered pursuant to this Section 8.5
may be relied upon by Landlord and by any mortgagee or prospective mortgagee of
any mortgage affecting the Property or any purchaser or prospective purchaser of
the Property. When so requested by Landlord, such statement shall be submitted
in writing under oath by a person or persons having knowledge of the statements
made therein.

         9.       REPAIRS, MAINTENANCE, ALTERATIONS, ETC.

                  9.1 Except as provided in Sections 3.5, 4.2.2, 6, 7 and the
next sentence in this Section 9.1, Tenant at its cost shall maintain, in good
condition, and shall repair if damaged and replace as required, all portions of
the Premises, including, without limitation, the HVAC system, all of Tenant's
personal property, the roof, exterior walls, steel structures and plumbing,
electrical and sprinkler systems of the Building, and the grounds, driveways and
parking areas on the Premises (including removal of ice and snow from the
sidewalks and curbs on the Premises) and the Landlord shall not be required to
furnish any services or facilities or to make any repairs, replacements or
alterations in or to the Premises. Notwithstanding the foregoing, Landlord shall
be responsible for normal and ordinary landscaping

                                      -11-


<PAGE>   14
maintenance, snow removal from parking areas, and well and irrigation system
maintenance, unless any such maintenance is necessary as a result of the
negligence or misconduct of Tenant or any of Tenant's agents, employees,
licenses, invitees, subtenants or contractors, in which case Tenant shall be
responsible for such maintenance.

                  9.2 Landlord shall not be liable for any failure of water
supply, gas or electric current or of any utility or for any damage to property
caused by or resulting from gasoline, oil, steam, gas, electricity, or
hurricane, tornado, flood, wind or similar storms or disturbances, or water,
rain or snow which may leak or flow from the street, sewers, gas mains or any
sub-surface area or from any part of the Building, or leakage of gasoline or oil
from pipes, appliances, sewer or plumbing works therein, or from any other
place, or for interference with light or other incorporeal hereditaments by
anyone, or caused by operations by or of any public or quasi-public work.

                  9.3 Tenant shall have the right to make, at its sole cost and
expense, additions, alterations and changes (collectively, "Alterations") in or
to the Building, provided Tenant shall not then be in default in the performance
of any of the covenants in this Lease beyond any applicable notice or grace
period, subject, however, in all cases to the following conditions:

                           9.3.1 No Alterations shall be commenced except after
fifteen (15) days' prior written notice, which shall include reasonably detailed
final plans and specifications and working drawings of the proposed Alterations
and the name of the contractor, to Landlord.

                           9.3.2 No single, integrated Alteration costing in
excess of $25,000.00 and no structural, Building system or exterior Alterations,
regardless of cost, shall be made without the prior written consent of Landlord,
which shall not be unreasonably withheld or delayed. Notwithstanding the
foregoing Landlord hereby consents to the performance by Tenant of the
Alterations specified on Exhibit B.

                           9.3.3 No Alterations shall be undertaken until Tenant
shall have procured and paid for, so far as the same may be required from time
to time, all permits and authorizations of all governmental authorities having
jurisdiction.

                           9.3.4 All Alterations shall be made promptly
(unavoidable delays excepted), in a good and workmanlike manner and in
compliance with all applicable permits, authorizations and all Legal
Requirements and all Insurance Requirements.

                           9.3.5 Before commencing the Alterations and at all
times during construction, Tenant's contractor shall maintain builder's risk
insurance coverage satisfactory to Landlord.

                           9.3.6 If the estimated cost of the Alterations
exceeds $100,000.00, before the commencement of the Alterations Tenant at its
cost shall furnish to Landlord a performance and completion bond issued by an
insurance company qualified to do business in New Jersey in a sum equal to the
cost of the Alterations (as determined by the construction contract between
Tenant and its

                                      -12-


<PAGE>   15
contractor) guaranteeing the completion of the Alterations free and clear of all
liens and other charges, and in accordance with the plans and specifications.

                  9.4 Prior to the expiration of the Term or sooner termination
of this Lease, Tenant, at Tenant's cost, shall remove any Alterations that
Tenant has made to the Premises and repair any damage caused by the removal of
such Alterations. Notwithstanding the foregoing, Tenant, at its election, shall
not be required to so remove those Alterations described on Exhibit C annexed
hereto, provided, however, if Tenant shall elect to so remove any of such
Alterations, it shall do so prior ro the expiration of the Term or sooner
termination of this Lease, and repair any damage caused by the removal of such
Alterations. This Section shall survive the expiration or termination of this
Lease.

         10.      SECURITY DEPOSIT

                  10.1 Tenant has this day deposited (by check subject to
collection) with Landlord the sum of $33,666,67 to secure the full and faithful
performance by Tenant of all the terms, covenants and conditions of this Lease
upon Tenant's part to be performed, which sum shall be returned to Tenant
without interest promptly after the expiration of the Term, less any amount,
applied by Landlord pursuant to this Section 10 and not previously restored by
Tenant. In no event shall Tenant be entitled to credit against any rent due
hereunder by virtue of the deposit of such security. In the event of a sale of
the Premises, Landlord shall have the right to transfer the security to the
vendee for the benefit of Tenant, and Landlord shall be considered released by
Tenant from all liability for the return of such security; Tenant shall look to
the new landlord solely for the return of the security, and it is agreed that
this shall apply to every transfer or assignment made of the security to a new
landlord. The security deposited under this Lease shall not be mortgaged,
assigned or encumbered by Tenant. Tenant shall from time-to-time deposit
additional amounts hereunder so that the total amount deposited hereunder shall
at all times be equal to $33,666.67.

         11.      ASSIGNMENTS, SUBLETTING AND MORTGAGING

                  11.1 Neither Tenant, nor Tenant's successors or assigns, shall
(unless expressly permitted to do so) assign, mortgage, pledge or encumber this
Lease, in whole or in part, or sublet the Premises, in whole or in part, or
permit the same or any portion thereof to be used or occupied by others, or
enter into a management contract or other arrangement whereby the Premises shall
be managed and operated by anyone other than the then owner of Tenant's
leasehold estate, nor shall this Lease be assigned or transferred by operation
of law, without the prior consent in writing of Landlord in each instance. If
this Lease be so assigned or transferred, or if all or any part of the Premises
be sublet or occupied by anybody other than Tenant, Landlord may, after such
default by Tenant, collect rent from the assignee, transferee, subtenant or
occupant, and apply the net amount collected to the rent reserved herein, but no
such assignment, subletting, occupancy or collection shall be deemed a waiver of
any agreement, term, covenant or condition of this Lease, or the acceptance of
the assignee, transferee, subtenant or occupant as tenant, or a release of
Tenant from the performance or further performance by Tenant of the terms,
covenants and conditions of this Lease, and Tenant shall continue to be liable
under this Lease. The consent by Landlord to an assignment, mortgage, pledge,
encumbrance, transfer, management contract or subletting shall not be construed
to relieve Tenant from obtaining the express

                                      -13-


<PAGE>   16
consent in writing of Landlord to any further assignment, mortgage, pledge,
encumbrance, transfer, management contract or subletting. Landlord shall have
the right to unreasonably withhold its consent to an assignment (except as
provided in Section 11.6), mortgage, pledge or other encumbrance, however
Landlord shall not unreasonably withhold its consent to a proposed subletting
(subject, however, to the provision of Section 11.3). Notwithstanding anything
to the contrary herein contained, an assignment of this Lease shall include,
without limitation, the following: (a) if Tenant shall be a corporation and a
controlling amount of its voting stock or all or substantially all its assets
shall be sold, mortgaged, assigned, pledged, encumbered or otherwise transferred
(whether in one (1) single transaction or in more than one (1) successive
transaction); or (b) if Tenant shall be a partnership, limited liability
company, joint venture, syndicate or other group and all or any portion of the
interest of any partner, member or other equity holder shall be sold or
otherwise transferred (however this provision shall not, as to a corporation or
other entity whose stock or other equity interests are publicly traded on a
recognized stock exchange, be applicable to sales of stock or other equity
interests on such stock exchange).

                  11.2 If Tenant shall desire to assign this Lease or sublet all
or a portion of the Premises, Tenant shall submit to Landlord a written request
for Landlord's consent to such assignment or subletting, which request shall
contain or be accompanied by the following information: (a) the name and address
of the proposed assignee or subtenant, (b) in the case of a proposed subletting,
a description identifying the space to be sublet and the term of such
subletting, (c) the nature and character of the business of the proposed
assignee or subtenant, (d) in the case of a proposed assignment, a current
financial statement of the proposed assignee, and (e) the proposed form of the
instrument of assignment or sublease.

                  11.3 Notwithstanding anything to the contrary contained in
Section 11.1, Landlord shall not unreasonably withhold its consent to a proposed
sublease provided that (a) the proposed subtenant shall not have a character or
reputation or be engaged in a business, in the reasonable opinion of Landlord,
making it unsuitable for occupancy in the Lakewood Industrial Park, and (b) the
proposed subtenant shall not be either (i) an occupant of any space in the
Building or any other space in Ocean County owned by Landlord or an affiliate
thereof, or (ii) a person to whom, in response to a written request submitted by
such person, Landlord (or an affiliate thereof), during the one hundred eighty
(180) day period prior to the submission of Tenant's request for consent, has
submitted a lease proposal, or whom, during the one hundred eighty (180) day
period prior to the submission of Tenant's request for consent, has submitted to
Landlord a lease proposal. Landlord shall, within fifteen (15) days after its
receipt of the materials required by this Section 11.3, either (1) grant its
consent or (2) withhold consent; provided, however, Landlord shall not be
required to consent if a default under this Lease by Tenant shall have occurred
and remain uncured.

                  11.4 Tenant, within twenty (20) days of its receipt of
Landlord's request therefor, shall reimburse Landlord for all reasonable
out-of-pocket costs incurred by Landlord in considering whether or not to
consent, including reasonable attorney's fees and disbursements and the
reasonable costs of making investigations regarding the proposed subtenant or
assignee. After Landlord shall have granted its consent, but before the
subtenant or assignee shall take possession, Tenant shall deliver to Landlord a
fully-executed counterpart of the sublease or instrument of assignment.


                                      -14-


<PAGE>   17
                  11.5 If Tenant shall sublease any portion of the Premises or
assign this Lease, Tenant shall pay to Landlord fifty percent (50%) of any
consideration received by Tenant (net of reasonable costs incurred by Tenant to
effect any such assignment or sublet, such as advertising, brokerage, legal and
construction expenses) from the subtenant or assignee, as the case may be, to
the extent such consideration exceeds the basic annual rental and additional
rent payable hereunder.

                  11.6 Notwithstanding the provisions of Section 11.1, Tenant
may, without the consent of Landlord, assign this Lease, or sublease all or any
part of the Premises, to any Successor (hereinafter defined). As used above, the
term "Successor" shall mean an entity (a) succeeding to Tenant by merger,
consolidation or sale or other transfer of all or substantially all the assets
of Tenant, and (b) whose net worth as of the effective date of the assignment or
sublease shall be equal to or greater than the net worth of Tenant at such time.
All financial criteria set forth in this Section 11.6 shall be determined in
accordance with generally accepted accounting principles consistently applied
and based upon financial statements of Tenant and such assignee audited by an
independent public accounting firm.

                  11.7 Any subletting, whether made with or without Landlord's
consent, shall be subject and subordinate to this Lease. Furthermore,
notwithstanding any assignment of this Lease or subletting of all or any part of
the Premises, whether made with or without Landlord's consent, the Tenant
originally named herein, and each Successor Tenant, shall be and remain jointly
and severally liable for all obligations of Tenant hereunder.

         12.      INDEMNITY

                  12.1 Notwithstanding that joint or concurrent liability may be
imposed upon Landlord by statute, ordinance, rule, regulation, order, or court
decision, Tenant shall, notwithstanding any insurance furnished pursuant hereto
or otherwise, indemnify, protect, defend and hold harmless Landlord (which for
purposes of this Section 12.1 shall include its agents, employees, partners and
principals) from and against any and all liability, fines, suits, claims,
obligations, damages, losses, penalties, demands, actions and judgments, costs
and reasonable expenses of any kind or nature (including reasonable attorneys'
fees) (collectively,"Costs"), by anyone whomsoever, due to or arising out of:

                           12.1.1 any work or thing done in, on or about the
Premises or any part thereof by Tenant or anyone claiming through or under
Tenant or the respective employees, agents, licensees, contractors, servants or
subtenants of Tenant or any such person;

                           12.1.2 any use, possession, occupation, condition,
operation, maintenance or management of the Premises or any part thereof,
including, without limitation, any air, land, water or other pollution caused by
Tenant;

                           12.1.3 any negligence or wrongful act or omission on
the part of Tenant or any person claiming through or under Tenant or the
respective employees, agents, licensees, invitees, contractors, servants or
subtenants of Tenant or any such person;


                                      -15-


<PAGE>   18
                           12.1.4 any accident or injury to any person
(including death) or damage to property (including loss of property) occurring
in or on the Premises or any part thereof,

                           12.1.5 any failure on the part of Tenant to perform
or comply with any of the covenants, agreements, terms, provisions, conditions
or limitations contained in this Lease on its part to be performed or complied
with; and

                           12.1.6 any failure on the part of Tenant to perform
or comply with Legal Requirements or Insurance Requirements.

In case any action or proceeding is brought against Landlord by reason of any of
the foregoing, Tenant, upon written notice from Landlord shall, at Tenant's
expense, resist or defend or cause to be resisted or defended such action or
proceeding. Tenant or its counsel shall keep Landlord apprised at all times of
the status of the action or proceeding. At the request of Tenant, Landlord will
cooperate with Tenant in any such action or proceeding, and will execute any
documents and pleadings reasonably required for such purpose, Tenant hereby
agreeing to save Landlord harmless from all cost, expense (excluding attorneys'
fees), loss and damage on account of, growing out of, or resulting from, such
cooperation. The establishment of limits of coverage for the insurance required
by Section 5 shall not serve in any way to limit Tenant's obligations pursuant
to this Section 12. The provisions of this Section shall survive the expiration
or termination of this Lease.

Notwithstanding the foregoing provisions of this Section 12.1, Tenant shall not
be obligated to indemnify Landlord to the extent any Costs result from the (a)
negligence or misconduct of Landlord or Landlord's agents, employees or
contractors, or (b) breach of this Lease by Landlord,

                  12.2 To the extent not covered by insurance, Landlord agrees
to indemnify, defend (with counsel reasonably approved by Tenant) and hold
Tenant harmless from and against all Costs resulting from any accident or injury
to any person occurring in or on the Premises resulting from the negligence of
Landlord or Landlord's agents, employees or contractors; provided, however, the
foregoing indemnity shall not include any Costs for which Tenant is otherwise
responsible under Section 12.1.

         13.      DEFAULT PROVISIONS, LANDLORD'S REMEDIES

                  13.1 Any of the following events ("Events of Default") shall
constitute a default under this Lease:

                           13.1.1 Tenant's default in the payment of any
installment of rent, or in the payment of any additional rent, on any day upon
which the same shall be due and payable and such default shall continue for five
(5) days after the date on which Tenant is given notice that such payment is
past due(the "Rent Grace Period"), provided, however, Tenant shall have the
benefit of the Rent Grace Period not more frequently than two (2) times in any
six (6) month period; or

                           13.1.2 Tenant's doing or permitting anything to be
done, whether by action or inaction, contrary to any of Tenant's obligations
pursuant to this Lease (except as to the payment of rent

                                      -16-


<PAGE>   19
and additional rent and the matters set forth in Sections 13.1.3 and 14) and
such situation shall continue and shall not be remedied by Tenant within thirty
(30) days after Landlord shall have given to Tenant notice specifying the same;
or, in the case of a happening or default which cannot with due diligence be
cured within a period of thirty (30) days and the continuance of which for the
period required for cure will not subject Landlord (or any of its directors,
officers, shareholders, partners, agents or employees) to the risk of criminal
or civil liability or foreclosure of any superior mortgage or any other lien on
the Premises, if Tenant shall not duly institute within such 30 day period and
promptly and diligently prosecute to completion all steps necessary to remedy
the same; or

                           13.1.3 The occurrence of any event or the arising of
any contingency whereby this Lease, any interest in it, the estate thereby
granted or, any portion thereof, or the unexpired balance of the Term would by
operation of law or otherwise devolve upon or pass to any person, firm or
corporation other than Tenant, except as expressly permitted by Section 11.

                  13.2 Upon the occurrence of any Event of Default, the Landlord
may exercise any one or more of the following remedies, in addition to all other
remedies provided in this Lease and by law or in equity:

                           13.2.1 The Landlord may, by written notice to Tenant,
accelerate all rental and other sums due or to become due hereunder, which shall
thereupon be immediately due and payable in full.

                           13.2.2 The Landlord may give the Tenant a notice (the
"Termination Notice") of its intention to terminate this Lease and, upon the day
specified in the Termination Notice, this Lease and the term and estate hereby
granted shall expire and terminate and all rights of the Tenant under this Lease
shall expire and terminate, but the Tenant shall remain liable for damages as
hereinafter set forth. Notwithstanding the foregoing, the Landlord may institute
dispossess proceedings for non-payment of rent, distraint or other proceedings
to enforce the payment of rent without giving the Termination Notice.

                  13.3 Upon any such termination or expiration of this Lease, or
other termination of Tenant's possession under this Lease, the Tenant shall
peaceably quit and surrender the Premises to the Landlord, and the Landlord or
Landlord's agents and employees may without further notice immediately or at any
time thereafter enter upon or re-enter the Premises, or any part thereof, and
possess or repossess itself or themselves thereof either by summary dispossess
proceedings, ejectment, any suitable action or proceeding at law, agreement,
force or otherwise, and may dispossess and remove Tenant and all other persons
and property from the Premises without being liable to indictment, prosecution,
or damages therefor, and may repossess the same, and may remove any persons
therefrom, to the end that Landlord may have, hold and enjoy the Premises again.
The words "enter" or "reenter", "possess" or "repossess" as used in this Lease
are not restricted to their technical legal meaning.

                  13.4 In the event of any breach or threatened breach by Tenant
of any of the agreements, terms, covenants or conditions contained in this
Lease, Landlord shall be entitled to enjoin such breach or threatened breach and
shall have the right to invoke any right and remedy allowed at law or in equity
or provided in this Lease.

                                      -17-


<PAGE>   20
                  13.5 Each right and remedy of the Landlord provided for in
this Lease shall be cumulative and shall be in addition to every other right or
remedy provided for in this Lease or now or hereafter existing at law or in
equity or by statute or otherwise, and the exercise or beginning of the exercise
by the Landlord of any one or more of the rights of remedies provided for in
this Lease or now or hereafter existing at law or in equity or by statute or
otherwise shall not preclude the simultaneous or later exercise by Landlord of
any or all other rights or remedies provided for in this Lease or now or
hereafter existing at law or in equity or by statute or otherwise.

                  13.6 Suit or suits for the recovery of damages, or any
installments thereof, may be brought by Landlord from time to time at its
election, and nothing contained in this Lease shall be deemed to require
Landlord to postpone suit until the date when the term of this Lease would have
expired if it had not been so terminated under the provisions of this Section 13
or under any provision of law, or had Landlord not re-entered the Premises.
Nothing contained in this Lease shall be construed to limit or preclude recovery
by Landlord against Tenant of any sums or damages to which Landlord may lawfully
be entitled by reason of any default under this Lease or otherwise on the part
of Tenant. Nothing contained in this Lease shall be construed to limit or
prejudice the right of Landlord to prove and obtain as liquidated damages by
reason of the termination of this Lease or reentry on the Premises for the
default of Tenant an amount equal to the maximum allowed by any statute or rule
of law in effect at the time when, and governing the proceeding in which, such
damages are to be proved.

                  13.7 Upon the occurrence of an Event of Default, the Tenant
hereby authorizes and empowers the Landlord, at the Landlord's option (without
imposing any duty upon the Landlord to do so), to re-enter the Premises as agent
for the Tenant or any successor-occupant of the Premises under the Tenant, or
for its own account or otherwise, and to relet the same for any term expiring
either prior to the original expiration date hereof, or simultaneously
therewith, or beyond such date, and to receive rent and apply same to pay all
reasonable fees and expenses incurred by the Landlord as a result of such Event
of Default, including without limitation any legal fees and expenses arising
therefrom, the cost of re-entry and re-letting and to the payment of the rent
and other charges due hereunder. No entry, re-entry or reletting by the
Landlord, whether by summary proceedings, termination or otherwise, shall
discharge the Tenant from its liability to the Landlord as set forth herein;
provided, however, Tenant shall not be responsible for any physical damage to or
deterioration of the Premises to the extent (a) caused by Landlord or any party
to whom the Premises are relet, or (b) occurring after vacation of the entire
Premises by Tenant.

                  13.8 The Tenant shall be liable for all costs, charges and
expenses, including reasonable attorney's fees and disbursements, incurred by
the Landlord by reason of the occurrence of any Event of Default or the exercise
of the Landlord's remedies with respect thereto.

                  13.9 Landlord shall have a lien upon and a security interest
in all of Tenant's property located on the Premises for the rent, any and all
additional rent, for all other payments to be made by Tenant to Landlord or any
other person hereunder, for Tenant's performance of all of Tenant's obligations
pursuant to this Lease and for all of Tenant's breaches thereof, provided,
however, if no default by Tenant hereunder shall have occurred and be
continuing, Landlord shall subordinate such lien to the lien on Tenant's
property held by a bona fide lender.

                                      -18-


<PAGE>   21
                  13.10 The Tenant, for the Tenant, and on behalf of any and all
persons claiming through or under the Tenant, including creditors of all kinds,
does hereby waive and surrender all rights and privileges which they or any of
them might have under or by reason of any present or future law, to redeem the
Premises or to have a continuance of this Lease for the Term after being
dispossessed or ejected therefrom by the valid order of a court of competent
jurisdiction.

                  13.11 The provisions of this Section 13 shall survive the
expiration or termination of this Lease.

         14.      BANKRUPTCY AND INSOLVENCY

                  14.1 Neither Tenant's interest in this Lease, nor any estate
hereby created in Tenant nor any interest herein or therein, shall pass to any
trustee or receiver or assignee for the benefit of creditors or otherwise by
operation of law except as may specifically be provided pursuant to the United
States Bankruptcy Code.

                  14.2 In the event the interest or estate created in Tenant
hereby shall be taken in execution or by other process of law, or if Tenant is
adjudicated insolvent by a court of competent jurisdiction other than the United
States Bankruptcy Court, or if a receiver or trustee of the property of Tenant
shall be appointed by reason of the insolvency or inability of Tenant to pay its
debts, or if Tenant shall file a voluntary petition or proceeding under any
federal or state law dealing with bankruptcy, insolvency, reorganization or any
other adjustment of its debts, or if any assignment shall be made of the
property of Tenant for the benefit of creditors, then this Lease and all rights
of Tenant hereunder shall automatically cease and terminate with the same force
and effect as though the date of such event were the date originally set forth
herein and fixed for the expiration of the Term, and Tenant shall vacate and
surrender the Premises but shall remain liable as herein provided.

                  14.3 Tenant shall not cause or give cause for the appointment
of a trustee or receiver of the assets of Tenant and shall not make any
assignment for the benefit of creditors or become or be adjudicated insolvent,
or file any voluntary petition or commence any voluntary proceeding in respect
thereto. The allowance of any petition under any insolvency law except under the
Bankruptcy Code or the appointment of a trustee or receiver of Tenant or of its
assets, shall be conclusive evidence that Tenant caused, or gave cause therefor,
unless such allowance of the petition, or the appointment of a trustee or
receiver, is vacated within sixty (60) days after such allowance or appointment.
Any act described in this Section 14.3 shall be deemed a material breach of
Tenant's obligations hereunder, and this Lease shall thereupon automatically
terminate. Landlord does, in addition, reserve any and all other remedies
provided in this Lease or by law or in equity.

                  14.4 Upon the filing of a petition by or against Tenant under
the United States Bankruptcy Code:

                           14.4.1 Tenant, as debtor and as debtor in possession,
and any trustee who may be appointed agree as follows: (a) to perform each and
every obligation of Tenant under this Lease, until such time as this Lease is
either rejected or assumed by order of the United States Bankruptcy Court; and

                                      -19-


<PAGE>   22
(b) to pay monthly in advance on the first day of each month as reasonable
compensation for use and occupancy on the Premises an amount equal to all rent,
additional rent and other charges otherwise due pursuant to this Lease; and (c)
to reject or assume this Lease within 60 days of the filing of such petition
under the Bankruptcy Code; and (d) to give Landlord at least 45 days' prior
written notice of any proceeding relating to any assumption of this Lease; and
(e) to give Landlord at least 30 days' prior written notice of any abandonment
of the Premises; any such abandonment to be deemed a rejection of this Lease;
and (f) to do all other things of benefit to Landlord otherwise required under
the Bankruptcy Code; and (g) to be deemed to have rejected this Lease in the
event of the failure to comply with any of the above, and (h) to have consented
to the entry of an order by an appropriate United States Bankruptcy Court
providing all of the above, waiving notice and hearing of the entry of same.

                           14.4.2 No Event of Default or default of this Lease
by Tenant, either prior to or subsequent to the filing of such a petition, shall
be deemed to have been waived unless expressly done so in writing by Landlord.

                           14.4.3 Included within and in addition to any other
conditions or obligations imposed upon Tenant or its successor in the event of
assumption and/or assignment are the following: (a) the cure of any monetary
defaults and the reimbursement of pecuniary loss within not more than 30 days of
assumption and/or assignment; and (b) the use of the Premises as set forth in
Section 3 of this Lease; and (c) the prior written consent of any mortgagee to
which this Lease has been assigned as collateral security; and (d) the Premises,
at all times, remains a single leasehold structure and no physical changes of
any kind may be made to the Premises unless in compliance with the applicable
provisions of this Lease.

                  14.5 Notwithstanding anything to the contrary contained in
this Lease, if any of the bankruptcy events described in this Article 14 occurs
and any and all such events are discharged or withdrawn in full within sixty
(60) days following the occurrence thereof, the occurrence of such events(s)
shall not constitute an Event of Default.

         15.      ENTRY BY LANDLORD, ETC.

                  15.1 Tenant shall permit Landlord and its authorized
representatives to enter the Premises, or any part thereof, at all reasonable
times for the purpose of curing defaults of Tenant in accordance with, and after
such notice (if any) as may be required by, the provisions of Section 13. In
addition, Tenant, after reasonable prior notice, shall permit Landlord and fee
mortgagees and their respective authorized representatives, to enter the
Premises, or any part thereof, at all reasonable times during usual business
hours on reasonable prior notice for the purpose of inspecting the same,
provided such persons shall comply with Tenant's reasonable confidentiality
procedures.

                  15.2 Landlord shall also have the right, after reasonable
prior notice, to enter the Premises, or any part thereof, at all reasonable
times during usual business hours for the purpose of showing the same to
appraisers, prospective lenders and prospective purchasers or fee mortgagees
thereof and, at any time within six months prior to the expiration of this
Lease, for the purpose of showing the same to prospective tenants.

                                      -20-


<PAGE>   23
                  15.3 If, at any time during which Landlord or any fee
mortgagee shall have the right to enter the Premises, admission to the Premises
for the purposes aforesaid cannot be obtained, they, or their respective agents,
servants, employees, contractors and representatives, may (on such notice, if
any, as may be reasonable under the circumstances, which notice need not be in
writing if an emergency exists in respect of the protection of the Premises)
enter the Premises and accomplish such purpose. Any entry on the Premises by
Landlord or a fee mortgagee shall be at such times and by such methods (other
than in the event of such an emergency) as will cause as little inconvenience,
annoyance, disturbance, loss of business or other damage to Tenant as may be
reasonably practicable in the circumstances.

         16.      COVENANT OF QUIET ENJOYMENT

                  16.1 Landlord covenants that Tenant, on paying the rents and
performing and observing all the covenants and conditions contained in this
Lease, shall and may peaceably and quietly have, hold and enjoy the Premises
during the Term, subject, however, to the terms of this Lease and to the matters
to which this Lease is subject.

         17.      EFFECT OF CONVEYANCE; LIMITS OF LIABILITY OF LANDLORD,
                  DEFINITION OF "LANDLORD"

                  17.1 The term "Landlord" as used in this Lease shall mean and
include only the owner or owners (and any mortgagee in possession) at the time
in question of the fee estate in the Premises, so that in the event of any
transfer or transfers (by operation of law or otherwise) of the title to such
fee estate, Landlord herein named (and in case of any subsequent transfers or
conveyances, the then transferor) shall be and hereby is automatically freed and
relieved, from and after the date of such transfer or conveyance, of all
liability in respect of the performance of any covenants or obligations on the
part of Landlord contained in this Lease thereafter to be performed, provided
that (a) any funds in which Tenant has an interest, in the hands of such
Landlord or the then transferor at the time of such transfer, shall then be
turned over to the transferee, (b) any amount then due and payable to Tenant by
Landlord or the then transferor under any provision of this Lease shall then be
paid to Tenant, and (c) the transferee shall be deemed to have assumed and
agreed to perform, subject to the limitations of this Section 17 (and without
further agreement between or among the parties or their successors in interest,
and/or the transferee) and only during and in respect of the transferee's period
of ownership, all of the terms, covenants and conditions in this Lease contained
on the part of Landlord thereafter to be performed, which terms, covenants and
conditions shall be deemed to "run with the land," it being intended hereby that
the terms, covenants and conditions contained in this Lease on the part of
Landlord shall, subject as aforesaid, be binding on Landlord, its successors and
assigns, only during and in respect of their respective successive periods of
ownership.

                  17.2 It is specifically understood and agreed that in the
event of a breach by Landlord of any of the terms, covenants or conditions of
this Lease to be performed by Landlord, the monetary liability of Landlord in
relation to any such breach shall be limited to the equity of Landlord in the
Premises, including Landlord's interest in this Lease, moneys held by any
trustee for the benefit of Landlord and any sums at the time due or to become
due under this Lease and insurance proceeds (and the term "equity" as used in
this Section 17.2 shall be deemed to include all of the foregoing). Tenant

                                      -21-


<PAGE>   24
shall look only to Landlord's equity in the Premises for the performance and
observance of the terms, covenants and conditions of this Lease to be performed
or observed by Landlord and for the satisfaction of Tenant's remedies for the
collection of any award, judgment or other judicial process requiring the
payment of money by Landlord in the event of a default in the full and prompt
payment and performance of any of Landlord's obligations hereunder. No property
or assets of Landlord, other than Landlord's equity in the Premises, shall be
subject to lien, levy, execution or other enforcement procedure for the
satisfaction of Tenant's remedies in any matter whatsoever arising out of or in
any way connected with this Lease or any of its provisions, any negotiations in
connection therewith, the relationship of Landlord and Tenant hereunder or the
use and occupancy of the Premises; and in confirmation of the foregoing, if any
such lien, levy, execution or other enforcement procedure so arising shall be on
or in respect of any property or assets of Landlord, other than Landlord's
equity in the Premises, Tenant shall promptly release any property or assets of
Landlord, other than Landlord's equity in the Premises, from such lien, levy,
execution or other enforcement procedure by executing and delivering, at
Tenant's expense and without charge to Landlord, any instrument or instruments,
in recordable form, to that effect prepared by Landlord (but any such instrument
of release shall not release any such lien, levy, execution or other endorsement
procedure on or in respect of Landlord's equity in the Premises).

         18.      SURRENDER, HOLDING OVER BY TENANT

                  18.1 On the expiration or termination of this Lease, Tenant
shall peaceably and quietly leave, surrender and deliver to Landlord the
Premises, and Tenant shall remove all Alterations which may have been made upon
the Premises and tangible personal property of any kind or nature which Tenant
may have installed or affixed on, in or to the Premises, except as provided in
Section 9.4, and Tenant shall remove all of the foregoing to be surrendered in
good, substantial and sufficient repair, order and condition, reasonable use,
wear and tear casualty and condemnation damage and hazardous substances
(hereinafter defined) for which Tenant is not responsible excepted and free of
occupants. If as a result of or in the course of the removal of Alterations and
Tenant's property any damage occurs to the Premises, Tenant shall pay to
Landlord the reasonable cost of repairing such damage. If Tenant fails to so
quit and surrender the Premises upon the expiration or termination of this
Lease, it shall be liable to Landlord for the damages caused to Landlord by
reason of such holdover and it is agreed that such damages shall be liquidated
in an amount equal to double the rental rate provided for in this Lease,
prorated based upon the period of holdover. The acceptance by Landlord of such
damages or rental after termination of this Lease shall not be construed as
consent to continued occupancy, nor shall such holding over constitute a renewal
or extension of this Lease. Landlord may, at its option, construe such holding
over as a tenancy from month to month, subject to all the terms, covenants and
conditions of this Lease, except as to duration thereof, and in that event the
Tenant shall pay rent and additional rent in advance at the rate provided in
this Lease as effective during the last month thereof Tenant's obligation to
observe or perform this covenant shall survive the expiration or termination of
this Lease.

         19.      CURING DEFAULTS, FEES AND EXPENSES

                  19.1 If Tenant shall fail to pay any imposition or to make any
other payment required hereunder or shall otherwise default in the full and
prompt performance of any covenant contained herein and to be performed on
Tenant's part, Landlord, without being under any obligation to do so and without

                                      -22-


<PAGE>   25
thereby waiving such default, may, after 30 days' notice to Tenant, or such
notice (which may be oral) as may be reasonable in the circumstances if any
emergency exists in respect of the protection of the Premises, make such payment
or perform such covenant for the account and at the expense of Tenant and may
enter upon the Premises for any such purpose and take all action thereon as may
be necessary therefor.

                  19.2 All sums so paid by Landlord in connection with the
payment or performance by it of any of the obligations of Tenant hereunder and
all actual and reasonable costs, expenses and disbursements paid in connection
therewith or enforcing or endeavoring to enforce any right under or in
connection with this Lease, or pursuant to law, together with interest thereon
at the rate of 12% per annum (or, if lower, the maximum rate permitted by law)
from the respective dates of the making of each such payment shall constitute
additional rent payable by Tenant under this Lease and shall be paid by Tenant
to Landlord within 15 days after demand by Landlord. Landlord shall not be
limited, in the proof of any damages which Landlord may claim against Tenant
arising out of or by reason of Tenant's failure to provide and keep in force
insurance as required by Section 5 hereof, to the amount of the insurance
premium or premiums not paid or incurred by Tenant.

                  19.3 If Landlord shall fail to perform its covenants as to
insurance under Section 5.1 or as to repairs and maintenance under Section 9.1,
and Landlord shall not institute measures to remedy the same within 30 days
after Tenant shall have given to Landlord written if notice specifying the
failure and thereafter promptly and diligently complete the remedy, Tenant,
without being under any obligation so to do and without thereby waiving such
default, may, perform such covenant for the account and at the expense of
Landlord and may deduct the actual and reasonable cost thereof from the next
rental payment(s) coming due under this Lease.

                  19.4 The provisions of this Section 19 shall survive the
expiration or termination of this Lease.

         20.      MECHANICS' AND OTHER LIENS

                  20.1 If any mechanic's, laborer's or materialman's lien shall
at any time be filed against the Premises or any part thereof with respect to
any work done, or labor or materials furnished, or caused to be furnished, by
Tenant or anyone claiming through or under Tenant, or any judgment, attachment
or levy is filed or recorded against the Premises or any part thereof by anyone
claiming through or under Tenant, Tenant, within 30 days after the date on which
Tenant receives notice of such filing, shall cause the same to be discharged of
record by payment, deposit, bond, order of a court of competent jurisdiction or
otherwise. If Tenant shall fail to cause such lien, judgment, attachment or levy
to be discharged within the period aforesaid, then, in addition to any other
right or remedy, Landlord may, but shall not be obligated to, discharge the same
by bonding proceedings, if permitted by law (and if not so permitted, by deposit
in court). Any amount so paid by Landlord, including all reasonable costs and
expenses paid by Landlord in connection therewith, together with interest
thereon at the rate of 12% per annum (or, if lower, the maximum rate permitted
by law) from the respective dates of Landlord's so paying any such amount, cost
or expense, shall constitute additional rent payable by Tenant under this Lease
and shall be paid by Tenant to Landlord on demand.

                                      -23-


<PAGE>   26
                  20.2 Nothing contained in this Lease shall be deemed or
construed in any way as constituting the consent or request of Landlord, express
or implied, by inference or otherwise, to any contractor, subcontractor, laborer
or materialman for the performance of any labor or the furnishing of any
materials for any specific improvement, alteration to or repair of the Premises,
or any part thereof, or as giving Tenant any right, power or authority to
contract for or permit the rendering of any services or the furnishing of any
materials that would give rise to the filing of any mechanic's liens against
Landlord's interest in the Premises. Notice is hereby given that Landlord shall
not be liable for any labor or materials furnished or to be furnished to Tenant
upon credit, and that no mechanic's or other lien for any such labor or
materials shall attach to or affect the reversion or estate or interest of
Landlord in and to the Premises.

         21.      SIGNS, ADDRESS

                  21.1 Tenant, subject to all Legal Requirements, may place on
the exterior of the Premises a sign or signs of such size, design and color, and
in such location, as shall be approved in advance in writing by Landlord.

                  21.2 Landlord shall have the right to (a) install, maintain,
move, remove and reinstall advertising signs on and off the Premises (other than
on the Building) or signs identifying the Premises for sale or for rent, and (b)
change the address of the Premises.

         22.      WAIVERS AND SURRENDERS TO BE IN WRITING; RIGHT TO TERMINATE

                  22.1 The receipt, acceptance and/or deposit (including the
endorsement of any check) of full or partial rent by Landlord with knowledge of
any breach of this Lease by Tenant or of any default on the part of Tenant in
the observance or performance of any of the provisions or covenants of this
Lease shall not be deemed to be a waiver of any such provision, covenant or
breach of this Lease. No waiver or modification by either party, unless in
writing and signed by the waiving party, shall discharge or invalidate any
provision or covenant or affect the right of the waiving party to enforce the
same in the event of any subsequent breach or default. The failure on the part
of Landlord to insist in any one or more instances upon the strict performance
of any of the provisions or covenants of this Lease, or to enforce any covenant
or provision herein contained consequent upon a breach of any provision of this
Lease shall not affect or alter this Lease or be construed as a waiver or
relinquishment for the future of such one or more provisions or covenants or of
the right to insist upon strict performance or to exercise such right, remedy or
election, but the same shall continue and remain in full force and effect with
respect to any then existing or subsequent breach, act or omission whether of a
similar nature or otherwise. The receipt, acceptance and/or deposit (including
the endorsement of any check) by Landlord of any rent or any other sum of money
or any other consideration hereunder paid by Tenant after the termination, in
any manner, of the Term, or after the giving by Landlord of a termination
notice, shall not reinstate, continue or extend the Term, or destroy, or in any
manner impair the efficacy of any such termination notice as may have been given
hereunder by Landlord to Tenant prior to the receipt, acceptance and/or deposit
(including the endorsement of any check) of any such rent, or other sum of money
or other consideration, unless so agreed to in writing and signed by Landlord.
Neither acceptance of the keys nor any other act or thing done by Landlord or
any agent or employee shall be deemed to be an acceptance of a surrender

                                      -24-


<PAGE>   27
of the Premises, or any part thereof, excepting only an agreement in writing
signed by Landlord. No payment by Tenant or receipt, acceptance and/or deposit
(including the endorsement of any check) by Landlord of a lesser amount than the
correct rent shall be deemed to be other than a payment on account, nor shall
any endorsement or statement on any check be deemed to effect or evidence an
accord and satisfaction, and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance or pursue any other remedy
in this Lease provided.

         23.      COVENANTS BINDING ON SUCCESSORS AND ASSIGNS

                  23.1 All of the terms, covenants and conditions of this Lease
shall apply to and inure to the benefit of and be binding upon the respective
heirs, executors, administrators, successors and assigns of the parties, except
as expressly otherwise herein provided. If there shall be more than one Tenant,
they shall all be bound jointly and severally by the terms, covenants and
agreements herein contained. No rights, however, shall inure to the benefit of
any assignee or subtenant of Tenant unless the assignment or subletting, as the
case may be, has been made in accordance with the provisions set forth in
Section 11.

         24.      RESOLUTION OF DISPUTES

                  24.1 The parties hereto waive a trial by jury (to the extent
permitted by law) on any and all issues arising in any action or proceeding
between them or their successors under or in any way connected with this Lease
or any of its provisions, any negotiations in connection therewith, the
relationship of Landlord and Tenant, or Tenant's use or occupation of the
Premises, including any claim of injury or any emergency or other statutory
remedy with respect thereto. The provisions of this Section shall survive the
expiration or termination of this Lease.

         25.      NOTICES

                  25.1 Any statement, demand, election, request, notice,
approval, consent or other communication, (collectively, "notice") authorized or
required by this Lease must be in writing and shall be deemed given when
delivered by telecopier, by special courier, by hand, against receipt, or sent
postage prepaid by United States certified mail, return receipt requested, in a
prepaid wrapper, addressed to the intended recipient at the address provided at
the head of this Lease (except that after the commencement of the Term any
notice to Tenant shall be addressed to Tenant at the Premises) or such other
address as either party may designate by notice given from time to time in
accordance with this Section. Any notices by a party signed by counsel to such
party shall be deemed a notice signed by such party. Notice shall be deemed
given on the date of delivery or the date delivery is refused.

         26.      DEFINITIONS; HEADINGS; CONSTRUCTION OF LEASE

                  26.1 For the purposes of this Lease, unless the context
otherwise requires:

                           26.1.1 The term "Landlord's agents" shall be deemed
to include agents, servants, employees and contractors of landlord.

                                      -25-


<PAGE>   28
                           26.1.2 The term "person" shall be deemed to include
individuals, corporations, partnerships, firms, associations and any other legal
or business entities.

                           26.1.3 The term "unavoidable delays" shall mean any
and all delays beyond the reasonable control of the party otherwise responsible,
including delays caused by the other party, governmental restrictions,
governmental preemption, strikes, labor disputes, lockouts, shortage of labor or
materials, acts of God, enemy action, civil commotion, riot or insurrection,
fire, holdover tenancies or other unavoidable casualty or any other cause beyond
the responsible party's control, but shall not include delays occasioned by lack
of money.

                           26.1.4 The terms "include," "including" and "such as"
shall be construed as if followed by the phrase "without being limited to". The
words "herein," "hereof," "hereby," "hereunder" and words of similar import
shall be construed to refer to this Lease as a whole and not to any particular
Section hereof unless expressly so stated.

                  26.2 The various terms which are defined in other Sections of
this Lease shall have the meanings specified in such other Sections for all
purposes of this Lease unless the context otherwise requires.

                  26.3 The Section headings in this Lease and the Table of
Contents prefixed to this Lease are inserted only as a matter of convenience and
reference and are not to be given any effect whatsoever in construing this
Lease.

                  26.4 All pronouns and any variations thereof shall be deemed
to refer to the masculine, feminine, neuter, singular or plural, as the identity
of the person or persons or entity or entities in question may require.

                  26.5 Anything in this Lease to the contrary notwithstanding,
in the event that (a) any act or omission of Tenant shall require the consent or
approval of Landlord pursuant to this Lease, and (b) this Lease provides that
Landlord shall not unreasonably withhold such consent or approval, and (c)
Tenant shall claim that Landlord has unreasonably withheld such consent or
approval, then the sole recourse of Tenant upon the inability of the parties to
agree shall be to bring an appropriate action in a court of competent
jurisdiction against Landlord solely to issue a determination of whether the
withholding of such consent or approval by Landlord is "reasonable" or
"unreasonable", and Tenant shall not be entitled to any damages or other remedy
other than specific performance for the issuance by Landlord of such consent or
approval if a court of competent jurisdiction shall determine that such
withholding of consent was unreasonable.

         27.      FORCE MAJEURE

                  27.1 Whenever the performance of any obligation of either
party hereunder shall be delayed, hindered or prevented due to unavoidable
delays, the time for performance of such obligation, unless other provision is
expressly made therefor in this Lease, shall be extended, subject to and limited
by the following conditions:

                                      -26-


<PAGE>   29
                           27.1.1 The extension shall be for no longer a period
than the delay actually so occasioned;

                           27.1.2 The party delayed shall promptly notify the
other party of the cessation of such unavoidable delay and of the extent of the
delay which the party delayed claims was occasioned thereby;

                           27.1.3 No statement of fact contained in any such
notice shall be binding on the party receiving such notice; and

                           27.1.4 In no event shall lack of funds be deemed a
matter beyond either party's control.

         28.      BROKERAGE

                  28.1 Landlord and Tenant each warrant and represent to the
other that either: (i) if any broker is listed here: NONE, such broker is the
only broker who was instrumental in bringing about this Lease; or (ii) if the
word "NONE" appears in the line in clause (i), no broker was instrumental in
bringing about this Lease. Each party (the "breaching party") hereto agrees to
indemnify, defend and hold the other party (the "non-breaching party") harmless
with respect to any judgments, damages, legal fees, court costs and any and all
liabilities of any nature whatsoever incurred by the non-breaching party arising
from a breach of the applicable warranty and representation by the breaching
party. The provisions of the foregoing representation and indemnity shall
survive the expiration or termination of this Lease.

         29.      MISCELLANEOUS PROVISIONS

                  29.1 This Lease sets forth all the covenants, promises,
agreements, conditions and understandings between Landlord and Tenant concerning
the Premises. There are no oral agreements or understandings between the parties
hereto affecting this Lease, and this Lease supersedes and cancels any and all
previous negotiations, arrangements, agreements and understandings, if any,
between the parties hereto with respect to the subject matters hereof, and none
thereof shall be used to interpret or construe this Lease. Except as otherwise
herein expressly provided, no subsequent alteration, amendment, change, waiver
or addition to or of any provision of this Lease, nor any surrender of the Term,
shall be binding upon Landlord or Tenant unless reduced to writing and signed by
the party against whom the same is charged or such party's successors in
interest.

                  29.2 Neither this Lease nor a memorandum thereof shall be
recorded by either party without the written consent of the other.

                  29.3 This Lease shall be governed in all respects by the laws
of the State of New Jersey.

                  29.4 This Lease may be executed in several counterparts, each
of which shall be an original, but all of which shall constitute one and the
same instrument.


                                      -27-


<PAGE>   30
                  29.5 All obligations of Tenant which shall not have been
performed prior to the end of the Term or which by their nature involve
performance, in any particular, after the end of the Term, or which cannot be
ascertained to have been fully performed until after the end of the Term, shall
survive the expiration or termination of the Term.

                  29.6 If any term, covenant, condition, or provision of this
Lease or the application thereof to any person or circumstance shall, at any
time or to any extent, be invalid or unenforceable, the remainder of this Lease,
or the application of such term or provision to persons or circumstances other
than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each term, covenant, condition, and provision of this
Lease shall be valid and be enforced to the fullest extent permitted by law.

         30.      COMPLIANCE WITH ENVIRONMENTAL LAWS

                  30.1 Tenant shall, at Tenant's sole cost and expense, comply
with the requirements of any Federal, state, county, municipal or other
governmental law, ordinance, rule, regulation, requirement and/or directive
pertaining to the environment (an "Environmental Law" or "Environmental Laws"),
including, but not limited to, the New Jersey Spill Compensation and Control Act
(N.J.S.A. 58:10-23.11 et seq.); the New Jersey Water Pollution Control Act
(N.J.S.A. 58:10A-1 et seq.); the Worker and Community Right To Know Act
(N.J.S.A. 34:5A-1 et seq.); the Resource Conservation and Recovery Act of 1976
(42 U.S.C. Section 6901 et seq.); the Comprehensive Environmental Response
Compensation and Liability Act of 1980 (42 U.S.C. Section 9601 et seq.); and the
Industrial Site Recovery Act (N.J.S.A. 13:1 K-6 et seq.) ("ISRA") arising out of
or relating to Tenant's operations at, use or occupancy of the Premises. In this
regard, Tenant shall, at Tenant's sole cost and expense, make all submissions
to, provide all information to and comply with all requirements of any
governmental authority. Should said governmental authority determine that action
is necessary to cleanup, remove and/or eliminate any spills or discharges of
Hazardous Substances (hereinafter defined), subject to the provisions of Section
30.7 of this Lease, Tenant agrees to take all actions as required by any
government agency to remove and clean-up said Hazardous Substances. As used
herein, "Hazardous Substances" means any substance that is toxic ignitable,
reactive, or corrosive and that is regulated by any local government, the State
of New Jersey or the United States government, any and all material or
substances that are defined as "hazardous waste," "extremely hazardous waste,"
or a "hazardous substance" pursuant to state, federal, or local government law,
and any asbestos, polychlorobiphinyls (PCBs), and petroleum. Tenant's
obligations pursuant to this Section shall arise whenever required by any
appropriate governmental agency, including, but not limited to, any closing,
terminating or transferring of operations at the Premises.

                           30.1.1 Tenant shall obtain, at its sole cost and
expense, at least one hundred twenty (120) days prior to the expiration of the
Term of this Lease or any extension renewal thereof, a written statement by the
New Jersey Department of Environmental Protection ("NJDEP") that the termination
of Tenant's operation at the Premises would not cause ISRA to become applicable
and Tenant shall provide Landlord with a copy of such written statement promptly
upon receipt thereof by Tenant. Tenant shall apply to the NJDEP not later than
six (6) months prior to the expiration of the Term or extensions thereof In the
event the NJDEP determines that Tenant's use of the Premises and its

                                      -28-


<PAGE>   31
subsequent termination of its operation would trigger the requirements of ISRA,
or in the event Tenant is unable or fails to obtain such written statement at
least one hundred twenty (120) days prior to the expiration of this Lease or any
renewal hereof, then Tenant shall promptly comply with ISRA, and shall be
responsible for all expenses and costs in complying with ISRA. Subject to
Section 30.7 herein, Tenant shall be responsible for obtaining a negative
declaration or effecting a clean-up plan prior to the expiration of this Lease
or any renewal thereof in accordance with ISRA. If Landlord is required by the
NJDEP to perform any act in order to obtain said negative declaration or effect
a clean-up plan, Landlord shall comply with same but Tenant shall (subject to
Section 30.7) reimburse Landlord for any and all costs incurred by Landlord,
including, without limitation, attorneys' and engineers' fees, if any.

                           30.1.2 Subject to Section 30.2.3(b), Landlord shall,
at Landlord's cost and expense, comply with ISRA during the Term of this Lease
to the extent that same is necessary as a result of any action or inaction by
Landlord, including but not limited to, any sale or other transfer or change in
ownership of the Premises by Landlord, or sale of the controlling share of
Landlord's assets. Landlord shall indemnify and defend Tenant from and against
any and all liability, loss and expenses, including Tenant's reasonable
attorneys' fees, which Tenant may incur by reason of Landlord's breach of the
provisions of this Section 30.

                           30.1.3(a) At no expense to Landlord, Tenant shall
promptly provide all information reasonably requested by Landlord for
preparation of an application for an ISRA letter of non-applicability, an ISRA
letter of negative declaration or similar applications to evidence compliance
with the provisions of ISRA and/or completion of a Hazardous Substance cleanup
from the state or federal environmental agency having jurisdiction over the
Premises, and affidavits, and shall promptly sign any documents, including
affidavits, in connection with such applications, when reasonably requested by
Landlord.

                           30.1.3(b) Notwithstanding anything to the contrary
contained herein in this Section 30, the party responsible for the obligation to
comply with ISRA or any Environmental Law shall not be required to bear the cost
of any cleanup to the extent the need for such cleanup arises from the acts or
omissions of the other party or its employees, agents and contractors, in which
event such other party shall bear the cost of the cleanup to such extent.

                           30.1.3(c) Landlord and Tenant agree to cooperate with
each other and provide such documents, affidavits and information as may be
reasonably necessary for each of the parties to comply with ISRA.

                           30.1.4 For purposes of this Section, the term
"Environmental Documents" shall mean all environmental documentation concerning
the Premises or its environs, in the possession or under the control of Tenant,
including without limitation all sampling plans, cleanup plans, preliminary
assessment plans and reports, site investigation plans and reports, remedial
investigation plans and reports, remedial action plans and reports or the
equivalent, sampling results, sampling result reports, data, diagrams, charts,
maps, analyses, conclusions, quality assurance/quality control documentation,
correspondence to or from the Element or any other municipal, county, state or
federal governmental authority, submissions to the Element or any other
municipal, county, state or federal governmental

                                      -29-


<PAGE>   32
authority and directives, orders, approvals and disapprovals issued by the
Element or any other municipal, county, state or federal governmental authority.
During the Term and subsequently promptly upon receipt by Tenant or Tenant's
representatives, Tenant shall deliver to Landlord all Environmental Documents
concerning or generated by or on behalf of Tenant, whether currently or
hereafter existing.

                           30.1.5 Tenant shall notify Landlord in advance of all
meetings scheduled between Tenant or Tenant's representatives and NJDEP or any
other environmental authority, and Landlord and Landlord's representatives shall
have the right, without the obligation, to attend and participate in all such
meetings.

                           30.1.6 Subject to the provisions of Section 30.7 of
this Lease, should the element or any other division of the NJDEP or other
governmental authority determine that a Remedial Action Workplan be prepared and
that remediation be undertaken because Hazardous Substances have been spilled,
discharged or placed in, on, under or about the Premises during the Term or any
Revised Term, Tenant shall at Tenant's own expense promptly prepare and submit a
Remedial Action Workplan and, if required, establish a remediation funding
source required by the NJDEP and shall promptly implement the approved Remedial
Action Workplan. In no event shall Tenant's Remedial Action involve engineering
or institutional controls, including without limitation capping, Deed Notice,
Declaration of Restriction or other institutional controls pursuant to PL 1993
(c) 139, and notwithstanding NJDEP's requirements, Tenant's remedial action
shall meet the NJDEP residential remediation standards for soil, surface water
and groundwater. Promptly upon completion of all required investigatory and
remedial activities, Tenant shall restore the affected areas of the Property
from any damage or condition caused by the work, including without limitation
closing, pursuant to law, any wells installed at the Property.

                           30.1.7 At no expense to Landlord, Tenant shall
promptly provide all information requested by Landlord or NJDEP for preparation
of a non-applicability affidavit, de minimis quantity exemption application,
limited conveyance application or other submission and shall promptly sign such
affidavits and submissions when requested by Landlord or NJDEP.

                           30.1.8 Should Tenant obtain a letter of
Non-Applicability or a de minimis quantity exemption from the Element, Landlord
may, at its option, hire a consultant to undertake sampling at the Premises
sufficient to determine whether any Hazardous Substances have been spilled,
discharged or placed in, on or under or about the Premises. Should it be
determined that a Remedial Action Workplan be prepared and that remediation be
undertaken because hazardous substances have been spilled, discharged or placed
in, on, under or about the property during the Term as the result of Tenant's
use, occupancy and operations, Tenant shall at Tenant's own expense promptly
prepare and submit a Remedial Action Workplan and, if required, establish a
remediation funding source required by the NJDEP and shall promptly implement
the approved Remedial Action Workplan. In no event shall Tenant's Remedial
Action involve engineering or institutional controls, including without
limitation capping, Deed Notice, Declaration of Restriction or other
institutional controls pursuant to PL 1993 (c) 139, and notwithstanding NJDEP's
requirements, Tenant's remedial action shall meet the NJDEP residential
remediation standards for soil, surface water and groundwater.


                                      -30-


<PAGE>   33
                           30.1.9 If Tenant (a) fails to obtain either (i) a
Letter of Non-Applicability, (ii) a de minimis quantity exemption, (iii) an
unconditional approval of Tenant's negative declaration, or (iv) a no further
action letter with respect to Tenant's Remedial Action Workplan (collectively
referred to as "ISRA Clearance") from the Element, or fails to remediate the
Premises pursuant to Section 30.1.8 above, prior to the expiration or earlier
termination of the Term, and (b) as a result of Tenant's failure to satisfy the
provision of the foregoing clause (a) Landlord shall not be able to relet or
sell the Premises upon the expiration or earlier termination the Term or any
renewal or extension thereof, then upon the expiration or earlier termination of
the Term or any renewal or extension thereof Landlord shall have the option
either to consider the Lease as having ended or to treat Tenant as a holdover
tenant in possession of the Premises pursuant to Section 18 of this Lease. If
Landlord considers the Lease as having ended, then Tenant shall nevertheless be
obligated to promptly obtain ISRA Clearance or fulfill the obligations set forth
in Section 30.1.8 above, as the case may be. If Landlord treats Tenant as a
holdover tenant in possession of the Premises, then Tenant shall monthly pay to
Landlord basic and additional rental at the rate set forth in Section 18 of this
Lease until such time as Tenant obtains ISRA Clearance, Landlord is able to
relet the Premises or sells the Premises, or Tenant fulfills its obligations
under Section 30.1.8 above, as the case may be, and during the holdover period
all of the terms of this Lease shall remain in full force and effect. In the
event the holdover tenancy ends as a result of Landlord reletting or selling the
Premises, Tenant's obligation to obtain ISRA Clearance or fulfill its
obligations set forth in Section 30.1.8 shall continue until satisfied.

                  30.2 Tenant represents and warrants to Landlord that Tenant
intends to use the Premises for only the use specified in Section 3.1 of this
Lease, which operations have the following Standard Industrial Classification
("S.I.C.") numbers as defined by the most recent edition of the Standard
Industrial Classification Manual published by the Federal Executive Office of
the President, Office of Management and Budget: 2834. Tenant's use of the
Premises shall be restricted to the classifications set forth above. Annexed
hereto as Exhibit A is an affidavit of an officer of Tenant ("Officer's
Affidavit") setting forth Tenant's S.I.C. numbers and a detailed description of
the operations and processes Tenant shall undertake at the Premises, organized
in the form of a narrative report, including a description and quantification of
Hazardous Substances to be generated, manufactured, refined, transported,
treated, stored, handled or disposed of at the Premises. Following commencement
of the Term, Tenant shall notify Landlord by way of a supplemental Officer's
Affidavit as to any changes in Tenant's operation, S.I.C. numbers or use,
generation, manufacture, refining, transportation, treatment, storage, handling
or disposal of Hazardous Substances. Tenant shall also supplement and update the
Officer's Affidavit upon each anniversary of the commencement of the Term and
upon the expiration or earlier termination of the Term. Tenant shall not
commence or alter any operations at the Premises prior to: (i) obtaining all
required operating and discharge permits or approvals, including but not limited
to air pollution control permits and water pollution discharge elimination
system permits from NJDEP, from all governmental or public authorities having
jurisdiction over Tenant's operations or the Premises, and (ii) providing copy
of the permits or approvals to Landlord.

                  30.3 Promptly upon the written request of Landlord, from time
to time, Tenant shall provide Landlord, at Landlord's expense, with an
environmental site assessment or environmental audit report prepared by an
environmental engineering firm acceptable to Landlord to assess with a
reasonable degree of certainty the presence or absence of any Hazardous
Substances and the potential costs in

                                      -31-


<PAGE>   34
connection with abatement, cleanup, or removal of any Hazardous Substances found
on, under, at, within or about the Premises. Upon reasonable notice, which may
be oral, Tenant shall permit Landlord and Landlord's agents, servants and
employees, including but not limited to legal counsel and environmental
consultants and engineers, access to the Premises for the purposes of
environmental inspection and sampling during regular business hours, or during
other hours either by agreement of the parties or in the event of any
environmental emergency. At all times, a representative of Tenant shall
accompany Landlord and his agents, servants and employees during the inspection.
Tenant shall not restrict access to any part of the Premises, and Tenant shall
not impose any conditions to access. In the event that Landlord's environmental
inspection shall include sampling and testing of the Premises, Landlord shall
use reasonable efforts to avoid unreasonably interfering with Tenant's use of
the Premises.

                  30.4 Tenant shall at all times indemnify, defend (with counsel
selected by Landlord) and hold harmless Landlord against and from any and all
claims, suits, liabilities, actions, debts, damages, costs, losses, obligations,
judgments, charges, and expenses caused by Tenant's operation of the Premises,
Tenant's negligence, Tenant's willful misconduct, Tenant's breach of this Lease
or other acts or omissions of Tenant with respect to:

                           30.4.1 Any actual discharge of Hazardous Substances,
or the actual presence of any Hazardous Substances on, in, upon, under, or
affecting the Property, whether or not the same originates or emanates from the
Premises, or any other real estate, including any loss of value of the Premises
as a result of any of the foregoing;

                           30.4.2 Any costs of removal or remedial action
incurred by any governmental authority, any response costs incurred by any other
person or damages from injury to, destruction of, or loss of natural resources,
including reasonable costs of assessing such injury, destruction or loss,
incurred pursuant to any Environmental Laws;

                           30.4.3 Liability for personal injury or property
damage arising under any statutory or common-law tort theory, including, without
limitation, damages assessed for the maintenance of a public or private nuisance
or for the carrying on of an abnormally dangerous activity at or near the
Premises; and/or

                           30.4.4 any other environmental matter affecting the
Premises within the jurisdiction any other federal agency, or any state or local
environmental agency or political subdivision or any court, administrative panel
or tribunal.

         Tenant's obligations pursuant to this Section 30.5 of this Lease shall
arise upon the discovery of any Hazardous Substance, whether or not any other
federal agency or any state or local environmental agency or political
subdivision or any court, administrative panel, or tribunal has taken or
threatened any action in connection with the presence of any Hazardous
Substances.

                  30.5 In the event of any discharge of Hazardous Substances or
the presence of any Hazardous Substance affecting the Property, whether or not
the same originates or emanates from the Premises or any other real estate,
and/or if Tenant shall fail to comply with any of the requirements of the

                                      -32-


<PAGE>   35
Environmental Laws, Landlord may at its election, but without the obligation so
to do, give such notices and/or cause such work to be performed at the Property
and/or take any and all other actions as Landlord shall deem necessary or
advisable in order to abate the discharge of any Hazardous Substance, remove the
Hazardous Substance or cure Tenant's noncompliance.

                  30.6 Notwithstanding anything to the contrary herein
contained, Tenant shall not be responsible for the cleanup, removal or
elimination of any (a) spill or discharge of Hazardous Substances that were
present in, on, under or about the Premises prior to the Commencement Date, or
(b) subsurface soil or groundwater migration of any Hazardous Substances onto
the Premises from an off-site source, provided any of the events or conditions
described in clauses (a) or (b) was not caused or exacerbated by Tenant or any
of its agents, employees, licensees, invitees, contractors or subtenants.

                  30.7 This Section 30 shall survive the expiration or earlier
termination of this Lease. Either party shall have the right of injunctive
relief to enforce any and all of the other parties' obligations under Section 30
of this Lease.

                  30.8 Landlord represents and warrants to Tenant that to
Landlord's knowledge, without investigation, no discharge or spill of Hazardous
Substances in violation of Environmental Laws has occurred on the Premises on or
before the date hereof

                  30.9 Landlord shall notify Tenant in advance of all meetings
scheduled between Landlord or Landlord's representatives and NJDEP or any other
environmental authority pertaining to environmental contamination on the
Premises and Tenant and Tenant's representatives shall have the right, without
the obligation, to attend and participate in all such meetings.

         31.      ENVIRONMENTAL REPORTS

                  31.1 Tenant shall promptly provide Landlord with all
documentation and correspondence provided to NJDEP pursuant to the Worker and
Community Right to Know Act, N.J.S.A. 34:5A-1 et seq. and the regulations
promulgated thereunder.

                  31.2 Tenant shall promptly supply to Landlord all reports and
notices made by Tenant pursuant to the Hazardous Substance Discharge--Reports
and Notices Act, N.J.S.A. 13:1K-15 et seq. and the regulations promulgated
thereunder.

                  31.3 Tenant shall promptly supply Landlord with any notices,
correspondence and submissions made by Tenant to NJDEP, the United State
Environmental Protection Agency, the United States Occupational Safety and
Health Administration, or any other local, state or federal authority which
requires submission of any information concerning Environmental Laws,
environmental matters or hazardous wastes or substances. Tenant shall also
promptly supply Landlord with all documentation, notices and correspondence
delivered to Tenant by any such authority with respect to Environmental Laws,
environmental matters or hazardous wastes or substances.


                                      -33-


<PAGE>   36
         32.      OPTION TO RENEW

                  Provided the following "Conditions to Renewal" are currently
satisfied, Tenant shall have two (2) five (5)-year renewal options (for two (2)
"Renewal Terms"), each to be exercised by the Tenant's giving to the Landlord
written notice to renew at least one (1) year prior to the expiration of the
original Term or incumbent Renewal Term, as the case may be. Upon the Tenant's
giving of any such notice to renew, this Lease shall be automatically renewed
for a Renewal Term of five (5) years, without the necessity of the execution of
any further instrument or instruments, upon the same terms and conditions as are
contained in this Lease, except that (A) the basic rent per annum shall be as
hereinafter specified, and (B) there shall not be included therein any option to
renew this Lease for any additional period beyond the second (2nd) Renewal Term
above referred to.

                  The Conditions to Renewal are that Tenant is in possession and
occupancy of the Premises, that this Lease is not previously canceled or
terminated by either party, as in this Lease provided, by operation of law or
otherwise, and that at both (i) the time of exercising the renewal option and
(ii) the commencement of the Renewal Term, the Tenant is not in default of any
monetary obligation under this Lease or in material default under any
non-monetary obligation under this Lease (without regard to any notice or remedy
period).

                  The basic rent per annum during each Renewal Term shall be an
amount equal to the basic rent payable during the original Term, payable in the
manner as hereinbefore set forth, multiplied by the sum of (1) 100% and (2) the
difference expressed as a percent between the Consumer Price Index (as
hereinafter defined) for the first day of the first full month of the original
Term and the Consumer Price Index for the first day of the month in which the
particular Renewal Term commences. In no event shall the basic rent per annum
during any Renewal Term be less than the greater of the basic rent per annum
during the original Term or the basic rent per annum during any previous Renewal
Term.

                  The Consumer Price Index shall be defined to be the Consumer
Price Index for Urban Wage Earners and Clerical Workers for New York and
Northeastern New Jersey (base years 1982-1984 = 100), published by the Bureau of
Labor Statistics, United States Department of Labor, or successor or substitute
index appropriately adjusted. In the event the Consumer Price Index (or a
successor or substitute index) is not available, a reliable governmental or
other nonpartisan publication evaluating the information theretofore used in
determining the Consumer Price Index shall be used for the computation herein
set forth.

                  If Tenant fails to give to the Landlord written notice of its
exercise of any its options to renew as hereinabove specified, then that option
and all subsequent options shall be null and void.



                                      -34-


<PAGE>   37
                  IN WITNESS WHEREOF, the parties have hereunto set their hands
and seals, or caused these presents to be signed by their proper corporate
officers and their proper corporate seals to be hereto affixed, the day and year
first above written.

LANDLORD

WITNESS:                                 AIRPORT ASSOCIATES


/S/ June Langbern                        By:/S/ Edmund Bennett, Jr. 
- ---------------------------                 -----------------------------------
Name: June Langbern                             Edmund Bennett, Jr. 


/S/ June Langbern                        By:/S/ Ronald Bennett
- ---------------------------                 -----------------------------------
Name: June Langbern                             Ronald Bennett


ATTEST                                   TENANT

                                         VIVUS, INC.


/S/ Leland Wilson                        By:/S/ David C. Yntema
- ---------------------------                 -----------------------------------
Name: Leland Wilson                      Name: David C. Yntema
Title: Chief Executive Officer           Title: Chief Financial Officer



                                      -35-


<PAGE>   38
                                    EXHIBIT A

                               OFFICER'S AFFIDAVIT


STATE OF California:
                              :ss.
COUNTY OF San Mateo:


         David C. Yntema, of full age, being duly sworn according to
law upon his/her oath, deposes and says:

         1.       I am Chief Financial Officer of the Tenant.

         2.       The S.I.C. number(s) for the operations of the Tenant to be
conducted in the Premises is (are) 2835.

         3.       The following is a detailed description of the operations and
processes Tenant shall undertake in the Premises, including a description and
quantification of the Hazardous Substances to be generated, manufactured,
refined, transported, treated, stored, handled or disposed of in the Premises:

         4.       This affidavit is made to induce the Landlord to enter into 
the Lease, knowing the Landlord will rely on the truth of these statements.


                                          /S/ David C. Yntema
                                         


Sworn to and subscribed before 
me this 27th day of January, 1997.



/S/ Valerie Hanson


<PAGE>   39
                                    EXHIBIT B

                               INITIAL ALTERATIONS

[This exhibit will set forth those Alterations that the Landlord will permit
Tenant to perform.]



<PAGE>   40
                                    EXHIBIT C


[This exhibit will set forth those Alterations that Tenant may elect to remove
prior to the expiration of the Term or sooner termination of this Lease.] 






<PAGE>   1
                                                                 EXHIBIT 10.29



                             LEASE AMENDMENT NO. 1


         THIS LEASE AMENDMENT NO. 1 (this "Amendment") is made as of the 15th
day of February, 1997, by and between AIRPORT ASSOCIATES, a New Jersey general
partnership ("Landlord"), and VIVUS, INC., a Delaware corporation ("Tenant").

                             W I T N E S S E T H :

         WHEREAS, Landlord and Tenant are parties to a certain Lease dated as
of January 1, 1997 (the "Lease"), pursuant to which Landlord demised and leased
to Tenant, and Tenant hired and took from Landlord, certain premises located at
735 Airport Road, Lakewood, New Jersey, as further described in the Lease (the
"735 Premises"); and

         WHEREAS, the initially capitalized terms used, but not defined, in
this Amendment shall have the same meanings as the terms defined in the Lease,
directly or by cross-reference, unless the context requires otherwise; and

         WHEREAS, Tenant desires to hire and take from Landlord, and Landlord
desires to demise and lease unto Tenant, the building (consisting of
approximately 50,000 square feet) and land located at 745 Airport Road,
Lakewood, New Jersey (the "745 Premises"), upon the terms and conditions set
forth in this Amendment;

         NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by each
 of the parties hereto,
Landlord and Tenant agree as follows:

         1.      Landlord demises and leases unto Tenant, and Tenant hires and
                 takes from Landlord, the 745 Premises.  This demise by
                 Landlord to Tenant of the 745 Premises shall be upon all the
                 terms, covenants and conditions set forth in the Lease
                 applicable to the 735 Premises, except as amended by this
                 Amendment.  The term of the Lease with respect to the 745
                 Premises shall commence on February 15, 1997 (the "745 Term
                 Commencement Date").  From and after the 745 Term Commencement
                 Date, all references in the Lease, as amended by this
                 Amendment, to (a) the "Premises" shall mean, collectively, the
                 735 Premises and the 745 Premises, and (b) the "Building"
                 shall mean, collectively, the building (consisting of
                 approximately 40,000 square feet) located on the 735 Premises
                 and the building (consisting of approximately 50,000 square
                 feet) located on the 745 Premises.  Tenant covenants and
                 agrees that it will accept the 745 Premises in their existing
                 "as is" state or condition as of the 745 Term Commencement
                 Date and without any representation or warranty, expressed or
                 implied, in fact or by law, by Landlord or its agents and
                 without recourse to Landlord or its agents, as to the nature,
                 condition or useability thereof, the title thereto, or the use
                 or occupancy which may be made thereof, except as specifically
                 provided in the Lease, as amended by this Amendment.

<PAGE>   2
         2.      The expiration date of the original Term of the Lease (set
                 forth in Section 1.2 of the Lease to expire on December 31,
                 2001) is extended until midnight on the day preceding the
                 fifth (5th) anniversary of the 745 Term Commencement Date.

         3.      Commencing as of the 745 Term Commencement Date, Section 2.1
                 of the Lease is hereby amended to read as follows:

                          Tenant shall pay to the Landlord, at the address set
                          forth above or at such other place of which Landlord
                          shall have given Tenant written notice, a basic
                          annual rental of $454,500.00, in monthly installments
                          of $37,875.00 each.

                 The basic annual rental and the additional rent payable by
                 Tenant hereunder shall be, with respect to the 745 Premises,
                 prorated for the unexpired portion of the month in which the
                 745 Term Commencement Date occurs.

         4.      Tenant shall be entitled to construct an enclosed passageway
                 connecting the 735 Premises and the 745 Premises, provided
                 that (a) the same shall be constructed by Tenant at its sole
                 cost and expense, and (b) such passageway shall constitute an
                 "Alteration" to be performed in accordance with all applicable
                 terms and conditions of the Lease, including Section 9.3
                 (including, without limitation, the requirement that all plans
                 and specifications for such passageway shall be subject to the
                 prior written consent of Landlord, which consent shall not be
                 unreasonably withheld or delayed) and Section 9.4 (including,
                 without limitation, the requirement that Tenant shall remove
                 such passageway, and repair any damage caused by the removal
                 of such passageway, prior to the expiration of the Term or
                 sooner termination of this Lease).

         5.      Tenant shall this day deposit with Landlord the sum of
                 $42,083.33 as an additional security deposit to be held by
                 Landlord in accordance with the terms of Section 10 of the
                 Lease, so that upon collection of such amount the total
                 security deposit shall be $75,750.00 (and the reference to
                 "$33,666.67" in the last sentence of Section 10 shall be
                 deleted and "$75,750.00" shall be inserted in lieu thereof.

         6.      Notwithstanding anything to the contrary contained in the
                 Lease, as amended by this Amendment (including, without
                 limitation, the definition of the "Building" set forth in
                 Paragraph 1(b) of this Amendment), for purposes of Section 6
                 of the Lease all references in this section to the "Building"
                 shall be deemed to refer individually to the Building on the
                 735 Premises and the Building on the 745 Premises; it being
                 understood that in the event of any damage to a Building which
                 would allow either Landlord or Tenant to terminate the Lease,
                 such right of termination shall apply only to the Building
                 which was damaged and the Lease shall remain in full force and
                 effect as to the other Building which was not so damaged.
                 
                 
                                       -2-

<PAGE>   3
         7.      Landlord warrants and represents to Tenant that the 745
                 Premises are encumbered by that certain mortgage (the
                 "Manufacturers Mortgage") described in the Subordination,
                 Non-Disturbance and Attornment Agreement dated January 24,
                 1997 (the "Manufacturers Non-Disturbance Agreement") by and
                 among Landlord, Tenant and The Manufacturers Life Insurance
                 Company ("Manufacturers") (and no other mortgage), which
                 Manufacturers Mortgage also encumbers the 735 Premises.
                 Landlord shall use its diligent, good faith efforts to obtain,
                 as soon as reasonably practicable, from Manufacturers an
                 amendment to the Manufacturers Non-Disturbance Agreement, in
                 form and substance reasonably satisfactory to Tenant, to the
                 effect that the terms (a) "Property" and "Demised Premises"
                 set forth in the Manufacturers Non-Disturbance Agreement shall
                 mean, collectively, the 735 Premises and the 745 Premises, and
                 (b) "Lease" set forth in the Manufacturers Non-Disturbance
                 Agreement shall mean the Lease, as amended by this Amendment.

         8.      Landlord and Tenant warrant and represent to each other that
                 they have no dealings with any real estate broker or like
                 agent in connection with the negotiation and execution of this
                 Amendment, and that each knows of no other real estate broker
                 or like agent who is or might be entitled to a commission in
                 connection with this Amendment.  Each party shall indemnify,
                 defend and hold the other party harmless from any breach of
                 the foregoing representation and warranty and/or a claim for a
                 brokerage commission or similar fee by any party claiming to
                 have represented or dealt with the indemnifying party in
                 connection with the negotiation and execution of this
                 Amendment.

         9.      Except as provided herein, the Lease is hereby ratified and
                 shall remain in full force and effect.  Tenant certifies that
                 there exists no default by Landlord of any term, covenant or
                 condition contained in the Lease, as amended hereby.





                                      -3-

<PAGE>   4
         IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment
as of the day and year first above written.

                                            LANDLORD

WITNESS:                                    AIRPORT ASSOCIATES


/S/ June Langbern                              Edmund Bennett, Jr.
______________________________________      By:____________________________
Name: June Langbern                            Edmund Bennett, Jr., Partner


/S/ June Langbern                              /S/ Ronald Bennett, Jr.
______________________________________      By:____________________________
Name: June Langbern                            Ronald Bennett, Jr., Partner





                                            TENANT

ATTEST:                                     VIVUS, INC.

/S/ A. Greg Sturmer                             /S/ David C. Yntema
_____________________________________       By: ___________________________
Name: A. Greg Sturmer                           Name: David C. Yntema
Title: Controller                               Title: Chief Financial Officer




                                      -4-



<PAGE>   1
                                                                 EXHIBIT 10.30




                                                                   March 7, 1997





                                LEASE AGREEMENT



                                 by and between

                      605 EAST FAIRCHILD ASSOCIATES, L.P.,
                        a California limited partnership


                                  ("LANDLORD")


                                      and



                                  VIVUS, INC.,
                             a Delaware corporation


                                   ("TENANT")


                           Dated as of March 7, 1997

<PAGE>   2

<TABLE>
<S>                                                                                                                        <C>
9.  REPAIR AND MAINTENANCE  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    23
    ----------------------      
         (a)     Landlord's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    23
         (b)  Tenant's Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    23
         (c)     Tenant's Obligations for Structural Maintenance  . . . . . . . . . . . . . . . . . . . . . . . . . . . .    24
         (d)  Maintenance Service Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    25
         (e)     Cure Rights  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    25
         (f)  No Liability of Landlord 26

10.      LIENS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    26
         -----     

11.      ASSIGNMENT AND SUBLETTING  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    27
         -------------------------                                                                                             
         (a)     Restriction on Assignment and Subleasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    27
         (b)      Required Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    27
         (c)     Landlord's Response To Proposed Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    27
         (d)     Landlord's Response To Proposed Sublease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    28
         (e)     Bonus Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    28
         (f)     Effect of Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    29
         (g)     Permitted Transfer.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    29
         (h)     Strategic Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    30
         (i)     Assumption by Transferee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    30
         (j)     Effect on Extension Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    31
         (k)     Assignment to Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    31

12.      INSURANCE AND INDEMNIFICATION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    31
         -----------------------------    
         (a)     Release of Landlord. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    31
         (b)     Tenant Indemnity.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    32
         (c)     Tenant's Insurance Requirements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    32
         (d)     Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    34
         (e)     Landlord's Insurance Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    34

13.      WAIVER OF SUBROGATION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    34
         ---------------------   

14.      SERVICES AND UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    35
         ----------------------                                                                                                
         (a)     Landlord's Responsibility  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    35
         (b)     Tenant's Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    35
         (c)     No Excessive Load. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    35
         (d)     No Liability of Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    36

15.      TENANT'S CERTIFICATES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    36
         ---------------------   

16.      HOLDING OVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    36

         ------------                                                                                                         

17.      SUBORDINATION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    37
         -------------                                                                                                        

18.      RULES AND REGULATIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    38
         ---------------------   

19.      RE-ENTRY BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    38
         --------------------   

20.      INSOLVENCY OR BANKRUPTCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    39
         ------------------------

21.      DEFAULT  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    39
         -------  
</TABLE>


<PAGE>   3

<TABLE>
<S>      <C>                                                                                                                <C>
         (a)     Tenant's Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    39
         (b)     Landlord's Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    40
         (c)     Landlord's Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    41

(d)      Tenant's Remedies  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    41

22.      DAMAGE AND DESTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    41
         ----------------------                                                                                                
         (a)     Restoration  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    42
         (b)     Insurance Proceeds.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    42
         (c)     Casualty at End of Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    42
         (d)     Mutual Termination Option; Insured Casualty  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    43
         (e)     Destruction Where Insufficient Proceeds Are Available 43
         (f)     Proceeds and Payments Upon Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    44
         (g)     Rent Abatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    44
         (h)     Waiver of Statutory Provisions.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    44

23.      EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    44
         --------------                                                                                                        
         (a)     Entire Building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    44
         (b)     Partial Building; Termination  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    45
         (c)     Partial Building; Restoration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    45
         (d)     End of Term Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    45
         (e)     Taking of Project  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    45
         (f)     Award. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    46
         (g)     Temporary Taking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    46
         (h)     Waiver of Statutory Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    46

24.      SALE BY LANDLORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    47
         ----------------                                                                                                      

25.      RIGHT OF LANDLORD TO PERFORM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    47
         ----------------------------  

26.      OWNERSHIP OF IMPROVEMENTS; SURRENDER OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    47
         ------------------------------------------------    
         (a)     Ownership of Tenant Improvements & Alterations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    47
         (b)     Delivery and Restoration of Premises.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    47
         (c)     No Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    48

27.      WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    48
         ------                                                                                                                

28.      NOTICES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    49
         -------

29.      TAXES PAYABLE BY TENANT  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    49
         ----------------------- 

30.      ABANDONMENT  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    49
         -----------                                                                                                           

31.      SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    49
         ----------------------                                                                                                

32.      ATTORNEY'S FEES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    50
         ---------------                                                                                                       

33.      LIGHT AND AIR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    50
         -------------   

34.      SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    50
         ----------------   
</TABLE>


<PAGE>   4

<TABLE>
<S>      <C>                                                                                                                <C>
         (a)     Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    50
         (b)     Annual Reduction of Letter of Credit.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    51
         (c)     Return of Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    51
         (d)     Substitution of Cash Collateral  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    52
         (e)     Conversion of Deposit to Loan  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    52

35.      FINANCIAL INFORMATION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    53
         ---------------------                                                                                                 

36.      PARKING.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    53
         -------       

37.      MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    53
         -------------                                                                                                         
         (a)  Defined Terms.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    53
         (b)  Other Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    54
         (c)  Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    54
         (d)  Survival of Indemnities; Immediate Obligation to Defend . . . . . . . . . . . . . . . . . . . . . . . . . .    54

38.      REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    54
         ------------------------------     
         (a)     Landlord's Representations and Warranties  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    54
         (b)     Tenant's Representations and Warranties  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    55

39.      REAL ESTATE BROKERS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    55
         -------------------                                                                                                   
         (a)     Landlord's Payment Obligation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    55
         (b)     No Other Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    55

40.      HAZARDOUS SUBSTANCE LIABILITY  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    55
         -----------------------------                                                                                         
         (a)     Definition of Hazardous Substances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    56
         (b)     Tenant Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    56
         (c)     Landlord Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    56
         (d)     Tenant Covenants.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    57

41.      ARBITRATION OF DISPUTES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    57
         -----------------------                                                                                              

42.      SIGNAGE  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    58
         -------                                                                                                              

43.      OPTION TO RENEW  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    58
         ---------------                                                                                                      

44.      RENT DURING EXTENSION TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    58
         -------------------------- 

45.      SATELLITE ANTENNAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    61
         ------------------ 
</TABLE>


<PAGE>   5
BASIC LEASE INFORMATION

Lease Date:           March 7, 1997

LANDLORD:             605 East Fairchild Associates, L.P.
                      a California limited partnership

Managing Agent:       The Mozart Development Company

Landlord's and Managing Agent's Address:
                      c/o The Mozart Development Company
                      1068 East Meadow Circle
                      Palo Alto, CA  94303

TENANT:               VIVUS, Inc.,
                      a Delaware corporation

Tenant's Address:     FOR NOTICE & BILLING:
                      (prior to physical occupancy of Premises)
                      545 Middlefield Road
                      Suite 200
                      Menlo Park, CA  94025

                      (after initial physical occupancy of Premises)
                      605 East Fairchild Drive
                      Mountain View, CA  94043

Premises:             A two-story building to be constructed on the
                      Land in accordance with this Lease (the "Building").

Building Address:     605 East Fairchild Drive, Mountain View, California

Land:                 The real property described on Exhibit "A-1" attached
hereto.

Project:              The Building, Land and other improvements
                      located in the area shown on Exhibit "A" attached hereto.

Rentable Area of the Premises:    
                      Approximately 53,361 Rentable Square Feet,
                      subject to final measurement pursuant to
                      Paragraph 1(a) [Premises] ("Rentable Area").

<PAGE>   6
Tenant's Use of the Premises:     Tenant may use the Premises for general
                                  office, administration, research and
                                  development (excluding uses which involve the
                                  use of Hazardous Substances as defined in
                                  Paragraph 40 [Hazardous Substance Liability]
                                  beyond levels typical for office tenants
                                  except to the extent specifically hereinafter
                                  permitted), and for no other purposes;
                                  provided, however, any proposed use which
                                  involves the use of Hazardous Substances
                                  beyond levels typical for office tenants
                                  shall be permitted subject to Landlord's
                                  prior written approval, which shall not be
                                  unreasonably withheld so long as (i) the
                                  proposed use does not involve any of the
                                  chemical substances which have been
                                  associated with the investigation and
                                  remediation of those Hazardous Substances
                                  currently existing in the soil and/or
                                  groundwater within the general area of the
                                  Premises, (ii) Landlord is provided an
                                  indemnity from Tenant or an entity (which may
                                  include Tenant, a subtenant of Tenant, or an
                                  affiliate of either of the foregoing)
                                  acceptable to Landlord and any mortgagees,
                                  and in all other respects satisfactory to
                                  Landlord and any mortgagees, indemnifying and
                                  defending Landlord, its mortgagees, and all
                                  of their successors and assigns, agents,
                                  representatives, and affiliates from and
                                  against any and all loss, cost, claim,
                                  liability, or suit arising directly or
                                  indirectly in connection with the use of such
                                  Hazardous Substances, and (iii) any such
                                  Hazardous Substances shall only be used in
                                  laboratory areas.  Notwithstanding the above,
                                  Tenant agrees that any lab use within the
                                  building shall not exceed 10,000 square feet,
                                  and that Landlord shall be allowed to
                                  disapprove lab uses of future sublessees or
                                  assignees in its sole discretion.
                                  Notwithstanding the above, Vivus, Inc. shall
                                  be allowed to use the Hazardous Substances
                                  identified in Exhibit N without any further
                                  indemnity agreement, except as provided in
                                  this Lease, being provided by Vivus, Inc. to
                                  Landlord.





                                      iii

<PAGE>   7
Lease Term:               Commencing on the Occupancy Date and ending on the
                          Expiration Date, with the right to extend for an
                          additional term of seven (7) years in accordance with
                          Paragraph 43 [Option to Renew].

Scheduled Rent Commencement Date:
                          Forty five (45)Days after the Occupancy Date.

Expiration Date:
                           Fifteen (15) years after the Rent Commencement Date.

Rent:                      Base Rent plus Additional Charges.


Monthly Base Rent:         $1.70 per Rentable Square Foot of the
                           Rentable Area of the Premises.

Base Rent Adjustment:      On each anniversary of the Rent Commencement
                           Date, the Monthly Base Rent shall increase by 
                           three percent(3%).

Security Deposit:          Tenant shall provide and maintain a letter of
                           credit or cash collateral in the initial
                           amount of One Million, Seven Hundred and
                           Fifty Thousand Dollars ($1,750,000), which
                           amount may be reduced during the Term in
                           accordance with Paragraph 34 [Security
                           Deposit].

Guarantor of Lease:        None

Landlord's Broker:         None

Tenant's Broker:           Cornish & Carey Commercial

Broker's Fee or Commission Paid By:
                           Landlord, per a separate agreement with
                           broker.

The foregoing Basic Lease Information is hereby incorporated into and made a
part of this Lease.  Each reference in this Lease to any of the Basic Lease
Information shall mean the information hereinabove set forth and shall be
construed to incorporate all of the terms provided under the particular
paragraph pertaining to such information.  In the event of any conflict between
any





                                       iv

<PAGE>   8
Basic Lease Information and any other portion of the Lease, the latter shall
control.

                 LANDLORD:

                                  605 EAST FAIRCHILD ASSOCIATES, L.P.,
                                  a California limited partnership

                                  By:  Mozart-Wilson-Dostart Ventures, Inc.,
                                       a California corporation,
                                       Its General Partner

                                           /S/ Steve Dostart
                                       By: _______________________
                                           Steve Dostart
                                           Its Vice President
                                  TENANT:

                                  VIVUS, INC.,
                                  a Delaware corporation

                                       /S/ David Yntema
                                  By:  ________________________________
                                       David Yntema
                                       Its Chief Financial Officer





                                       v

<PAGE>   9
                                LEASE AGREEMENT

         THIS LEASE AGREEMENT is made and entered into as of March 7, 1997, by
and between 605 East Fairchild Associates, L.P., a California limited
partnership (herein called "Landlord"), and Vivus, Inc., a Delaware corporation
(herein called "Tenant").

1.       LEASED PREMISES.

                 (a)      PREMISES.  Upon and subject to the terms, covenants
and conditions hereinafter set forth, Landlord agrees to lease to Tenant and
Tenant agrees to hire from Landlord those premises (the "Premises") comprising
the entire two-story building to be constructed as shown on Exhibit "A"
attached hereto (the "Building").  The Building will be located on the parcel
or parcels of real property shown on Exhibit "A-1" (the "Land").  The Building,
together with the Land and associated improvements located on the Land, are
collectively referred to as the "Project".  Because the final construction
drawings for the Building are not yet available, the parties acknowledge that
as of the date of this Lease the exact Rentable Area of the Premises cannot be
determined.  Within ten (10) business days following the date Landlord's Plans
have been completed and finally approved by Landlord and Tenant in accordance
with the work letter attached hereto as Exhibit "D" (the "Work Letter"),
Landlord shall have its architect, Devcon Construction, Inc., measure the
Premises and shall deliver its calculation (together with the supporting CADD
data) to Tenant.  The measurement standard applied shall be based on the
standard for measuring floor area outlined in Paragraph 3 of the "Zoning
Calculations; Methods, Definitions and Clarifications" pamphlet issued by the
City of Mountain View and attached hereto as Exhibit "C", as reasonably
interpreted by Devcon Construction, Inc. and shall be taken using a CADD
system. Tenant shall have ten (10) business days following its receipt of such
information from Landlord to notify Landlord, in writing, if it disputes the
technical accuracy of said measurements; however, the exact interpretation of
the points to which the measurements shall be made pursuant to the standard
referenced above shall be based on the letter dated March 4, 1997 from
Sylvester Ramirez of Devcon Construction to Steve Dostart of the Mozart
Development Company with attached plans dated 2-19-97 showing the building
sample measurements.  If Tenant does not notify Landlord, in writing, of any
dispute within ten (10) business days of its receipt of Landlord's information,
Tenant shall be deemed to have agreed with Landlord's architects calculation of
the Rentable Area of the Premises and such calculation shall be inserted into
this Lease as the Rentable Area for all purposes.  If Tenant disputes the





                                       1

<PAGE>   10
calculation of Landlord's architect, Landlord and Tenant shall endeavor for a
period of five (5) business days following Tenant's dispute notice to resolve
the disagreement.  If, however, the parties are unable to resolve the dispute
within such five (5) business day period, the dispute shall be submitted for
binding arbitration pursuant to the provisions of Paragraph 41 [Arbitration] of
this Lease.  Until the matter is finally resolved, for all purposes herein,
unless and until the Rentable Area is finally determined, the Rentable Area
shall be the amount determined by Landlord's architect, and upon final
determination the parties shall make such financial adjustments as are
necessary to reflect the amount of Rentable Area as finally determined as
though it had been determined as of the date of execution of this Lease.

                 (b)      CONSTRUCTION OF THE PROPERTY.  Tenant acknowledges
that (i) Landlord named in this Lease has not constructed the Building.
Landlord shall use commercially reasonable efforts to construct the Building in
accordance with the terms and conditions of this Lease and the Work Letter,
provided that Tenant's rights and remedies for any breach of such obligation
shall be limited as provided in Paragraph 3(f) [Exclusive Remedies].

         2.      OCCUPANCY AND USE.   Tenant may use and occupy the Premises
for the permitted uses specified in the Basic Lease Information and for no
other use or purpose without the prior written consent of Landlord.  Landlord
may grant or withhold consent to a proposed change of use (which change of use
is not within the uses that are permitted which are specified in the Basic
Lease Information) in its sole discretion.


         3.      TERM AND POSSESSION.

                 (a)       TERM; OCCUPANCY DATE; EXPIRATION DATE.  The term of
this Lease (the "Term") shall commence on the Occupancy Date and, unless sooner
terminated pursuant to PARAGRAPHS 3(E), 3(F), 11(C), 20, 21(B), 22 OR 23, shall
expire on the Expiration Date, provided that Tenant shall have an option to
extend the Term in accordance with the terms and conditions of Paragraph 43
[Option to Renew].  "Occupancy Date" shall mean the date on which Landlord has
(i) completed the construction components of the Base Building Improvements
(excluding site work) required to be completed by Landlord, and (ii) tendered
possession of the Premises to Tenant subject to Landlord's continuing right to
access the Premises and take all steps required to complete the site work.  All
of the rights and obligations of the parties





                                       2

<PAGE>   11
under this Lease (other than Tenant's obligation to pay Base Rent and
Additional Charges) shall commence on the Occupancy Date.   The dates upon
which the Term shall actually commence and terminate with respect to the entire
Premises pursuant to this Paragraph 3(a) are herein called the "Occupancy Date"
and the "Expiration Date," respectively.

                 (b)      INITIAL CONSTRUCTION.  Completion of the Base
Building Improvements (as defined in the Work Letter) by Landlord and the
Tenant Improvements by Tenant shall be governed by the terms and conditions of
Work Letter.  Tenant's obligation to construct the Tenant Improvements pursuant
to the Work Letter is independent of, and in addition to, Tenant's obligation
to pay Rent under this Lease.  Tenant acknowledges that Landlord has not made
any representation or warranty with respect to the construction of the Base
Building Improvements or the condition of the Premises or the Common Area or
with respect to the suitability or fitness of either for the conduct of
Tenant's permitted use or for any other purpose, except as may be expressly and
specifically provided in this Lease.

                 (c)      OCCUPANCY BY TENANT.  Tenant shall be deemed to
occupy the Premises from and after the Occupancy Date.  This Paragraph 3(c)
shall not be construed as an obligation of Tenant to continuously occupy the
Premises.  Within five (5) days after the Occupancy Date, Landlord shall
deliver to Tenant a certificate confirming the Occupancy Date, in the form of
Exhibit "E" hereto.  If Tenant does not agree with Landlord's determination of
the Occupancy Date, Tenant may submit such matter to arbitration in accordance
with Paragraph 41 [Arbitration of Disputes], provided that prior to the
resolution of such matter by arbitration, the parties shall proceed under this
Lease as if the Occupancy Date is the date designated by Landlord, with any
required adjustments to the Rent Commencement Date made after the matter is
ultimately determined by arbitration.

                 (d)      RENT COMMENCEMENT DATE; CERTIFICATE OF OCCUPANCY.
Tenant's obligation to pay Base Rent and Additional Charges hereunder shall
commence on the earlier to occur of (i) the Scheduled Rent Commencement Date
set forth in the Basic Lease Information, or (ii) the date on which Tenant has
substantially completed the Tenant Improvements for the Building (excluding any
laboratory space) in accordance with the Work Letter (the "Rent Commencement
Date") or (iii) Tenant has commenced business in the Premises; provided
however, the period set forth in (i) and (ii) shall be extended by any delay,
other than Tenant delay, in the substantial completion in the Base Building
Improvements.  As





                                       3

<PAGE>   12
used in the preceding sentence, "substantial completion of the Base Building
Improvements shall be defined as (A) receiving a signed off shell completion
permit, (B) assuring Tenant access to the building (e.g. all concrete/asphalt
paving and hard scape work is complete), and (C) Landlord is diligently
prosecuting the completion of landscaping.  After substantial completion of the
Tenant Improvements (as defined in the Work Letter), Tenant shall immediately
apply for, and use best efforts to obtain within fifteen (15) business days, a
certificate of occupancy (or equivalent documentation) for the Building.
Tenant shall promptly deliver to Landlord copies of the certificate of
occupancy, and all other permits, consents and approvals from the appropriate
governmental agencies which are necessary for occupancy and operation of the
Premises as contemplated by this Lease which are reasonably requested by any
Mortgagee.

                 (e)  MILESTONES.  The estimated construction schedule for the
Project is included in Exhibit "F", "Estimated Construction Schedule."  Such
schedule is intended only as an estimate of what the Landlord currently
believes to be the construction schedule; Landlord and Tenant shall use
reasonable efforts to perform their respective obligations in order to achieve
the goals described in the construction schedule, but, Landlord shall in no
manner warrant such schedule.  Notwithstanding this, the parties have set forth
certain events which must occur prior to or during the construction of the
Building (each, a "Milestone"), which must be accomplished by Landlord on or
before certain prescribed dates or Tenant shall have the right to terminate
this Lease and pursue certain remedies as described in Paragraph 1(f) below.
The Milestones to which Landlord and Tenant have agreed are as follows:

                         (1)     Construction of the Building's foundation 
shall have commenced no later than July 1, 1997.

                          (2)     The Base Building Improvements shall have
been substantially completed (as defined in the Work Letter) in accordance with
Landlord's Plans, except for site work, on or before January 31, 1998.

Notwithstanding anything to the contrary set forth hereinabove, the Milestone
dates set forth in clauses (1) and (2) above shall be extended as follows: (A)
one day for each day of delay caused by Tenant Delays (as defined in the Work
Letter), (B) one day for each day of delay caused by casualty, natural
disaster, acts of God, acts of the Government or labor strikes ("Force Majeure
Events"), however, the maximum number of days that any such Milestone can be
extended for such Force Majeure Delays shall be





                                       4

<PAGE>   13
limited to a total of ninety (90), and (C) by the amount of time required to
complete any arbitration process resulting from disputes between Landlord and
Tenant under the Work Letter, to the extent that the arbitration process (and
the issue being arbitrated) actually causes a delay in achieving the
Milestone(s), plus an additional thirty (30) days.

                 (f)      EXCLUSIVE REMEDIES.  If any Milestone set forth in
Paragraph 3(e) is not achieved by Landlord, Tenant shall have the right to
terminate this Lease by written notice to Landlord at any time within ten (10)
business days after Landlord's failure to achieve the particular Milestone.  If
Tenant exercises this termination right, Tenant shall be entitled to the
remedies hereinbelow described, which shall be Tenant's sole and exclusive
remedies with respect to Landlord's failure to achieve any Milestone.  If
Tenant exercises a termination right pursuant to this Paragraph 3(f) and
Landlord believes that the Milestone was achieved by the appropriate date (as
extended for acts of Tenant, Force Majeure Events or arbitration proceedings as
provided in Paragraph 3(e)), the parties agree to submit the dispute concerning
Landlord's failure to achieve that particular Milestone, and Tenant's resulting
right to terminate the Lease, to binding arbitration pursuant to the provisions
of Paragraph 41 [Arbitration of Disputes].  Notwithstanding any other provision
of this Lease or the Work Letter, if Landlord fails to achieve any Milestone
Tenant's sole and exclusive remedies shall be to terminate this Lease and
receive damages from Landlord (which shall be paid within thirty (30) days of
the date of Tenant's notice of termination, or, if the parties resort to
arbitration pursuant to the provision set forth above, then within thirty (30)
days of Tenant's prevailing on said termination in arbitration) in the
following amounts (all clauses referenced are in Paragraph 3(e)): $25,000, as
liquidated damages for failure of Landlord to achieve the Milestone described
in clause (1); and $75,000, as liquidated damages for failure of Landlord to
achieve the Milestone described in clause (2).  Landlord and Tenant acknowledge
and agree that if Landlord fails to achieve the Milestone described in clause
(1) or (2)and Tenant elects to terminate its Lease pursuant to this paragraph
as a result thereof, the damages which Tenant will suffer are difficult, if not
impossible to calculate, and that the above-described liquidated damages are a
fair and reasonable estimate of the damages that Tenant would suffer with
respect to a failure to achieve the Milestone described in clause (1) or (2).
Notwithstanding the above, in the event that all of the following are true: (i)
Landlord intentionally breaches it obligation to diligently prosecute the
construction of Landlord's Work to completion, (ii) such breach by Landlord is
within Landlord's





                                       5

<PAGE>   14
control, and (iii) Tenant is not in a continuing default under the Lease, then
the limitation of liquidated damages as noted above shall be waived.

                 (g)      TERMINATION AFTER COMMENCEMENT OF TENANT
IMPROVEMENTS.If this Lease is terminated by Tenant pursuant to this Paragraph 3
after construction of the Tenant Improvements has commenced, at Landlord's
option and upon Landlord's request Tenant shall assign to Landlord all of
Tenant's rights under Tenant's general contract, architect and/or engineer
agreements and any other agreements with contractors or suppliers in connection
with the Tenant Improvements, and Landlord shall assume Tenant's obligations
under any such assigned agreements to the extent such obligations arise from
work or materials provided to the Premises after termination of the Lease.  In
such event Tenant shall indemnify and hold the Landlord Parties harmless from,
and defend the Landlord Parties against, all liens filed and claims made by any
contractors, architects, subcontractors, or suppliers who provided work or
materials to the Premises prior to the termination of the Lease in connection
with the Tenant Improvements, except that the indemnity contained in this
section shall not limit Tenant's right of recovery if, and only if, the
limitation of liquidated damages in waived in accordance with the last sentence
of subparagraph 3(f).


         4.      RENT; RENT ADJUSTMENTS; ADDITIONAL CHARGES FOR EXPENSES AND
                 TAXES.

                 (a)  MONTHLY BASE RENT.

                          (i)     Commencing on the Rent Commencement Date,
Tenant shall pay to Landlord throughout the Term Base Rent in an amount equal
to the Monthly Base Rent rate specified in the Basic Lease Information
multiplied by the Rentable Area of the Premises, as specified in the Basic
Lease Information ("Base Rent").

                          (ii)  Base Rent shall be payable by Tenant in equal
monthly installments on or, at Tenant's election, before the first day of each
month, in advance, in lawful money of the United States (without any prior
demand therefor and without deduction or offset whatsoever, except for
abatement as may be expressly and specifically provided for in Paragraphs 22
[Damage and Destruction] and 23 [Eminent Domain]), to Landlord at the address
specified in the Basic Lease Information or to such other firm or to such other
place as Landlord may from time to time designate in writing.  Tenant shall pay
all charges and other





                                       6

<PAGE>   15
amounts whatsoever as provided in this Lease ("Additional Charges") to Landlord
at the place where the Base Rent is payable, and Landlord shall have the same
remedies for a default in the payment of Additional Charges as for a default in
the payment of Base Rent.  If the Rent Commencement Date occurs on a day other
than the first day of a calendar month, or the Expiration Date occurs on a day
other than the last day of a calendar month, then the Base Rent and Additional
Charges for such fractional month shall be prorated on a daily basis.  As used
herein, the term "Rent" shall include all Base Rent and Additional Charges
(including, without limitation, Additional Charges pursuant to Paragraph 25
[Right of Landlord to Perform]).

                 (b)  ADJUSTMENTS IN BASE RENT.  The Monthly Base Rent under
Paragraph 4(a) [Monthly Base Rent] shall be adjusted as provided in the Basic
Lease Information.

                 (c)  ADDITIONAL CHARGES FOR EXPENSES AND TAXES.

                          (1)  DEFINITIONS OF CERTAIN ADDITIONAL CHARGES:  For
purposes of this Paragraph 4(c), the following terms shall have the meanings
hereinafter set forth:

                                  (A)  "TAX YEAR" shall mean each twelve (12)
consecutive month period commencing January 1st of the calendar year during
which the Rent Commencement Date of this Lease occurs.

                                  (B)  "REAL ESTATE TAXES" shall mean all
taxes, assessments and charges levied upon or with respect to the Project or
any personal property of Landlord used in the operation thereof, or Landlord's
interest in the Project or such personal property.  Real Estate Taxes shall
include, without limitation, all general real property taxes and general and
special assessments, charges, fees or assessments for transit (including,
without limitation, shuttle fees and roadways), housing, police, fire,
utilities, sewers, emergency response or other governmental services or
purported benefits to the Project (provided, however, that any refunds of Real
Estate Taxes paid by Tenant shall be credited against Tenant's further
obligation to pay Real Estate Taxes during the Term or refunded to Tenant at
the end of the Term), service payments in lieu of taxes, and any tax, fee or
excise on the act of entering into this Lease, or any other lease of space in
the Project, or on the use or occupancy of the Project or any part thereof, or
on the rent payable under any lease or in connection with the business of
renting space in the Project, that are now or hereafter levied or assessed
against Landlord by the United States of America, the State of





                                       7

<PAGE>   16
California, or any political subdivision, public corporation, district or any
other political or public entity, and shall also include any other tax, fee or
other excise, however described, that may be levied or assessed as a substitute
for, or as an addition to, in whole or in part, any other Real Estate Taxes,
whether or not now customary or in the contemplation of the parties on the date
of this Lease, which is customarily charged to Tenants by Landlords in
comparable triple-net leasing scenarios from and after the enactment of the
tax, fee or charge.  Real Estate Taxes shall not include franchise, transfer,
inheritance or capital stock taxes or income taxes measured by the net income
of Landlord from all sources unless, due to a change in the method of taxation,
any of such taxes is levied or assessed against Landlord as a substitute for,
or as an addition to, in whole or in part, any other tax that would otherwise
constitute a Real Estate Tax, unless it has become customary to charge such
tax, fee or charge to Tenants by Landlords in comparable triple-net leasing
scenarios from and after the enactment of the tax, fee or charge.
Additionally, Real Estate Taxes shall not include any assessments or like
charges to pay for any remediation of contamination from any Hazardous
Substances.  Real Estate Taxes shall also include reasonable legal fees, costs
and disbursements incurred in connection with proceedings to contest, determine
or reduce Real Estate Taxes.  If any assessments are levied on the Project,
Tenant shall have no obligation to pay more than that amount of annual
installments of principal and interest that would become due during the Lease
Term had Landlord elected to pay the assessment in installment payments, even
if Landlord pays the assessment in full.

                                  (C)  "EXPENSES" shall mean the total costs
and reasonable expenses paid or incurred by Landlord in connection with the
management, operation, maintenance and repair of the Project, including,
without limitation, (i) the cost of fire, extended coverage, boiler, sprinkler,
commercial general liability, property, rent, earthquake, flood, and all other
insurance described in Paragraph 12(e) [Landlord's Insurance Obligations] or
otherwise obtained by Landlord in connection with the Project, including,
without limitation, insurance premiums and any deductible amounts paid by
Landlord;  (ii) the cost of air conditioning, electricity, steam, heating,
mechanical, ventilating, water, gas, elevator systems and all other utilities,
the cost of supplies and equipment and maintenance and service contracts in
connection therewith, and the cost of refuse service, parking lot sweeping and
similar maintenance services; (iii) the cost of repairs and general maintenance
and cleaning; (iv) fees, charges and other costs, including consulting fees,
legal fees and accounting fees, fees for any project engineer for





                                       8

<PAGE>   17
the Project, and fees of all independent contractors, engaged by Landlord and
related solely to the operation of the Project (or, if any such costs, fees or
charges are attributable to other property managed by Landlord, the portion of
such costs, fees and charges allocable to the Project, as reasonably determined
by Landlord); (v) the cost of any capital improvements made to the Building or
the Project as required or permitted by this Lease, provided that the cost of
such capital improvements in excess of $12,806 during any Expense Year shall be
amortized over the useful life of the capital item in question as determined in
accordance with generally accepted accounting principles ("GAAP"), together
with interest on the unamortized balance at the rate paid by Landlord on funds
borrowed for the purpose of constructing such capital improvements, or, if
Landlord does not elect to borrow funds, at the "prime rate" of interest
announced by the Wall Street Journal for Union Bank (or, if Union Bank ceases
to exist, by another bank mutually acceptable to Landlord and Tenant) (the
"Interest Rate"), as reflected over the period the funds are advanced, plus two
percent (2%) and Tenant shall pay such amortization allocable to the period in
question as part of "Expenses" until the first to occur of expiration of the
term of this Lease or until full payment of all amortization (with interest);
(vi) a management fee for Landlord's management and administrative services in
connection with the Project in the amount of two percent (2.0%) of Base Rent
and Additional Charges (excluding the management fee); and (vii) any other
expenses of any other kind whatsoever incurred in managing, operating,
maintaining and repairing the Premises and/or Project.  Notwithstanding the
above, the cost of deductibles to be paid by Tenant pursuant to insurance
policies shall be paid as follows:  (x) any amount up to an amount equaling one
month's Base Rent shall be paid in the current year, (y) the amount in excess
of one month's Base Rent shall be amortized pursuant to GAAP, but in no event
shall the amortization period be longer than fifteen (15) years and Tenant
shall pay such amortization calculated in the same manner, and for the same
period as part of "Expenses" calculated and paid in the same manner as
amortization determined pursuant to clause (v) of such subparagraph 4(c)(1)(C)
except as otherwise specifically noted in this sentence.

                 EXCLUSIONS.  Notwithstanding anything to the contrary herein
contained, Expenses shall not include, and in no event shall Tenant have any
obligation to pay for pursuant to this Paragraph 4(c) or Paragraph 8(b) [Repair
and Maintenance; Tenant's Obligations], (aa) the initial cost of the Base
Building Improvements which is to be paid by Landlord pursuant to the Work
Letter with respect to the Building or the Project; (bb) debt service
(including, but without limitation, interest and





                                       9

<PAGE>   18
principal) required to be made on debt incurred by Landlord and relating to the
Project other than debt service and financing charges imposed pursuant to
Paragraph 4(c)(1)(C)(v) above; (cc) the portion of the total of all management
fees in excess of two percent (2.0%) of the sum of Base Rent and Additional
Charges (excluding the management fee); (dd) depreciation; (ee) costs for which
Landlord has a right to receive reimbursement from others; (ff) costs
occasioned by Landlord' fraud or willful misconduct under applicable Laws; (gg)
costs to correct any construction defects in the original construction of the
Base Building Improvements for the Building or the Project; (hh) costs arising
from a disproportionate use of any utility or service supplied by Landlord to
any other occupant of the Project to the extent that Landlord has the ability
to charge such other tenant for said costs under the terms of a lease
comparable to terms governing said costs in this Lease; (ii) environmental
pollution related costs (other than costs for which Tenant has indemnified
Landlord pursuant to Paragraph 40 [Hazardous Substance Liability]); (jj) any
maintenance, repair or replacement costs for which Landlord is responsible
pursuant to Paragraph 9(a) [Repair and Maintenance; Landlord's Obligations];
(kk) advertising or promotional costs; (ll) leasing commissions; (mm) reserves
for expenses; (nn) insurance deductibles in excess of fifteen (15%) of the
replacement cost of the Building; (oo) Real Estate Taxes; (pp) earthquake
insurance to the extent it exceeds commercially reasonable rates.  All costs
and expenses shall be determined in accordance with generally accepted
accounting principles which shall be consistently applied (with accruals
appropriate to Landlord's business).

                                  (D)  "EXPENSE YEAR" shall mean each twelve
(12) consecutive month period commencing January 1 of the calendar year during
which the Rent Commencement Date of the Lease occurs. Landlord, upon notice to
Tenant, may change the Expense Year from time to time to any other twelve (12)
consecutive month period, and, in the event of any such change, Expenses shall
be equitably adjusted for the Expense Years involved in any such change.

                          (2)  PAYMENT OF REAL ESTATE TAXES

                                  (A)  PAYMENT AS DUE:  With reasonable
promptness after Landlord has received the tax bills for any Tax Year, Landlord
shall furnish Tenant with a statement (herein called "Landlord's Tax
Statement") setting forth the amount of Real Estate Taxes for such Tax Year.
Unless otherwise required pursuant to clause (B) below, Tenant shall pay to
Landlord actual Real Estate Taxes in installments, twice each Tax Year, no
later





                                       10

<PAGE>   19
than fifteen (15) business days prior to the due date of each Real Estate Tax
installment.

                                   (B)  IMPOUNDS: Notwithstanding clause (A)
above, if required by any Mortgagee or, at Landlord's election, after any
default by Tenant in the timely payment of Real Estate Taxes, Tenant shall pay
to Landlord as Additional Charges one-twelfth (1/12th) of Real Estate Taxes for
each Tax Year on or before the first day of each month during such Tax Year, in
advance, in an amount reasonably estimated by Landlord and billed by Landlord
to Tenant. Landlord shall have the right initially to determine monthly
estimates and to revise such estimates from time to time.  If the actual Real
Estate Taxes for such Tax Year (as shown on Landlord's Tax Statement) exceed
the estimated Real Estate Taxes paid by Tenant for such Tax Year, Tenant shall
pay to Landlord the difference between the amount paid by Tenant and the actual
Real Estate Taxes within fifteen (15) days after the receipt of Landlord's Tax
Statement, and if the total amount paid by Tenant for any such Tax Year shall
exceed the actual Real Estate Taxes for such Tax Year, such excess shall be
credited against the next installment of Real Estate Taxes due from Tenant to
Landlord hereunder.  If it has been determined that Tenant has overpaid Real
Estate Taxes during the last year of the Lease Term, then Landlord shall
reimburse Tenant for such overage on or before the thirtieth (30th) day
following the Expiration Date.

                          (3)  PAYMENT OF EXPENSES:  Tenant shall pay to
Landlord as Additional Charges one-twelfth (1/12th) of the Expenses for each
Expense Year on or before the first day of each month of such Expense Year, in
advance, in an amount reasonably estimated by Landlord and billed by Landlord
to Tenant; provided, however, that all insurance premiums which are included in
Expenses shall be payable annually, in advance, by Tenant within twenty (20)
days after Tenant's receipt from Landlord of a copy of the invoice with respect
to such premiums.  Landlord shall have the right initially to determine monthly
estimates and to revise such estimates from time to time.  With reasonable
promptness after the expiration of each Expense Year, Landlord shall furnish
Tenant with a statement (herein called "Landlord's Expense Statement"), setting
forth in reasonable detail the Expenses for such Expense Year.  If the actual
Expenses for such Expense Year exceed the estimated Expenses paid by Tenant for
such Expense Year, Tenant shall pay to Landlord the difference between the
amount paid by Tenant and the actual Expenses within fifteen (15) days after
the receipt of Landlord's Expense Statement, and if the total amount paid by
Tenant for any such Expense Year shall exceed the actual Expenses for such
Expense Year, such excess shall be credited against the next installment





                                       11

<PAGE>   20
of the estimated Expenses due from Tenant to Landlord hereunder or if the Term
has ended it shall be returned to Tenant within thirty (30) days.  If Tenant
has overpaid Expenses during the last year of the Lease Term, then Landlord
shall reimburse Tenant for such overage on or before the thirtieth (30th) day
following the later of the Expiration Date or the end of the last Expense Year.
To the extent any item of Expenses is payable by Landlord in advance of the
period to which it is applicable (e.g. insurance and tax escrows required by
any Mortgagee), or to the extent that prepayment is customary for the service
or matter, Landlord may (aa) include such items in Landlord's estimate for
periods prior to the date such item is to be paid by Landlord, and (bb) to the
extent Landlord has not collected the full amount of such item prior to the
date such item is to be paid by Landlord, Landlord may include the balance of
such full amount in a revised monthly estimate for Additional Charges.

                          (4)     AUDIT RIGHTS:  Within ninety (90) days after
receipt of any Landlord's Expense Statement or Landlord's Tax Statement, Tenant
shall have the right to audit, at Landlord's office located in the San
Francisco Bay Area, at Tenant's expense, Landlord's accounts and records
relating to Expenses and Real Estate Taxes.  Such audit shall be conducted by a
certified public accountant approved by Landlord, which approval shall not be
unreasonably withheld.  If such audit reveals that Landlord has overcharged
Tenant, Tenant shall notify Landlord within one hundred twenty (120) days after
the date the applicable Landlord's Expense Statement or Landlord's Tax
Statement was received by Tenant.  Landlord may dispute such audit by
arbitration pursuant to Paragraph 41 [Arbitration of Disputes].  If Landlord
does not dispute such amount, or if Tenant prevails in any such arbitration,
the amount overcharged shall be paid to Tenant within thirty (30) days
thereafter, together with interest thereon at the Interest Rate, from the date
Landlord's Expense Statement or Landlord's Tax Statement, as applicable, was
delivered to Tenant until payment of the overcharge is made to Tenant.  In
addition, if Landlord's Expense Statement or Landlord's Tax Statement, as
applicable, exceeds the actual Expenses and Real Estate Taxes which should have
been charged to Tenant by more than five percent (5%), the cost of the audit,
up to a maximum cost of Ten Thousand Dollars ($10,000), shall be paid by
Landlord.  If Tenant fails to object to any Landlord's Expense Statement or
Landlord's Tax Statement within one hundred twenty (120) days after receipt
thereof, such statement shall be final and shall not be subject to any audit,
challenge or adjustment.





                                       12

<PAGE>   21
                          (5)  OTHER:   If either the Rent Commencement Date or
the Expiration Date shall occur on a date other than the first day of a Tax
Year and/or Expense Year, Real Estate Taxes and Expenses for the Tax Year
and/or Expense Year in which the Rent Commencement Date or the Expiration Date
occurs shall be prorated.

                 (d)  LATE CHARGES; DEFAULT RATE.  Tenant recognizes that late
payment of any Base Rent or Additional Charges will result in administrative
expenses to Landlord, the extent of which additional expense is extremely
difficult and economically impractical to ascertain.  Tenant therefore agrees
that if any Base Rent or Additional Charges remain unpaid three (3)days after
Landlord has provide written notice to Tenant that such amount is overdue, the
amount of such unpaid Base Rent or Additional Charges shall be increased by a
late charge to be paid to Landlord by Tenant, as an Additional Charge, in an
amount equal to five percent (5%) (or such greater amount not to exceed six
percent (6%) as may be charged by any Mortgagee for a late payment of a monthly
mortgage payment) of the amount of the delinquent Base Rent or Additional
Charges.  In addition, any outstanding Base Rent, Additional Charges, late
charges and other outstanding amounts shall accrue interest at an annualized
rate of the greater of 10% or The Ninth Circuit Federal Reserve Discount Rate
plus 5% (the "Default Rate"), until paid to Landlord.  Tenant agrees that such
amount is a reasonable estimate of the loss and expense to be suffered by
Landlord as a result of such late payment by Tenant and may be charged by
Landlord to defray such loss and expense.  The provisions of this Paragraph
4(d) shall not relieve Tenant of the obligation to pay Base Rent or Additional
Charges on or before the date they are due, or affect Landlord's remedies
pursuant to Paragraph 21(b) [Landlord's Remedies] if any Base Rent or
Additional Charges are unpaid after they are due.

         5.      INTENTIONALLY DELETED.

         6.      RESTRICTIONS ON USE. Tenant shall not use or allow the
Premises or Project to be used for any unlawful purpose, nor shall Tenant cause
or maintain or permit any nuisance in, on or about the Premises or Project.
Tenant shall not commit or suffer the commission of any waste in, on or about
the Premises or Project.

         7.      COMPLIANCE WITH LAWS.

                 (a)      TENANT'S COMPLIANCE OBLIGATIONS.  Tenant shall
promptly, at its sole expense, maintain the Project and the





                                       13

<PAGE>   22
Premises, any Alterations (as defined in Paragraph 8(b) [Landlord's Consent to
Tenant's Alterations]) permitted hereunder and Tenant's use and operations
thereon in strict compliance at all times with all present and future laws,
statutes, ordinances, resolutions, regulations, proclamations, orders or
decrees of any municipal, county, state or federal government or other
governmental or regulatory authority with jurisdiction over the Project, or any
portion thereof, whether currently in effect or adopted in the future and
whether or not in the contemplation of the parties hereto (collectively,
"Laws").  Such Laws shall include, without limitation, all Laws relating to
health and safety (including, without limitation, the California Occupational
Safety and Health Act of 1973 and the California Safe Drinking Water and Toxic
Enforcement Act of 1986, including posting and delivery of notices required by
such Laws with respect to the Premises and the Project) and disabled
accessibility (including, without limitation, the Americans with Disabilities
Act, 42 U.S.C. section 12101 et seq.), Hazardous Substances, and all present
and future life safety, fire, sprinkler, seismic retrofit, building code and
municipal code requirements; provided however, that Tenant's obligation to
comply with Laws relating to Hazardous Substances is subject to the terms and
conditions of Paragraph 40 [Hazardous Substances Liability], and Tenant shall
not be responsible for compliance with clean-up provisions of any Laws with
respect to Hazardous Substances except to the extent of any release caused or
permitted by the Tenant Parties (as defined in Paragraph 12(b) [Tenant
Indemnity]). Notwithstanding the foregoing, Tenant shall not be required to
make any structural alterations to the Base Building Improvements in order to
comply with Laws unless the requirement that such alterations be made is
triggered by any of the following (or, if such requirement results from the
cumulative effect of any of the following when added to other acts, omissions,
negligence or events, to the extent such alterations are required by any of the
following): (i) the installation, use or operation of the Tenant Improvements,
any Alterations, or any of Tenant's trade fixtures or personal property; (ii)
the acts, omissions or negligence of Tenant, or any of its servants, employees,
contractors, agents or licensees; or (iii) the particular use or particular
occupancy or manner of use or occupancy of the Premises by Tenant, or any of
its servants, employees, contractors, agents or licensees.  The parties
acknowledge and agree that Tenant's obligation to comply with all Laws as
provided in this paragraph (subject to the limitations contained herein) is a
material part of the bargained-for consideration under this Lease.  Tenant's
obligations under this Paragraph shall include, without limitation, the
responsibility of Tenant to make substantial or





                                       14

<PAGE>   23
structural repairs and alterations to the Premises (including the Base Building
Improvements, Tenant Improvements, and any Alterations) to the extent provided
above, regardless of, among other factors, the relationship of the cost of
curative action to the Rent under this Lease, the length of the then remaining
Term hereof, the relative benefit of the repairs to Tenant or Landlord, the
degree to which the curative action may interfere with Tenant's use or
enjoyment of the Premises, and the likelihood that the parties contemplated the
particular Law involved.  Tenant waives any rights now or hereafter conferred
upon it by any existing or future Law to terminate this Lease, to receive any
abatement, diminution, reduction or suspension of payment of Rent, or to compel
Landlord to make any repairs to comply with any such Laws, on account of any
occurrence or situation arising during the Term. Notwithstanding the foregoing,
Tenant shall not be responsible for the cost of making any alteration to the
Base Building which is required by law to the extent that the correction is
required because the Base Building was not built in accordance with laws
applicable at the time the permits were obtained for the construction of the
Base Building.

                 (b)      INSURANCE REQUIREMENTS.  Tenant shall not do or
permit anything to be done in or about the Project or bring or keep anything
therein which will cause a cancellation of any insurance on the Project or
otherwise violate any requirements, guidelines, conditions, rules or orders
with respect to such insurance.  Tenant shall at its sole cost and expense
promptly comply with the requirements of the board of fire underwriters or
other similar body now or hereafter constituted relating to or affecting the
condition, use or occupancy of the Premises or the Project (other than in
situations where compliance involves repair, maintenance or replacement of
items that Landlord is expressly required to repair, maintain or replace under
this Lease).

                 (c)      NO LIMITATION ON OBLIGATIONS.  The provisions of this
Paragraph 7 shall in no way limit Tenant's maintenance, repair and replacement
obligations under Paragraph 9 [Repair and Maintenance], or Tenant's obligation
to pay Expenses under Paragraph 4(c) [Additional Charges for Expenses and
Taxes].  The judgment of any court of competent jurisdiction or the admission
of Tenant in an action against Tenant, whether Landlord is a party thereto or
not, that Tenant has so violated any such Law shall be conclusive of such
violation as between Landlord and Tenant.

         8.      ADDITIONAL ALTERATIONS.





                                       15

<PAGE>   24
                 (a)      LANDLORD'S ALTERATIONS.  After completion of the Base
Building Improvements, Landlord shall not make or suffer to be made any
additional alterations, additions or improvements in, on or to the Building or
any part thereof without the prior written consent of Tenant, except as may be
required by Law or as expressly required or permitted by this Lease.

                 (b)      LANDLORD'S CONSENT TO TENANT'S ALTERATIONS. Tenant
shall not make or suffer to be made any additional alterations, additions or
improvements ("Alterations") in, on or to the Premises or any part thereof,
without the prior written consent of Landlord.  Alterations do not include
initial construction of the Tenant Improvements.  Failure of Landlord to give
its disapproval to any Alterations within ten (10) business days after receipt
of Tenant's written request for approval shall constitute approval by Landlord
of such Alterations so long as Tenant's request includes the following
statement in capitalized and boldfaced letters: BY FAILING TO RESPOND TO THIS
REQUEST, YOU WILL BE DEEMED TO HAVE APPROVED THE TENANT'S INSTALLATION OF THE
ALTERATIONS DESCRIBED IN THIS REQUEST.  Any Alterations in, on or to the
Premises, except for Tenant's movable furniture and equipment, trade fixtures
and Alterations which may be removed without damage to the Premises, shall
become the property of Landlord upon their completion without compensation to
Tenant.  Landlord shall not unreasonably withhold its consent to Alterations
that (i) do not materially affect the structure of the Building, the Building
Systems (as defined in Paragraph 9(b) below) or the Building's security or
other systems, (ii) are not visible from the exterior of the Building, (iii)
are consistent with Tenant's permitted use hereunder, (iv) comply with any
Mortgage, and (v) do not materially adversely affect the value or marketability
of Landlord's reversionary interest upon termination or expiration of this
Lease (taking into account any commitment given by Tenant to remove Alterations
to the extent necessary to eliminate such material and adverse effect).
Notwithstanding the above, Landlord shall not unreasonably withhold its consent
to Alterations which comply with the Approved Tenant Plan Guidelines in Exhibit
"D-2".

                 (c)      PERMITTED ALTERATIONS.  Notwithstanding Paragraph
8(b), Tenant may make Alterations to the Premises without Landlord's prior
consent so long as (x) such Alterations comply with items (i) through (v) in
Paragraph 8(b) [Landlord's Consent to Tenant's Alterations], and (y) the cost
of each such Alteration (or group of Alterations, if occurring substantially at
the same time and as part of a single project) does not exceed Fifty Thousand
Dollars ($50,000) (with no more than thirty percent (30%) of such cost being
for demolition), and the cost of





                                       16

<PAGE>   25
all such Alterations in any twelve (12) month period during the Term in the
aggregate does not exceed Fifty Thousand Dollars ($50,000) (any such
Alterations being defined herein as "Permitted Alterations").

                 (d)      REQUIREMENTS FOR TENANT ALTERATIONS.  Tenant shall
make any Alterations consented to or permitted under this Paragraph 8 at
Tenant's sole cost and expense, in compliance with the following requirements:
(i) Alterations (other than Permitted Alterations) shall be made in accordance
with plans and specifications reasonably approved by Landlord, and all
Alterations shall be made in accordance with the requirements of Paragraph 10
[Liens], (ii) any contractor or person selected by Tenant to make Alterations
(other than Permitted Alterations) must first be approved in writing by
Landlord, in its reasonable discretion, (iii) Alterations shall be made in
compliance with all applicable Laws; and (iv) Alterations shall not alter or
interfere with the ceiling of any Building (all partitions being below the
ceiling grid, except in areas designated by Landlord on plans and
specifications), unless approved by Landlord in its sole discretion; provided,
however, that Tenant may make Alterations that do not comply with the standards
set forth in item (iv) above (subject to any other applicable Landlord consent
requirement) if Tenant agrees to reconfigure the affected floor to such
standard upon expiration or earlier termination of this Lease.  By making
Alterations which do not comply with the standards set forth in item (iv)
above, Tenant shall be deemed to have agreed to reconfigure the Premises upon
expiration or termination of the Lease as provided above unless Landlord
specifically agrees otherwise in writing.  Upon completion of any Alterations,
Tenant shall furnish Landlord with a complete set of final as-built plans and
specifications, at Tenant's cost and expense.  With respect to items (i) and
(ii) above, failure of Landlord to give its disapproval to any plans and
specifications or general contractor within ten (10) business days after
receipt of Tenant's written request for approval shall constitute approval by
Landlord of such matters so long as Tenant's request includes the following
statement in capitalized and boldfaced letters: BY FAILING TO RESPOND TO THIS
REQUEST, YOU WILL BE DEEMED TO HAVE APPROVED THE PLANS AND SPECIFICATIONS
AND/OR GENERAL CONTRACTOR FOR TENANT'S ALTERATIONS DESCRIBED IN THIS REQUEST.

                 (e)      REMOVAL OF ALTERATIONS AND RESTORATION.  Upon the
expiration or sooner termination of the Term, Tenant shall upon demand by
Landlord, at Landlord's election and at Tenant's sole cost and expense,
forthwith and with all due diligence remove any Alterations made by or for the
account of Tenant that are





                                       17

<PAGE>   26
designated by Landlord to be removed and restore the Premises as required by
Paragraph 26(b) [Delivery and Restoration of the Premises].  Upon the written
request of Tenant prior to installation of any Alterations, Landlord shall
notify Tenant of its election to require that such Alterations be removed upon
the expiration or sooner termination of this Lease, so long as such written
request clearly requests Landlord's election regarding the removal of such
Alterations.  Landlord's failure to specifically notify Tenant of Landlord'
election shall be deemed Landlord's election to require removal of the
Alterations upon expiration of the Term, notwithstanding any deemed approval by
Landlord of the Alterations pursuant to this paragraph. Notwithstanding the
above, any office improvements (excluding work relating to lab space or other
non- generic improvements which are not of a typical office space nature) which
are consented to by Landlord and fall within the "Approved Tenant Plan
Guidelines" noted in Exhibit "D-2" shall not be subject to this requirement to
remove provision.

                 (f)      REIMBURSEMENT OF LANDLORD'S REVIEW COSTS.  Tenant
shall reimburse Landlord upon demand for any reasonable out-of- pocket expenses
incurred by Landlord in connection with the review of any Alterations made by
Tenant, including reasonable fees charged by Landlord's contractors or
consultants to review plans and specifications prepared by Tenant.

         9.  REPAIR AND MAINTENANCE.

                 (a)      LANDLORD'S OBLIGATIONS.  Landlord shall maintain,
repair and replace, at its sole cost and expense, the following, except as
provided in Paragraph 9(c) [Tenant's Obligations for Structural Maintenance]:
(i) the exterior concrete walls, structural portions of the roof and structural
portions of the Building (including load bearing walls and foundations); (ii)
plumbing and electricity (located on the Project and owned by Landlord) to the
point of entry into the Building; and (iii), during the initial twenty-four
(24) months of the Term, the correction of any defects in the design,
construction, installation or materials of the Building which materially affect
Tenant's use or enjoyment of the Premises.  Landlord's obligations under
Paragraph 9(a)(i), (ii) and (iii) with respect to any particular repair,
replacement or maintenance requirement, shall not commence until Tenant
notifies Landlord in writing of any circumstances which Tenant believes may
trigger Landlord's obligations.

                 (b)  TENANT'S OBLIGATIONS.  Tenant shall maintain, repair and
replace, at its sole cost and expense, all portions of





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<PAGE>   27
the Premises included in the Project which are not Landlord's obligations under
Section 9(a) [Landlord's Obligations], including, without limitation, (i) the
building systems for electrical, mechanical, HVAC and plumbing and all controls
appurtenant thereto (collectively, "Building Systems"); (ii) the interior
portion of the Building, the Tenant Improvements, the Alterations, and any
additional tenant improvements, alterations or additions installed by or on
behalf of Tenant within the Premises; and, (iii) parking areas, courtyards,
sidewalks, entry ways, lawns, landscaping and other similar facilities of the
Project.  At Tenant's election, Tenant may, by written notice to Landlord
delivered at any time after the tenth (10th) anniversary of the Rent
Commencement Date, cause Landlord to assume Tenant's maintenance obligations
with respect to the Building Systems under clause (i) above, which assumption
by Landlord shall be effective thirty (30) days after Landlord's receipt of
such notice.  If Landlord assumes such obligations, all costs incurred by
Landlord in connection therewith shall be deemed Additional Charges payable by
Tenant in accordance with Paragraph 4(c) [Additional Charges for Expenses and
Taxes].  The Building shall at all times be maintained by Tenant in the
condition of a first-class office building.  Tenant's obligations under this
Paragraph 9 include, without limitation, the replacement, at Tenant's sole cost
and expense, of any portions of the Building which are not Landlord's express
responsibility under Paragraph 9(a) [Landlord's Obligations], if it would be
commercially prudent to replace, rather than repair, such portions of the
Building, regardless of whether such replacement would be considered a capital
expenditure; provided, however, that if Landlord has assumed Tenant's
maintenance obligations for Building Systems pursuant to this Paragraph 9(b),
any replacement of any portion of the Building Systems which would be
considered a capital expenditure and which is made at least one (1) year after
Landlord assumes such obligations shall be amortized over the useful life of
the capital item in question in accordance with Paragraph 4(c)(1)(C)
[Expenses].  Tenant hereby waives and releases its right to make repairs at
Landlord's expense under Sections 1941 and 1942 of the California Civil Code or
under any similar law, statute or ordinance now or hereafter in effect.  In
addition, Tenant hereby waives and releases its right to terminate this Lease
under Section 1932(1) of the California Civil Code or under any similar law,
statute or ordinance now or hereafter in effect.

                 (c)      TENANT'S OBLIGATIONS FOR STRUCTURAL MAINTENANCE.
Notwithstanding the provisions of Paragraph 9(a) [Landlord's Obligations] and
without limiting Tenant's other obligations hereunder, Tenant shall bear the
full cost of structural repairs





                                       19

<PAGE>   28
or maintenance to preserve the Building in good working order and condition, to
the extent such structural repair and/or maintenance is required due to the
following (except to the extent any claims arising from any of the following
are reimbursed by insurance carried by Landlord, are covered by the waiver of
subrogation in Paragraph 13 [Waiver of Subrogation] or are otherwise provided
for in Paragraph 22 [Damage and Destruction]): (i) the installation, use or
operation of any Alterations or other modification to the Premises or Project
made by Tenant; (ii) the installation, use or operation of Tenant's property or
fixtures;  (iii) the moving of Tenant's property or fixtures in or out of the
Building or in and about the Project; or (iv) the acts, omissions or negligence
of Tenant, or any of its servants, employees, contractors, agents or licensees
("Tenant Parties"), or the particular use or particular occupancy or manner of
use or occupancy of the Premises or Project by Tenant or any such person.  In
addition, if at any time during the Term Hazardous Substances are released,
discharged, or disposed of on any portion of the Premises, or on any portion of
the Project by any of the Tenant Parties, in violation of Tenant's obligations
hereunder, repairs of the plumbing to the point of entry into the Building
shall be excluded from Landlord's obligations under Section 9(a).  Tenant shall
not cause or permit any disposal or release of Hazardous Substances into the
plumbing systems at the Project.  Any Alterations required for Tenant to comply
with this Paragraph 9(c) shall be made in accordance with the provisions of
Paragraph 8(d) [Requirements for Tenant Alterations].

                 (d)  MAINTENANCE SERVICE CONTRACTS.  In connection with
Tenant's maintenance and repair obligations contained in this Paragraph 9,
Tenant shall, at its own cost and expense, enter into regularly scheduled
preventive maintenance service contracts with maintenance contractors approved
by Landlord, in its reasonable discretion, for servicing all hot and cold
water, heating, air conditioning and electrical systems, elevators and
equipment within the Building, and shall provide copies of such contracts to
Landlord.  At Landlord's option at any time in which Tenant is in default
hereunder, maintenance service contracts shall be prepaid on an annual basis.
Each maintenance service contract shall specifically name Landlord as a third
party beneficiary, with the right to receive copies of all notices delivered
under such contract and the ability to exercise Tenant's rights thereunder upon
Tenant's default under this Section 9 or upon Landlord's assumption of Tenant's
maintenance obligations with respect to Building Systems pursuant to Paragraph
9(e) [Cure Rights], at Landlord's election.





                                       20

<PAGE>   29
                 (e)      CURE RIGHTS.  Tenant shall have a period of thirty
(30) days from the date of written notice from Landlord within which to cure
any failure to fulfill any of its obligations under this Paragraph 9; provided,
however, that if such failure is curable but cannot be cured within such thirty
(30) day period, Tenant shall have such additional time as may be reasonably
required to cure so long as Tenant commences such cure within the initial
thirty (30) day period and diligently prosecutes such cure to completion.  If
Tenant fails to cure such failure as provided above, or in the event of an
emergency which materially adversely affects the Project, Landlord may, at
Landlord's election, cure such failure, at Tenant's cost and expense, and the
expenses thereof incurred by Landlord shall be reimbursed as Additional Charges
within thirty (30) days after submission of a bill or statement therefor.  In
addition, Landlord may elect, by delivery of written notice to Tenant, to
assume Tenant's maintenance obligations with respect to the Building Systems
under Paragraph 9(b)(i) [Tenant's Obligations] if Tenant does not cure any
breach of such obligations.  If Landlord assumes such obligations, all costs
incurred by Landlord in connection therewith shall be deemed Additional Charges
payable by Tenant in accordance with Paragraph 4(c) [Additional Charges for
Expenses and Taxes].  The remedies described in this paragraph are cumulative
and in addition to any other remedies Landlord may have at law or under this
Lease.

                 (f)  NO LIABILITY OF LANDLORD.  There shall be no abatement of
Rent with respect to, and Landlord shall not be liable for any injury to or
interference with Tenant's business arising from, any repairs, maintenance,
alteration or improvement in or to any portion of the Project by any party,
except as expressly and specifically provided in Paragraph 22; provided,
however, that (i) Base Rent and Additional Charges may be abated during the
period of any interference to Tenant's business which exceeds five (5)days, in
proportion to the portion of the Premises Tenant is unable to use, only if such
interruption results from an insured casualty such that proceeds are payable to
Landlord under the rental interruption insurance carried by Landlord pursuant
to Paragraph 12(e) [Landlord's Insurance Obligations] and only to the extent of
such proceeds actually received by Landlord, and (ii) subject to the
limitations on Tenant's recourse against Landlord contained in Paragraph 21(d)
[Tenant's Remedies], Landlord shall be liable for any actual damage to Tenant
to the extent caused by Landlord's gross negligence or willful misconduct in
connection with any such repairs, maintenance, alteration or improvement.





                                       21

<PAGE>   30

         10.     LIENS.  Tenant shall keep the Premises and Project free from
any liens arising out of any work performed, material furnished or obligations
incurred by Tenant.  If Tenant does not, within thirty (30) days following the
imposition of any such lien, cause it to be released of record by payment or
posting of a proper bond (or such shorter period of time as may be required to
avoid a default under any Mortgage), Landlord shall have, in addition to all
other remedies provided herein and by law, the right, but not the obligation,
to cause it to be released by such means as Landlord deems proper, including
payment of the claim giving rise to such lien.  All sums paid and expenses
incurred by Landlord in connection therewith shall be considered Additional
Charges and shall be payable to Landlord by Tenant on demand, with interest at
the Default Rate.  Landlord shall have the right at all times to post and keep
posted on the Premises and Project any notices permitted or required by law or
by any Mortgagee, for the protection of Landlord, any Mortgagee, the Premises,
the Building, the Land, the Project, the Project, and any other party having an
interest therein, from mechanics' and materialmen's liens. Tenant shall give
Landlord at least five (5) business days' prior notice of commencement of any
construction on the Premises.  This Paragraph 10 shall survive any termination
of this Lease.


         11.     ASSIGNMENT AND SUBLETTING.


                 (a)      RESTRICTION ON ASSIGNMENT AND SUBLEASING.  Tenant
shall not directly or indirectly, voluntarily or by operation of law, sell,
assign, encumber, pledge or otherwise transfer or hypothecate all or any part
of the Premises, the Tenant Improvements, or Tenant's leasehold estate
hereunder (collectively, "Assignment"), or permit the Premises to be occupied
by anyone other than Tenant or sublet the Premises or any portion thereof
(collectively, "Sublease"), without Landlord's prior written consent in each
instance, which consent shall not be unreasonably withheld or delayed by
Landlord; provided, however, that Landlord may withhold its consent, in its
sole discretion, to any assignment of less than the entire Lease.  Without
otherwise limiting the criteria upon which Landlord may withhold its consent to
any proposed Sublease or Assignment, if Landlord withholds its consent where
either (i) the creditworthiness of the proposed Sublessee or Assignee is not
reasonably acceptable to Landlord or any Mortgagee (taking into account
Tenant's continuing liability for performance of the obligations of the Tenant
under the Lease in connection with sublease for a cumulative total of less than
fifty percent (50%)





                                       22

<PAGE>   31
of the Building), or (ii) the proposed Sublessee's or Assignee's use of the
Premises is not in compliance with the allowed Tenant's Use of the Premises as
described in the Basic Lease Information or, in Landlord's judgment, would
require or result in presence of Hazardous Substances on the Premises and/or
Project in excess of those described in Paragraph 40(d) [Hazardous Substance
Liability; Tenant's Covenants], such withholding of consent shall be
presumptively reasonable.  If Landlord consents to the Sublease or Assignment,
Tenant may thereafter enter into a valid Sublease or Assignment upon the terms
and conditions set forth in this Paragraph 11.

                  (b)      REQUIRED NOTICE.  If Tenant desires at any time to
enter into an Assignment of this Lease or a Sublease of the Premises or any
portion thereof, it shall first give written notice to Landlord containing (i)
the name of the proposed assignee, subtenant or occupant;  (ii) a description
of the proposed assignee's, subtenant's, or occupant's business to be carried
on in the Premises;  (iii) the terms and provisions of the proposed Assignment
or Sublease;  and (iv) such financial information as Landlord may reasonably
request concerning the proposed assignee, subtenant or occupant.

                 (c)      LANDLORD'S RESPONSE TO PROPOSED ASSIGNMENT. Within
ten (10) business days after Landlord's receipt of the notice specified in
Paragraph 11(b) [Required Notice] with respect to an Assignment of Tenant's
interest under this Lease, Landlord may by written notice to Tenant elect to
(i) consent to the Assignment, or (ii) disapprove the Assignment.

                 (d)      LANDLORD'S RESPONSE TO PROPOSED SUBLEASE.  Within ten
(10) business days after Landlord's receipt of the notice specified in
Paragraph 11(b) [Required Notice] with respect to a Sublease, Landlord may by
written notice to Tenant elect to (i) consent to the Sublease; or (ii)
disapprove the Sublease.  Notwithstanding anything in this Paragraph 11(d) to
the contrary, Landlord shall not have the rights set forth in (ii) of Paragraph
11(e) in connection with any Sublease to a "Strategic Partner" (as defined
below) in compliance with Paragraph 11(h) [Strategic Partners], or any
"Permitted Transfer" described in Paragraph 11(g).

                 (e)      BONUS RENT.  If Landlord consents to any Assignment
or Sublease pursuant to Paragraph 11(c) [Landlord's Response To Proposed
Assignment] or Paragraph 11(d) [Landlord's Response To Proposed Sublease],
Tenant may within one hundred twenty (120) days after Landlord's consent, but
not later than the expiration of said one hundred twenty (120) days, enter into





                                       23

<PAGE>   32
such Assignment or Sublease of the Premises or portion thereof upon the terms
and conditions set forth in the notice furnished by Tenant to Landlord pursuant
to Paragraph 11(b) [Required Notice].  With respect to any Assignment or
Sublease (excluding any Subleases to Strategic Partners and Permitted
Transfers) which cause or contribute to more than fifty percent (50%) of the
area of the Building to be subleased or assigned by Tenant to third parties
(excluding areas occupied by Strategic Partners or which are the subject of
Permitted Transfers), Landlord shall be entitled to receive fifty percent (50%)
of any rent or other consideration realized by Tenant (after the execution of
the Assignment or Sublease which caused more than fifty percent (50%) of the
area to be so subleased or assigned) under any, and all, such Assignment or
Sublease(s) in excess of the (i) Base Rent and Additional Charges payable
hereunder (or the amount thereof fairly allocable to the portion of the
Premises subject to such Sublease or Assignment) (ii) the unamortized value of
the Tenant Improvements located on the portion of the Premises subject to such
Sublease or Assignment as of the effective date of such Assignment or Sublease
which are attributable to and allocated in equal installments over the term of
the Sublease or Assignment, determined by assuming a useful life equal to
fifteen (15) years and amortization on a straight line basis (with interest
thereon at the rate of ten percent (10%) per annum), (iii) any customary
brokers' commissions that Tenant has incurred in connection with such
Assignment or Sublease amortized on a straight line basis (with interest
thereon at the rate of ten percent (10%) per annum) over the term of the
Sublease or Assignment, and (iv) the cost of any market based Alterations
installed by Tenant as a condition to obtaining such Assignment or Sublease
(amortized in the same fashion as brokerage commissions).  Tenant shall, not
later than ninety (90) days after the Rent Commencement Date, deliver evidence
of the cost of the Tenant Improvements, which shall be acceptable to Landlord
in its reasonable discretion, for Landlord's use as the basis for calculating
the value of the Tenant Improvements for purposes of this Paragraph 11(e) (such
resulting calculation being referred to herein as the "Value of Tenant
Improvements").  The Value of Tenant Improvements shall be allocated
proportionally over the Premises. Failure by Landlord to either consent or
refuse such consent to a proposed Assignment or Sublease within the ten (10)
business day period specified in Paragraph 11(c) shall be deemed to be
Landlord's consent thereto.

                 (f)      EFFECT OF TRANSFER.  Landlord's consent





                                       24

<PAGE>   33
to any Assignment or Sublease shall not relieve Tenant of any obligation to be
performed by Tenant under this Lease, whether arising before or after the
Assignment or Sublease.  Landlord's consent to any Assignment or Sublease shall
not relieve Tenant from the obligation to obtain Landlord's express written
consent to any other Assignment or Sublease.  Any Assignment or Sublease that
is not in compliance with this Paragraph 11 shall be void and, at the option of
Landlord, shall constitute a material default by Tenant under this Lease.  The
acceptance of Base Rent or Additional Charges by Landlord from a proposed
assignee or sublessee shall not constitute the consent to such Assignment or
Sublease by Landlord.

                 (g)      PERMITTED TRANSFER.  The following shall be deemed a
voluntary Assignment of Tenant's interest in this Lease: (i) any dissolution,
merger, consolidation, or other reorganization of Tenant;  and (ii) if the
capital stock of Tenant is not publicly traded, the sale or transfer of stock
to one person or entity which sale or transfer results in such person or entity
acquiring more than fifty percent (50%) of the total combined voting power of
all classes of Tenant's stock issued, outstanding and entitled to vote for the
election of directors.  Notwithstanding anything to the contrary contained in
this Paragraph 11, Tenant may enter into any of the following transfers (a
"Permitted Transfer") without Landlord's prior written consent:  (1) Tenant may
assign its interest in the Lease to a corporation which results from a merger,
consolidation or other reorganization involving Tenant, so long as immediately
following such transaction the surviving corporation has a net worth, and cash,
cash equivalents or third party marketable securities with liquidity of 90 to
360 days (collectively, "Liquid Assets"), equal to or greater than the net
worth and Liquid Assets of Tenant as of both the execution of this Lease and
the Occupancy Date; and (2) Tenant may assign this Lease to a corporation which
purchases or otherwise acquires all or substantially all of the assets of
Tenant, so long as immediately following such transaction such acquiring
corporation has a net worth and Liquid Assets that are equal to or greater than
the net worth and Liquid Assets of Tenant as of both the date of execution of
this Lease and the Occupancy Date.

                 (h)      STRATEGIC PARTNERS.  Tenant may Sublease portions of
the Premises to Tenant's Strategic Partners (as defined below) without
Landlord's prior consent, subject to the following conditions:  (1) after any
such Sublease, Tenant shall continue to directly occupy at least eighty percent
(80%) of the Rentable Area in the Premises; and (2) Tenant shall provide
Landlord with written notice at least thirty (30) days' prior to any such
Sublease including the name of the Strategic Partner, the location of the
subleased space, the name and address of the Strategic Partner's agent for
service of process and delivery of





                                       25

<PAGE>   34
notices under this Lease, and a certification by an officer of Tenant that the
subtenant is a "Strategic Partner" as defined in this Paragraph 11(h).  Any
Strategic Partner subleasing a portion of the Premises shall maintain an agent
for service of process and notice, and notify Landlord of any changes in such
agent, at all times during the term of such sublease.  The term "Strategic
Partner" shall refer to any entity (i) in which Tenant holds an ownership
interest of at least ten percent (10%), (ii) that is engaged in a business
which Tenant believes to be of strategic importance to its own business, and
(iii) that Tenant determines, in its reasonable business judgment, would
benefit Tenant's business by conducting its own business within Tenant's
Premises.

                 (i)      ASSUMPTION BY TRANSFEREE.  Each assignee, other than
Landlord, shall assume all obligations of Tenant arising after the date of the
transfer under this Lease, as provided in this Paragraph 11(i), and shall be
and remain liable jointly and severally with Tenant for the payment of Base
Rent and Additional Charges, and for the performance of all the terms,
covenants, conditions and agreements herein contained on Tenant's part to be
performed for the Term.  Any Sublease or Assignment shall expressly provide
that if this Lease terminates, the subtenant or assignee will attorn to and
become the tenant of the Landlord at the option of Landlord if Landlord elects
to recognize such assignment or sublease upon such termination.  Any Sublease
shall be subject and subordinate to this Lease.  Each Assignment and Sublease
shall provide that the assignee or subtenant shall not take any action which
would cause Tenant to be in default of its obligations under this Lease.  If
this Lease is assigned, Landlord may collect rent directly from the assignee.
If all or part of the Premises is subleased and Tenant defaults, Landlord may
collect Rent directly from each sublessee, and if it does so, Landlord shall
then apply the amount collected from each sublessee to Tenant's monetary
obligations under this Lease.  No Assignment shall be binding on Landlord
unless the assignee or Tenant delivers to Landlord a counterpart of the
Assignment and an instrument that contains a covenant of assumption by the
assignee satisfactory in substance and form to Landlord, consistent with the
requirements of this Paragraph 11(i), but the failure or refusal of the
assignee to execute such instrument of assumption shall not release or
discharge the assignee from its liability as set forth above.

                 (j)      EFFECT ON EXTENSION OPTION.  Notwithstanding any
other provision of this Lease, Tenant may not enter into any Sublease
(including, without limitation, a Sublease to a Strategic Partner or an
affiliate) with a term which exceeds the





                                       26

<PAGE>   35
Expiration Date unless (i) the conditions to Tenant's right to extend the Term
contained in Paragraph 43 [Option to Renew] have been met at the commencement
of such Sublease, and (ii) Tenant delivers its Exercise Notice pursuant to
Paragraph 43 [Option to Renew] at or prior to the commencement of the Sublease.

                 (k)      ASSIGNMENT TO AFFILIATES.  Tenant shall have the
right, without Landlord's consent but with written notice to Landlord at least
thirty (30) days prior thereto, to enter into an Assignment of Tenant's
interest in the Lease or a Sublease of all or any portion of the Premises to an
Affiliate (as defined below) of Tenant, and any such Assignment or Sublease
shall be a "Permitted Transfer", provided that (i) the Affiliate delivers to
the Landlord concurrent with such Assignment a written notice of the Assignment
and an assumption agreement whereby the affiliate assumes and agrees to
perform, observe and abide by the terms, conditions, obligations, and
provisions of this Lease, and (ii) the entity remains an Affiliate throughout
the term of this Lease.  No Sublease or Assignment by Tenant made pursuant to
this Paragraph shall relieve Tenant of Tenant's obligations under this Lease.
As used in this paragraph, the term "Affiliate" shall mean and collectively
refer to a corporation or other entity which controls, is controlled by or is
under common control with Tenant, by means of an ownership of either (aa) more
than fifty percent (50%) of the outstanding voting shares of stock or (bb)
stock or partnership interests which provide the right to control the
operations, transactions and activities of the applicable entity.



         12.     INSURANCE AND INDEMNIFICATION.

                 (a)      RELEASE OF LANDLORD.  Landlord shall not be liable to
Tenant, and Tenant hereby waives all claims against Landlord Parties for any
injury or damage to any person or property in or about the Premises or Project
by or from any cause whatsoever (other than the gross negligence or willful
misconduct of Landlord or its agents, servants, contractors or employees
(collectively, including Landlord, "Landlord Parties")), and without limiting
the generality of the foregoing, whether caused by water leakage of any
character from the roof, walls, or other portion of the Building, or caused by
gas, fire, oil, electricity, or any cause whatsoever, in, on, or about the
Project or any part thereof (other than that caused by the gross negligence or
willful misconduct of Landlord Parties).  Tenant acknowledges that any casualty
insurance carried by Landlord will not cover, and Landlord shall not be
responsible for, loss of





                                       27

<PAGE>   36
income to Tenant or damage to the Alterations in the Premises installed by
Tenant or Tenant's personal property located within the Premises, including,
without limitation, during construction of Base Building Improvements and
Tenant Improvements.  Tenant shall be required to maintain the insurance
described in Paragraph 12(c) [Tenant's Insurance Requirements] below during the
Term.  In the event of a discrepancy between the terms of this paragraph and
the terms of Paragraph 40 [Hazardous Substance Liability], the latter shall
control.  Nothing in this Paragraph is intended to nor shall it be deemed to
override the provisions of Paragraph 13 [Waiver of Subrogation].

                 (b)      TENANT INDEMNITY.  Except to the extent (i) caused by
the gross negligence or willful misconduct of the Landlord Parties or (ii) as
otherwise provided for in Paragraph 40, Hazardous Substance Liability, Tenant
shall indemnify and hold the Landlord Parties harmless from and defend the
Landlord Parties against any and all claims or liability for any injury or
damage to any person or property whatsoever occurring in or on the Premises.
Tenant further agrees to indemnify and hold the Landlord Parties harmless from,
and defend the Landlord Parties against, any and all claims, losses, or
liabilities (including damage to Landlord's property) arising from (x) any
breach of this Lease by Tenant and/or (y) the conduct of any work or business
of Tenant, its agents, servants, employees, or invitees (collectively,
including Tenant, "Tenant Parties"), in or about the Project.

                 (c)      TENANT'S INSURANCE REQUIREMENTS.  Tenant shall
procure at its cost and expense and keep in effect during the Term (including,
without limitation, during the course of construction of Tenant Improvements)
the following insurance:

                            (i) A policy of Commercial General Liability
insurance written on an occurrence form insuring Landlord, any Mortgagee and
Tenant against any liability arising out of the ownership, use, occupancy,
maintenance, repair or improvement of the Premises or the Project and as
appurtenant thereto.  Such insurance shall provide $5,000,000 combined single
limit for bodily injury and property damage.  The limits of said insurance
shall not, however, limit the liability of the Tenant hereunder, and Tenant is
responsible for ensuring that the amount of liability insurance carried by
Tenant is sufficient for Tenant's purposes.  Tenant may carry said insurance
under a blanket policy so long as "per location" liability aggregate limit is
maintained, satisfactory to Landlord.  If Tenant shall fail to procure and
maintain said insurance, Landlord may, but shall not be required to, procure
and maintain same, but at the expense of Tenant.





                                       28

<PAGE>   37
Tenant shall deliver to Landlord prior to occupancy of the Premises copies of
policies of liability insurance required herein and certificates evidencing the
existence and amounts of such insurance which name Landlord and any Mortgagee
as additional insured with evidence satisfactory to Landlord of payment of
premiums.  No policy shall be cancelable or subject to reduction of coverage
except after thirty (30) days' prior written notice to Landlord.  Tenant
acknowledges and agrees that insurance coverage carried by Landlord will not
cover Tenant's property within the Premises and that Tenant shall be
responsible, at Tenant's sole cost and expense, for providing insurance
coverage for Tenant's movable equipment, furnishing, trade fixtures and other
personal property in or upon the Premises and for any alterations, additions or
improvements (other than the initial construction of the Tenant Improvements)
to or of the Premises or any part thereof made by Tenant, in the event of
damage or loss thereto from any cause whatsoever.

                          (ii)  Business interruption and extra expense
insurance, insuring Tenant for a period of eighteen (18) months against losses
arising from the interruption of Tenant's business, and for lost profits, and
charges and expenses which continue but would have been earned if the business
had gone on without interruption, insuring against such perils, in such form as
is reasonably satisfactory to Landlord.  Such insurance should be without
deductible and on an agreed amount basis with no coinsurance payable.

                          (iii) Tenant shall maintain a policy or policies of
fire and property damage insurance in "special" (also known as "all risk") form
with a sprinkler leakage endorsement insuring the personal property, inventory,
trade fixtures, and if applicable boiler and machinery, within the Premises for
the full replacement value thereof.  The proceeds from any of such policies
shall be used for the repair or replacement of such items so insured.

                          (iv)  Tenant shall also maintain a policy or policies
of workers' compensation insurance and any other employee benefit insurance
sufficient to comply with all Laws.

                          (v)    TENANT IMPROVEMENTS/ALTERATIONS.  Tenant shall
purchase and keep in force a policy or policies of liability, fire and property
damage insurance including provision for the payment of deductibles (up to a
maximum of $10,000 per occurrence for all-risk coverage and up to fifteen
percent (15%) of replacement cost for earthquake) and pre-payment for coverage,
up to one year, covering loss or damage to the Tenant





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<PAGE>   38
Improvements and Alterations, for which Landlord shall be listed as a co-loss
payee) in the amount of the full replacement value thereof, insuring direct
physical loss or damage included within the "special form" classification of
coverage and flood and earthquake insurance, if available.  In addition, during
the course of construction of the Tenant Improvements, Tenant shall purchase
and keep in force Comprehensive Builder's Risk/Course of Construction
insurance, with the same requirements as policies described above but with
appropriate adjustments to reflect that the Tenant Improvements are under
construction.  Tenant shall pay directly the cost of such policy or policies of
insurance.

Insurance required under this Paragraph 12(c) shall be in companies rated "A" X
or better in "Best's Insurance Guide."  Tenant shall deliver policies of such
insurance or certificates thereof to Landlord on or before the Occupancy Date,
and thereafter at least thirty (30) days before the expiration dates of
expiring policies; and, in the event Tenant shall fail to procure such
insurance, or to deliver such policies or certificates, Landlord may, at its
option, procure same for the account of Tenant, and the cost thereof shall be
paid to Landlord as Additional Charges within fifteen (15) days after delivery
to Tenant of bills therefor.

                 (d)      SURVIVAL.  The provisions of this Paragraph 12 shall
survive the expiration or termination of this Lease with respect to any claims
or liability arising out of events occurring prior to such expiration or
termination.

                 (e)      LANDLORD'S INSURANCE OBLIGATIONS.  Landlord shall
purchase and keep in force a policy or policies of liability, fire and property
damage insurance including provision for the payment of deductibles and
pre-payment for coverage, up to one year, covering loss or damage to the
Premises and Project in the amount of the full replacement value thereof,
insuring direct physical loss or damage included within the "special form"
classification of coverage and flood and earthquake insurance, if available,
plus a policy of rental income insurance in the amount of twelve (12) months
Base Rent and Additional Charges (or such longer time as any Mortgagee may
require).  At Tenant's request, Landlord shall include any specific Alterations
made in accordance with this Lease in such policies, provided that Tenant
provides Landlord with all information reasonably required by Landlord or its
insurer in connection with such Alterations.  In addition, during the course of
construction of the Base Building Improvements and Tenant Improvements,
Landlord shall purchase and keep in force Comprehensive Builder's Risk/Course
of Construction insurance, with the same requirements as policies described
above





                                       30

<PAGE>   39
but with appropriate adjustments to reflect that the Project is under
construction.  Tenant shall pay to Landlord the cost of such policy or policies
of insurance pursuant to Paragraph 4(c) [Additional Charges for Expenses and
Taxes].  If such insurance cost is increased due to Tenant's use of the
Premises, Tenant agrees to pay to Landlord the full cost of such increase.
Tenant shall have no interest in nor any right to the proceeds of any insurance
procured by Landlord for the Premises or the Project.  Notwithstanding the
foregoing obligations of Landlord to carry insurance, Landlord may modify the
foregoing coverages if and to the extent it is commercially reasonable to do
so; provided, however, that such coverages shall not be voluntarily reduced by
Landlord without Tenant's prior consent.

         13.     WAIVER OF SUBROGATION.  Notwithstanding anything to the
contrary in this Lease, to the extent that this waiver does not invalidate or
impair their respective insurance policies, the parties hereto release each
other and their respective agents, employees, successors, contractors,
subcontractors, assignees and subtenants from all liability for injury to any
person or damage to any property that is caused by or results from a risk (i)
which is actually insured against, to the extent of receipt of payment under
such policy (unless the failure to receive payment under any such policy
results from a failure of the insured party to comply with or observe the terms
and conditions of the insurance policy covering such liability, in which event,
such release shall not be so limited), (ii) which is required to be insured
against under this Lease or the Work Letter, or (iii) which would normally be
covered by the standard ISO "special" form of casualty insurance, without
regard to the negligence or willful misconduct of the entity so released.
Landlord and Tenant shall each obtain a similar waiver of subrogation in their
respective construction contracts for the Base Building Improvements and Tenant
Improvements, respectively, and shall require that their respective contractors
obtain a similar waiver from all subcontractors of all tiers.  Landlord and
Tenant shall each obtain, and shall cause their respective contractors and
subcontractors to obtain, from their respective insurers under all policies of
fire, theft and other property insurance maintained by either of them at any
time during the Term (including during the course of construction of the Base
Building Improvements and the Tenant Improvements) insuring or covering the
Project or any portion thereof of its contents therein, a waiver of all rights
of subrogation which the insurer of one party might otherwise, if at all, have
against the other party, and Landlord and Tenant shall each indemnify the other
against any loss or expense, including reasonable attorneys' fees, resulting
from the failure to obtain such waiver.





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<PAGE>   40
         14.     SERVICES AND UTILITIES.

                 (a)      LANDLORD'S RESPONSIBILITY.  Landlord shall provide
the maintenance and repairs described in Paragraph 9(a) [Maintenance and
Repairs; Landlord's Obligations], except for damage caused by the acts or
omissions of the Tenant Parties, which damage shall be repaired by Landlord at
Tenant's expense, subject to the waiver of subrogation provisions in Paragraph
13.

                 (b)      TENANT'S RESPONSIBILITY.  Subject to the provisions
elsewhere herein contained and to the Rules and Regulations, Tenant shall be
responsible for arranging for, and direct payment of any and all cost of,
garbage pickup, recycling, janitorial, security, landscape maintenance (except
in the Project), transportation management programs (including any commuter
shuttle program required by the City of Mountain View), water, electricity,
gas, telephone, cable and digital communications equipment, and any and all
other utilities and services, and Tenant shall provide the maintenance, repair
and replacement of Building Systems in connection with such utilities and
services as described in Section 9(b) [Repair and Maintenance; Tenant's
Obligations].  Landlord shall cooperate with Tenant's efforts to arrange all
such services.  If Landlord assumes Tenant's maintenance obligations with
respect to the Building Systems pursuant to Paragraph 9(e) [Cure Rights],
Tenant shall cooperate fully with Landlord and abide by all the reasonable
regulations and requirements that Landlord may prescribe for the proper
functioning and protection of the Building Systems.

                 (c)      NO EXCESSIVE LOAD.  Tenant will not without the prior
written consent of Landlord, which consent shall not be unreasonably withheld
or delayed, use any apparatus or device in the Premises which, when used, puts
an excessive load on any Building or its structure or systems.

                 (d)      NO LIABILITY OF LANDLORD.  Landlord shall not be in
default hereunder or be liable for any damages directly or indirectly resulting
from, nor shall Rent be abated by reason of, (i) the installation (but not
including installation which is Landlord's obligation pursuant to the Work
Letter), use or interruption of use of any equipment in connection with the
foregoing utilities and services; (ii) failure to furnish or delay in
furnishing any services to be provided by Landlord when such failure or delay
is caused by Force Majeure Events, or by the making of repairs or improvements
to the Project or any portion thereof which are the responsibility of Landlord
under





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<PAGE>   41
this Lease; or (iii) the limitation, curtailment, rationing or restriction on
use of water or electricity, gas or any other form of energy or any other
service or utility whatsoever serving the Project; provided, however, that (aa)
Base Rent and Additional Charges may be abated during the period of any total
interruption of utilities or services to the Premises which exceeds thirty (30)
days only if such interruption results from an insured casualty such that
proceeds are payable to Landlord under the rental interruption insurance
carried by Landlord pursuant to Paragraph 12(e) [Landlord's Insurance
Obligations] and only to the extent of such proceeds actually received by
Landlord, and (bb) subject to the limitations on Tenant's recourse against
Landlord contained in Paragraph 21(d) [Tenant's Remedies], Landlord shall be
liable for any actual damage to Tenant's property to the extent caused by
Landlord's gross negligence or willful misconduct in connection with the
failure to furnish or delay in furnishing any services to be provided by
Landlord.

         15.     TENANT'S CERTIFICATES.  Tenant, at any time and from time to
time, within ten (10) days after written request from Landlord, will execute,
acknowledge and deliver to Landlord and, at Landlord's request, to any
prospective purchaser, ground or underlying lessor or Mortgagee of any part of
the Project or any other party acquiring an interest in Landlord, a certificate
of Tenant substantially in the form attached as Exhibit "H". The certificate
may also contain any other information reasonably required by any such persons.
It is intended that any certificate of Tenant delivered pursuant to this
Paragraph 15 may be relied upon by Landlord and any prospective purchaser,
ground or underlying lessor or Mortgagee of any part of the Project or such
other party.  If requested by Tenant, Landlord shall provide Tenant with a
similar certificate.

         16.     HOLDING OVER.  If Tenant (directly or through any
successor-in-interest of Tenant) remains in possession of all or any portion of
the Premises after the expiration or termination of this Lease without the
consent of Landlord, Tenant's continued possession shall be on the basis of a
tenancy at the sufferance of Landlord.  In such event, Tenant shall continue to
comply with or perform all the terms and obligations of Tenant under this
Lease, except that the Monthly Base Rent during Tenant's holding over shall be
the greater of the then-fair market rent for the Premises (as reasonably
determined by Landlord) or one hundred twenty fifty percent (125%) of the
Monthly Base Rent payable in the last full month prior to the termination
hereof (and shall be increased in accordance with Paragraph 4(b) [Adjustments
in Base Rent]).  In addition to Rent, Tenant shall pay Landlord for all damages
proximately caused by reason of the Tenant's retention of possession.
Landlord's acceptance of Rent after such termination shall not constitute a
renewal of this Lease, and nothing contained in this provision shall be deemed
to waive





                                       33

<PAGE>   42
Landlord's right of re-entry or any other right hereunder or at law.  Tenant
acknowledges that, in Landlord's marketing and re-leasing efforts for the
Premises, Landlord is relying on Tenant's vacation of the Premises on the
Expiration Date.  Accordingly, Tenant shall indemnify, defend and hold Landlord
harmless from and against all claims, liabilities, losses, costs, expenses and
damages arising or resulting directly or indirectly from Tenant's failure to
timely surrender the Premises, including (i) any loss, cost or damages suffered
by any prospective tenant of all or any part of the Premises, and (ii)
Landlord's damages as a result of such prospective tenant rescinding or
refusing to enter into the prospective lease of all or any portion of the
Premises by reason of such failure of Tenant to timely surrender the Premises.

         17.     SUBORDINATION.  Without the necessity of any additional
document, this Lease shall be subject and subordinate at all times to: (i) all
ground leases or underlying leases that may now exist or hereafter be executed
affecting any portion of the Premises or Project;  and (ii) the lien of any
mortgage or deed of trust that may now exist or hereafter be executed in any
amount for which any portion of the Premises or Project or any ground leases or
underlying leases, or Landlord's interest or estate in any of said items, is
specified as security (any such lien being herein defined as a "Mortgage" and
the holder of any Mortgage being a "Mortgagee").  Notwithstanding the
foregoing, Landlord shall have the right to subordinate or cause to be
subordinated any such ground leases or underlying leases or any Mortgage to
this Lease.  If any ground lease or underlying lease terminates, or any
Mortgage is foreclosed or a conveyance in lieu of foreclosure is made, for any
reason, Tenant shall, notwithstanding any subordination, attorn to and become
the Tenant of the successor in interest to Landlord at the option of such
successor in interest.  Notwithstanding anything to the contrary contained
herein, this Lease shall not be subject or subordinate to any ground or
underlying lease or to any lien, Mortgage, or other security interest affecting
the Premises, and Tenant shall not attorn to the ground lessor, Mortgagee or
other holder of the interest to which this Lease would be subordinated unless
such ground lessor, Mortgagee or holder executes a reasonable recognition and
non-disturbance agreement which provides for the following (i) Tenant shall be
entitled to continue in possession of the Premises on the terms and conditions
of this Lease if and for so long as Tenant fully performs all of its
obligations hereunder, (ii) such ground lessor, Mortgagee or holder will not
have a more strict standard than is allowed per the Lease concerning the
withholding of consent to Alterations, (iii) any draw upon the security deposit
shall be credited to reduce the obligations of Tenant under the Lease, whether
or not the lender actually receives the proceeds from such draw, and (iii)
insurance proceeds must be made available for restoration or payment to Tenant
in accordance with





                                       34

<PAGE>   43
the terms of this Lease.  Tenant shall execute and deliver upon demand by
Landlord, and in the form requested by Landlord or any Mortgagee and reasonably
acceptable to Tenant, any additional documents evidencing the priority or
subordination of this Lease with respect to any such ground leases or
underlying leases or the lien of any such Mortgage.  Tenant shall execute,
deliver and authorize recordation of any such documents within twenty (20) days
after Landlord's written request.

         18.     RULES AND REGULATIONS.  Tenant shall faithfully observe and
comply with the rules and regulations attached to this Lease as Exhibit "J" and
all reasonable nondiscriminatory modifications thereof and additions thereto
from time to time put into effect by Landlord and approved by Tenant, provided
such rules and regulations do not unreasonably interfere with Tenant's use of
the Premises as contemplated by this Lease.  At such time as Landlord desires
to modify the Rules and Regulations, it should deliver a copy of such
modifications to Tenant for its approval, which shall not be unreasonably
withheld.  In the event that Tenant does not signify its disapproval within ten
(10) days and explain the reasons for such approval, the modifications shall be
deemed to have been approved by Tenant.  In the event of an express and direct
conflict between the terms, covenants, agreements and conditions of this Lease
and those set forth in the rules and regulations, as modified and amended from
time to time by Landlord, this Lease shall control.

         19.     RE-ENTRY BY LANDLORD.  Landlord reserves and shall at all
reasonable times have the right to re-enter the Premises upon reasonable prior
notice (except in the case of an emergency), and subject to Tenant's reasonable
security precautions and the right of Tenant to accompany Landlord at all
times, to inspect the same; to supply any service to be provided by Landlord to
Tenant hereunder (unless Tenant is supplying such service); to show the
Premises to prospective purchasers, Mortgagees or tenants (as to prospective
tenants other than prospective tenants of any recaptured space, only during the
last eighteen (18) months of the initial Term or the last twenty-four (24)
months of any Extension Term); and to post notices of nonresponsibility; to
alter, improve or repair the Premises and any portion thereof as required or
allowed by this Lease or by law (and Landlord may for that purpose erect, use,
and maintain scaffolding, pipes, conduits, and other necessary structures in
and through the Premises where reasonably required by the character of the work
to be performed).  Landlord shall not be liable in any manner for any
inconvenience, disturbance, loss of business, nuisance or other damage arising
from Landlord's or any third party's entry and acts pursuant to this Paragraph
19 unless caused by Landlord's gross negligence or willful misconduct.  Tenant
shall not be entitled to an abatement or reduction of Base Rent or Additional
Charges if Landlord exercises any rights reserved in





                                       35

<PAGE>   44
this paragraph.  Tenant hereby waives any claim for damages for any injury or
inconvenience to or interference with Tenant's business, any loss of occupancy
or quiet enjoyment of the Premises, and any other loss occasioned thereby,
except to the extent caused by Landlord's gross negligence or willful
misconduct.  For each of the aforesaid purposes, Landlord shall have the right
to use any and all means which Landlord reasonably determines are necessary or
proper to open doors on the Premises in an emergency in order to obtain entry
to any portion of the Premises.  Any entry to the Premises, or portion thereof
obtained by Landlord by any of said means, or otherwise, shall not under any
emergency circumstances be construed or deemed to be a forcible or unlawful
entry into, or a detainer of, the Premises, or an eviction, actual or
constructive, of Tenant from the Premises or any portions thereof.  Landlord
shall use best efforts during re-entry to not unreasonably interfere with
Tenant's use of the Premises or its business conducted therein.

         20.     INSOLVENCY OR BANKRUPTCY.  The appointment of a receiver to
take possession of all or substantially all of the assets of Tenant, or an
assignment by Tenant for the benefit of creditors, or any action taken or
suffered by Tenant under any insolvency, bankruptcy, reorganization or other
debtor relief proceedings (each of the foregoing, an "Insolvency Proceeding"),
whether now existing or hereafter amended or enacted, shall, at Landlord's
option, constitute a breach of this Lease by Tenant, unless a petition in
bankruptcy, receiver attachment, or other remedy pursued by a third party is
discharged within sixty (60) days.  Upon the happening of any such event
(including the expiration of such 60 day period, if applicable) or at any time
thereafter, this Lease shall terminate five (5) days after written notice of
termination from Landlord to Tenant.  In no event shall this Lease be assigned
or assignable by operation of law (except as provided in Paragraph 11
[Assignment and Subletting]) or by voluntary or involuntary bankruptcy
proceedings or otherwise.  In no event shall this Lease or any rights or
privileges hereunder be an asset of Tenant under any bankruptcy, insolvency,
reorganization or other debtor relief proceedings.

         21.     DEFAULT.

                 (a)      TENANT'S DEFAULT. The failure to perform or honor any
covenant, condition or representation made under this Lease shall constitute a
"default" hereunder by Tenant upon expiration of the appropriate grace period
hereinafter provided.  Tenant shall have a period of three (3) days from the
date of written notice from Landlord (which notice shall be in lieu of and not
in addition to the notice required by Section 1161 of the California Code of
Civil Procedure) within which to cure any default in the payment of Base Rent
or Additional Charges.  Tenant shall have a





                                       36

<PAGE>   45
period of thirty (30) days from the date of written notice from Landlord (which
notice shall be in lieu of and not in addition to the notice required by
Section 1161 of the California Code of Civil Procedure) within which to cure
any other curable default under this Lease;  provided, however, that with
respect to any curable default other than the payment of Base Rent or
Additional Charges that cannot reasonably be cured within thirty (30) days, the
default shall not be deemed to be uncured if Tenant commences to cure within
thirty (30) days from Landlord's notice and continues to prosecute diligently
the curing thereof.  Notwithstanding the foregoing, (i) if a shorter cure
period is specified elsewhere in this Lease or the Work Letter with respect to
any specific obligation of Tenant, such shorter cure period shall apply with
respect to a default of such obligation; (ii) the foregoing cure rights shall
not extend the  specified time for compliance with any required delivery,
approval or performance obligation of Tenant under the Work Letter; and (iii)
the foregoing cure rights shall not apply to any Draw Event (as defined in the
Work Letter).

                 (b)      LANDLORD'S REMEDIES.  Upon an uncured default of this
Lease by Tenant, Landlord shall have the following rights and remedies in
addition to any other rights or remedies available to Landlord at law or in
equity:

                          (1)  The rights and remedies provided by California
Civil Code, Section 1951.2, including but not limited to, recovery of the worth
at the time of award of the amount by which the unpaid Base Rent and Additional
Charges for the balance of the Term after the time of award exceeds the amount
of rental loss for the same period that the Tenant proves could be reasonably
avoided, as computed pursuant to subsection (b) of said Section 1951.2;

                          (2)  The rights and remedies provided by California
Civil Code, Section 1951.4, that allows Landlord to continue this Lease in
effect and to enforce all of its rights and remedies under this Lease,
including the right to recover Base Rent and Additional Charges as they become
due, for so long as Landlord does not terminate Tenant's right to possession.
Acts of maintenance or preservation, efforts to relet the Premises or the
appointment of a receiver upon Landlord's initiative to protect its interest
under this Lease shall not constitute a termination of Tenant's rights to
possession;

                         (3)  The right to terminate this Lease by giving 
notice to Tenant in accordance with applicable law;

                          (4)   If Landlord elects to terminate this Lease, the
right and power to enter the Premises and remove therefrom all persons and
property, and to store such property in a public





                                       37

<PAGE>   46
warehouse or elsewhere at the cost of and for the account of Tenant, and to
sell such property and apply such proceeds therefrom pursuant to applicable
California law.

                 (c)      LANDLORD'S DEFAULT.  Landlord shall have a period of
thirty (30) days from the date of written notice from Tenant of Landlord's
default (any such notice, a "Landlord Default Notice") to cure any default by
Landlord under this Lease;  provided, however, that with respect to any default
that cannot reasonably be cured within thirty (30) days, the default shall not
be deemed to be uncured if Landlord commences to cure within thirty (30) days
from Tenant's receipt of a Landlord Default Notice and continues to prosecute
diligently the curing thereof.  Tenant agrees to give any Mortgagee, by
registered or certified mail, a copy of any Landlord Default Notice served upon
the Landlord, provided that prior to such notice Tenant has been notified in
writing of the address of such Mortgagee.  If Landlord fails to cure such
default within the time provided for in this Lease, then the Mortgagee shall
have an additional thirty (30) days after the expiration of such cure period
within which to cure such default (provided that Tenant notifies Mortgagee
concurrently with Tenant's delivery of the Landlord Default Notice to Landlord
after the expiration of such cure period within which to cure such default;
otherwise Mortgagee shall have thirty (30) days from the later of the date on
which it receives notice of the default from Tenant and the expiration of
Landlord's cure period).  If such default cannot be cured by Mortgagee within
the cure period, Tenant may not exercise any of its remedies so long as
Mortgagee has commenced and is diligently pursuing the remedies necessary to
cure such default (including, but not limited to, commencement of foreclosure
proceedings, if necessary to effect such cure).

                 (d)      TENANT'S REMEDIES. Subject to Paragraph 3(f)
[Exclusive Remedies], if any default hereunder by Landlord is not cured within
the applicable cure period provided in Paragraph 21(c) [Landlord's Default],
Tenant's exclusive remedies shall be an action for specific performance or
action for actual damages.  Tenant hereby waives the benefit of any laws
granting it (A) the right to perform Landlord's obligation, or (B) the right to
terminate this Lease or (C) withhold Rent on account of any Landlord default.
Tenant shall look solely to Landlord's interest in the Project (such interest
to include proceeds of insurance or condemnation where the claim of the Tenant
arises in connection with the event giving rise to such proceeds), for the
recovery of any judgment from Landlord.  Landlord, or if Landlord is a
partnership, its partners whether general or limited, or if Landlord is a
corporation, its directors, officers or shareholders, shall never be personally
liable for any such judgment.  Any lien obtained to enforce such judgment and
any levy of execution thereon shall be subject and subordinate to any





                                       38

<PAGE>   47
Mortgage (excluding any Mortgage which was created as part of an effort to
defraud creditors, i.e. a fraudulent conveyance);  provided, however that any
such judgement and any such levy of execution thereon shall not be subject or
subordinated to any Mortgage that is created or recorded in the Official
Records of Santa Clara County after the date of the judgement giving rise to
such lien.  Notwithstanding the provisions of Paragraph 21(d)(B), Tenant shall
have the right to terminate this Lease in the event (i) Landlord is in default
of an express obligation under this Lease, (ii) such default, if not cured,
would constitute constructive eviction of Tenant, (iii) Tenant has given
written notice to Landlord and any Mortgagee, (iv) sixty (60) days has expired
from the date of Tenant's written notice in accordance with clause (iii) and
the default has not been cured and neither Landlord nor any Mortgagee are
diligently attempting to cure such default.  If all of the foregoing conditions
exist, except that the default of Landlord is the failure to maintain or repair
an item which is not structural in nature, then Tenant may, upon ten (10)
additional days notice elect to provide the necessary repair or maintenance and
to recover the cost of such cure with interest at the Default Rate (except to
the extent otherwise payable by Tenant hereunder), all in the same manner and
in accordance with the procedures described in Paragraph 25.

         22.     DAMAGE AND DESTRUCTION

                 (a)      RESTORATION.  Subject to the termination rights set
forth in Paragraphs 22(c) [Casualty at End of Term] and Paragraph 22(d) [Mutual
Termination Option] and Paragraph 22(e) [Destruction Where Insufficient
Proceeds Are Available], if the Premises or any portion thereof are damaged or
destroyed by fire or other casualty, Tenant will promptly give written notice
thereof to Landlord, and:

                          (1)     Tenant, at Tenant's sole cost and expense,
and pursuant to the provisions of Paragraph 8 [Alterations] and/or the Work
Letter, as applicable, will promptly repair, restore and rebuild the Tenant
Improvements and any Alterations as nearly as possible to the condition they
were in immediately prior to such damage or destruction or with such changes or
alterations as may be made pursuant to Paragraph 8 [Alterations]; and

                          (2)     to the extent that any such damage or
destruction affects the Base Building Improvements, Landlord shall repair the
same at Landlord's cost to the extent of Landlord's obligations under the Work
Letter.

                 (b)      INSURANCE PROCEEDS.  Subject to the provisions of
Paragraph 22(f) [Proceeds Upon Termination], all insurance proceeds recovered
by the Landlord and/or Tenant on account of





                                       39

<PAGE>   48
such damage or destruction, less the cost, if any, to the Landlord
and/or Tenant of such recovery, shall be held by the Mortgagee or in escrow and
paid out from time to time to or at the direction of Landlord in respect of the
Base Building Improvements and Tenant in respect of the Tenant to the extent
required to repair, restore and rebuild the Base Building Improvements and
Tenant Improvements and any Alterations, pursuant to disbursement procedures
established by Landlord and/or any Mortgagee.  The amount of available
insurance proceeds shall not limit Tenant's or Landlord's obligation to repair,
restore and rebuild the Tenant Improvements and Alterations and the Base
Building Improvements, respectively, in accordance with this Paragraph 22.

                 (c)      CASUALTY AT END OF TERM.  Notwithstanding anything to
the contrary contained in this Lease, if, during the twelve (12) months prior
to the expiration of the Term (without taking into account Tenant's termination
option contained in Paragraph 45 [Termination Option] unless prior to the
casualty Tenant notified Landlord in writing of Tenant's intent to exercise
such option), the entire Building or a substantial portion thereof is damaged
or destroyed by fire or other casualty, either Tenant or Landlord shall have
the option to terminate this Lease as of the date of such damage or destruction
by written notice to the other party given within thirty (30) days after such
damage or destruction, in which event the Landlord shall make a proportionate
refund to the Tenant of such Rent as may have been paid in advance.  For the
purposes of this paragraph, a "substantial portion" of the Building shall mean
twenty percent (20%) or more of the Rentable Area thereof.  If neither party
elects to terminate this Lease, Landlord and/or Tenant shall repair, restore
and rebuild the Premises in accordance with Paragraph 22(a) [Restoration].

                 (d)      MUTUAL TERMINATION OPTION; INSURED CASUALTY.
Notwithstanding anything to the contrary contained herein (but subject to
Paragraph 22(e) below), if at any time during the Term the Base Building
Improvements shall be damaged or destroyed to the extent that they cannot be
reconstructed within twelve (12) months following the date such reconstruction
can commence, either Landlord or Tenant shall have the right to terminate this
Lease as of the date of such damage or destruction by written notice to the
other party.  Within forty-five (45) days after any damage or destruction
described in this Paragraph 22(d), Landlord shall notify Tenant whether or not
in Landlord's reasonable opinion (supported by reasonable written confirmation
from a third party architect or general contractor) such reconstruction can be
made within twelve (12) months after the date such reconstruction can commence,
and if reconstruction cannot be made within twelve (12) months, whether or not
Landlord elects to terminate the Lease.  If Tenant is so notified, but Landlord
does





                                       40

<PAGE>   49
not elect to terminate, Tenant may terminate this Lease as of the date of such
damage or destruction by written notice to Landlord given within forty-five
(45) days after receipt of Landlord's notice.  If Tenant disputes Landlord's
determination that such reconstruction can be completed within twelve (12)
months, Tenant shall so notify Landlord within forty-five (45) days after
receipt of Landlord's notice (supported by reasonable written confirmation from
a third party architect or general contractor backing Tenant's assertions), and
if the parties are unable to reach agreement within the ten (10) day period
after Landlord's receipt of Tenant's notice, either party may submit such
dispute to arbitration pursuant to Paragraph 41 [Arbitration of Disputes],
provided that Landlords may, at its sole election (but shall not be obligated
to), commence reconstruction of the Base Building Improvements while such
arbitration proceedings are pending.  If neither party elects to terminate this
Lease, Landlord and/or Tenant shall repair, restore and rebuild the Premises in
accordance with Paragraph 22(a) [Restoration].

                (e)     DESTRUCTION WHERE INSUFFICIENT PROCEEDS ARE AVAILABLE.
If the Base Building Improvements are damaged by any peril and the insurance
proceeds (not including any "deductible" complying with provisions of this
Lease) available to repair the Base Building Improvements are less than
ninety-five percent (95%) of the replacement cost of the Base Building
Improvements, then this Lease shall terminate unless the damage can be
reconstructed within twelve (12) months following the commencement of
reconstruction (determined as provided above) and either (x) Landlord elects to
reconstruct the Base Building Improvements at its cost, or (y) if Landlord
elects not to so reconstruct the Base Building Improvements, within ten (10)
days after Landlord notifies Tenant of its election, Tenant agrees to pay the
amount by which the restoration cost not covered by insurance proceeds exceeds
five percent (5%) of the replacement cost of the Base Building Improvements. If
Landlord elects to restore the Base Building Improvements, the cost incurred
by Landlord, which is not covered by insurance proceeds, shall be amortized
over the useful life of the Base Building Improvements and such amortization
shall be reimbursed by Tenant to Landlord on a monthly basis during the
remainder of the term of the Lease as an Additional Charge (which amortization
shall be calculated with interest in the same manner as amortization determined
pursuant to clause (v) and the last sentence of subparagraph 4(c)(1)(C);
provided, however, that Tenant shall not be obligated to pay any portion of the
useful life of the Base Building Improvements which extends beyond the
Expiration Date.  If Landlord does not elect to restore the Base Building
Improvements, but becomes obligated to do so because Tenant elects to make the
contribution toward the first sentence of this subparagraph, the Landlord shall
restore the Base Building Improvements and

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<PAGE>   50
utilize such insurance proceeds as are available, and Tenant shall make the
contribution which it has agreed to make toward such cost as when Landlord
needs such funds for restoration.  If Landlord elects or becomes obligated to
reconstruct the Base Building Improvements, Tenant shall be obligated to
reconstruct the Tenant Improvements at Tenant's cost.  However, notwithstanding
anything contained herein, if Landlord makes the election under clause (x) of
the first sentence of this subparagraph, the maximum cost to be borne by Tenant
relating to the Base Building Improvements under any such event shall be
amortization of an amount equal to fifteen percent (15%) of the replacement
cost of the Base Building Improvements.  In addition, and notwithstanding
anything to the contrary contained in this subparagraph, if the total cost that
Tenant becomes obligated to pay pursuant to this subparagraph on account of
damage to the Base Building Improvements and the Tenant Improvements (either in
cash or through amortization) exceeds fifteen percent (15%) of the full
replacement cost of both the Base Building Improvements and the Tenant
Improvements, then Tenant shall have the option to terminate this Lease;
provided, however, that if Tenant exercises said option, this Lease shall not
terminate if Landlord agrees to pay such excess.


                 (f)      PROCEEDS AND PAYMENTS UPON TERMINATION.  If this
Lease is terminated under Paragraph 22(e) or by Tenant under Paragraph 22(c)
[Casualty at End of Term] or Paragraph 22(d) [Mutual Termination Option;
Insured Casualty], Landlord shall be entitled to retain any and all insurance
proceeds arising out of the damage or destruction (including, without
limitation, proceeds attributable to the Tenant Improvements), except for any
portion of the award specifically compensating Tenant for the loss of its
personal property, equipment and trade fixtures.  Upon any termination by
Tenant, Tenant shall assign all of its rights to any insurance proceeds to
which it is entitled (except any portion specifically compensating Tenant for
the loss of its personal property, equipment and trade fixtures) to Landlord.



                 (g)      RENT ABATEMENT.  In the event of an insured casualty,
the Base Rent and Additional Charges during the period from the date of the
damage or destruction until completion of the restoration, repair, replacement
or rebuilding shall be abated by an amount that is in the same ratio to the
Base Rent and Additional Charges as the area of the Premises rendered unusable
for the permitted use hereunder bears to the area of the Premises prior to the
damage or destruction, but only to the extent of the amount of proceeds payable
to Landlord (taking into account any applicable waiting period or deductibles)
under the





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<PAGE>   51
rental interruption insurance required to be carried by Landlord pursuant to
Paragraph 12(e) [Landlord's Insurance Obligations].

                 (h)      WAIVER OF STATUTORY PROVISIONS.  Tenant hereby waives
the provisions of Section 1932.2, and Section 1933.4, of the Civil Code of
California, or any similar laws now or hereafter in effect, that would relieve
the Tenant from any obligation to pay Rent under this Lease due to any damage
or destruction.

         23.     EMINENT DOMAIN.

                 (a)      ENTIRE BUILDING.  If the entire Building is taken or
appropriated under the power of eminent domain or conveyed in lieu thereof (any
such event, a "Taking"), (i) this Lease and all right, title and interest of
the Tenant hereunder shall cease and come to an end on the date of vesting of
title pursuant to such Taking, and (ii) the Base Rent and Additional Charges
payable shall be apportioned as of the date of such vesting.

                 (b)      PARTIAL BUILDING; TERMINATION.  If there is a Taking
of less than the entire Building, this Lease shall terminate as to the portion
of the Building so taken upon vesting of title pursuant to such Taking, and if,
but only if, such Taking is so extensive that it renders the remaining portion
of the Building unsuitable for the use being made of the Building on the date
immediately preceding such Taking, either the Tenant or the Landlord may
terminate this Lease by written notice to the other party not later than thirty
(30) days after the date of such vesting, specifying as the date for
termination a date not later than thirty (30) days after such notice.  On the
date specified in such notice, (i) the term of this Lease and all right, title
and interest of Tenant hereunder shall cease, and (ii) the Base Rent and
Additional Charges shall be apportioned as of the date of such termination.

                 (c)      PARTIAL BUILDING; RESTORATION.  If there is a Taking
of less than the entire Building and this Lease is not terminated with respect
to the Building as provided in (b) above, this Lease shall terminate as to the
portion of the Building so taken upon vesting of title pursuant to such Taking.
In any such case, Landlord shall restore the Base Building Improvements (to the
extent of Landlord's obligations under the Work Letter) for the portion of the
Building continuing under this Lease at Landlord's cost and expense;  provided,
however, that Landlord shall not be required to repair or restore any injury or
damage to the property of Tenant or to make any repairs or restoration of any
Tenant Improvements or Alterations installed on the Premises by or at the
expense of Tenant. Tenant shall, at Tenant's sole cost and expense, promptly
and pursuant to the provisions of Paragraph 8 [Alterations], restore those
portions





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<PAGE>   52
of the Tenant Improvements and Alterations not so taken.  Thereafter, the Base
Rent and Additional Charges to be paid under this Lease for the remainder of
the Term shall be proportionately reduced, such that thereafter the amounts to
be paid by Tenant shall be in the ratio that the portion of the Building not so
taken bears to the total area of the Building prior to such Taking.

                 (d)      END OF TERM TAKING.  If, during the twelve (12)
months prior to the expiration of the Term, there is a Taking of a portion of
the Building, both Landlord and Tenant shall have the option, exercisable by
written notice to the other party given within thirty (30) days after such
vesting of title, of terminating this Lease as of the date of vesting of title
pursuant to the Taking, in which event Landlord shall make a proportionate
refund to Tenant of any Base Rent and Additional Rent that has been paid in
advance.

                 (e)      TAKING OF PROJECT.  If there is a Taking of any
portion of the Project which causes the Premises to violate parking
requirements, building setbacks or access requirements under any applicable
Laws, Landlord shall cure such non-compliance by any reasonable means.  If
Landlord determines that such violation is not curable by reasonable means, or
if Landlord fails to commence such cure within sixty (60) days after such
Taking, both Landlord and Tenant shall have the option, exercisable by written
notice to the other party, of terminating this Lease as of the date of vesting
of title pursuant to the Taking, in which event Landlord shall make a
proportionate refund to Tenant of any Base Rent and Additional Rent that has
been paid in advance.

                 (f)      AWARD.  Landlord shall receive (and Tenant shall
assign to Landlord upon demand from Landlord) any income, rent, award or any
interest therein which may be paid in connection with any Taking, whether
partial or total, and whether or not either Landlord or Tenant exercises any
right it may have to terminate this Lease excepting that portion of the award
which is specifically allocable to the unamortized cost of any Tenant
Improvements (whether or not the Tenant was required to remove such Tenant
Improvements at the Expiration of the Lease).  Tenant shall have no claim
against Landlord for any other part of such sum paid by virtue of the Taking,
whether or not attributable to the value of the unexpired term of this Lease,
except that Tenant shall be entitled to petition the condemning authority for
the following:  (i) the then unamortized cost of any Tenant Improvements or
Alterations paid for by Tenant which Tenant is required to remove upon
termination of the Lease; (ii) the value of Tenant's trade fixtures;  (iii)
Tenant's relocation costs; and





                                       44

<PAGE>   53
(iv) Tenant's goodwill, loss of business and business interruption.

                 (g)       TAKING.  Notwithstanding anything to the
contrary contained in this Paragraph 23, if there is a Taking of the temporary
use or occupancy of any part of the Premises during the Term, this Lease shall
be and remain unaffected by such Taking and Tenant shall continue to pay in
full all Base Rent and Additional Charges payable hereunder by Tenant during
the Term.  In such event, Tenant shall be entitled to receive that portion of
any award which represents compensation for the use or occupancy of the
Premises during the Term, and Landlord shall be entitled to receive that
portion of any award which represents the cost of restoration of the Premises
and the use and occupancy of the Premises after the end of the Term.
Notwithstanding the foregoing, if Landlord determines in its reasonable
judgment that any Taking of the temporary use or occupancy of any part of the
Premises will continue until the end of the Term, either party may elect to
terminate this Lease by written notice to the other party at any time after
Landlord has made such determination and delivered written notice thereof to
Tenant, and Landlord shall be entitled to receive the entire award for the
Taking, except for that portion which represents compensation for the use or
occupancy of the Premises during the period of time prior to such termination.

                 (h)      WAIVER OF STATUTORY PROVISIONS.  Landlord and Tenant
understand and agree that the provisions of this Paragraph 23 are intended to
govern fully the rights and obligations of the parties in the event of a Taking
of all or any portion of the Premises.  Accordingly, the parties each hereby
waives any right to terminate this Lease in whole or in part under Sections
1265.120 and 1265.130 of the California Code of Civil Procedure or under any
similar Law now or hereafter in effect.

         24.     SALE BY LANDLORD.  Landlord shall not sell or otherwise convey
its interest in any portion of the Premises, other than by foreclosure or a
conveyance in lieu of foreclosure, prior to substantial completion of the Base
Building Improvements.  If Landlord sells or otherwise conveys its interest in
all or any portion of the Premises, Landlord shall be relieved of its
obligations under the Lease with respect to the conveyed portion from and after
the date of sale or conveyance only when Landlord transfers the proportionate
amount of any security deposit of Tenant to its successor and the successor
assumes in writing the obligations to be performed by Landlord on and after the
effective date of the transfer, whereupon Tenant shall attorn to such
successor.





                                       45

<PAGE>   54
         25.     RIGHT OF LANDLORD TO PERFORM.  All covenants and agreements to
be performed by Tenant under any of the terms of this Lease shall be performed
by Tenant at Tenant's sole cost and expense and without any abatement of Base
Rent or Additional Charges.  If Tenant defaults in the payment of any sum of
money, other than Base Rent or Additional Charges, required to be paid by it
hereunder or fails to perform any other act on its part to be performed
hereunder, and such failure continues for ten (10) days after notice thereof by
Landlord (or such longer period as noted in Paragraph 9(e)[Cure Rights] or
Paragraph 21(a) [Tenant's Default], except in the event of emergency), Landlord
may, but shall not be obligated to, make any such payment or perform any such
act on Tenant's part to be made or performed as provided in this Lease without
waiving or releasing Tenant from any obligations of Tenant.  All sums so paid
by Landlord and all reasonable and necessary incidental costs incurred by
Landlord in connection therewith, together with interest thereon at the Default
Rate from the date of such payment by Landlord, shall be payable to Landlord on
demand as Additional Charges.

         26.     OWNERSHIP OF IMPROVEMENTS; SURRENDER OF PREMISES.

                 (a)      OWNERSHIP OF TENANT IMPROVEMENTS & ALTERATIONS.  The
Tenant Improvements and any Alterations constructed on or affixed to the
Premises by or on behalf of Tenant pursuant to the terms and conditions of this
Lease and the Work Letter, except for Tenant's movable furniture and equipment,
trade fixtures and Alterations which can be removed without damage to the
Premises, shall become Tenant's property upon their completion, shall remain
Tenant's property throughout the Term of this Lease and shall become Landlord's
property upon the expiration or earlier termination of this Lease.

                 (b)      DELIVERY AND RESTORATION OF PREMISES.  At the end of
the Term or any renewal thereof or other sooner termination of this Lease,
Tenant will peaceably deliver to Landlord possession of the Premises, together
with all improvements or additions thereon (including, without limitation, the
Tenant Improvements and Alterations which Landlord does not require Tenant to
remove pursuant to Paragraph 8 [Alterations] or Paragraph 6 [Election to Remove
Tenant Improvements] of the Work Letter), in the same condition as received or
first installed subject to normal wear and tear but in the condition described
on Exhibit "K" attached hereto, subject to the terms of Paragraph 23 [Eminent
Domain] and the rights and obligations of Landlord and Tenant concerning
casualty damage pursuant to Paragraph 22 [Damage and Destruction].  Tenant may,
upon the termination of this Lease, remove all movable furniture, trade
fixtures and equipment belonging to Tenant which is not an integral part of any
Building System, at Tenant's sole cost, provided that Tenant repairs any





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<PAGE>   55
damage caused by such removal.  Property not so removed shall be deemed
abandoned by Tenant, and title to the same shall thereupon pass to Landlord.
In addition, Tenant shall remove and/or reconfigure, at Tenant's sole cost and
with all due diligence, any or all Tenant Improvements and Alterations to the
Premises installed by or at the expense of Tenant which Tenant is required to
remove and/or reconfigure under Paragraphs 8(d) or (e) [Alterations] of this
Lease or Paragraph 6 [Election to Remove Tenant Improvements] of the Work
Letter.

                 (c)      NO MERGER.  The voluntary or other surrender of this
Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and
shall, at the option of Landlord, terminate all or any existing subleases or
subtenancies, or may, at the option of Landlord, operate as an assignment to it
of any or all such subleases or subtenancies.

         27.     WAIVER.  If either Landlord or Tenant waives the performance
of any term, covenant or condition contained in this Lease, such waiver shall
not be deemed to be a waiver of any subsequent breach of the same or any other
term, covenant or condition contained herein.  Furthermore, the acceptance of
Base Rent or Additional Charges by Landlord shall not constitute a waiver of
any preceding breach by Tenant of any term, covenant or condition of this
Lease, regardless of Landlord's knowledge of such preceding breach at the time
Landlord accepted such Base Rent or Additional Charges.  Failure by Landlord to
enforce any of the terms, covenants or conditions of this Lease for any length
of time shall not be deemed to waive or to decrease the right of Landlord to
insist thereafter upon strict performance by Tenant.  Waiver by Landlord of any
term, covenant or condition contained in this Lease may only be made by a
written document signed by Landlord.

         28.     NOTICES.  Except as otherwise expressly provided in this
Lease, and except for routine bills or invoices for Base Rent or Additional
Charges delivered by Landlord pursuant to Paragraph 4, which Landlord may elect
to deliver by first class U.S. Mail, any bills, statements, notices, demands,
requests or other communications given or required to be given under this Lease
shall be effective only if rendered or given in writing, sent by certified mail
(return receipt requested), reputable overnight carrier, or delivered
personally, (i) to Tenant at Tenant's address set forth in the Basic Lease
Information; or (ii) to Landlord at Landlord's address set forth in the Basic
Lease Information;  or (iii) to such other address as either Landlord or Tenant
may designate as its new address for such purpose by notice given to the other
in accordance with the provisions of this Paragraph 28.  Any bill, statement,
notice, demand, request or other communication shall be deemed to have





                                       47

<PAGE>   56
been rendered or given on the date the return receipt indicates delivery of or
refusal of delivery if sent by certified mail, the day upon which recipient
accepts and signs for delivery from a reputable overnight carrier or on the
date a reputable overnight carrier indicates refusal of delivery,  or upon the
date personal delivery is made, or 3 days after mailed by first class mail.

         29.     TAXES PAYABLE BY TENANT.   Prior to delinquency Tenant shall
pay all taxes levied or assessed upon Tenant's equipment, furniture, fixtures
and other personal property located in or about the Premises.  If the assessed
value of Landlord's property is increased by the inclusion therein of a value
placed upon Tenant's equipment, furniture, fixtures or other personal property,
Tenant shall pay to Landlord, upon written demand, the taxes so levied against
Landlord, or the proportion thereof resulting from said increase in assessment.

         30.     ABANDONMENT.  Tenant shall not abandon the Premises and cease
performing its financial and maintenance obligations under this Lease at any
time during the Term. If Tenant abandons and ceases performing its financial
and maintenance obligations under this Lease, or surrenders the Premises or is
dispossessed by process of law or otherwise, any personal property belonging to
Tenant and left on the Premises shall, at the option of Landlord, be deemed to
be abandoned and title thereto shall thereupon pass to Landlord.
Notwithstanding anything to the contrary contained herein, Tenant may not
vacate the Premises if such would result in a termination of Landlord's
insurance.  Upon Tenant's request, Landlord will ask its insurer if such
vacation of the Premises would result in termination of its current insurance
policy.  Solely for purposes of this Paragraph 30, Tenant shall not be deemed
to have abandoned the Premises solely because Tenant is not occupying the
Premises.

         31.     SUCCESSORS AND ASSIGNS.  Subject to the provisions of
Paragraphs 11 [Assignment and Subletting] and 24 [Sale by Landlord], the terms,
covenants and conditions contained herein shall be binding upon and inure to
the benefit of the parties hereto and their respective legal and personal
representatives, successors and assigns.

         32.     ATTORNEY'S FEES.  If Tenant or Landlord brings any action for
any relief against the other, declaratory or otherwise, arising out of this
Lease, including any suit by Landlord for the recovery of Base Rent or
Additional Charges or possession of the Premises, the losing party shall pay to
the prevailing party a reasonable sum for attorney's fees, which shall be
deemed to have accrued on the commencement of such action and shall be paid
whether or not the action is prosecuted to judgment.





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<PAGE>   57
         33.     LIGHT AND AIR.  Tenant covenants and agrees that no diminution
of light, air or view by any structure which may hereafter be erected (whether
or not by Landlord) shall entitle Tenant to any reduction of Rent under this
Lease, result in any liability of Landlord to Tenant, or in any other way
affect this Lease or Tenant's obligations hereunder.

         34.     SECURITY DEPOSIT.

                 (a)      LETTER OF CREDIT.  On or before March 19, 1997, Tenant
shall deliver to Landlord an unconditional, irrevocable, transferable letter of
credit, in the amount of One Million Seven Hundred and Fifty Thousand Dollars
($1,750,000), issued by a financial institution acceptable to Landlord in the
form attached hereto as Exhibit "M", with an original term of no less than one
year and automatic extensions through the end of the Term of this Lease and
sixty (60) days thereafter (the "Letter of Credit").  Tenant shall keep the
Letter of Credit, at its expense, in full force and effect until the sixtieth
(60th) day after the Expiration Date or other termination of this Lease, to
insure the faithful performance by Tenant of all of the covenants, terms and
conditions of this Lease, including, without limitation, Tenant's obligations to
repair, replace or maintain the Premises and Tenant's obligations under the Work
Letter.  The Letter of Credit shall provide thirty (30) days' prior written
notice to Landlord of cancellation or material change thereof, and shall further
provide that, in the event of any nonextension of the Letter of Credit at least
thirty (30) days prior to its expiration, the entire face amount shall
automatically be paid to Landlord, and Landlord shall hold the funds so obtained
as the security deposit required under this Lease.  If for any reason such
automatic payment does not occur in the event of a nonextension at least thirty
(30) days prior to expiration, Landlord shall be entitled to present its written
demand for payment of the entire face amount of the Letter of Credit, and the
funds so obtained shall be held as provided above.  Any unused portion of the
funds so obtained by Landlord shall be returned to Tenant upon replacement of
the Letter of Credit or deposit of cash security in the full amount required
hereunder.  If Landlord uses any portion of the cash security deposit to cure
any default by Tenant hereunder, Tenant shall replenish the security deposit to
the original amount within ten (10) days of notice from Landlord.  Tenant's
failure to do so shall become be a material  breach of this Lease.  Landlord
shall keep any cash security funds separate from its general funds, and shall
invest such cash security at Tenant's reasonable direction, and any interest
actually earned by Landlord on such cash security shall be paid to Tenant
quarterly.  If an event of default occurs under this Lease or the Work Letter
(including, without limitation, any default by Tenant with respect to its





                                       49

<PAGE>   58
payment and performance obligations under the Work Letter), or if Tenant is the
subject of an Insolvency Proceeding, Landlord may present its written demand
for payment of the entire face amount of the Letter of Credit and the funds so
obtained shall become due and payable to Landlord.  Landlord may retain such
funds to the extent required to compensate Landlord for damages incurred, or to
reimburse Landlord as provided herein, in connection with any such event of
default, and any remaining funds shall be held as a cash security deposit.
Without limiting the foregoing, in the event of a default in Tenant's
obligations to complete the Tenant Improvements in accordance with the Work
Letter, Landlord may use the security deposit to complete the Tenant
Improvements as contemplated by the Work Letter.  The security deposit
described in this Paragraph 34, and Tenant's obligations and Landlord's rights
with respect thereto, shall be in addition to any Letter of Credit or other
security provided by Tenant under the Work Letter.


                 (b)      RETURN OF LETTER OF CREDIT.  The Letter of Credit
shall be returned to Tenant, and Tenant's obligation to provide a security
deposit to Landlord under this Paragraph 34 shall terminate, at any time after
the fifth (5th) anniversary of the Rent Commencement Date when Tenant can
establish to Landlord's reasonable satisfaction that as of the end of any
fiscal year of Tenant following the fifth anniversary of the Rent Commencement
Date, Tenant has (i) annual net income in excess of Twenty-Five Million Dollars
($25,000,000) for the previous two consecutive years, (ii) shareholder equity
in excess of One Hundred Million Dollars ($100,000,000), and (iii) cash and
cash equivalents in excess of Fifty Million Dollars ($50,000,000), all as
determined in accordance with GAAP and as reflected on certified, audited
financial statements.

                 (c)      SUBSTITUTION OF CASH COLLATERAL.  In lieu of, or in
replacement of, the Letter of Credit, Tenant may deliver to Landlord at any
time during the Term a cash deposit in the face amount required of the Letter
of Credit, provided that Landlord shall have no additional liability or reduced
benefits from that which Landlord would have if Tenant provided a Letter of
Credit.  All terms, conditions and requirements with respect to the Letter of
Credit contained in this Paragraph 34, including, without limitation,
application of proceeds, reduction of amount, return of deposit, and investment
requirements for cash collateral, shall apply to any such cash collateral.

                 (d)      CONVERSION OF DEPOSIT TO LOAN.  Landlord and Tenant
acknowledge and agree that, if Tenant defaults under this Lease and fails to
fully cure such default within the applicable cure period and Landlord elects
to pursue its remedies under





                                       50

<PAGE>   59
California Civil Code Section 1951.2 or under this Lease to terminate this
Lease (any such event, a "Landlord Action"), (i) Landlord will incur certain
damages, costs and expenses, including, without limitation, marketing costs,
commissions, relocation costs, tenant improvement costs, and carrying costs in
connection with releasing the Premises, in addition to the other damages, costs
and expenses Landlord may incur as a result of such default and/or other
defaults under this Lease (all of the foregoing collectively, "Default
Damages");  (ii) Landlord has no assurance of a source of funds to cover such
Default Damages other than the proceeds of the Letter of Credit (or cash
collateral); and (iii) the proceeds of the Letter of Credit (or cash
collateral) should be available to Landlord to apply to Default Damages, even
if the amount thereof exceeds that amount to which Landlord is ultimately
determined to be entitled under this Lease and pursuant to applicable law.
Accordingly, at Landlord's sole election, Landlord shall be entitled to draw
the full amount of the Letter of Credit (or the full amount of cash collateral
shall be released to Landlord) which is then existing (after any previous
application of funds by Landlord and/or replenishment by Tenant pursuant to
Paragraph 34(a) above), simultaneously with commencement of a Landlord Action
or at any time thereafter.  All proceeds thereof in excess of amounts applied
(pursuant to Paragraph 34(a)) to Default Damages incurred by Landlord prior to
commencement of the Landlord Action shall be deemed a loan from Tenant to
Landlord (the "Default Loan").  The Default Loan shall be unsecured and shall
not bear interest, and repayment thereof shall be limited to the terms and
conditions set forth in this paragraph.  Any sums to which Landlord from time
to time becomes entitled hereunder and pursuant to law as a result of Tenant's
default and any previous defaults of the Lease, to which the Letter of Credit
(or cash collateral) has not previously been applied pursuant to Paragraph
34(a), shall be offset against the principal balance of the Loan.  The amount
of the Default Loan remaining, if any, after such offset shall be referred to
herein as the "Excess Amount".  The Excess Amount shall be payable by Landlord
to Tenant from, and only from, first any proceeds from the Letter of Credit (or
cash collateral) which have not been applied to Default Damages incurred by
Landlord after the same are finally determined (the "Remaining Proceeds"), and
then Excess Rent.  The Remaining Proceeds shall be paid by Landlord to Tenant
promptly upon final determination after the entire Premises are leased to a
third party or parties.  If Tenant disputes the amount of Remaining Proceeds
paid by Landlord, Tenant may submit such dispute to arbitration in accordance
with Paragraph 41 [Arbitration of Disputes] of this Lease.  "Excess Rent" shall
mean the amount by which (x) rent received by Landlord (from the tenant or
tenants leasing all or any portion of the Premises after Tenant's default) in
any month exceeds (y) the amount of rent that would have been payable under





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<PAGE>   60
this Lease for such month if this Lease had not been terminated.  Landlord
shall pay Tenant one-half of the Excess Rent until the earlier of (A) the date
the Excess Amount is fully repaid or (B) the date that would have been the
Expiration Date (excluding any Renewal Term) of this Lease.  Any remaining
balance of the Default Loan on such date shall be deemed forgiven.  If the
Default Loan is insufficient to cover all Default Damages, Tenant shall pay
Landlord any such shortfall immediately upon demand by Landlord, and Landlord
shall have all rights and remedies available at law or elsewhere in the Lease
with respect to such shortfall.

         35.     FINANCIAL INFORMATION.  Tenant will furnish to the Landlord
within ninety (90) days after the end of each calendar year, copies of audited,
consolidated financial statements, which shall include, without limitation,
balance sheets, statements of income and expenses and sources and uses of funds
of the Tenant and its subsidiaries for such calendar year, all in reasonable
detail and stating in comparative form the figures as of the end of and for the
previous calendar year and including appropriate footnotes, prepared in
accordance with generally accepted accounting principles, and certified and
audited by independent public accountants of recognized standing reasonably
satisfactory to the Landlord; provided, however, that so long as Tenant is a
publicly traded corporation, in lieu of the foregoing Tenant shall provide
Landlord with copies of Tenant's annual report and 10K Filing when such
documents are released to the public.  Tenant hereby covenants and warrants to
Landlord that all financial information and other descriptive information
regarding Tenant's business, which has been or shall be furnished to Landlord,
is and shall be accurate and complete at the time of delivery to Landlord.

         36.     PARKING.  Subject to the Rules and Regulations, Tenant shall
have the exclusive right to use the parking situated on the Land; provided,
however, that other than marking parking spaces situated on the Land as
designated for Tenant's use (at Tenant's request), Landlord shall not be
obligated to enforce such exclusive right.

         37.     MISCELLANEOUS.

                  (a)  DEFINED TERMS.  The paragraph headings herein are for
convenience of reference and shall in no way define, increase, limit or
describe the scope or intent of any provision of this Lease.  The term
"Landlord" shall include Landlord and its successors and assigns.  In any case
where this Lease is signed by more than one person, the obligations hereunder
shall be joint and several.  The term "Tenant" shall include Tenant and its
successors and assigns.





                                       52

<PAGE>   61
                 (b)   OTHER TERMS.  Time is of the essence of this Lease and
all of its provisions.  This Lease shall in all respects be governed by the
laws of the State of California.  This Lease, together with its exhibits,
contains all the agreements of the parties hereto and supersedes any previous
negotiations.  There have been no representations made by the Landlord or
understandings made between the parties other than those set forth in this
Lease and its exhibits.  This Lease may not be modified except by a written
instrument by the parties hereto.

                 (c)   QUIET ENJOYMENT.  Upon Tenant paying the Base Rent and
Additional Charges and performing all of Tenant's obligations under this Lease,
Tenant may peacefully and quietly enjoy the Premises during the Term as against
all persons or entities lawfully claiming by or through Landlord; subject,
however, to the provisions of this Lease.

                 (d)  SURVIVAL OF INDEMNITIES; IMMEDIATE OBLIGATION TO DEFEND.
All indemnities contained herein shall survive the expiration or earlier
termination of this Lease.  With respect to each of the indemnities contained
in this Lease, the indemnitor has an immediate and independent obligation to
defend the indemnitee from any claim which actually or potentially falls within
the indemnity provision, which obligation arises at the time such claim is
tendered to the indemnitor by the indemnitee and continues at all times
thereafter.

         38.     REPRESENTATIONS AND WARRANTIES.

                 (a)      LANDLORD'S REPRESENTATIONS AND WARRANTIES.  Landlord
represents and warrants to Tenant that, to Landlord's best knowledge, (i) the
Premises are not now in violation of any applicable Laws other than Laws with
respect to Hazardous Substances; (ii) the zoning requirements currently
applicable to the Premises permit the permitted use under this Lease; and (iii)
upon substantial completion of the Base Building Improvements, the Premises
will not be in violation of any applicable Laws other than Laws with respect to
Hazardous Substances (subject to completion of the Tenant Improvements, to the
extent such completion is required for compliance with any Law).  For purposes
of this Section 38, the term "to Landlord's best knowledge" shall mean the
current actual conscious knowledge of Steve Dostart after reasonably
appropriate and diligent inquiry in connection with the acquisition of the Land
and construction of the Base Building Improvements.  Landlord hereby represents
that Steve Dostart is the representative of Landlord with supervisory
responsibilities concerning the Premises, the acquisition of the Land and the
construction of the Base Building





                                       53

<PAGE>   62
Improvements who would, in the ordinary course of his responsibilities, receive
notice from persons or entities of any of the matters described in the
representations and warranties in this Lease.

                 (b)      TENANT'S REPRESENTATIONS AND WARRANTIES.  Tenant
represents and warrants to Landlord that, to Tenant's best knowledge, upon
substantial completion of the Tenant Improvements, the Premises will not be in
violation of any applicable Laws other than Laws with respect to Hazardous
Substances.  For purposes of this Section 38, the term "to Tenant's best
knowledge" shall mean the current actual conscious knowledge of David Yntema
after reasonably appropriate and diligent inquiry in connection with
construction of the Tenant Improvements.  Tenant hereby represents that David
Yntema is the representative of Tenant with supervisory responsibilities
concerning the Premises, this Lease and the construction of the Tenant
Improvements who would, in the ordinary course of his responsibilities, receive
notice from persons or entities of any of the matters described in the
representations and warranties in this Lease.

         39.     REAL ESTATE BROKERS.

                 NO OTHER BROKERS.  Each party represents that it has not had
dealings with any real estate broker, finder or other person with respect to
this Lease in any manner, except for Landlord's Broker and Tenant's Broker
named in the Basic Lease Information, whose fees or commission, if earned,
shall be paid as provided in a separate agreements between the parties.  Each
party shall hold harmless the other party from all damages resulting from any
claims that may be asserted against the other party by any other broker, finder
or other person with whom the other party has or purportedly has dealt.

         40.     HAZARDOUS SUBSTANCE LIABILITY.   Tenant has received from
Landlord a copy of the following report: (the "Environmental Reports"): (i)
Phase I and Phase II Environmental Assessment, Former RMC Lonestar Facility,
605 Fairchild Drive, Mountain View, California, dated December 26, 1996 by
McLaren Hart Environmental Engineering Corporation.

                 (a)      DEFINITION OF HAZARDOUS SUBSTANCES.  For the purposes
of this Lease, "Hazardous Substances" shall be defined, collectively, as oil,
flammable explosives, asbestos, radioactive materials, hazardous wastes, toxic
or contaminated substances or similar materials, including, without limitation,
any substances which are "hazardous substances," "hazardous wastes," "hazardous
materials" or "toxic substances" under applicable environmental laws,
ordinances or regulations.





                                       54

<PAGE>   63
                 (b)      TENANT INDEMNITY.  Tenant releases Landlord from any
liability for, waives all claims against Landlord and shall indemnify, defend
and hold harmless Landlord, its employees, partners, agents, subsidiaries and
affiliate organizations against any and all claims, suits, loss, costs
(including costs of investigation, clean up, monitoring, restoration and
reasonably attorney fees), damage or liability, whether foreseeable or
unforeseeable, by reason of property damage (including diminution in the value
of the property of Landlord), personal injury or death directly arising from or
related to Hazardous Substances released, manufactured, discharged, disposed,
used or stored on, in, or under the Land or Premises during the initial Term
and any extensions of this Lease by Tenant or its employees, agents or
contractors.  The provisions of this Tenant Indemnity regarding Hazardous
Substances shall survive the termination of the Lease.

                 (c)      LANDLORD INDEMNITY.  Landlord releases Tenant from
any liability for, waives all claims against Tenant and shall indemnify, defend
and hold harmless Tenant, its officers, employees, and agents to the extent of
Landlord's interest in the Project, against any and all actions by any
governmental agency for clean up of Hazardous Substances on or under the Land
(including, without limitation, any groundwater contamination) including costs
of legal proceedings, investigation, clean up, monitoring, and restoration,
including reasonable attorney fees and Landlord also releases Tenant from any
liability for, waives all claims against Tenant and shall indemnify, defend and
hold harmless Tenant, its officers, employees and agents from and against any
and all actions for damages to property instituted by any third parties, if,
and to the extent, in either case, arising from the presence of Hazardous
Substances on, in or under the Land or Premises, except to the extent caused by
the release, disposal, use or storage of Hazardous Substances in, on or about
the Premises by Tenant, its employees, agents, sublessees, assignees, or
contractors.  The provisions of this Landlord Indemnity regarding Hazardous
Substances shall survive the termination of the Lease.

                 (d)      TENANT COVENANTS.  Tenant has informed Landlord that,
except for very immaterial amounts of toxic materials incidental to office use
(e.g. copier toner, typical janitorial cleaning materials, petroleum products
in cars) and those materials listed on Exhibit "N", Tenant will not use any
Hazardous Substances within the Project and shall comply with any applicable
Laws to the extent that it does. Tenant shall immediately notify Landlord if
and when Tenant learns or has reason to believe there has been any release of
Hazardous Substances in, on or about the Project during the Term.

         41.     ARBITRATION OF DISPUTES.





                                       55

<PAGE>   64
ANY CONTROVERSY OR CLAIM ARISING OUT OF PARAGRAPHS 1(a) [PREMISES] WITH RESPECT
TO REMEASUREMENT; 3(c) [OCCUPANCY DATE], 3(e) [MILESTONES], 3(f) [EXCLUSIVE
REMEDIES], 4(c)(2)(4) [AUDIT], 7 [COMPLIANCE WITH LAWS], 8 [ALTERATIONS], 9
[REPAIRS AND MAINTENANCE], 14 [SERVICES AND UTILITIES], 22(f) [MUTUAL
TERMINATION RIGHT; INSURED CASUALTY] WITH RESPECT TO LENGTH OF TIME TO RESTORE,
26 [DELIVERY AND RESTORATION OF PREMISES], AND 43(e) [CONVERSION OF DEPOSIT TO
LOAN] WITH RESPECT TO THE AMOUNT OF REMAINING PROCEEDS, OF THIS LEASE, OR
PARAGRAPH 18 [DISPUTE RESOLUTION] OF THE WORK LETTER, OR A BREACH OF SUCH
PARAGRAPHS SOLELY BETWEEN LANDLORD AND TENANT, BUT NOT INCLUDING A DEFAULT WITH
RESPECT TO THE TIMELY PAYMENT OF BASE RENT AND ADDITIONAL CHARGES, SHALL BE
SETTLED BY ARBITRATION IN ACCORDANCE WITH THE RULES OF THE AMERICAN ARBITRATION
ASSOCIATION, AND JUDGMENT ON THE AWARD RENDERED BY THE ARBITRATOR(S) MAY BE
ENTERED IN ANY COURT HAVING JURISDICTION.  THE PREVAILING PARTY IN SUCH
ARBITRATION SHALL BE ENTITLED TO ATTORNEYS' FEES AND COSTS.

                 NOTICE:  BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO
HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF
DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA
LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE
LITIGATED IN A COURT OR JURY TRIAL.  BY INITIALING IN THE SPACE BELOW YOU ARE
GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE
SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION.  IF YOU
REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE
COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL
PROCEDURE.  YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY.

         WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES
ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION
TO NEUTRAL ARBITRATION.

         CONSENT TO NEUTRAL ARBITRATION BY:
/s/ Steve Dostart (LANDLORD): /s/ David Yntema (TENANT).


         42.     SIGNAGE.  Subject to (a) compliance with all applicable
governmental requirements and subject to (b) Landlord's approval of the exact
size, location and materials thereof (which approval shall not be unreasonably
withheld, conditioned or delayed), Tenant shall have the right to install
exterior monument signage adjacent to entrances to the Building and the Project
and on the exterior of the Building, but in not more than two (2) locations on
the exterior of the Building.  Tenant shall be responsible for the costs
related to such signage.

         43.     OPTION TO RENEW.   Tenant shall have the right to extend the
Term for one (1) period of seven (7) years ("Extension





                                       56

<PAGE>   65
Term") following the initial Expiration Date, by giving written notice
("Exercise Notice") to Landlord at least eighteen (18) months prior to the
Expiration Date, subject to the following conditions: (i) no event of default
is continuing under this Lease at the time of the Exercise Notice or at the
commencement of the Extension Term; (ii) Vivus, Inc. continues to physically
occupy the Premises; and (iii) the creditworthiness of Vivus, Inc. has not
reduced below that which existed as of the execution date of the Lease, and, in
the event that the Security Deposit required under Paragraph 34 has been
returned to Tenant, and then the credit of Tenant as of the date of the
Exercise Notice has fallen below the credit standards outlined in Paragraph
34(b) "Return of Letter of Credit", that Vivus, Inc. shall redeliver such
Security Deposit to Landlord and such Security Deposit shall be governed by the
provisions of Paragraph 34.

         44.     RENT DURING EXTENSION TERM.  The Monthly Base Rent during the
seven-year Extension Term shall be the greater of the Base Rent paid during the
last month of the immediately preceding Term or the Fair Market Rental Value
for the Premises as of the commencement of the option term as determined below:

                 (a)      Within the later of thirty (30) days after receipt of
Tenant's Exercise Notice or eleven (11) months prior to the Expiration Date,
Landlord shall notify Tenant of Landlord's estimate of the Fair Market Rental
Value for the Premises, as determined below, for determining Monthly Base Rent
during the ensuing Extension Term.   Within fifteen (15) days after receipt of
such notice from Landlord, Tenant shall notify Landlord in writing that it (i)
agrees with such Fair Market Rental Value or (ii) disagrees with such Fair
Market Rental Value.  No response shall constitute disagreement.  If Tenant
disagrees with Landlord's estimate of Fair Market Rental Value for the
Premises, then the parties shall meet and endeavor to agree within fifteen (15)
business days after Landlord receives Tenant's notice described in the
immediately preceding sentence.  If the parties cannot agree upon the Fair
Market Rental Value within said fifteen (15) day period, Tenant may make
written demand upon Landlord for arbitration in accordance with the following
paragraph.  The judgment or the award rendered in any such arbitration may be
entered in any court having jurisdiction and shall be final and binding between
the parties.  The arbitration shall be conducted and determined in the City of
Palo Alto in accordance with the then prevailing rules of the American
Arbitration Association or its successor for arbitration or commercial
disputes, except to the extent the procedures mandated by said rules shall be
modified as follows:

                          (1)     Tenant shall, by the applicable date
specified therefor in this Lease, make written demand upon Landlord pursuant to
this Lease for arbitration, specifying therein the name and address of the
person to act as the





                                       57

<PAGE>   66
arbitrator on Tenant's behalf.  The arbitrator shall be qualified as a real
estate appraiser, with at least five (5) years experience in appraising major
commercial property in Santa Clara County and a member of a recognized society
of real estate appraisers, who would qualify as an expert witness over
objection to give opinion testimony addressed to the issue in a court of
competent jurisdiction.  Failure on the part of Tenant to make a timely and
proper demand for such arbitration (specifying the arbitrator to act on
Tenant's behalf, as aforesaid) shall constitute a waiver of the right thereto.
Within ten (10) business days after receipt of Tenant's demand for arbitration,
Landlord shall give written notice to Tenant pursuant to this Lease, specifying
the name and address of the person designated by Landlord to act as arbitrator
on its behalf who shall be similarly qualified.  If Landlord fails to notify
Tenant of the appointment of its arbitrator, within or by the time above
specified, then the arbitrator appointed by Tenant shall be the arbitrator to
determine the issue.  Notwithstanding the foregoing, upon receipt of Tenant's
demand for arbitration Landlord may, in its sole discretion, deliver a revised
estimate of the Fair Market Value of the Premises, and within fifteen (15) days
after receipt of such notice from Landlord, Tenant shall notify Landlord in
writing that it (i) agrees with such revised Fair Market Rental Value, or (ii)
disagrees with such revised Fair Market Rental Value, with no response
constituting agreement.  If Tenant disagrees with Landlord's Fair Market Value,
then within ten (10) business days after receipt of Tenant's notice of such
disagreement Landlord shall give Tenant written notice specifying Landlord's
designated arbitrator as provided in this paragraph above.

                                  (2)If two (2) arbitrators are chosen pursuant
to paragraph (1) above, the arbitrators so chosen shall meet within ten (10)
business days after Landlord notifies Tenant of the appointment of Landlord's
arbitrator as aforesaid.  If the two appraisers reach agreement on the Fair
Market Rental Value, that value shall be binding and conclusive upon the
parties.  If within ten (10) business days after such first meeting the two
arbitrators shall be unable to agree upon a determination of Fair Market Rental
Value, they, themselves, shall appoint a third arbitrator, who shall be a
competent and impartial person with qualifications similar to those required of
the first two arbitrators pursuant to Paragraph (1).  If the first two
arbitrators are unable to agree upon such appointment within five (5) business
days after expiration of said ten (10) days period, the third arbitrator shall
be selected by Landlord and Tenant, if they can agree thereon, within a further
period of ten (10) business days.  If Landlord and Tenant do not so agree, then
either party, on behalf of both, may request appointment of such a qualified
person by the then Chief Judge of the United States District Court having
jurisdiction over the City and county of San Francisco, and the other party
shall not raise any question





                                       58

<PAGE>   67
as to such Judge's full power and jurisdiction to entertain the application for
and make the appointment.  The three (3) arbitrators shall decide the dispute
if it has not previously been resolved by following the procedure set forth in
the following paragraph.

                 (3)      If an issue cannot be resolved by agreement between
the two arbitrators selected by Landlord and Tenant or settlement between
Landlord and Tenant during the course of arbitration, the issue shall be
resolved by the three arbitrators in accordance with the following procedures.
Within ten (10) business days after appointment of the third arbitrator, each
of the two arbitrators selected by Landlord and Tenant shall state in writing
his determination of the Fair Market Rental Value supported by the reasons
therefor with counterpart copies to each party.  The arbitrators shall arrange
for a simultaneous exchange of such proposed resolutions.  The role of the
third arbitrator shall be to select, within ten (10) business days after
submission to the third arbitrator of the two proposed resolutions, which of
the two proposed resolutions most closely approximates the third arbitrator's
determination of Fair Market Rental Value.  The third arbitrator shall have no
right to propose a middle ground or any modification of either of the two
proposed resolutions.  The resolution he chooses as most closely approximating
his determination shall constitute the decision of the arbitrators and be final
and binding upon the parties.

                          (4)     If any arbitrator fails, refuses or is unable
to act, his successor shall be appointed by the party who originally appointed
him, but in the case of the third arbitrator, his successor shall be appointed
in the same manner as provided for appointment of the third arbitrator.
Landlord and Tenant shall each pay the fees and expenses of its respective
arbitrator, if any, and shall each pay half of the fees and expenses of the
third arbitrator, if any.  The attorneys' fees and expenses of counsel for the
respective parties and of witnesses shall be paid by the respective party
engaging such counsel or calling such witnesses.

                          (5)     The arbitrators shall have the right to
consult experts and competent authorities with factual information or evidence
pertaining to a determination of Fair Market Rental Value, but any such
consultation shall be made in the presence of both Landlord and Tenant with
full right on their part to cross-examine.  The arbitrators shall render their
decision and award in writing with counterpart copies to Landlord and Tenant.
The arbitrators shall have no power to modify the provisions of this Lease.

                 (b)      Wherever used throughout this Paragraph (Rent during
Extension Term) the term "Fair Market Rental Value" shall mean the fair market
rental value of the Premises, using as a





                                       59

<PAGE>   68
guide the rate of monthly base rent which would be charged during the Extension
Term (including periodic increases during the Extension Term, if any) in the
South Bay Area for comparable commercial office space in comparable condition,
of comparable quality, as of the time that the Extension Term commences, with
appropriate adjustments regarding taxes, insurance and operating expenses as
necessary to insure comparability to this Lease, as the case may be, and also
taking into consideration amount and type of parking, location, existing
leasehold improvements (regardless of who paid for them and with the
assumption, for purposes of determining Fair Market Rental Value, that they are
fully usable by Tenant), proposed term of lease, amount of space leased, extent
of service provided or to be provided, and any other relevant terms or
conditions; provided, however, that in determining "Fair Market Rental Value,"
there shall be excluded any rental premium allocable to laboratory improvements
in the Premises over the rent which would have been received had the lab areas
been improved for office use.

                 (c)      If binding arbitration has not been completed prior
to the expiration of any preceding period for which Monthly Base Rent has been
determined, Tenant shall pay Monthly Base Rent at the greater of the Base Rent
paid during the last month of the immediately preceding Term or the Fair Market
Rental Value estimated by Landlord, with an adjustment to be made once Fair
Market Rental Value is ultimately determined by binding arbitration.  Such
adjustment shall not result in a decrease of the Monthly Base Rent for the
Premises below the amount payable by Tenant as of the period immediately
preceding the ensuing Extension Term.

                 (d)      From and after the commencement of the Extension
Term, all of the other terms, covenants and conditions of the Lease shall also
apply; provided, however, that Tenant shall have no further rights to extend
the Term.  No brokers' commissions or allowance for new tenant improvements
will be payable by Landlord in connection with the Extension Term.

         45.     SATELLITE ANTENNAS.  During the Term, Tenant shall have the
right, subject to relevant regulatory approvals and Landlord's consent, such
consent not to be unreasonably withheld or delayed, to install one or more
satellite antennas (each, an "Antenna") on the roof of the Building in a
location satisfactory to both Landlord and Tenant.  Without otherwise limiting
the criteria upon which Landlord may withhold its consent to any proposed
Antenna, if Landlord withholds its consent due to concerns regarding the
appearance of the Antenna or the impact on structural aspects of the Building,
such withholding of consent shall be presumptively reasonable.  Tenant shall
not be charged any rent for roof space.  Prior to submitting any plans to the
City of Mountain View or proceeding with any installation of an Antenna, Tenant
shall submit to Landlord elevations and





                                       60

<PAGE>   69
specifications for the Antenna.  Tenant shall install any approved Antennas at
its sole expense and shall be responsible for any damage caused by the
installation of the Antennas or related to the Antennas.  At the end of the
Term, Tenant shall remove the Antennas from their locations and repair any
damage caused by such removal.

        IN WITNESS WHEREOF, the parties hereto have executed this Lease as of 
the date first above written.

                                  LANDLORD:

                                  605 EAST FAIRCHILD ASSOCIATES, L.P.,
                                  a California limited partnership

                                  By:  Mozart-Wilson-Dostart Ventures, Inc.,
                                       a California corporation,
                                       Its General Partner


                                       By: /s/ Steve Dostart 3/13/97
                                           -------------------------
                                           Steve Dostart
                                           Its Vice President


                                  TENANT


                                  VIVUS, INC.,
                                  a Delaware corporation

                                  By: /s/ David C. Yntema 3/10/97
                                      -----------------------------
                                       David Yntema
                                       Its Chief Financial Officer





                                       61

<PAGE>   70
                                LIST OF EXHIBITS


EXHIBIT "A"      MAP OF PROJECT (INCLUDING THE BUILDING)

EXHIBIT "A-1"    DESCRIPTION OF LAND

EXHIBIT "B"      [INTENTIONALLY DELETED]

EXHIBIT "C"      STANDARD FOR MEASURING FLOOR AREA

EXHIBIT "D"      WORK LETTER

EXHIBIT "D-1"    SPAR REVIEW PLANS

EXHIBIT "D-2"    APPROVED TENANT PLAN GUIDELINES

EXHIBIT "E"      CERTIFICATE ESTABLISHING OCCUPANCY DATE

EXHIBIT "F"      ESTIMATED CONSTRUCTION SCHEDULE

EXHIBIT "G"      [INTENTIONALLY DELETED]

EXHIBIT "H"      ESTOPPEL CERTIFICATE

EXHIBIT "I"      [INTENTIONALLY DELETED]

EXHIBIT "J"      RULES & REGULATIONS

EXHIBIT "K"      REQUIRED CONDITION OF PREMISES UPON SURRENDER

EXHIBIT "L"      [INTENTIONALLY DELETED]

EXHIBIT "M"      FORM OF LETTER OF CREDIT

EXHIBIT "N"      TENANT'S HAZARDOUS SUBSTANCES DISCLOSURES





                                       62

<PAGE>   71
                             INDEX OF DEFINED TERMS





<TABLE>
<CAPTION>
Defined Term              Paragraph
- ------------              ---------

<S>                                    <C>              
Additional Charges .................... 4(a)(ii)

Affiliate ............................. 11(k)

Alterations ........................... 8(b)

Assignment ............................ 11(a)

Antenna ............................... 46

Base Building Improvements ............ Work Letter

Base Rent ............................. 4(a)(i)

Building .............................. Basic Lease Info. & 1(a)

Building Systems ...................... 9(b)

Default Damages ....................... 34(e)

Default Loan .......................... 34(e)

Default Rate .......................... 4(d)

Environmental Reports ................. 40

Expenses .............................. 4(c)(1)(C)

Expense Year .......................... 4(c)(1)(D)

Exercise Notice ....................... 43

Existing Covenants......................1(c)

Expiration Date ....................... 3(a)

Extension Term ........................ 43

Fair Market Rental Value .............. 44(b)

Force Majeure Events ..................3(e)

Foreclosure.............................47(d)
</TABLE>


<PAGE>   72

<TABLE>
<S>                                     <C>                                           <C>
GAAP .................................. 3(c)(1)(C)(v)

Hazardous Substances .................. 40(a)

Initial Tenant Work Date ...............3(a)

Insolvency Proceeding ................. 20

Interest Rate ......................... 3(c)(1)(C)

Land .................................. Basic Lease Information &                     1(a)

Landlord .............................. Recitals & 37(a)

Landlord Action ....................... 34(e)

Landlord Parties ...................... 12(a)

Landlord's Broker ..................... Basic Lease Information

Landlord's Expense Statement .......... 4(c)(3)

Landlord's Plans....................... Work Letter

Landlord's Tax Statement .............. 4(c)(2)(A)

Laws .................................. 7(a)

Letter of Credit ...................... 34(a)

Liquid Assets ......................... 11(g)

Milestone ............................. 3(e)

Monthly Base Rent ..................... Basic Lease Information

Mortgage .............................. 17

Mortgagee ............................. 17

Occupancy Date ........................ 3(a)

Permitted Alterations ................. 8(c)

Permitted Transfer .................... 11(g)

Premises .............................. 1(a)

Project ............................... 1(c)(1)

Real Estate Taxes ..................... 4(c)(1)(B)



</TABLE>



                                       64

<PAGE>   73

<TABLE>
<S>                                     <C>
Rent .................................. 4(a)(ii)

Rent Commencement Date ................ 3(d)

Rentable Area ......................... Basic Lease Information

substantially complete ................ Work Letter

Strategic Partner ..................... 11(h)

Sublease .............................. 11(a)

Taking ................................ 23(a)

Tax Year .............................. 4(c)(1)(A)

Tenant ................................ Recitals & 37(a)

Tenant Improvements ................... Work Letter

Tenant Parties ........................ 12(b)

Tenant's Broker ....................... Basic Lease Information

Term .................................. 3(a)

Value of Tenant Improvements............11(e)

Work Letter ........................... 1(a)




</TABLE>


                                       65

<PAGE>   74


                                  EXHIBIT "A"

                      MAP OF PROJECT (INCLUDING BUILDING)





              [SITE PLAN WITH BUILDING OUTLINED AND CROSSHATCHED]





                                   Exhibits -1

<PAGE>   75
                                 EXHIBIT "A-1"

                              DESCRIPTION OF LAND





                    [PARCEL MAP AND LEGAL DESCRIPTION HERE]





                                   Exhibits -2

<PAGE>   76
                                  EXHIBIT "B"

                            [INTENTIONALLY DELETED]





                                   Exhibits -3

<PAGE>   77





                                  Exhibit "C"

                       Standard for Measuring Floor Area

                   City of Mountain View Planning Department
                              Zoning Calculations:
                             Methods, Definitions,
                               and Clarifications

                                  Exhibits - 4

<PAGE>   78

Zoning Calculations:
Methods, Definitions
and Clarifications

1.       Percentage of Landscaping

         This requirement generally applies in commercial and industrial zoning
districts.

         The percentage of landscaping is defined as the total area of the lot,
minus the area covered by buildings, accessory structures, outdoor enclosures,
driveways, and parking.

         Paved sidewalk and patio areas are counted as landscaping.  Any areas
which are necessary for automobile access or parking are not counted as
landscaping, even though it may be planted with landscaping.

2.       Open Green Area, Paving, and Building Coverage

         These requirements generally apply in residential zoning districts.

         The following three categories open green area, auto-dedicated paving
area, and building coverage  when added together will account for 100 percent
of the site area.  However, in cases where upper level decks or patios are
allowed to be counted as open green area (e.g., multi-family residential
apartments), the total could exceed 100 percent of the site area.

         a.      Open Green Area

                 Total lot area; minus the area covered by buildings, accessory
structures, other structures, driveways, and off- street parking.  Also, decks,
roof gardens and patios on upper floors, and similar open spaces shall
constitute open green area, except in townhouse projects where upper level
decks may not count toward the open green area requirement.

         b.      Auto-Dedicated Area (Paving)

                 Any area necessary for the ingress, egress, or parking of
motor vehicles.  This includes areas necessary for automobile circulation which
also serve pedestrians.

It also includes fire turnaround areas, except those which are covered by
turfstone/Grasscrete.  Paved areas underneath carports are not included in
parking coverage; they count as building coverage.

         c.      Building Coverage

                 The total lot area covered by structures (defined below).
Porches, entryways, and covered patios are included in this calculation.  All
accessory structures, including garages, trash dumpster enclosures, storage
sheds, etc., are included in this calculation.  Architectural appurtenances are
included in lot coverage also (i.e., stairs, chimneys, porches, decks above the
first floor, etc.).

3.       Floor Area

         Floor areas shall include the following:  all floor area enclosed
within the walls of the principal structure (measured from the outside
perimeter of the walls); the total floor area of all accessory structures,
including garages, carports, and storage sheds; enclosed patios; and any other
fully enclosed habitable space.

         The total area of each floor, as defined by the area enclosed by the
exterior permanent walls, will be calculated separately.  Openings for
stairways or shafts are not deducted.

         In residential districts, any double height room will be counted as
two floors if the average floor-to-floor or floor-to- roof height of the room
exceeds 15'.

         In residences where proposed or existing habitable space is under a
sloping roof, any area where the wall height is 5' or greater is counted as
floor area.  (See Figure 2).

         Any architectural projection which adds to the usable area of the
building is included in floor area calculations (i.e., fireplaces and chimneys,
full floor bay windows, etc.).

Figure 2:  Floor Area Under Sloping Roof

                                  Exhibits - 5

<PAGE>   79


Figure 3:  Building Height

         Any basement level where more than one-half of the height is above
building grade constitutes a story and counts as floor area (Section 36.23.3).

         Minor architectural projections which are cantilevered for short
distances and are not a full story in height are not counted as floor area
(e.g., kitchen greenhouse windows).  Open, unenclosed structures such as decks,
open porches, open patios and trellises are not counted as floor area.

4.       Height of Building

         The vertical distance from the elevation of the top of the existing or
planned curb along the front property line to the highest point of the coping
of a flat roof; or to the top of the slope of a mansard roof; or the mean
height level between eaves and ridge for a gable, hip, or gambrel roof (Section
36.3.32.2).  (See Figure 3.).

Figure 4:  Height of Wall

5.       Structure

         That which is built or constructed as an edifice or building of any
kind, or any piece of work artificially built up or composed of parts joined
together in the same definite manner (Section 36.3.70).  This includes all
buildings; all accessory structures such as garages, trash enclosures, storage
sheds, etc.; all fences; porches; or any other built structure.

6.       Height of Wall

         The vertical distance from the grade along a given wall to the highest
point of the coping of a flat roof; or to the top of the slope of a mansard
roof; or to the mean height level between eaves and ridge for a gable, hip, or
gambrel roof (Section 36.3.32.3).  (See Figure 4.).

7.       Accessory Structure

         A use or structure subordinate to the principal use of a building on
the same lot and serving a purpose . . . . . .

                                  EXHIBIT--6

<PAGE>   80
                                  EXHIBIT "D"


                                  WORK LETTER

         1.   Obligations of Landlord and Tenant.  Landlord shall furnish and
install the Base Building Improvements provided for in Paragraph 2 below at
Landlord's expense, and Tenant shall furnish and install, at Tenant's expense,
the additional interior improvements and building systems work (as described in
Paragraph 3 hereof as exclusions from Base Building Improvements) necessary to
complete the Premises, including, without limitation, cable TV connections, if
any, telephone equipment and wiring, and office equipment wiring required by
the plans and specifications approved by Landlord and Tenant pursuant to this
Work Letter ("Tenant Improvements");  provided, however, that the Tenant
Improvements shall not include lab benches, lab hoods, equipment, furnishings,
and trade fixtures of Tenant that are not within the types of improvements
described in Paragraph 3 hereof.  Tenant shall bear the cost of Tenant
Improvements, including, without limitation, the cost of space planning,
preparing the working drawings and related permits and fees for Tenant
Improvements, and changes to the Base Building Improvements due to Change
Orders (as defined in Paragraph 10 below).  The quantities, character and
manner of installation of all of the foregoing work shall be subject to the
limitations imposed by any applicable regulations, laws, ordinances, codes and
rules.

         2.      Base Building Improvements.  Landlord shall furnish an
industrial shell building which exterior and site shall substantially comply
with the plans submitted for SPAR Review at the City of Mountain View (Exhibit
D-1), and shall have the additional finishes and improvements as follows ("Base
Building Improvements"):

                 (a)      Floor - hard trowel, smooth concrete, level (at a
specification not to exceed a slope of 1/4" in 10 feet) and ready for
installation of floor covering (excluding standard floor preparation and
waterproofing); underslab waterproofing shall include 2" sand layer over gravel
with visqueen vapor barrier;

                 (b)      ceiling/roof - (a) structural members, (b) completed
roof assembly, (c) building sprinkler system to include main floor shut off
valves, primary loop;

                 (c) exterior walls -  (a) exposed unfinished concrete walls,
(b) completed window assembly with painted metal window frames;





                                   Exhibits -7

<PAGE>   81
                 (d)      electrical/utilities - small electrical transformer
for site lighting, all other utilities (including telephone lines and sanitary
sewer) stubbed into shell;

                 (e)      elevator - one(1) elevator pit;

                 (f)      stairs - one (1) building unfinished metal staircase
which is in compliance with the applicable requirements of ADA concerning width
of stairs, rise and landings;

                 (g) live load - slab and upper floor decks shall be designed
to support a live load of eighty (80) pounds per square foot and a partition
load of twenty (20) pounds per square foot for a total of one hundred (100)
pounds per square foot; and

                 (h) site work - parking, parking lot lighting (in compliance
with applicable code requirements) striping, curb cuts, ramps, sidewalks (if
required by the City of Mountain View), underground storm drains, and main
entries to the Building to be in compliance with the applicable ADA
requirements.

Unless required by applicable Laws, Landlord shall not be obligated to
fire-proof the Base Building Improvements.  Landlord shall also provide
landscaping as required by the City of Mountain View.

         3.      Exclusions from Base Building Improvements.  Specific
exclusions from Base Building Improvements include, but are not limited to, (a)
sprinklers beyond those required for shell permit, (b) window coverings, (c)
fire alarms or security systems, (d) interior walls, (e) HVAC systems, (f)
electrical service in the Building, (g) restrooms, (h) elevator, (i) lobby, (j)
electrical, telephone, janitorial and similar closets, (k) building cabling,
(l) roof screens.

         4.   Landlord's Plans.  Landlord shall provide Tenant with necessary
base "design build" drawings, specifications, and CAD diskettes (to the extent
available) for the Buildings no later than July 1, 1997 ("Landlord's Plans").
Landlord's Plans shall be substantially in accordance with the SPAR Review
Plans described on Exhibit "D-1" (which have been approved by Tenant), together
with and including the specifications described for the Base Building
Improvements in Paragraph 2 of this Work Letter, but shall specifically exclude
any improvements to the interior of the Building, or items noted in Paragraph 3
as specific exclusions from the Base Building Improvements.  Landlord shall
have the right to change Landlord's Plans after submission to Tenant as needed
to satisfy any requirements of the City of





                                   Exhibits -8

<PAGE>   82
Mountain View.

         5.      Tenant's Plans.  Tenant shall diligently pursue the
preparation of all construction plans and specifications for Tenant
Improvements, and shall deliver such plans and specifications to Landlord for
Landlord's review within ninety (90) days after Landlord has delivered
Landlord's Plans.  Tenant's architect and/or engineers shall prepare complete
architectural, mechanical, electrical, plumbing, and other plans for the
Premises.  The space plan and working drawings shall provide for corridors,
lobbies, bathrooms, mechanical and electrical systems, and fire exits which are
designed to accommodate multi-tenant configurations in the Building (including,
without limitation separate metering for utilities), in a design reasonably
acceptable to Landlord; provided that Tenant will not be required to build
corridors for multi-tenant configurations so long as Tenant does not build
hard wall office space in the areas shown as "potential future corridors" on
Landlord's Plans.  The plans and working drawings also shall comply with
Landlord's Plans, including, without limitation, those elements included
therein which are Tenant Improvements hereunder (e.g. roof screens, placement
of bathroom cores, elevators, lobbies and mechanical outside air supply ducts).
All such plans, drawings and specifications shall be performed by Tenant's
architectural services, or another architect mutually acceptable to Landlord
and Tenant, and shall be subject to approval by Landlord, in Landlord's sole
discretion. Notwithstanding the foregoing sentence, Landlord shall not
unreasonably withhold its approval of improvements which comply with the
Approved Tenant Plan Guidelines noted in Exhibit "D-2".  Promptly following
their completion, Tenant shall supply copies of the space plans and any other
required supporting drawings and specifications, together with a pallet of
interior colors and finishes, to Landlord for Landlord's review and approval.
Within ten (10) business days after such submission, Landlord shall either
approve or disapprove such items.  Tenant shall make any changes necessary in
order to correct any item identified by Landlord as grounds for its
disapproval, and shall resubmit the corrected space plan, supporting drawings
and specifications and pallet to Landlord within fifteen (15) business days
after Landlord's disapproval.  Within five (5) business days after Landlord
receives the revised items, Landlord shall approve or disapprove them.  This
procedure shall be repeated until the space plan, supporting drawings and
specifications and pallet of interior colors and finishes are finally approved
by Landlord and written approval has been delivered to Tenant.  The plans,
drawings, specifications and pallet of interior colors and finishes for the
Tenant Improvements which are approved by





                                   Exhibits -9

<PAGE>   83
Landlord pursuant to this Paragraph 5 are referred to herein collectively as
"Tenant's Plans".   Once approved by Landlord, no material changes shall be
made to Tenant Plans without the prior written approval of Landlord, in
Landlord's sole discretion. Tenant shall include provisions in its contracts
with its design professionals which expressly allow Landlord to use any and all
of the plans and specifications for the Tenant Improvements without any
additional cost or payment in the event the Lease is terminated.

         6.      Election to Remove Tenant Improvements.  In connection with
its approval of Tenant's Plans, Landlord shall designate in writing which
Tenant Improvements must be removed upon the expiration or sooner termination
of this Lease and which may remain on the Premises.  If Landlord does not make
such designation in writing with respect to any portion of the Tenant
Improvements, Landlord shall be deemed to have elected to allow such portion of
the Tenant Improvements to remain on the Premises.  Tenant Improvements which
comply with the parameters set forth in Exhibit D-2 shall not be subject to
such a removal requirement except to the extent specifically set forth in
Exhibit D-2.

         7.      Tenant's Contractor.  Tenant shall use Devcon Construction as
its general contractor for the Tenant Improvements ("Tenant's Contractor").
Tenant shall direct and authorize Tenant's Contractor to keep Landlord fully
informed of the construction process for the Tenant Improvements and to provide
Landlord with access to all documentation and other information in Tenant's
Contractor's possession or control regarding construction of the Tenant
Improvements, provided that Landlord shall not be obligated to monitor or
inspect construction of the Tenant Improvements or any information in
connection therewith.

         8.   Construction of Tenant Improvements.  After receipt of Landlord's
approval of Tenant's Plans, Tenant shall administer and diligently prosecute
the construction of Tenant Improvements in accordance with Tenant's Plans.  All
Tenant Improvements shall be constructed by Tenant's contractor. Installation
of all Tenant Improvements shall be coordinated with Landlord's contractor's
schedule for the Base Building Improvements, and shall be handled in such a
manner as to maintain harmonious labor relations and not interfere with or
delay the work of Landlord's contractors.  In addition, at Landlord's request
all Tenant Improvements shall be constructed using union labor.  All Tenant
Improvements furnished and installed by Tenant shall not cause Landlord's
contractor to be dependent upon Tenant's work in order for





                                  Exhibits -10

<PAGE>   84
Landlord's contractor to complete his work.  Tenant's contractors,
subcontractors and labor shall be subject to approval by Landlord which
approval shall not be unreasonably withheld or delayed and shall be subject to
the reasonable administrative supervision of Tenant's general contractor and
reasonable rules of the site.  Contractors and subcontractors engaged by Tenant
shall employ men and means to insure, so far as may be possible, the progress
of the work without interruption on account of strikes, work stoppage or
similar causes for delay. After the Occupancy Date, Tenant shall give Landlord
full access and entry to the Premises in order to complete the Base Building
Improvements.  Tenant shall not be charged any fee for Landlord's review of the
plans, drawings and specifications or any oversight of the construction of the
initial Tenant Improvements. Landlord and Tenant shall each have the full
benefit of all contractor warranties.

         9.      Landlord's Right to Inspect and Stop Work.  Upon reasonable
prior notice (written or verbal), Landlord and its agents may inspect the
Tenant Improvements in the course of construction and on completion of the
Tenant Improvements.  Landlord shall have the right to object to any material
deviation from the Tenant Plans not approved by Landlord in accordance with
this Work Letter.  Tenant shall cause such deviation to be corrected.  If
Tenant contests any such objection, Tenant may avail itself of the arbitration
provision set forth in the Lease.  If the deviation is material in the
Landlord's reasonable judgment and may have an adverse affect on the Base
Building Improvements, Landlord shall have the authority, without liability to
Tenant (except as stated in the last sentence of this paragraph 9), to stop
that portion of the work relating to the deviation, without liability to Tenant
unless the dispute resolution process is resolved in favor of Tenant and Tenant
incurs additional costs for the Tenant Improvements as a direct result of such
work stoppage.  If the deviation is not corrected by Tenant and is not resolved
in favor of Tenant through the arbitration process, Landlord may cause such
deviation to be remedied, at Tenant's expense.  In the event that Landlord
breaches its obligations under this Work Letter and it is determined (pursuant
to arbitration as contemplated by this Lease) to have caused actual delay of
completion of the Tenant Improvements, the Rent Commencement Date shall be
extended by the amount of such delay;  provided, however, if the contractor
being sued for the Base Building Improvements is the same as the contractor
Tenant is using for the Tenant Improvements, no action or omission of such
contractor shall be attributed to Landlord.

         10.   Change Orders.  Any changes requested by Tenant (or





                                  Exhibits -11

<PAGE>   85
necessitated by applicable legal requirements due to Tenant's Plans) that
necessitate revisions or changes in Landlord's Plans or the design or
construction of the Base Building Improvements or delay the commencement or
completion of Base Building Improvements, shall be subject to the prior written
approval of Landlord, in its sole discretion;  however, that Landlord shall not
unreasonably withhold changes requested by Tenant which meet both of the
following criteria: (i) that are required specifically to accommodate the
Tenant Improvements; and, (ii) that do not affect the exterior appearance of
the Building.  Any such changes approved by Landlord shall be a "Change Order"
hereunder.  Tenant shall be responsible for all costs (which shall be evidenced
by trade cost breakdowns by Landlord's Contractor) and delays resulting from
such design revisions or construction changes (compensation for delays to
include the lost rent to Landlord), including architectural and engineering
charges, and any special permits or fees attributable to a Change Order.
Before any such design and/or construction changes are made, Tenant shall pay
to Landlord the full costs to be incurred by Landlord in connection with such
Change Order pursuant to Paragraph 14 below.  Landlord and Tenant shall hold
weekly construction meetings during the development of the Project and shall
cooperate in good faith during the weekly meetings to review and agree upon
Change Orders.  In those instances in which proposed revisions to Landlord's
Plans result from a Change Order, Landlord shall cause the Landlord's
contractor, if applicable, to determine the additional cost or savings from
such Change Order, and Landlord shall promptly so notify Tenant.  The
additional costs or savings resulting from such Change Orders (and the time
impact of said Change Order, if any) shall be supported by detailed trade cost
breakdowns prepared by Landlord's Contractor.  Tenant shall, within five (5)
business days after such notification by Landlord, inform Landlord in writing
whether or not Tenant desires to proceed with such Change Order.  In the event
that Tenant fails to inform Landlord within such five (5) day period that
Tenant desires to proceed with such Change Order, Landlord shall not make any
changes(s) to the Base Building Improvements included in such Change Order.  If
Tenant informs Landlord within such five (5) day period that Tenant does wish
to proceed with the proposed Change Order, the proposed Change Order shall be
incorporated in the Base Building Improvements if applicable thereto and
Landlord's contractor shall proceed with the work covered by the Change Order
and Tenant shall be responsible for all costs and expenses incurred in
connection therewith as aforesaid.  The Landlord shall pass through to Tenant
the Landlord's contractor's percentage mark-up (which shall not be greater than
the mark-up charged to Landlord) for overhead and profit (which shall include
all charges for





                                  Exhibits -12

<PAGE>   86
general conditions) for Change Orders to the Base Building Improvements without
additional mark-up from Landlord.  All Change Orders shall be in writing and
shall be on such AIA form as required by Landlord and/or Landlord's contractor.
Tenant shall evidence in writing it's approval of such Change Order prior to
Landlord's approval of same.  Upon completion of the Tenant Improvements,
Landlord shall reimburse Tenant for any net cost savings to Landlord in
connection with the Change Orders, as documented in accordance with this
Paragraph 10, within thirty (30) days after receipt of Tenant's billing and
documentation.

         11.     Substantial Completion.  For purposes of this Work Letter and
the Lease, (i) the Base Building Improvements shall be deemed "substantially
complete" at such time as Landlord has completed work in accordance with
Landlord's Plans and in compliance with all legal requirements applicable to
the Base Building Improvements at the time the permits where obtained for the
construction thereof subject to completion and correction of items on
Landlord's architect's punch list, and certain other items which will not be
completed until substantial completion of the Tenant Improvements (such as
items necessary to modify the sprinklers in accordance with the Tenant
Improvement package and certain landscaping), and (ii) the Tenant Improvements
shall be deemed "substantially complete" at such time as Tenant has completed
work in accordance with Tenant's plans and specifications sufficient to obtain
the signature of the appropriate City of Mountain View building official that
the Tenant Improvements have passed final inspection, subject only to the
completion or correction of items on Tenant's architect's punch list (and
exclusive of the installation of all telephone and other communications
facilities and equipment and other finish work or decorating work to be
performed by or for Tenant), and the Premises are in a reasonably appropriate
condition for occupancy by Tenant.  Upon Tenant's request, if a certificate of
shell completion or similar certification is available from the City of
Mountain View in connection with the Base Building Improvements, without
incurring any additional cost or causing delays to the Base Building
Improvements or Tenant Improvements, Landlord shall use commercially reasonable
efforts to obtain such certification after completion of the Base Building
Improvements and deliver a copy to Tenant.


         12.     Initial Tenant Work Date.  Landlord shall provide Tenant's
contractors with access to the Building for purposes of constructing the Tenant
Improvements from and after the "Initial Tenant Work Date".  To be deemed the
"Initial Tenant Work Date" the following construction components need to be
completed in





                                  Exhibits -13

<PAGE>   87
accordance with Landlord's Plans: (i) slab and footings in place; (ii) steel
fully erected; (iii) upper floor decks and roof poured; (iv) roofing membrane
installed; (v) access to the Building provided to Tenant's contractors along
with location for the construction trailers for Tenant's contractors; (vi)
utilities to be installed to slab; (vii) roof drain lines and underslab
sanitary sewer lines with cleanouts will be installed; water will be provided
in water main to building line; and (viii) storm drains.

         13.     Tenant Delays.  If substantial completion of the Tenant
Improvements or Base Building Improvements is delayed due to any of the
following (collectively, "Tenant Delays"), then the Rent Commencement Date
shall be adjusted to reflect what the substantial completion date would have
been if there had been no delay:  (i) Tenant's failure to timely submit any
items required by this Work Letter, including, without limitation, the space
plan, supporting drawings and specifications and pallet of interior colors and
finishes; (b) Tenant's requested changes to the Base Building Improvements (or
necessitated by applicable legal requirements due to the Tenant's Plans)
pursuant to any Change Order(s); (c) Tenant's failure to comply with Landlord's
contractor's schedule; or (d) Tenant's requested changes to the Tenant Plans
after the date specified for completion of such items herein.

         14.   Billing.  Tenant shall pay to Landlord all amounts payable by
Tenant within twenty (20) days after billing by Landlord.  Bills may be
rendered during the progress of the work so as to enable Landlord to pay its
general contractor, architect or engineers without advancing Landlord's funds
for changes to the Base Building Improvements, though such progress billings
shall only be based on the extent to which the work is completed.

         15.     Insurance.  During the course of construction, Landlord and
Tenant shall require their respective contractors and architects to obtain and
maintain in force Broad Form Comprehensive General Liability insurance
(including, without limitation, insurance against completed operations
liability for losses occurring within three (3) years after the completion of
the Work) with coverage for explosion, collapse, and underground damage,
against claims arising out of bodily injury, personal injury, or death and from
damage to or destruction of property of others, including, without limitation,
loss of use thereof, and including, without limitation, the liability of
Landlord, Tenant or the applicable contractor or architect arising out of the
activities of all subcontractors, and each of them, with a combined single
limit of not less than One Million Dollars





                                  Exhibits -14

<PAGE>   88
($1,000,000) for any one accident and/or occurrence and/or series of accidents
or occurrences arising out of any one event.  Such insurance shall include
Broad Form Property Damage and Independent Contractors Coverage.  Such
insurance shall be primary and not subject to any contribution from any
insurance carried by Landlord or Tenant.  In addition, Tenant's architect, and
any contractors or subcontractors doing design/build for any portion of the
Tenant Improvements, shall carry Professional Liability Insurance (errors &
omissions) insurance, in an amount not less than $1,000,000, covering personal
injury, bodily injury and property damages, said coverage to be maintained for
a period of three (3) years after completion of Tenant Improvements.

         16.     Completion Assurance.  The parties acknowledge and agree that
(i) Landlord will be acquiring the Land and obtaining a construction loan for
the Base Building Improvements in reliance on the Lease, including Tenant's
obligation to complete and pay for the Tenant Improvements as provided in this
Work Letter, (ii)  Landlord would not enter into the Lease unless Tenant's
obligation to complete the Tenant Improvements is assured in accordance with
the terms of this Paragraph 16, and (iii) Tenant's failure to provide such
assurance and complete such Tenant Improvements shall entitle Landlord to the
liquidated damages as provided herein.  Accordingly, Tenant has agreed to
provide assurance for its obligations under this Work Letter in accordance with
this Paragraph 16.

                 (a)      Certificate of Deposit. On or before March 19, 1997,
Tenant shall deliver to Landlord a certificate of deposit in the amount of Two
Million Dollars ($2,000,000) (representing the estimated cost of Tenant
Improvements), as security for Tenant's obligation to provide the "Completion
Assurance" (as described below).  Landlord shall return the certificate of
deposit to Tenant at such time as Tenant provides Landlord with the Completion
Assurance.  If Tenant does not provide the Completion Assurance on or before
May 1, 1997, as such date may be extended by Landlord, in its sole discretion,
by written notice to Tenant (as it may be so extended, the "Replacement Date"),
it shall be a material default of Tenant under the Lease (without any cure
right), and Landlord may terminate the Lease by delivering written notice to
Tenant.  Upon such termination of the Lease, Landlord may present the
certificate of deposit for payment, and funds so obtained shall be due and
payable to Landlord as liquidated damages for Tenant's failure to provide the
Completion Assurance and complete the Tenant Improvements as required in this
Work Letter.

IF LANDLORD TERMINATES THE LEASE AS A CONSEQUENCE OF TENANT'S





                                  Exhibits -15

<PAGE>   89
FAILURE TO PROVIDE THE COMPLETION ASSURANCE ON OR BEFORE THE REPLACEMENT DATE,
LANDLORD SHALL RETAIN THE CERTIFICATE OF DEPOSIT AS LIQUIDATED DAMAGES.  THE
PARTIES AGREE THAT LANDLORD'S ACTUAL DAMAGES WOULD BE DIFFICULT OR IMPOSSIBLE
TO DETERMINE IF TENANT DEFAULTS IN ITS OBLIGATION TO PROVIDE THE COMPLETION
ASSURANCE BY THE REQUIRED DATE, AND THE AMOUNT OF THE CERTIFICATE OF DEPOSIT IS
THE BEST ESTIMATE OF THE AMOUNT OF DAMAGES LANDLORD WOULD SUFFER.  THE PARTIES
FURTHER AGREE THAT THE PROVISIONS OF THIS PARAGRAPH 16(A) SHALL BE LANDLORD'S
SOLE REMEDY (IN ADDITION TO TERMINATION OF THE LEASE) IN THE EVENT OF TENANT'S
FAILURE TO PROVIDE THE COMPLETION ASSURANCE BY THE REPLACEMENT DATE, IN LIEU OF
ALL OTHER REMEDIES LANDLORD MIGHT OTHERWISE HAVE HEREUNDER OR AT LAW OR IN
EQUITY.  THE PARTIES WITNESS THEIR AGREEMENT TO THIS LIQUIDATED DAMAGES
PROVISION AND THIS LIMITATION OF REMEDIES PROVISION BY INITIALING BELOW:

LANDLORD: /s/SD                            TENANT:  /s/ DCY


                 (b)      Approved Forms of Completion Assurance:  On or before
the Replacement Date, Tenant shall deliver to Landlord one of the following
(any one, the "Completion Assurance"):

                          (i)     Completion Guaranty/Bond:  One or more
completion guarantees issued by Fireman's Fund Insurance Company, or such other
guarantor as Landlord shall reasonably approve ("Guarantor"), guaranteeing the
completion of the Tenant Improvements in form and substance acceptable to
Landlord.

                                  (A)      The completion guarantee shall
require the Guarantor to assure lien free completion of all the Tenant
Improvements required to be constructed by Tenant pursuant to this Work Letter
at no cost to Landlord and with no subrogation rights in respect to Landlord's
interest in the Premises, the Lease or otherwise.

                                  (B)      Tenant agrees that, in connection
the issuance of such a completion guarantee, Tenant shall deposit a certificate
of deposit with the Guarantor in the amount of the cost of Tenant Improvements.
The completion guarantee shall require the guarantor to complete the Tenant
Improvements in accordance with the approved Tenant's Plans, or if and to the
extent such plans and specifications are not complete, in accordance with
Landlord's instructions, subject, however, to the limitation that the Guarantor
shall not be required to complete tenant improvements with a value in excess of
the greater of Two Million Dollars ($2,000,000) or the total cost of the Tenant
Improvements (as reflected in Tenant's construction contract for





                                  Exhibits -16

<PAGE>   90
the Tenant Improvements).  Tenant agrees that in connection with the issuance
of such completion guarantee Tenant shall execute such additional documents as
shall be necessary to cause the Guarantor to issue the completion guarantee,
including, without limitation, an agreement to indemnify the Guarantor against
any and all costs (including, without limitation, the costs of litigation) in
connection with the obligations of the Guarantor under the completion
guarantee.

                                  (C)      The cost of the premium for the
completion guarantee is estimated to be one half percent of the aggregate value
of the Tenant Improvements.

                                  (D)      If Landlord determines that a
completion guarantee substantially on the terms and conditions described in
this clause (i) is unavailable, Landlord shall give written notice thereof
Tenant at any time (but in any event at least five (5) business days prior to
the Replacement Date), and Tenant shall be obligated to cause the Letter of
Credit (described in (ii) below) to be issued as the Completion Assurance.

                 (ii)     Letter of Credit:  One or more unconditional,
irrevocable letter(s) of credit, in the initial aggregate amount of Two Million
Dollars ($2,000,000), issued by a financial institution, and in form and
substance, acceptable to Landlord.

                                  (A)      The letter(s) of credit shall have
an original term of no less than one year and automatic extensions until sixty
(60) days after the later of Tenant's satisfaction of all of its obligations
under this Work Letter and the Rent Commencement Date.  The letter(s) of credit
shall provide for partial draws.  At such time as Tenant enters into a
construction contract for the Tenant Improvements, if the total cost of Tenant
Improvements (as reflected in such contract) exceeds Two Million Dollars
($2,000,000), Tenant shall increase the letter of credit to reflect the total
cost of Tenant Improvements.  If the total cost of Tenant Improvements is less
than Two Million Dollars ($2,000,000), there shall be no change in the amount
of the letter of credit.  Tenant shall keep the letter of credit, at its
expense, in full force and effect during such time as security for Tenant's
obligation to timely construct the Tenant Improvements pursuant to, and in
accordance with the terms of, this Work Letter.  The letter of credit shall
provide thirty (30) days' prior written notice to Landlord of cancellation or
material change thereof.

                (B)      If a "Draw Event" (as defined below) occurs, Landlord 
or its assignee, at its option, may present its





                                  Exhibits -17

<PAGE>   91
written demand for payment of the entire face amount of the letter of credit
and the funds so obtained shall become due and payable to Landlord or its
assignee, and Landlord or its assignee may use the funds so obtained to
complete the Tenant Improvements contemplated by this Work Letter or, if
Landlord terminates the Lease as a result of a default by Tenant, in lieu of
any portion thereof, any other improvements or alterations to the Premises (so
long as the aggregate cost of the Tenant Improvements and/or other improvements
or alterations does not exceed the cost of the Tenant Improvements as
determined pursuant to Paragraph 16(b)(ii)(A)).  Alternatively, Landlord or its
assignee may make partial draws on the letter(s) of credit as needed to pay for
the Tenant Improvements (or, if Landlord terminates this Lease as a result of a
default by Tenant, any other improvements or alterations so long as the
aggregate cost thereof does not exceed the cost of the Tenant Improvements as
determined pursuant to Paragraph 16(b)(ii)(A)).  Upon Landlord's completion of
the Tenant Improvements (or any other improvements or alterations), Landlord
shall reimburse Tenant, at Tenant's request and subject to Landlord's receipt
of reasonable documentation, for any costs incurred by Tenant prior to the Draw
Request for construction of the Tenant Improvements, but only to the extent of
any remaining proceeds from the letter(s) of credit.  A "Draw Event" shall mean
any of the following: (I) Tenant is the subject of an Insolvency Proceeding (as
defined in the Lease); (II) Tenant defaults under its construction contract
with Tenant's Contractor and does not cure such default within the longer of
the applicable cure period under such contract or five (5) days after such
default occurs; (III) the Lease is terminated by Landlord due to a Tenant
default before completion of the Tenant Improvements; (IV) the letter of credit
is not extended within thirty (30) days prior to its expiration; and (V) Tenant
fails to complete the Tenant Improvements within one hundred (100) days after
the Base Building Improvements are substantially complete (subject to delay,
not to exceed ninety (90) additional days, caused by Force Majeure Events),
provided that if Landlord reasonably determines that Tenant is diligently
pursuing construction of the Tenant Improvements, Landlord shall allow Tenant
an additional thirty (30) days to complete the Tenant Improvements.

                                  (C)      The letter of credit shall be
returned to Tenant, and Tenant's obligations under this Paragraph 16 shall
terminate, at such time as Tenant has spent $1,800,000 on the Tenant
Improvements, a minimum of $1,600,000 of which is used to construct generic
office improvements and all of the improvements described in Paragraph 3
hereof, except items (c) and (k), which are exclusions from the Base Building
Improvements, and has provided Landlord with items (w), (x) and (y) required in





                                  Exhibits -18

<PAGE>   92
Paragraph 17 below and evidence satisfactory to Landlord that all potential
lien claimants have been fully paid and released their lien claims.  Tenant
Improvements costs, as used in the subparagraph (c), shall include reasonable
design, permit, construction consultant fees, as well as all amounts paid for
labor, materials and contractor's fees related to the construction of the
Tenant Improvements.  To the extent that Tenant does not make the minimum
investment in Tenant Improvements described by this subparagraph prior to the
time Tenant completes the Tenant Improvements it initially constructs in the
Premises, then Tenant shall have the right (upon move-in and acceptance) to
replace the letter of credit initially given with a new letter of credit in the
amount of the difference between the minimum investment required by this
subparagraph and the amount actually spent by Tenant, which letter of credit
shall be governed by this Paragraph 16 and shall be maintained by Tenant until
such time as Tenant has expended an amount equal to or exceeding the face
amount of such new letter of credit on Alterations which Alterations, if they
had been constructed along with the Tenant Improvements initially constructed
by Tenant, would have enabled Tenant to meet the minimum investment requirement
set forth in this subparagraph.

                                  (D)      At or prior to Tenant's delivery to
Landlord of the letter(s) of credit, Tenant shall enter into, and shall cause
Tenant's Contractor for the Tenant Improvements to enter into, an agreement
with Landlord, in form and substance reasonably satisfactory to Landlord (the
"Three Party Agreement").  The Three Party Agreement shall provide that, if a
Draw Event occurs, and the Landlord has terminated this Lease, Landlord shall
have the option to either (I) terminate the existing contract for construction
of Tenant Improvements, after paying the general contractor for all completed
work from the proceeds of the letter(s) of credit, to the extent they are
available to Landlord; or (II) assume Tenant's obligations under the existing
contract for construction of Tenant Improvements; or (III) terminate the
existing contract as provided in (I) above and enter into a new contract with
the general contractor for completion of the Tenant Improvements or any other
alterations or improvements to the Premises.

                 (iii)    Other Completion Assurance:  In lieu of the letter(s)
of credit or completion guaranty/bond described above, Tenant may deliver to
Landlord other completion assurance in the face amount required by the
letter(s) of credit, and in form and substance acceptable to Landlord in its
sole discretion, provided that Landlord shall have no additional liability or
reduced benefits from that which Landlord would have if Tenant provided





                                  Exhibits -19

<PAGE>   93
letter(s) of credit.  All terms, conditions and requirements with respect to
the letter(s) of credit contained in this paragraph, including, without
limitation, application of proceeds, reduction of amount, return of letter(s)
of credit, draw events, and partial draw options, shall apply to any such
completion security.

         (c)     Additional Obligations.  The certificate of deposit and
Completion Assurance described in this Paragraph 16, and Tenant's obligations
and Landlord's rights with respect thereto, shall be in addition to any Letter
of Credit or other security deposit provided by Tenant under the Lease pursuant
to Paragraph 34 of the Lease.

         17.  Tenant's Occupancy.  Prior to Tenant's commencement of business
at the Premises, Tenant shall provide to Landlord the following: (w) "as-built"
drawings signed by either Tenant's architect or contractor; (x) final punch
list signed off by both Tenant and Landlord and /or their architects; (y)
written certification from Tenant's architect and/or contractor that the work
is complete and meets all applicable building codes, and a copy of the
certificate of occupancy; and (z) final conditional lien releases (IE. the
final amount due to Tenant's contractor and any other contractors,
subcontractors or suppliers).

         18.     Dispute Resolution.  If Landlord and Tenant disagree
concerning (i) any issues used to determine the Occupancy Date or the Rent
Commencement Date, (ii) whether or not Tenant is in default under its contract
with Devcon Construction for construction of the Tenant Improvements, (iii)
whether or not there had been delay in completion of construction beyond the
allocated time periods, and the parties are unable to resolve that dispute
within thirty (30) days after Tenant occupies the Premises, the dispute shall
be submitted for resolution pursuant to the Lease.  Notwithstanding the
foregoing, during the pendency period of any arbitration initiated pursuant to
this Paragraph 16, Tenant shall pay Rent and Additional Charges from and after
the Rent Commencement Date as determined by Landlord; provided, however, that
such payment shall be without prejudice to the ultimate determination of that
issue.





                                  Exhibits -20

<PAGE>   94
                                  EXHIBIT D-1

                               SPAR REVIEW PLANS




<TABLE>
<CAPTION>
         FIRM    SHEET             DATE    DESCRIPTION
         ----    -----             ----     -----------
         <S>     <C>              <C>      <C>
         Devcon  A1.1             2/19/97  Site Plan

         Devcon  A2.1             2/19/97  First Floor Plan

         Devcon  A2.2             2/19/97  Second Floor Plan

         Devcon  A3.1             2/19/97  Elevations




</TABLE>


                                  Exhibits -21

<PAGE>   95
                                  EXHIBIT D-2

                        APPROVED TENANT PLAN GUIDELINES



            [To be forthcoming pursuant to the terms outlined below]



Landlord and Tenant shall endeavor to agree upon parameters concerning the
contents of this Exhibit.  However, the parties have no obligation to so agree.
In the event that Tenant believes that the parties are unable to agree upon
such parameters, Tenant shall have the option to terminate the Lease by
providing Landlord written notice of its election to do so within two (2) weeks
of the execution date of the Lease.





                                  Exhibits -22

<PAGE>   96
                                   EXHIBIT E
ESTOPPEL CERTIFICATE

[Date]

Vivus, Inc.
545 Middlefield Road
Menlo Park, CA  94025
Attn:  Chief Financial Officer

         Re:     Acknowledgment of Occupancy Date under the Lease Agreement by
                 and between 605 East Fairchild Associates, L.P., and Vivus,
                 Inc., dated as of February ______________, 1997 (the "Lease")

Dear Sirs:

                 This letter will confirm that for all purposes of the Lease,
the Occupancy Date (as defined in Paragraph 3(a) of the Lease) is
_______________, 199_.

                 Please acknowledge your acceptance of this letter by signing
and returning a copy to the undersigned.

                                  Very truly yours,

                                  605 East Fairchild Associates, L.P.,
                                  a California limited partnership

                                  By:  Mozart-Wilson-Dostart Ventures, Inc.,
                                       a California corporation
                                       Its General Partner


                                       By: ___________________
                                       Its: __________________


Accepted and Agreed:

Vivus, Inc.,
a Delaware corporation

By: ___________________________
Its: __________________________

Dated: ________________________





                                  Exhibits -23

<PAGE>   97
                                  EXHIBIT "F"

                        ESTIMATED CONSTRUCTION SCHEDULE





                                  Exhibits -24

<PAGE>   98
                    ESTIMATED CONSTRUCTION SCHEDULE (CONT'D)





                                  Exhibits -25

<PAGE>   99
                                  EXHIBIT "G"

                            [INTENTIONALLY DELETED]





                                  Exhibits -26

<PAGE>   100
                                  EXHIBIT "H"

                              ESTOPPEL CERTIFICATE
                             (CONSTRUCTION LENDER)


      [TO FOLLOW FROM LENDER, SUBJECT TO TENANT'S REASONABLE REQUIREMENTS]





                                  Exhibits -27

<PAGE>   101
                                  EXHIBIT "H"

                      FORM OF TENANT ESTOPPEL CERTIFICATE
                                   (ONGOING)

TO:      _________________________________________________, OR ASSIGNEE
("LENDER"), AND/OR WHOM ELSE IT MAY CONCERN:

THIS IS TO CERTIFY THAT:

1.       The undersigned is the lessee ("Tenant") under that certain lease
         dated __________________________, 19______, ("Lease"), by and between
         _________________________________________________________________as
         lessor ("Landlord") and ___________________________________________
         ____________________ as Tenant, covering those certain premises
         commonly known and designated as
         _______________________________________
         ___________________("Premises").

2.       The Lease has not been modified, changed, altered, assigned,
         supplemented or amended in any respect (except as indicated below; if
         none, state "none").  The Lease is not in default and is valid and in
         full force and effect on the date hereof.  The Lease is the only Lease
         or agreement between the Tenant and the Landlord affecting or relating
         to the Premises.  The Lease represents the entire agreement between
         the Landlord and the Tenant with respect to the Premises.
         ____________________.

3.       The Tenant is not entitled to, and has made no agreement(s) with the
         Landlord or its agents or employees concerning free rent, partial
         rent, rebate of rent payments, credit or offset or deduction in rent,
         or any other type of rental concession, including, without limitation,
         lease support payments or lease buy-outs (except as expressly provided
         in the Lease or as indicated below; if none, state "none").
         _______________________________________________________________________
         _____________________________________________________.

4.       The Tenant has accepted the Premises, and opened for business in the
         Premises on _________________, 19 ____.  The Lease term began _____
         ____________________, 19____.  The termination date of the present
         term of the Lease, excluding unexercised renewals, is ______________ ,
         19 ____.

5.       The Tenant has paid rent for the Premises for the period up to and
         including ___________________________, 19_________.  The fixed minimum
         rent and any additional





                                  Exhibits -28

<PAGE>   102
         rent (including the Tenant's share of tax increases and cost of living
         increases) payable by the Tenant presently is $ ___per month._No such
         rent has been paid more than one (1) month in advance of its due date,
         except as indicated below (if none, state "none").  The Tenant's
         security deposit is $
         _________________________.__________________________________
         ____________________________________________________________

6.       To the best of Tenant's knowledge (which means the current, actual
         knowledge of the signatory for Tenant, who is the person responsible
         at Tenant for applicable matters): (i) no event has occurred and no
         condition exists which, with the giving notice or the lapse of time or
         both, will constitute a default under the Lease; and (ii) the Tenant
         has no existing defenses or offsets against the enforcement of this
         Lease by the Landlord.

7.       The Tenant has received or will receive payment or credit for tenant
         improvement work in the total amount of $__________________________
         _____________________(or if other than cash, describe below; if none,
         state "none").  Except as noted below, all conditions under this Lease
         to be performed by the Landlord have been satisfied.
         _______________________________________________________________________
         _______________________________________________________________________
         ___________________________________________.

8.       Except as provided in the Lease, the Tenant has no outstanding options
         or rights of first refusal to purchase the Premises or any part
         thereof or all or any part of the real property of which the Premises
         are a part.

9.       No actions, whether voluntary or otherwise, are pending against the
         Tenant or any general partner of the Tenant under the bankruptcy laws
         of the United States or any state thereof.

10.      The Tenant has not sublet the Premises to any sublessee and has not
         assigned any of its rights under the Lease, except as indicated below
         (if none, state "none").  No one except the Tenant and its employees
         occupies the Premises.  _____________________________________
         _____________________________________________.

11.      The address for notices to be sent to the Tenant is as set forth in
         the Lease.

12.      To the best of Tenant's knowledge, Tenant's and Tenant's





                                  Exhibits -29

<PAGE>   103
         sublessee's and assignee's use, maintenance or operation of the
         Premises complies with, and will at all times comply with, all
         applicable federal, state, county or local statutes, laws, rules and
         regulations of any governmental authorities relating to environmental,
         health or safety matters (being hereinafter collectively referred to
         as the Environmental Laws).

13.      The Premises have not been used and the Tenant does not plan to use
         the Premises for any activities which, directly or indirectly, involve
         the use, generation, treatment, storage, transportation or disposal of
         any petroleum product or any toxic or hazardous chemical, material,
         substance, pollutant or waste except as permitted by the lease.

14.      Tenant has not received any notices, written or oral, of violation of
         any Environmental Law or of any allegation which, if true, would
         contradict anything contained herein and there are no writs,
         injunctions, decrees, orders or judgements outstanding, no lawsuits,
         claims, proceedings or investigations pending or threatened, relating
         to Tenant's or Tenant's sublessee's or assignee's use, maintenance or
         operation of the Premises, nor is Tenant aware of a basis for any such
         proceeding.

15.      (INCLUDE THIS PARAGRAPH FOR LOAN TRANSACTIONS.)  The Tenant
         acknowledges that all the interest of the Landlord in and to the Lease
         is being duly assigned to Lender, and that pursuant to the terms
         thereof, all rent payments under the Lease shall continue to be paid
         to the Landlord in accordance with the terms of the Lease unless and
         until the Tenant is notified otherwise in writing by Lender or its
         successors or assigns.  Tenant is hereby authorized and directed by
         Landlord to comply with any written direction of Lender concerning
         payment of Rent and no such compliance will give rise to any default
         by Tenant under the Lease.

         It is particularly noted that:
         (a)     Under the provisions of this assignment, the Lease cannot be
                 terminated (except as expressly provided in the Lease) or
                 modified in any of its terms, or consent be given to the
                 release of any party having liability thereon, without the
                 prior written consent of Lender or it successors or assigns,
                 and without such consent, no rent may be collected or accepted
                 more than one (1) month in advance.

         (b)     The interest of the Landlord in the Lease has been





                                  Exhibits -30

<PAGE>   104
         assigned to Lender for the purposes specified in the assignment.
         Lender, or its successors or assigns, assumes no duty, liability or
         obligation whatsoever under the Lease or any extension or renewal
         thereof.

         (c)     Any notices sent to Lender or its affiliates should be sent by
                 registered mail and addressed as follows:
                 _______________________________________________________________
                 _______________________________________________________________
                 ______________.

16.      Tenant agrees to give any Mortgagee and/or Trust Deed Holders
         ("Mortgagee"), by registered mail, a copy of any notice of default
         served upon the Landlord, and Lender shall have the cure rights
         expressly provided in Paragraph 21 of the Lease.

17.      This certification is made to induce Lender to make certain fundings,
         knowing that Lender relies upon the truth of this certification in
         disbursing said funds.

18.      The undersigned is authorized to execute this Tenant Estoppel
         Certificate on behalf of the Tenant.



DATED THIS ________________________________ DAY OF
________________________________, 19 ___________.

                                       ____________________________________
                                       (TENANT)

                                        BY:
                                           --------------------------------
                                           
                                        ITS:
                                           --------------------------------
                     
                                        DATE:
                                           --------------------------------

THE UNDERSIGNED HEREBY CERTIFIES THAT THE CERTIFICATIONS SET FORTH ABOVE ARE
TRUE AS OF THE DATE HEREOF.

                                       ____________________________________
                                       (OWNER/LANDLORD)

                                        BY:
                                           --------------------------------

                                        ITS:
                                           --------------------------------

                                        DATE:
                                           --------------------------------





                                  Exhibits -31

<PAGE>   105
                                  EXHIBIT "I"

                            [INTENTIONALLY DELETED]





                                  Exhibits -32

<PAGE>   106
                                  EXHIBIT "J"

                             RULES AND REGULATIONS

         1.      Sidewalks, exits, entrances, elevators, escalators and
stairways shall not be obstructed by Tenant or used by Tenant for any purpose
other than for ingress to and egress from the Premises.  Tenant, and Tenant's
employees or invitees, shall not go upon the roof of the Building, except as
authorized by Landlord or pursuant to Paragraph 46 of the Lease.

         2.      All curtains, draperies, blinds, shutters, shades, screens or
other coverings, awnings, hangings or decorations shall be attached to, hung or
placed in, or used in connection with, any exterior window, door or patio on
the Premises, if any, shall be subject to Landlord's approval, which shall not
be unreasonably withheld.

         3.      If Tenant shall alter any lock or access device or install a
new or additional lock or access device, Tenant shall in each case furnish
Landlord with a key for any such lock to the extent Landlord would be entitled
to such key under the Lease.

         4.   Upon the termination of the tenancy, Tenant shall deliver to
Landlord all the keys or access devices for the Building, offices, rooms and
toilet rooms which Tenant shall have had made.

         5.      The toilet rooms, toilets, urinals, wash bowls and other
apparatus shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein, and the expense of any breakage, stoppage or damage resulting from the
violation of this rule by Tenant or Tenant's employees or invitees shall be
borne by Tenant.

         6.      Animals or birds shall not be brought or kept in or about the
Premises or the Building, other than seeing-eye dogs or other such animals that
assist handicapped individuals.

         7.      Tenant shall not install any radio or television antenna,
loudspeaker or any other device on the exterior walls or the roof of the
Building except as expressly permitted by the Lease.

         8.      Tenant shall not lay linoleum, tile, carpet or any other floor
covering so that the same shall be affixed to the floor of the Premises in any
manner except as approved in writing





                                  Exhibits -33

<PAGE>   107
by Landlord.  The expense of repairing any damage resulting from a violation of
this rule by Tenant or Tenant's contractors, employees or invitees or the
removal of any floor covering shall be borne by Tenant.

         9.      Tenant shall not place a load upon any floor of the Premises
which exceeds the load per square foot which such floor was designed to carry
and which is allowed by law.   Tenant may hang pictures on walls in the
Premises.  Any damage to the walls caused by molley bolts, double sided tape,
or like hanging materials, will be repaired by Tenant.

         10.     Tenant shall store all trash and garbage within the interior
of the Premises or in the appropriate trash collection areas outside of the
Premises.  No material shall be placed in the trash boxes or receptacles if
such material is of such nature that it may not be disposed of in the ordinary
and customary manner of removing and disposing of trash and garbage in the
jurisdiction in which the Premises is located, without violation of any law or
ordinance governing such disposal.

         11.     Tenant shall comply with all safety, fire protection and
evacuation procedures and regulations established by any governmental agency.

         12.     Tenant assumes any and all responsibility for protecting the
Premises from theft, robbery and pilferage, which includes keeping doors locked
and other means of entry to the Premises closed, unless caused by the gross
negligence or willful misconduct of Landlord, its agents, servants, or
employees ("Landlord Parties").

         13.     Tenant shall be responsible for the observance of all of the
foregoing Rules and Regulations by Tenant's employees, agents, clients,
customers, invitees and guests.

         14.     Unless otherwise defined, terms used in these Rules and
Regulations shall have the same meaning as in the Lease.





                                  Exhibits -34

<PAGE>   108
                                   EXHIBIT K

                 REQUIRED CONDITION OF PREMISES UPON SURRENDER


         Upon termination of the Lease, the Premises shall be returned to
Landlord with all Building Systems and elevator, fire and gas systems in good
working order and maintained with any necessary repairs completed in the
reasonable opinion of Landlord's subcontractor, and all operating manuals and
maintenance records with respect to such systems shall be delivered to
Landlord.  All space in the Premises shall be clean and well-maintained with
walls freshly painted as necessary (or touched-up, if acceptable to Landlord in
its reasonable discretion), and carpet shampooed and presentable for
re-leasing.  Any damaged or unpresentable carpet shall be replaced.  All window
coverings shall be cleaned and any damaged coverings repaired or replaced.  Any
damaged ceiling tiles shall be replaced and all light fixtures shall be fully
operational and clean.  All doors shall be presentable and damaged doors
repaired or replaced.  Bathrooms shall be freshly mopped and all tile surfaces
cleaned.  Any damaged bathroom partitions or fixtures shall be repaired or
replaced.  The exterior and interior of all windows shall be washed and all
interior partition glass shall be cleaned.  If   Tenant is obligated to remove
or restore any Tenant Improvements or Alterations upon termination or
expiration of the Lease  pursuant to Paragraph 8(d) or (e) of the Lease or
Paragraph 6 of the Work Letter, the affected area will be returned to Landlord
in the form of open office space  in the condition described above.





                                  Exhibits -35

<PAGE>   109
                                  EXHIBIT "L"

                            [INTENTIONALLY DELETED]





                                  Exhibits -36

<PAGE>   110

                            Exhibits - Exhibit "M"

BA Bank of America         Form of Letter of Credit

              Form of LC pursuant to Par. 16(b)(ii) of Work Letter

Date:  December 3, 1996
Irrevocable Standby Letter of Credit Number:  3002638

                              
                              

<TABLE>                       
<CAPTION>                     
BENEFICIARY                                             APPLICANT
- ------------------------------             ---------------------------------
<S>                                      <C>
Middlefield/Ellis Associates, L.P.         [Name Blacked Out]
401 Ellis Street                           Mountain View, California  94043
Mountain View, California 94043
                                                          AMOUNT
                                           ---------------------------------
                                           USD [USD Blacked Out]
                                           Three Million and 00/100's US Dollars

                                                        EXPIRATION
                                           ---------------------------------
                                           November 15, 1997 at our counters
</TABLE>


WE HEREBY ESTABLISH IN YOUR FAVOR OUR IRREVOCABLE STANDBY LETTER OF CREDIT
NUMBER 3002638 WHICH IS AVAILABLE WITH BANK OF AMERICA NT & SA BY PAYMENT
AGAINST PRESENTATION OF THE ORIGINAL OF THIS LETTER OF CREDIT AND YOUR DRAFTS AT
SIGHT DRAWN ON BANK OF AMERICA NT & SA, ACCOMPANIED BY THE DOCUMENTS DETAILED
BELOW:

A LETTER SIGNED BY A PURPORTED AUTHORIZED REPRESENTATIVE OF THE BENEFICIARY
CERTIFYING THAT BENEFICIARY IS ENTITLED TO DRAW ON THIS LETTER OF CREDIT
PURSUANT TO THAT WORK LETTER AGREEMENT BETWEEN MIDDLEFIELD/ELLIS ASSOCIATES,
L.P. AND NETSCAPE COMMUNICATIONS CORPORATION, FOR THE SPACE LOCATED AT 401 ELLIS
STREET, IN MOUNTAIN VIEW, CA AS IT MAY BE AMENDED.  THIS LETTER OF CREDIT IS
IRREVOCABLE.

SPECIAL CONDITIONS:

THIS LETTER OF CREDIT SHALL AUTOMATICALLY RENEW WITHOUT AMENDMENT TO AUGUST 15,
1998, UNLESS WE SHALL NOTIFY YOU IN WRITING BY CERTIFIED MAIL, RETURN RECEIPT
REQUESTED OR OVERNIGHT COURIER AT LEAST 60 DAYS PRIOR TO THE THEN CURRENT
EXPIRATION DATE THAT THIS LETTER OF CREDIT WILL NOT BE RENEWED.  FOLLOWING SUCH
NOTIFICATION AND PRIOR TO THE EXPIRAT ION OF THIS LETTER OF CREDIT, YOU MAY DRAW
UPON THIS LETTER OF CREDIT BY PRESENTATION OF THE SIGHT DRAFT(S) MENTIONED
ABOVE, ACCOMPANIED BY A LETTER SIGNED BY A PURPORTED AUTHORIZED REPRESENTATIVE
OF BENEFICIARY STATING THAT BENEFICIARY HAS NOT BEEN PRESENTED WITH A SUBSTITUTE
LETTER OF CREDIT IN THE SAME PRINCIPAL AMOUNT, AND ON THE SAME TERMS AS THIS
LETTER OF CREDIT FROM AN ISSUER REASONABLY SATISFACTORY TO YOU.

THIS LETTER OF CREDIT TRANSFERABLE.  TRANSFER OF THIS LETTER OF CREDIT IS
SUBJECT TO OUR CONSENT AND OUR RECEIPT OF BENEFICIARY'S INSTRUCTIONS IN THE FORM
ATTACHED AS EXHIBIT A, ACCOMPANIED BY THE ORIGINAL LETTER OF CREDIT AND
AMENDMENT(S) IF ANY, COST OR EXPENSES OF SUCH TRANSFER SHALL BE FOR THE ACCOUNT
OF THE BENEFICIARY.  PARTIAL DRAWS ARE ALL OWED UNDER THIS LETTER OF CREDIT.

THIS LETTER OF CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR
DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE
PUBLICATION NO. 500 AND ENGAGES US PURSUANT TO THE TERMS THEREIN.

BANK OF AMERICA NT & SA


<TABLE>
<C>                                 <C>                                  
- -----------------------------       -------------------------------
</TABLE>

                                 Exhibits - 37

<PAGE>   111


                        Form of Letter of Credit (con'd)
BA Bank of America                                            Exhibit A

Request for Entire Transfer of Credit Without Substitution of Invoices

<TABLE>
<S>                           <C>

                                                            19    
- ----------------------------   ----------------------------   ----                 
Last Name and No.                
                               Letter of Credit No. ---------------              
Address
- ----------------------------                              
                               Issued By -------------------------                         
- ----------------------------              

                               Your Advice No. ------------------                  
                                               

</TABLE>

To:  Bank of America NT & SA

We request you to transfer all of our rights as beneficiary under the Letter of
Credit referenced above to a second beneficiary, named below.
_________________________________________________________________
Name of Second Beneficiary
_________________________________________________________________
Address

By this transfer, all our rights as the original beneficiary, including all
rights to make drawings under the Letter of Credit, go to the second
beneficiary.  The second beneficiary shall have sole rights as beneficiary,
whether existing now or in the future, including sole rights to agree to any
amendments, including increases or extensions or other changes.  All amendments
will be sent directly to the second beneficiary without the necessity of
consent by or notice to us.

We enclose the original letter of credit and any amendments.  Please indicate
your acceptance of our request for the transfer by endorsing the letter of
credit and sending it to the second beneficiary with your customary notice of
transfer.

For your transfer fee:

[ ]      Enclosed is our check for $________________________

[ ]      You may debt my/our account No.____________________

We also agree to pay you on demand any expenses which may be incurred by you in
connection with this transfer.

The signature and title at the right conform with those shown in our files as
authorized to sign for the beneficiary.  Policies governing signature
authorization as required for withdrawals from customer accounts shall also be
applied to the authorization of signatures on this form.


<TABLE>
<S>                             <C>
                                                                                                
                                -------------------------------------                                                 
                                Name of Beneficiary
                                  
- --------------------------      -------------------------------------
                                Name of Authorized Signer and Title

                                x
- --------------------------      -------------------------------------                                                   
Authorized Signature and Title  Authorized Signature
</TABLE>

                                 Exhibits - 38

<PAGE>   112
 

BA Bank of America                               Form of Letter of Credit
(con'd)

                    Form of LC pursuant to Par. 34 of Lease

Date:  December 5, 1996

Irrevocable Standby Letter of Credit Number:  3002639


<TABLE>
<CAPTION>
BENEFICIARY                   
- ------------------------------
<S>                                        <C>
                                                        APPLICANT       
                                             --------------------------------
Middlefield/Ellis Associates, L.P.           [Name Blacked Out]
401 Ellis Street                             Mountain View, California  94043
Mountain View, California 94043
                                                          AMOUNT         
                                             --------------------------------
                                             USD [USD Blacked Out]
                                             Two Million and 00/100's US  Dollars

                                                         EXPIRATION          
                                             --------------------------------                                  
                                             November 4, 1997 at our counters

</TABLE>


WE HEREBY ESTABLISH IN YOUR FAVOR OUR IRREVOCABLE STANDBY LETTER OF CREDIT
NUMBER 3002639 WHICH IS AVAILABLE WITH BANK OF AMERICA NT & SA BY PAYMENT
AGAINST PRESENTATION OF THE ORIGINAL OF THIS LETTER OF CREDIT AND YOUR DRAFTS
AT SIGHT DRAWN ON BANK OF AMERICA NT & SA, ACCOMPANIED BY THE DOCUMENTS
DETAILED BELOW:

A LETTER SIGNED BY A PURPORTED AUTHORIZED REPRESENTATIVE OF THE BENEFICIARY
CERTIFYING THAT BENEFICIARY IS ENTITLED TO DRAW ON THIS LETTER OF CREDIT
PURSUANT TO THAT LEASE AGREEMENT BETWEEN MIDDLEFIELD/ELLIS ASSOCIATES, L.P. AND
NETSCAPE COMMUNICATIONS CORPORATION, FOR THE SPACE LOCATED AT 401 ELLIS STREET,
IN MOUNTAIN VIEW, CA AS IT MAY BE AMENDED.  THIS LETTER OF CREDIT IS
IRREVOCABLE.

SPECIAL CONDITIONS:

THIS LETTER OF CREDIT SHALL AUTOMATICALLY RENEW WITHOUT AMENDMENT FOR AN
ADDITIONAL ONE YEAR PERIOD FROM THE CURRENT OR FOR ANY FUTURE EXPIRATION DATE,
UNLESS WE SHALL NOTIFY YOU IN WRITING BY CERTIFIED MAIL, RETURN RECEIPT
REQUESTED OR OVERNIGHT COURIER AT LEAST 60 DAYS PRIOR TO THE THEN CURRENT
EXPIRATION DATE THAT THIS LETTER OF CREDIT WILL NOT BE RENEWED.  FOLLOWING SUCH
NOTIFICATION AND PRIOR TO THE EXPIRATION OF THIS LETTER OF CREDIT, YOU MAY DRAW
UPON THIS LETTER OF CREDIT BY PRESENTATION OF THE SIGHT DRAFT(S) MENTIONED
ABOVE AND BENEFICIARY SIGNED STATEMENT CERTIFYING THAT NETSCAPE HAS FAILED TO
PROVIDE SUBSTITUTE LETTER OF CREDIT IN THE SAME PRINCIPAL AMOUNT, OR SUCH
REDUCED PRINC IPAL AMOUNT, AS MAY BE PERMITTED BY SECTION 34(B) OF THE LEASE,
AND ON THE SAME TERMS AS THIS LETTER OF CREDIT FROM AN ISSUER REASONABLY
SATISFACTORY TO YOU.

THIS LETTER OF CREDIT TRANSFERABLE.  TRANSFER OF THIS LETTER OF CREDIT IS
SUBJECT TO OUR CONSENT AND OUR RECEIPT OF BENEFICIARY'S INSTRUCTIONS IN THE
FORM ATTACHED AS EXHIBIT A, ACCOMPANIED BY THE ORIGINAL LETTER OF CREDIT AND
AMENDMENT(S) IF ANY, COST OR EXPENSES OF SUCH TRANSFER SHALL BE FOR THE ACCOUNT
OF THE BENEFICIARY.

PARTIAL DRAWS ARE ALLOWED UNDER THIS LETTER OF CREDIT.

                                 Exhibits - 39

<PAGE>   113


IN NO EVENT WILL THIS LETTER OF CREDIT BE EXTENDED BEYOND A FULL AND FINAL
EXPIRATION DATE OF NOVEMBER 4, 2001.

THIS LETTER OF CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR
DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE
PUBLICATION NO. 500 AND ENGAGES US PURSUANT TO THE TERMS THEREIN.

BANK OF AMERICA NT & SA

<TABLE>

<S>                                <C> 
- --------------------------        --------------------------------        
Authorized Signature              Authorized Signature
</TABLE>


                      THIS DOCUMENT CONSISTS OF 2 PAGE(S).

                                 Exhibits - 40

<PAGE>   114


                        Form of Letter of Credit (con'd)
BA Bank of America         Exhibit A

Request for Entire Transfer of Credit Without Substitution of Invoices


<TABLE>
                               <S>                          <C>   <C>
                                                            19    
- ----------------------------   ----------------------------   ----                 
Last Name and No.              Letter of Credit No.               
- ----------------------------                       ---------------       
Address                        Issued By                         
- ----------------------------             ------------------------
                               Your Advice No.                   
                                               ------------------
</TABLE>


To:  Bank of America NT & SA

We request you to transfer all of our rights as beneficiary under the Letter of
Credit referenced above to a second beneficiary, named below.
_________________________________________________________________
Name of Second Beneficiary
_________________________________________________________________
Address

By this transfer, all our rights as the original beneficiary, including all
rights to make drawings under the Letter of Credit, go to the second
beneficiary.  The second beneficiary shall have sole rights as beneficiary,
whether existing now or in the future, including sole rights to agree to any
amendments, including increases or extensions or other changes.  All amendments
will be sent directly to the second beneficiary without the necessity of
consent by or notice to us.

We enclose the original letter of credit and any amendments.  Please indicate
your acceptance of our request for the transfer by endorsing the letter of
credit and sending it to the second beneficiary with your customary notice of
transfer.

For your transfer fee:

[ ]      Enclosed is our check for $________________________

[ ]      You may debt my/our account No.____________________

We also agree to pay you on demand any expenses which may be incurred by you in
connection with this transfer.

The signature and title at the right conform with those shown in our files as
authorized to sign for the beneficiary.  Policies governing signature
authorization as required for withdrawals from customer accounts shall also be
applied to the authorization of signatures on this form.

<TABLE>
<S>                             <C>
                                                                                                
                                  -------------------------------------                                                 
                                  Name of Beneficiary
                                     
- --------------------------        -------------------------------------
                                  Name of Authorized Signer and Title

                                  x
- --------------------------        -------------------------------------                                                   
Authorized Signature and Title    Authorized Signature

</TABLE>

                                 Exhibits - 41

<PAGE>   115
                       FORM OF LETTER OF CREDIT (CONT'D)



                             [INTENTIONALLY BLANK]





                                  Exhibits -42

<PAGE>   116


                                  Exhibit "N"

                    Tenant's Hazardous Substance Disclosures

                               [VIVUS Letterhead]

Steve Dostart
26 February 1997
Mozart Development Corporation
1068 East Meadow Circle
Palo Alto, CA 94303

Dear Sir:

    As per your request, enclosed you will find a listing of the chemicals used
by VIVUS, Inc. in our laboratories.  The amounts included are amounts expected
to be on hand at any point in time.  You will note that these are small
amounts.  We are not, nor will be, engaged in commercial manufacture of any
product in our laboratories.  Our laboratories are used for initial formation
and analytical analysis.  Our product contains small quantities of a naturally
occurring prostaglandin PGE1 (alprostadil), therefore we do not need large
quantities of chemical materials.

Should you have any questions regarding this, please contact me.

Sincerely,

/s/    WILLIAM L. SMITH
- -----------------------
William L. Smith, Ph.D.
Vice President
Research and Development

                                 Exhibits - 43

<PAGE>   117

               Tenant's Hazardous Substance Disclosures (cont'd)

                               [VIVUS Letterhead]

                                  CONFIDENTIAL

This information is the sole property of VIVUS, Inc. and is not to be used or
disclosed in any manner without prior express written permission.

                                  VIVUS, Inc.
                               Chemical Inventory


<TABLE>
<CAPTION>
             Chemical                                            Quantity     
- --------------------------------------                   ---------------------
<S>                                                      <C>
Alprogradil alpha-cyclo dextrin                          0.1 grams
dl-propranolol                                           25.0 grams
3-isobutyl-1-methylxanchine                              1.0 gram
Sigmacote                                                100 milliliters
Alprostadil                                              350.0 milligrams
Phentolamine                                             5.2 grams
Prostaglandin Al                                         50.0 milligrams
Linoleic acid                                            25.0 grams
Oleic acid                                               25.0 grams
Linoleic acid ethyl aster                                25.0 grams
Oleic acid ethyl ester                                   25.0 grams
Linolenic acid                                           1.0 gram
Acetonitrile                                             6.0 liters
Isopropranol                                             8.0 liters
Methylene Chloride                                       4.0 liters
Heptane                                                  4.0 liters
Cyclobexane                                              4.0 liters
Methanol                                                 8.0 liters
Ethyl alcohol (dematured)                                4.0 liters
Acetone                                                  4.5 liters
Ethyl acetate                                            1.0 liter
Propylene carbonate                                      4.0 liters
Magnesiun stearate                                       1.0 kilogram
Ethylanediamine tetrasostic acid                         500 grams
Methyl cellulose                                         500 grams
Sulfadiazine                                             25 grams
Sodium nitroprusside                                     100 grams
Potassium ferocyanide                                    500 grams
Estradiol                                                10 grams
Papaverine                                               100 grams
Propyl gallato                                           100 grams
Caffeine                                                 100 grams
Yohimbine                                                5.4 grams
Prazosin                                                 80 grams
Ferric chloride                                          100 grams
</TABLE>


                                 Exhibits - 44

<PAGE>   118


                               [VIVUS Letterhead]

                                  CONFIDENTIAL

This information is the sole property of VIVUS, Inc. and is not to be used or
disclosed in any manner without prior express written permission.


<TABLE>
<S>                                                      <C>
Progesterone                                             25 grams
Chromic chloride                                         500 grams
Arginina                                                 75 grams
Tetrabutylammonlures dihydrogen phosphate                5 grams
Isosorbide dinitrate                                     250 grams
Rhodium (III) chloride                                   1 gram Adenosina5 grams
Phenylaphrine                                            100 grams
Potassium chloride-3 molar                               125 milliters
Argon gas                                                336 cubic feet
Polyethylene glycol 1500                                 500 grams
Polyethylene glycol 3350                                 500 grams
Polyvinyl alcohol                                        1 kilogram
Dicthylamine                                             500 milliters
Sodium hydroxide-25% solution                            1 liter
Sodium acetate                                           500 grams
Sodium phosphate, dibasic                                500 grams
Triethanoamine                                           100 milliters
Triethylamine                                            100 milliters
Atropine                                                 50 grams
Mineral oil                                              2 liters
Triton X-100                                             1 liter
Polyxyethylene 100 sterate                               250 grams
Citric acid                                              1.5 kilograms
Theophyline                                              100 grams
Ascorbic acid                                            300 grams
Nicotinic acid                                           100 grams
Acetic acid, glacial                                     500 milliters
Hydralazine                                              100 grams
Hydrochloric acid (1N)                                   1 liter
Ethyl alcohol                                            8 liters
Ethyl ether                                              4 liters
Petroleum ether                                          500 milliters
Hexane                                                   500 milliters
Helium gas                                               290 cubic feet
Nitrogen gas                                             300 cubic feet
Prostaglandin A2                                         10 milligrams
Prostaglandin B1                                         10 milligrams
Prostaglandin E3                                         500 micrograms
Prostaglandin F1 alpha                                   10 milligrams
Prostaglandin F2 alpha                                   10 milligrams
</TABLE>


                                 Exhibits - 45



<PAGE>   1





                                                                    EXHIBIT 11.1

                                  VIVUS, INC.
                       COMPUTATION OF NET LOSS PER SHARE





<TABLE>
<CAPTION>
                                                 Twelve Months Ended December 31,
                                                 --------------------------------
                                                 1996               1995      
                                                 ----------         ----------
<S>                                              <C>               <C>
Net Loss...............................          $(16,527,000)     $ (22,811,000)
                                                 =============     =============
Weighted average common shares
outstanding............................            14,916,554          12,901,728

Common shares, options, and warrants
granted (using the treasury stock
method assuming an initial public
offering price of $14.00) since January
1, 1993 included pursuant to Securities
and Exchange Commission
Rules..................................                   -0-             555,449
                                               ---------------      -------------
                                                         
                                                           
Weighted average common and equivalent
shares............................                 14,916,554          13,457,177
                                                  ============        ===========
Net loss per common and equivalent
share..................................            $     (1.11)        $   (1.70)       
                                                   ============        =========           
                                                   
                                                   
</TABLE>







<PAGE>   1


                          

                                                                    Exhibit 13.1


SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)


<TABLE>
<CAPTION>
                                                                      Quarters Ended,
                                             ------------------------------------------------------------------
1996                                            March 31          June 30      September 30     December 31
- ---------------------------------------------------------------------------------------------------------------
<S>                                          <C>              <C>              <C>              <C>
Net income (loss)                            $    (6,235)     $    (3,745)     $      2,662     $    (9,209)
Net income (loss) per common
    and equivalent share                     $     (0.45)     $     (0.26)     $       0.15     $     (0.57)
Common stock prices
    High                                     $        31-3/4  $        34       $        42     $        40-3/4
    Low                                      $        23-1/2  $        25-1/4   $        28     $        27-7/8
1995
- ---------------------------------------------------------------------------------------------------------------
Net loss                                     $    (5,457)     $    (6,413)      $    (4,873)    $    (6,068)
Net loss per common
    and equivalent share                     $     (0.44)     $     (0.47)      $     (0.35)    $     (0.43)
Common stock prices
    High                                     $        19      $        17-1/2   $        24     $        31-1/4
    Low                                      $        13      $        11-1/4   $        14     $        16-3/4

</TABLE>


The Company's common stock is traded over-the-counter on The Nasdaq Stock
Market under the symbol "VVUS." As of December 31, 1996, there were
approximately 368 stockholders of record.  The Company has not paid any
dividends since its inception and does not intend to pay any dividends in the
foreseeable future. 

SELECTED FINANCIAL DATA


<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
                                          -----------------------------------------------------------------
                                              1996          1995          1994          1993           1992
- -----------------------------------------------------------------------------------------------------------
<S>                                        <C>           <C>           <C>           <C>          <C>
Revenue                                   $ 20,000      $     --      $     --      $     --      $      --
Operating expenses:
    Research and development                28,279        21,313        13,916         6,814          3,102
    General and administrative              11,733         4,389         2,587         1,499            626
                                          --------      --------      --------      --------      ---------
       Total operating expenses             40,012        25,702        16,503         8,313          3,728
                                          --------      --------      --------      --------      ---------
       Loss from operations                (20,012)      (25,702)      (16,503)       (8,313)        (3,728)
Interest income                              3,485         2,891         1,639           538             63
                                          --------      --------      --------      --------      ---------
       Net loss                           $(16,527)     $(22,811)     $(14,864)     $ (7,775)     $  (3,665)
                                          ========      ========      ========      ========      =========
       Net loss per common and
           equivalent
 share               $  (1.11)     $  (1.70)     $  (1.27)     $  (0.79)
Shares used in per share calculations       14,917        13,457        11,744         9,828
Financial position at year end:
    Total assets                          $ 96,532      $ 44,049      $ 43,021      $ 24,732      $   5,626
    Accumulated deficit                    (66,154)      (49,627)      (26,816)      (11,952)        (4,177)
    Stockholders' equity                    89,780        41,181        40,307        23,435          5,096
Additional information:
    Working capital                        $60,388      $ 19,878      $ 21,656      $ 16,010      $   5,002
    Capital expenditures                   $ 3,682      $  3,148      $    787      $  1,007      $      81
    Common shares outstanding               16,227        13,476        11,724         2,328          2,215
    Number of employees                         95            38            28            15              5
</TABLE>



<PAGE>   2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Since its inception in April 1991, VIVUS, Inc. (the Company) has focused on the
design and development of products for the treatment of erectile dysfunction.
The Company has devoted substantially all its efforts to research and
development conducted on its own and through collaboration with clinical
institutions. The Company's primary product, MUSE(R) (alprostadil), has moved
from preclinical development to regulatory marketing clearance over the last
four years. In November 1996, the Company obtained regulatory marketing
clearance by the U.S. Food and Drug Administration (FDA) to manufacture and
market MUSE (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 approval of MUSE (alprostadil)
in the United Kingdom and Sweden in 1996, and in Norway in early 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.

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 its 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.

Spending increased from 1994 through 1996 largely as a result of expanded
operational activities related to the Company's Phase II and III clinical
trials, preparing the MUSE (alprostadil) New Drug Application (NDA) for the
FDA, expansion of its manufacturing capacity and development of its marketing
and sales capabilities. Spending levels will continue to increase during 1997
as the Company further expands its commercial manufacturing, marketing and
sales capabilities.

In May 1996, the Company completed a 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. 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 it achieves certain other milestones. In
January 1997, the Company signed 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. The Company received a $5 million payment as a result of the execution
of the agreement and additional payments will be made in the event that certain
other milestones are achieved.

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 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, attainment of foreign regulatory approvals for MUSE (alprostadil) and
domestic and foreign approval of other potential products. Failure to make such
a transition successfully would have a material adverse effect on the Company's
business, financial condition and results of operations.






<PAGE>   3

In April 1994, the Company successfully completed an initial public offering of
2,473,000 shares of common stock, with net proceeds to the Company of
$31,578,000. The Company completed a secondary public offering of 1,800,000
shares of common stock in April 1995. Of the total number of shares sold,
1,670,000 shares were sold by the Company and 130,000 shares were sold by a
current stockholder. Net proceeds to the Company were $22,483,000. The Company
completed a third public offering of 2,000,000 shares of common stock in June
1996. In July 1996, the underwriters for this offering exercised their option
to purchase an additional 300,000 shares to cover over-allotments. Net proceeds
to the Company were $57,468,000.

This Overview section contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1993, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results could differ
materially from those projected in the forward-looking statements as a result
of the factors set forth in the above mentioned paragraphs.

Results of Operations

Years Ended December 31, 1996 and 1995

In May 1996, the Company completed a 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 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 recorded these receipts as
revenue in the consolidated statement of operations during 1996. The Company
began generating revenues from product sales in January 1997. No product
revenues were recorded in 1996 or 1995.

Research and development expenses in 1996 were $28,279,000 compared with
$21,313,000 in 1995, an increase of 33%. This increase resulted primarily from a
$5.8 million charge related to the issuance of 200,000 shares of common stock in
May 1996 to ALZA Corporation to maintain exclusive rights to certain patents and
patent applications beyond 1998. In addition, higher pre-launch manufacturing
costs were partially offset by lower clinical and regulatory expenses.

General and administrative expenses in 1996 were $11,733,000 compared with
$4,389,000 in 1995, an increase of 167%. This increase resulted primarily from
higher product marketing and market research expenses, hiring and training the
U.S. sales force, and additional personnel and increased facilities costs to
support the growth of the Company's operations.

Interest income in 1996 was $3,485,000 compared with $2,891,000 in 1995, an
increase of 21%. The increase resulted from higher average invested cash
balances associated with the $57,468,000 in net proceeds received from the
stock offering in June 1996.

Years Ended December 31, 1995 and 1994

No revenues were recorded in 1995 or 1994. Research and development expenses in
1995 were $21,313,000 compared with $13,916,000 in 1994, an increase of 53%.
This increase resulted primarily from the increased expenses supporting the
Company's Phase III confirmatory clinical studies and ongoing clinical study
programs for MUSE (alprostadil), costs associated with the preparation of the
NDA for MUSE (alprostadil), expansion of the Company's






<PAGE>   4

manufacturing capability and growth in personnel to support the Company's
expanding operations. Clinical trial costs consisted largely of payments to
clinical investigators. The Company pays its clinical investigators on a per
patient basis. In clinical trials through December 31, 1995, the MUSE
transurethral system had been used by more than 1,900 men at more than 80 sites
in the United States and Europe.

General and administrative expenses in 1995 were $4,389,000 compared with
$2,587,000 in 1994, an increase of 70%. This increase resulted primarily from
hiring additional personnel to support the growth of the Company's operations,
in addition to higher market research, legal and accounting expenses, and
expenses associated with being a public company.

Interest income in 1995 was $2,891,000 compared with $1,639,000 in 1994, an
increase of 76%. The increase resulted from higher average invested cash
balances as well as higher returns on its cash investments in 1995 due to the
favorable effects of higher average interest rates.

Liquidity and Capital Resources

Since inception, the Company has financed operations primarily from the sale of
preferred and common stock. To date, the Company has raised $147,594,000. Cash,
cash equivalents and securities totaled $84,325,000 at the end of 1996 compared
with $39,524,000 at the end of 1995. The Company maintains its current excess
cash balances in a variety of interest-bearing financial securities such as 
U.S. government securities, high-grade corporate debt and certificates of 
deposit. Principal preservation, liquidity and safety are the primary investment
objectives. See Note 2 of Notes to Consolidated Financial Statements.

Cash used in operations in 1996 was $10,379,000 compared with $21,539,000 in
1995. The decreased use of cash was primarily due to a lower net loss of
$16,527,000, which also included a non-cash charge of $5,821,000 to operations
related to the issuance of 200,000 shares of stock to ALZA, in 1996 compared
with a net loss of $22,811,000 in 1995.

Product inventories were recorded beginning in the fourth quarter of 1996,
consistent with the FDA marketing clearance of MUSE (alprostadil).

Interest and other receivables and prepaid and other current assets at December
31, 1996 were $1,335,000 compared with $637,000 at December 31, 1995, an
increase of $698,000. This increase resulted primarily from an increase in
interest receivables related to the Company's investment portfolio.

Current liabilities were $6,752,000 at December 31, 1996 compared with
$2,868,000 at December 31, 1995, an increase of $3,884,000. This increase was
primarily due to an increase in expenditures in 1996.

Capital expenditures in 1996 were $3,682,000 compared with $3,148,000 in 1995,
an increase of $534,000. In 1995, the Company constructed and equipped
approximately 6,000 square feet of manufacturing and testing space within Paco
Pharmaceutical Services, Inc., a contract manufacturing facility owned by The
West Company located in Lakewood, New Jersey. Capital expenditures in 1996
consisted primarily of manufacturing, quality control, laboratory and computer
equipment. Major capital expenditures over the next two years are expected to
include Company-owned manufacturing facilities in the United States and Europe,
a new corporate headquarters and research and development laboratory facility
in the United States.






<PAGE>   5

In 1995, the Company implemented an international product distribution strategy
for its products. Implementation included the transfer of international product
manufacturing and marketing rights to VIVUS International Limited, a
wholly-owned subsidiary of the Company, in a taxable transaction. The transfer
of rights and related allocation of research and development costs resulted in
the utilization of $29,467,000 of the net operating loss carryforward.

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 the 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 future products. The sale of additional equity
securities would result in additional dilution to the Company's stockholders.
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.

This Liquidity and Capital Resources section contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors set forth above in this
Liquidity and Capital Resources section and in the Overview section to this

Management's Discussion and Analysis of Financial Condition and Results of
Operations. The discussion of those factors is incorporated herein by this
reference as if said discussion was fully set forth at this point.






<PAGE>   6
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)



<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                               -----------------------------
                                                                                   1996             1995
- ------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>              <C> 
Assets

Current assets:

    Cash and cash equivalents                                                  $        555     $        973

    Available-for-sale securities                                                    60,710           21,136

    Interest and other receivables                                                      748              449

    Inventories                                                                       4,540               --

    Prepaid expenses and other                                                          587              188
                                                                               ------------     ------------
       Total current assets                                                          67,140           22,746

Property, net                                                                         6,332            3,888

Available-for-sale securities, non-current                                           23,060           17,415
                                                                               ------------     ------------
       Total                                                                   $     96,532     $     44,049
                                                                               ============     ============


Liabilities and Stockholders' Equity

Current liabilities:

    Accounts payable                                                           $      3,324     $        353

    Accrued and other liabilities                                                     3,428            2,515
                                                                               ------------     ------------
       Total current liabilities                                                      6,752            2,868
                                                                               ------------     ------------

Commitments (Notes 7 and 8)

Stockholders' equity:

    Preferred stock; no par value; shares authorized--

       5,000,000; shares outstanding--none                                               --               --

    Common stock; $.001 par value; shares authorized--

       30,000,000; shares outstanding--December 31, 1996,

       16,227,170; December 31, 1995, 13,475,570                                         16               13

    Paid in capital                                                                 156,189           91,472

    Unrealized gain on securities                                                        77              114

    Deferred compensation                                                              (348)            (791)

    Accumulated deficit                                                             (66,154)         (49,627)
                                                                               ------------     ------------
       Total stockholders' equity                                                    89,780           41,181
                                                                               ------------     ------------
       Total                                                                   $     96,532     $     44,049
                                                                               ============     ============
</TABLE>



See notes to consolidated financial statements.






<PAGE>   7
CONSOLIDATED STAEMENTS OF OPERATIONS
(In thousands, except per share data)



<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                                                          ---------------------------------------------
                                                                 1996            1995              1994
- -------------------------------------------------------------------------------------------------------
<S>                                                       <C>               <C>              <C>
Revenue                                                   $    20,000       $       --       $       --

Operating expenses:

   Research and development                                    28,279           21,313           13,916

   General and administrative                                  11,733            4,389            2,587
                                                          -----------       ----------       ----------
      Total operating expenses                                 40,012           25,702           16,503
                                                          -----------       ----------       ----------
      Loss from operations                                    (20,012)         (25,702)         (16,503)

Interest income                                                 3,485            2,891            1,639
                                                          -----------       ----------       ----------
      Net loss                                            $   (16,527)      $  (22,811)      $  (14,864)
                                                          ===========       ==========       ==========
      Net loss per common and
        equivalent share                                  $     (1.11)      $    (1.70)      $    (1.27)
                                                          ===========       ==========       ==========       
Shares used in per share calculation                           14,917           13,457           11,744
                                                          ===========       ==========       ==========
</TABLE>




See notes to consolidated financial statements.






<PAGE>   8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)


<TABLE>
<CAPTION>
                                                                Common Stock
                                             Convertible             and         Unrealized 
                                           Preferred Stock     Paid-in Capital   Gain (Loss)
                                           ----------------    ---------------      on          Deferred   Accumulated
                                           Shares    Amount    Shares   Amount   Securities   Compensation   Deficit
- ----------------------------------------------------------------------------------------------------------------------
<S>                                       <C>       <C>         <C>    <C>        <C>           <C>         <C>
Balances, December 31, 1993                20,641   $ 34,402    2,328  $   1,968  $      2      $   (984)   $(11,952)
Sale of common stock at $14.00                                
  per share for cash (net of                                  
  issuance costs of $3,037,000)                                 2,473     31,578
Conversion of preferred stock                                 
  into common                             (20,641)   (34,402)   6,880     34,402
Sale of common stock through                                  
  employee stock purchase plan                                      5         50
Exercise of common stock options                              
  for cash                                                         38         18
Unrealized loss on securities                                                         (341)
Deferred compensation related to                              
  stock option grants                                                        682                    (682)
Amortization of deferred compensation                                                                430
Net loss                                                                                                     (14,864)
                                          -------  ---------   ------  ---------  --------      --------    -------- 
Balances, December 31, 1994                    --         --   11,724     68,698      (339)       (1,236)    (26,816)
Sale of common stock at $14.50                                
  per share for cash (net of                                  
  issuance costs of $1,732,000)                                 1,670     22,483
Sale of common stock through                                  
  employee stock purchase plan                                     16        172
Exercise of common stock options                              
  for cash                                                         66        132
Unrealized gain on securities                                                          453
Amortization of deferred compensation                                                                445
Net loss                                                                                                     (22,811)
                                          -------  ---------   ------  ---------  --------      --------    -------- 
Balances, December 31, 1995                    --         --   13,476     91,485       114          (791)    (49,627)
Issuance of common stock at $29.11                            
  for patent rights                                               200      5,821
Sale of common stock at $26.75                                
  per share for cash (net of                                  
  issuance costs of $4,057,000)                                 2,300     57,468
Sale of common stock through                                  
  employee stock purchase plan                                     10        226
Exercise of common stock options                              
  for cash                                                        241      1,205
Unrealized loss on securities                                                          (37)
Amortization of deferred compensation                                                                443
Net loss                                                                                                     (16,527)
                                          -------  ---------   ------  ---------  --------      --------    -------- 
Balances, December 31, 1996                    --  $      --   16,227  $ 156,205  $     77      $   (348)   $(66,154)
                                          =======  =========   ======  =========  ========      ========    ========
</TABLE>

See notes to consolidated financial statements.






<PAGE>   9
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)




<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                              ----------------------------------------------
                                                                      1996             1995             1994
- ------------------------------------------------------------------------------------------------------------
<S>                                                           <C>              <C>              <C>
Cash flows from operating activities:
    Net loss                                                  $    (16,527)    $    (22,811)    $    (14,864)
    Adjustments to reconcile net loss to net cash
       used for operating activities:
       Depreciation and amortization                                 1,238              708              265
       Amortization of deferred compensation                           443              445              430
       Issuance of common stock for patent rights                    5,821               --               --
    Changes in assets and liabilities:
       Interest and other receivables                                 (299)             (41)             118
       Inventories                                                  (4,540)              --               --
       Prepaid expenses and other                                     (399)               6              (10)
       Accounts payable                                              2,971             (298)            (302)
       Accrued and other liabilities                                   913              452            1,720
                                                              ------------     ------------     ------------
           Net cash used for operating activities                  (10,379)         (21,539)         (12,643)
                                                              ------------     ------------     ------------

Cash flows from investing activities:
    Property purchases                                              (3,682)          (3,148)            (787)
    Investment purchases                                          (177,074)        (146,338)        (116,811)
    Proceeds from sale/maturity of securities                      131,818          147,202           99,498
    Other                                                               --              (28)               4
                                                              ------------     ------------     ------------
           Net cash used for investing activities                  (48,938)          (2,312)         (18,096)
                                                              ------------     ------------     ------------
Cash flows from financing activities:
    Sale of common stock                                            57,468           22,483           31,578
    Exercise of common stock options                                 1,205              132               18
    Sale of common stock through employee
       stock purchase plan                                             226              172               50
                                                              ------------     ------------     ------------
           Net cash provided by financing activities                58,899           22,787           31,646
                                                              ------------     ------------     ------------
Net increase (decrease) in cash and
    cash equivalents                                                  (418)          (1,064)             907
Cash and cash equivalents:
    Beginning of period                                                973            2,037            1,130
                                                              ------------     ------------     ------------
    End of period                                             $        555     $        973     $      2,037
                                                              ============     ============     ============
Non-cash investing and financing activities:
    Deferred compensation recorded relating to
       stock option grants                                    $         --     $         --     $        682
    Unrealized gain (loss) on securities                               (37)             453             (341)
</TABLE>



See notes to consolidated financial statements.






<PAGE>   10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994


NOTE 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES


Business

VIVUS, Inc. was incorporated in California in 1991 to develop products for the
treatment of erectile dysfunction. The Company was reincorporated in Delaware
in 1996. The classification of the capital accounts reflects the effect of the
reincorporation for all periods presented.

The Company has devoted substantial effort towards product research and
development, clinical trials, securing adequate product supply and
manufacturing capabilities, and raising capital. As of December 31, 1996, the
Company is no longer considered a development stage company. The Company
obtained clearance from the U.S. Food and Drug Administration ("FDA") to
manufacture and market MUSE (alprostadil) in November 1996 and is currently
seeking marketing clearance in other countries. 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
January 1997.

The Company is subject to a number of risks including its ability to scale-up
its manufacturing capabilities and secure an adequate supply of raw materials,
its ability to successfully market, distribute and sell its product, its
reliance on a single therapeutic approach for the treatment of erectile
dysfunction, and intense competition. Accordingly, there can be no assurance of
the Company's future success.

Revenue Recognition

The Company recognized revenue of $20 million in the year ended December 31,
1996 as a result of achieving certain milestones under its marketing agreement
with Astra AB. The amount recognized is not refundable and does not involve any
significant future performance obligations.

While there were product shipments in December 1996, the Company has not
recognized revenue, nor the associated cost of sales on these shipments because
of extended rights-of-return privileges granted to customers during this initial
selling period. Assuming return privileges are not exercised, revenue will be
recognized during the first quarter of 1997 when the return period has elapsed.
For shipments after January 1, 1997, extended rights-of-return will not be
offered and revenue will be recognized as shipments are made.

Principles of Consolidation

The consolidated financial statements include VIVUS, Inc., VIVUS International
Limited, a wholly-owned subsidiary, and VIVUS UK Limited and VIVUS BV Limited,
wholly-owned subsidiaries of VIVUS International Limited. All significant
intercompany transactions and balances have been eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with an
original maturity of 90 days or less to be cash equivalents.

Inventories

Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Cost includes material and conversion costs. Pending FDA marketing
clearance, which was obtained in November 1996, the Company expensed to
research and development in 1996 and prior years all raw material purchases
prior to October 1, 1996. Certain of these expensed raw material costs
(approximately $10 million) will have the benefit of reducing future cost of
sales.






<PAGE>   11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Available-for-Sale Securities

The Company accounts for available-for-sale securities in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Available-for-sale securities
represent debt securities that are stated at fair value. The difference between
amortized cost (cost adjusted for amortization of premiums and accretion of
discounts which are recognized as adjustments to interest income) and fair
value, representing unrealized holding gains or losses, are recorded as a
separate component of stockholders' equity until realized. The Company's policy
is to record debt securities as available-for-sale because the sale of such
securities may be required prior to maturity. Any gains and losses on the sale
of debt securities are determined on a specific identification basis.

Property

Property is stated at cost. Depreciation and amortization are computed using
the straight-line method over estimated useful lives of three to seven years.

Income Taxes

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which requires an
asset and liability approach for financial reporting of income taxes.

License Agreements

The Company has obtained rights to patented technologies related to its initial
product under several licensing agreements. These agreements generally require
payments during the development period and royalties on product sales. Payments
prior to commercial availability of the product have been reported as research
and development expense.

Research and Development

Research and development costs are expensed as incurred.

Net Loss Per Common and Equivalent Share

Net loss per common and equivalent share is based on the weighted average
number of common and common equivalent shares outstanding during the periods.
Common equivalent shares, which represent shares issuable upon the exercise of
outstanding stock options, were excluded from the calculation of loss per share
because the effect of including such shares in the calculation would be
anti-dilutive.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.






<PAGE>   12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 2. AVAILABLE-FOR-SALE SECURITIES

The fair value and the amortized cost of available-for-sale securities at
December 31, 1996 and 1995 are presented in the table that follows.  Fair
values are based on quoted market prices obtained from an independent broker.
For each category of investment securities the table presents gross unrealized
holding gains and losses.

As of December 31, 1996:


<TABLE>
<CAPTION>
                                               Amortized       Fair Market     Unrealized       Unrealized
(In thousands)                                   Cost             Value       Holding Gains    Holding Losses
- -------------------------------------------------------------------------------------------------------------
<S>                                          <C>              <C>              <C>              <C> 
U.S. government securities                   $     55,441     $     55,488     $         84     $       (37)
Corporate debt                                     28,252           28,282               32              (2)
                                             ------------     ------------     ------------     -----------
      Total                                  $     83,693     $     83,770     $        116     $       (39)
                                             ============     ============     ============     ===========
</TABLE>


As of December 31, 1995:


<TABLE>
<CAPTION>
                                               Amortized       Fair Market      Unrealized       Unrealized
(In thousands)                                   Cost             Value       Holding Gains    Holding Losses
- -------------------------------------------------------------------------------------------------------------
<S>                                          <C>              <C>              <C>              <C> 
U.S. government securities                   $     35,937     $     36,050     $        113     $        --
Corporate debt                                      2,500            2,501                1              --
                                             ------------     ------------     ------------     -----------
         Total                               $     38,437     $     38,551     $        114     $        --
                                             ============     ============     ============     ===========
</TABLE>

The contractual maturities of these securities as of December 31, 1996 are as
follows:


<TABLE>
<CAPTION>
                                                                                 Amortized       Fair Market
(In thousands)                                                                     Cost             Value
- -------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>              <C>
Less than 1 year                                                               $     60,650     $     60,710
From 1 to 2 years                                                                    13,684           13,673
From 2 to 3 years                                                                     9,359            9,387
                                                                               ------------     ------------
      Total                                                                    $     83,693     $     83,770
                                                                               ============     ============
</TABLE>

NOTE 3. INVENTORIES

Inventories as of December 31 consist of:


<TABLE>
<CAPTION>
(In thousands)                                                                         1996             1995
- -------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>              <C>       <C>
Raw materials                                                                  $      1,893     $         --
Work in process                                                                         344               --
Finished goods                                                                        2,303               --
                                                                               ------------     ------------
      Inventories, net                                                         $      4,540     $         --
                                                                               ============     ============
</TABLE>

NOTE 4. PROPERTY

Property as of December 31 consists of:


<TABLE>
<CAPTION>
(In thousands)                                                                         1996             1995
- -------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>              <C>
Machinery and equipment                                                        $      4,763     $      3,578
Computers and software                                                                1,859              872
Furniture and fixtures                                                                  535              404
Construction in progress                                                              1,554              175
                                                                               ------------     ------------
                                                                                      8,711            5,029
Accumulated depreciation and amortization                                            (2,379)          (1,141)
                                                                               ------------     ------------
      Property, net                                                            $      6,332     $      3,888
                                                                               ============     ============
</TABLE>






<PAGE>   13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 5. ACCRUED AND OTHER LIABILITIES

Accrued and other liabilities as of December 31 consist of:

<TABLE>
<CAPTION>

(In thousands)                                                                         1996             1995
- ------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>              <C>        
Clinical trial expenses                                                        $        347     $        906
Manufacturing expenses                                                                1,086              496
Marketing expenses                                                                      711               76
Employee benefits                                                                       392              182
Other                                                                                   892              855
                                                                               ------------     ------------
      Accrued and other liabilities                                            $      3,428     $      2,515
                                                                               ============     ============

</TABLE>

NOTE 6. STOCKHOLDERS' EQUITY

In April 1994, the Company completed an initial public offering of 2,473,000
shares of common stock. Net proceeds to the Company were $31,578,000. The
Company effected a one-for-three common stock split and a corresponding change
in the preferred stock conversion ratios in connection with the initial public
offering. Additionally, all preferred stock was converted to common stock. All
common stock data in the accompanying consolidated financial statements for all
years presented have been retroactively adjusted to reflect the stock split.

The Company completed a secondary stock offering of 1,800,000 shares of common
stock in April 1995. Of the total number of shares sold, 1,670,000 shares were
sold by the Company and 130,000 shares were sold by a current stockholder. Net
proceeds to the Company were $22,483,000.  

The Company completed a third stock offering of 2,000,000 shares of common stock
in June 1996. In July 1996, the underwriters for this offering exercised their
option to purchase an additional 300,000 shares to cover over-allotments. Net
proceeds to the Company were $57,468,000.

Preferred Stock

The Company is authorized to issue 5,000,000 shares of undesignated preferred
stock. Such shares of preferred stock may be issued by the Company in the
future, without stockholder approval, upon such terms as the Company's Board of
Directors may determine.

Stock Warrants

In connection with the issuance of convertible preferred stock in 1993, the
Company issued warrants currently exercisable for up to 264,000 shares of
common stock at an exercise price of $8.63 per share. The warrants expire in
1999.

Stock Purchase and Option Plans

Under the 1991 Incentive Stock Plan (the Plan), the Company may grant incentive
or nonstatutory stock options or stock purchase rights (SPRs).  Up to 3,100,000
shares of common stock have been authorized for issuance under the Plan. The
Plan allows the Company to grant incentive stock options (ISOs) and
nonstatutory stock options (NSOs) to key employees, directors and consultants
at not less than the fair market value (for an ISO) of the stock at the date of
grant (110% of fair market value for individuals who control more than 10% of
the Company stock; otherwise, not less than 85% of fair market value for an
NSO), as determined by the Board of Directors. Under the Plan, 25% of the
options generally become exercisable after one year and 2.0833% per month
thereafter. The term of the option is determined by the Board of Directors on
the date of grant but shall not be longer than ten years. The Plan allows the
Company to grant SPRs to key employees and consultants at not less than 85% of
the fair market value of the stock at the date of grant, as determined by the
Board of Directors. Sales of stock under SPRs are made pursuant to restricted
stock purchase agreements containing provisions established






<PAGE>   14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

by the Board of Directors. The Company has a right to repurchase the shares at
the original sale price, which expires at a rate to be determined by the Board
of Directors. As of December 31, 1996, no SPRs have been granted under the
Plan.

In February 1994, the Board of Directors authorized the adoption of the 1994
Director Stock Option Plan (the Director Option Plan). Under the Director
Option Plan, the Company reserved 100,000 shares of common stock for issuance
to nonemployee directors of the Company pursuant to nonstatutory stock options
issued at the fair market value of the Company's common stock at the date of
grant. Under the Director Option Plan, nonemployee directors will receive an
option to purchase 12,500 shares of common stock when they join the Board of
Directors. These options vest 25% after one year and 25% annually thereafter.
Thereafter, each director shall receive an option to purchase 2,500 shares of
the Company's common stock annually upon their reelection. These options are
fully exercisable ratably over eight months.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants: risk-free rates ranging from 5-7% and corresponding to government
securities with original maturities similar to the vesting periods; expected
dividend yield of 0%; expected lives of .64 years beyond vest dates; and
expected volatility of 55%.

Details of option activity under these plans are as follows:


<TABLE>
<CAPTION>
                                                                                   Exercise Prices
                                                                          -------------------------------------
                                                                Number                            Weighted
                                                               of Shares         Range             Average
- ---------------------------------------------------------------------------------------------------------------
<S>                                                           <C>         <C>         <C>         <C>
Outstanding, December 31, 1994                                1,092,384   $    .18 -  $  15.75    $        5.79
Granted                                                         627,025      11.25 -     27.00            16.24
Exercised                                                       (66,385)       .18 -      7.50             2.00
Canceled                                                        (20,708)       .48 -     14.50            13.45
                                                              ---------      
Outstanding, December 31, 1995                                1,632,316        .18 -     27.00             9.86
Granted                                                         722,373      28.25 -     39.94            32.80
Exercised                                                      (242,898)       .18 -     19.75             4.95
Canceled                                                        (12,866)       .48 -     23.75            20.49
                                                              ---------      
Outstanding, December 31, 1996                                2,098,925   $    .18 -  $  39.94    $       18.26
                                                              =========
</TABLE>


<TABLE>
<CAPTION>
        Options Outstanding                                        Options Exercisable
- -------------------------------------         -------------------------------------------------------------------------
                           Number                                                        Number
                       Outstanding at         Weighted-Average                         Exercisable
    Range of            December 31,              Remaining         Weighted-Average   December 31,    Weighted-Average
Exercise Prices             1996              Contractual life       Exercise Price       1996          Exercise Price
                       --------------         -------------------------------------------------------------------------
<S>                      <C>                       <C>                <C>              <C>                <C> 
$ 0.18 to $ 7.50           523,117                 6.60 years         $     2.85         402,349          $   2.51
$11.25 to $13.50           525,535                 8.15 years              13.12         241,987             13.16
$14.00 to $30.00           574,275                 8.80 years              23.67         136,870             18.30
$30.25 to $36.50           422,999                 4.85 years              33.87               0                 0
$38.00 to $39.94            52,999                 9.41 years              38.09               0                 0
                         ---------                                                     ---------
$ 0.18 to $39.94         2,098,925                 7.31 years         $    18.26         781,206          $   8.58
                         =========                                                     =========
</TABLE>

At December 31, 1996, 737,109 shares remain authorized and unissued and options
to purchase 781,206 shares were exercisable under these plans.  The weighted
average of fair values of options granted during the year under these plans was
$13.49.

During 1993, options to purchase 589,875 shares of common stock were granted at
exercise prices ranging from $.48 to $3.00. Deferred compensation of $1,093,000
was recorded in 1993. In January and February 1994, options to purchase 189,166
shares of common stock were granted at exercise prices ranging from $6.00 to
$7.50. Deferred compensation of $682,000 was recorded in the first quarter of
1994.






<PAGE>   15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company accounts for these plans under APB Opinion No. 25. Except for
deferred compensation discussed in the preceding paragraph, no compensation cost
has been recognized because the exercise price equals the market value of stock
on the date of grant. Options under these plans vest over four years, and all
options expire after ten years.

Had compensation cost for these plans been determined consistent with FASB
Statement No. 123 (FASB 123), "Accounting for Stock-based Compensation", the
Company's net loss and net loss per common and equivalent share would have
reflected the following pro forma amounts:


<TABLE>
<CAPTION>
                                                                                       1996             1995
- ------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>
Net loss (in thousands)

      As reported                                                              $   (16,527)      $  (22,811)

      Pro forma                                                                $   (20,039)      $  (23,941)

Net loss per common and equivalent share

      As reported                                                              $     (1.11)      $    (1.70)

      Pro forma                                                                $     (1.34)      $    (1.78)

</TABLE>

Because the FASB 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.

In June 1994, the Company implemented an employee stock purchase plan under
which eligible employees may authorize payroll deductions of up to 10% of their
base compensation (as defined) to purchase common stock at a price equal to 85%
of the lower of the fair market value as of the beginning or the end of the
offering period. A total of 200,000 shares were reserved for issuance under the
employee stock purchase plan. As of December 31, 1996, 30,525 shares have been
issued to employees. During 1996, the weighted average fair market value of
shares issued under the employee stock purchase plan was $31.69 per share.

NOTE 7. LICENSE AGREEMENTS

The Company has entered into several agreements to license patented
technologies that are essential to the development and production of the
Company's product. In connection with these agreements, upon meeting certain
milestones (as defined) and contingent on the issuance of patents in certain
countries, the Company is obligated to (1) pay license fees of $2,575,000 (of
which $1,750,000 has been paid); (2) issue 448,246 shares of the Company's
common stock (all of which has been issued); and (3) pay royalties on product
sales covered by the license agreements (4% of U.S. and Canadian product sales
and 3% of sales elsewhere in the world). In 1996, the Company issued an
additional 200,000 shares of common stock to maintain exclusive rights to
certain patents and patent applications beyond 1998. In connection with this
issuance, the Company recorded a charge of $5,821,000 to the consolidated
statements of operations.

NOTE 8. LEASE COMMITMENTS

The Company leases its principal administrative facility under a noncancelable
operating lease expiring December 1997. The Company also leases additional
office space and a development facility under noncancelable operating leases
expiring September 1999.

Subsequent to year end, the Company executed a five year lease for two
buildings totalling 90,000 square feet that will be built out to support
expansion of the Company's manufacturing capabilities. Additionally, the
Company signed a fifteen year noncancelable lease (expected to commence in
December 1997) for its new principal administrative and research and
development laboratory facility. Under the terms of this lease, the Company is
required to post a $2 million letter of credit to secure tenant improvements
and a $1.75 million letter of credit to secure ongoing performance under the
lease.






<PAGE>   16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Future minimum lease payments under operating leases for the years ended
December 31, 1997, 1998 and 1999, including the leases entered into subsequent
to year end described above, are $1,067,000, $1,675,000 and $1,671,000,
respectively.

Rent expense under operating leases totaled $560,000, $342,000, and $206,000
for years ended December 31, 1996, 1995, and 1994, respectively.

NOTE 9. INCOME TAXES

Deferred income taxes result from differences in the recognition of expenses
for tax and financial reporting purposes, as well as operating loss and tax
credit carryforwards. Significant components of the Company's deferred income
tax assets as of December 31 are as follows:


<TABLE>
<CAPTION>
(In thousands)                                                                         1996             1995
- ------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>              <C>
Deferred tax assets:
      Net operating loss carryforwards                                         $      7,870     $      4,834
      Research and development credit carryforwards                                   2,715            2,292
      Capitalized research and development expenses                                   3,695            2,642
      Inventory reserve                                                               4,237               --
      Amortization                                                                       --              329
      Accruals and other                                                                709              247
      Notes receivable from subsidiaries                                                 --           (1,700)
      Deferred gain                                                                  (1,760)              --
      Depreciation                                                                      487               91
                                                                               ------------     ------------
                                                                                     17,953            8,735
Valuation allowance                                                                 (17,953)          (8,735)
                                                                               ------------     ------------
      Total                                                                    $         --     $         --
                                                                               ============     ============
</TABLE>

For federal and state income tax reporting purposes, net operating loss
carryforwards of approximately $22,231,000 and $956,000 are available to reduce
future taxable income, if any. These carryforwards begin to expire in 2007.
Additionally, at December 31, 1996, the Company has research and development
credit carryforwards available to reduce future federal and state income taxes
through 2011 of approximately $1,537,000 and $1,178,000, respectively. In 1995,
the Company implemented an international product distribution strategy for its
products.  Implementation included the transfer of international product
manufacturing and marketing rights to VIVUS International Limited in a taxable
transaction. The transfer of rights and related allocation of research and
development costs resulted in the current utilization of $29,467,000 of the net
operating loss carryforward. Should significant changes in the Company's
ownership occur, the annual amount of tax loss and credit carryforwards
available for future use would be limited.

NOTE 10. SUBSEQUENT EVENT

In January 1997, the Company signed 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. The Company received a $5,000,000 payment as a result of the execution
of the agreement and additional payments will be made in the event that certain
milestones are achieved.






<PAGE>   17
R
EPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF VIVUS, INC.:

We have audited the accompanying consolidated balance sheets of VIVUS, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of VIVUS, Inc. and subsidiaries
at December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.



Arthur Andersen LLP

San Jose, California

January 27, 1997









<PAGE>   1

                                                                    EXHIBIT 21.2

                              LIST OF SUBSIDIARIES


The following is a list of subsidiaries of VIVUS, Inc.

1.  VIVUS International Limited, a wholly owned subsidiary of VIVUS, Inc.
2.  VIVUS UK Limited, a wholly owned subsidiary of VIVUS International Limited
3.  VIVUS BV Limited, a wholly owned subsidiary of VIVUS International Limited
4.  VIVUS Ireland Limited, a wholly owned subsidiary of VIVUS International
    Limited










<PAGE>   1
                                                             EXHIBIT 23.1


                       CONSENT OF INDEPENDENT ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report dated January 27, 1997 on the consolidated financial statements of
the Company for the year ended December 31, 1996, by reference in this Form
10-K, into the Company's previously filed Registration Statement on Form S-8
(File No. 33-80362).


                                                       /s/ ARTHUR ANDERSEN LLP
                                                           Arthur Andersen LLP 


San Jose, California
March 19, 1997





<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER>                                     1,000
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-START>                             JAN-01-1996
<PERIOD-END>                               DEC-31-1996
<CASH>                                             555
<SECURITIES>                                    60,710
<RECEIVABLES>                                      748
<ALLOWANCES>                                         0
<INVENTORY>                                      4,540
<CURRENT-ASSETS>                                67,140
<PP&E>                                           8,711
<DEPRECIATION>                                 (2,379)
<TOTAL-ASSETS>                                  96,532
<CURRENT-LIABILITIES>                            6,752
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                            16
<OTHER-SE>                                      89,764
<TOTAL-LIABILITY-AND-EQUITY>                    96,532
<SALES>                                              0
<TOTAL-REVENUES>                                20,000
<CGS>                                                0
<TOTAL-COSTS>                                        0
<OTHER-EXPENSES>                                40,012
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                               (16,527)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                           (16,527)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                  (16,527)
<EPS-PRIMARY>                                   (1.11)
<EPS-DILUTED>                                        0
        

</TABLE>