<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
 

<TABLE>
<S>                                                 <C>
            FOR THE FISCAL YEAR ENDED                             COMMISSION FILE NUMBER
                DECEMBER 31, 1998                                        0-23490
</TABLE>

 
                            ------------------------
 
                                   VIVUS INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 

<TABLE>
<S>                                                 <C>
                     DELAWARE                                           94-3136179
 (STATE OR OTHER JURISDICTION OF INCORPORATION OR          (IRS EMPLOYER IDENTIFICATION NUMBER)
                   ORGANIZATION)
</TABLE>

 
           605 EAST FAIRCHILD DRIVE, MOUNTAIN VIEW, CALIFORNIA 94043
             (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
 
                                 (650) 934-5200
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
                            ------------------------
 
        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                         COMMON STOCK, $.001 PAR VALUE
                        PREFERRED SHARE PURCHASE RIGHTS
 
                            ------------------------
 
     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 26, 1999, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $78,631,411 (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 percent
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 26, 1999, the number of outstanding shares of the
Registrant's Common Stock was 31,721,292.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     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 1999
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, 1998.
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<PAGE>   2
 
                                  VIVUS, INC.
 
                             FISCAL 1998 FORM 10-K
 
                                     INDEX
 

<TABLE>
<CAPTION>
                                                                            Page

                                 PART I                                     ----
<S>         <C>                                                             <C>
 

ITEM 1:     Business....................................................      1

ITEM 2:     Properties..................................................     17

ITEM 3:     Legal Proceedings...........................................     17

ITEM 4:     Submission of Matters to a Vote of Security Holders.........     18
 

                                PART II
 

ITEM 5:     Market for Registrant's Common Equity And Related
            Stockholder Matters.........................................     18

ITEM 6:     Selected Financial Data.....................................     19

ITEM 7:     Management's Discussion and Analysis of Financial Conditions
            and Results of Operations...................................     20

ITEM 8:     Financial Statements and Supplemental Data..................     25

ITEM 9:     Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure....................................     44
 

                                PART III
 

ITEM 10:    Executive Officers and Directors of the Registrant..........     44

ITEM 11:    Executive Compensation......................................     44

ITEM 12:    Security Ownership of Certain Beneficial Owners And
            Management..................................................     44

ITEM 13:    Certain Relationships and Related Transactions..............     44

ITEM 14:    Exhibits, Financial Statements, Schedules, and Reports on
            Form 8-K....................................................     44
Signatures..............................................................     48
</TABLE>

 
                                        i

<PAGE>   3
 
     This Form 10-K contains "forward-looking" statements about future financial
results, future products and other events that have not yet occurred. For
example, statements like we "expect," we "anticipate" or we "believe" are
forward-looking statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of risks and
uncertainties about the future. We will not necessarily update the information
in this Form 10-K if any forward-looking statement later turns out to be
inaccurate. Details about risks affecting various aspects of our business are
discussed throughout this Form 10-K. Investors should read all of these risks
carefully, and should pay particular attention to risks affecting the following
areas: future capital needs and uncertainty of additional financing (page 9);
history of losses and limited operating history (pages 9 and 10); limited sales
and marketing experience and dependent on third parties (pages 10 and 11);
intense competition (page 11); dependence on key personnel (page 11); and other
risk factors as stated (pages 12 through 17).
 

                                     PART I
 

ITEM 1. BUSINESS
 
COMPANY OVERVIEW
 
     VIVUS, Inc. ("VIVUS" or the "Company"), is the developer and manufacturer
of MUSE(R) (alprostadil) and ACTIS(TM), two advancements in the treatment of men
with erectile dysfunction ("ED"), also known as impotence. The Company's
objective is to become a global leader in the development and commercialization
of innovative therapies for the treatment of sexual dysfunction and urologic
disorders. The Company intends to market and sell its products through
distribution, co-promotion or license agreements with corporate partners.
Currently VIVUS markets MUSE and ACTIS in the United States and has retained its
rights to market the products in Japan. Elsewhere around the globe, MUSE is
partnered with ASTRA AB ("ASTRA") and Janssen Pharmaceutica ("Janssen") through
licensing and distribution agreements. VIVUS has active research, development
and clinical programs, and it is currently conducting Phase III clinical trials
for ALIBRA, its second-generation male ED treatment.
 
VIVUS STRATEGY
 
     The Company's objective is to become a global leader in the development and
commercialization of innovative therapies for the treatment of sexual
dysfunction and urologic disorders. The Company is pursuing this objective
through the following strategies:
 
  Targeted Research and Development (R&D) Efforts
 
     The Company will exploit its expertise and patent portfolio by focusing its
R&D activities on sexual dysfunction, incontinence, premature ejaculation and
other urologic disorders.
 
  Focus on Development and Regulatory Review
 
     The Company will continue to focus its R&D efforts on developing new
patentable uses of known pharmacologic agents for which significant safety data
already exists. The Company believes that such agents present a lower
development risk profile and may progress more rapidly through the clinical
development and regulatory process than agents without preexisting data.
 
  Maintain Proprietary Technology
 
     The Company will continue to invest in building its patent portfolio.
Currently, VIVUS has been awarded 13 patents and has 19 patent applications
pending in the United States. The Company also has 44 patents granted and 22
patents pending internationally.
 
                                        1

<PAGE>   4
 
  Partnering Strategy
 
     VIVUS is seeking a marketing partner for MUSE, ACTIS and ALIBRA in the
United States. The Company has already entered into international marketing
agreements for its products with ASTRA and Janssen, which cover all significant
countries, except Japan. The Company is also currently seeking a partner to
market, distribute and sell its products in Japan.
 
1998 HIGHLIGHTS
 
  First Quarter 1998
 
     During the first quarter, in anticipation of Pfizer's launch of Viagra
(sildenafil), VIVUS increased the size of its sales force and expanded its
physician call universe of urologists and ED Specialists to include primary care
physicians who prescribed treatments for ED. In March, Pfizer announced the
approval of sildenafil in the U.S. by the Food and Drug Administration ("FDA")
and proceeded to launch sildenafil through a multi-million dollar
direct-to-consumer advertising campaign, aided by intense media interest.
Pfizer's campaign for sildenafil became the most successful launch to date in
the history of the U.S. pharmaceutical market.
 
     Outside the U.S., MUSE gained international regulatory approvals. VIVUS'
marketing partner ASTRA launched MUSE into the United Kingdom in February. In
March, the European Medicine Controls Agency ("MCA") approved VIVUS'
manufacturing facility for MUSE. Also during the first quarter, MUSE was
approved in South Korea.
 
  Second quarter 1998
 
     The ED marketplace in the United States changed dramatically during the
second quarter of 1998. Primarily based on the media attention engendered by the
launch of sildenafil, patients were requesting prescriptions for sildenafil from
their primary care physician. Urologists, VIVUS' most cultivated audience,
ceased to serve as the leading prescribers of erectile dysfunction therapy. This
shift in the marketplace away from the urologist dramatically reduced the impact
of VIVUS' sales organization.
 
     VIVUS' MUSE had positive data presented in several forums during this
period. The June edition of The British Journal of Urology reported on a
landmark European study in 13 hospitals in the UK, France, Germany, Ireland and
The Netherlands which demonstrated that 64% of men who used MUSE achieved an
erection sufficient for sexual intercourse. VIVUS also released long-term safety
data (in excess of 24 months) with regard to MUSE-related serious adverse
effects. Serious adverse events in this long-term study were found to be similar
to treatment with placebo; MUSE did not increase the incidence of heart attack,
stroke, hospitalization, disability or death.
 
  Third Quarter 1998
 
     In July, VIVUS announced a strategic shift in its business model; VIVUS
decided to seek a major pharmaceutical partner to promote MUSE in the U.S.
marketplace. This change was necessary due to the erosion of market share MUSE
suffered, and the very large expense associated with maintaining a competitively
sized sales force for a primary care physician marketplace. The Company
transferred its sales organization to ALZA Corporation ("ALZA"), and as part of
the transfer, the ALZA urology sales representatives continued to detail MUSE to
urologists through December 31, 1998. Additionally, the Company terminated its
contract sales force agreement with Innovex.
 
     In August, the Company announced that it had retained Credit Suisse First
Boston Corporation to assist the Company in evaluating various strategic
alternatives including marketing collaborations or partnerships, acquisition of
the Company or other transactions.
 
     In September, Pfizer received approval in the European Union for
sildenafil. Based on the VIVUS' U.S. sales experience post-launch of sildenafil,
VIVUS' distribution partners for MUSE notified the Company that they would
significantly reduce their orders for MUSE.
 
                                        2

<PAGE>   5
 
     The Company took significant steps to restructure its operations in an
attempt to bring the cost structure in line with current and projected revenues.
These steps included significant reductions in personnel, the closing of the
contract manufacturing site located in PACO Pharmaceutical Services, Inc., and
the termination of the lease for the Company's corporate office. The Company
recorded a significant write-down of property, equipment and inventory. The
Company significantly scaled back its manufacturing operations as a result of
lower domestic and international demand for MUSE. As a result, the Company
experienced an operating loss of $54.7 million, or $1.72 per share, in the third
quarter of 1998.
 
  Fourth Quarter 1998
 
     As a result of the restructuring effort VIVUS initiated in the third
quarter, the Company reported net income of $1 million, or $0.03 per share. All
Company expenses for the fourth quarter of 1998 were less than the preceding
quarters of 1998 as well as the same period in 1997. The Company anticipates
that these steps have brought its cost structure in line with current revenue
projections, however, there can be no assurance that product demand will not
weaken further or that these steps will result in sustained profitability in the
future.
 
     VIVUS made significant progress during the fourth quarter in the area of
international approvals. MUSE was approved and launched in Canada and it also
received approval for licensing within the European Union.
 
     The Company announced high efficacy rates for MUSE in the severely
dysfunctional radical prostatectomy patient group. VIVUS also reiterated its
findings regarding the safety of MUSE in combination with renewed sexual
activity in older Americans.
 
     In November, VIVUS was issued U.S. patent number 5,820,587 for "Method and
Kit for Preventing Erectile Dysfunction." The patent describes and protects the
use of MUSE, or other transurethral therapies, as a periodically administered
treatment to prevent erectile dysfunction. The patent is based on the concept
that regular administration of an appropriate therapy transurethrally increases
blood flow to the penis, thereby maintaining functional erectile tissue within
the penis.
 
VIVUS' TRANSURETHRAL SYSTEM FOR ERECTION
 
     Administration. 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 massages 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.
 
     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.
 
MUSE ADVANTAGES
 
     VIVUS' transurethral system for erection represents a unique approach to
treating ED 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's transurethral
 
                                        3

<PAGE>   6
 
system for erection is designed to overcome the limitations of other available
therapies through its unique product attributes that include:
 
     Safety. MUSE is a safe local treatment for patients. It offers an
alternative to oral treatments that may have adverse systemic effects.
 
     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 the penis.
 
     Minimally-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,
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.
 
CURRENT THERAPIES
 
     In addition to MUSE, the primary physiological therapies currently utilized
for the treatment of ED are:
 
     Oral Medications. In 1998, Pfizer Inc. received clearance from the FDA to
market its oral treatment for ED, sildenafil. Commercial introduction of this
new competitive product has adversely effected the Company's business, financial
condition and results of operations. SEE "RISK FACTORS -- INTENSE COMPETITION"
ON PAGE 12. Yohimbine is another oral medication currently prescribed in the
United States for the treatment of ED.
 
     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 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.
 
SALES AND MARKETING
 
     The Company intends to market and sell its products worldwide through
distribution, co-promotion or license agreements with corporate partners. To
date, the Company has entered into marketing agreements with ASTRA and Janssen
for certain international markets. The Company is currently seeking a major
pharmaceutical partner to market, distribute and sell its products in the U.S.
and Japan. There can be no assurance that the Company will be able to
successfully enter into additional agreements with corporate
 
                                        4

<PAGE>   7
 
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. SEE "RISK FACTORS -- LIMITED SALES AND MARKETING
EXPERIENCE; DEPENDENCE ON THIRD PARTIES" ON PAGE 11.
 
  Domestic
 
     The Company believes that the launch of sildenafil has increased the role
of the primary care physician ("PCP") in the treatment of ED. The Company also
recognized that the infrastructure of a major pharmaceutical company was needed
to effectively address the needs of the PCP. Therefore, on July 8, 1998, the
Company announced a strategic decision to seek a major pharmaceutical partner to
market, distribute and sell MUSE in the U.S. As the first step in the
implementation of the Company's new strategy and to immediately reduce expenses,
the Company agreed to facilitate the transition of its direct sales
representatives to ALZA. Sales personnel joining ALZA continued to sell MUSE on
a limited basis through December 31, 1998. Currently, VIVUS supports MUSE sales
in the U.S. through physician and patient information/help lines, sales support
for major accounts, and product education newsletters. VIVUS also participates
in national urologic and sexual dysfunction forums and conferences such as the
American Urologic Association annual meeting and the International Society for
Impotence Research. In addition, the Company supports ongoing research and
clinical investigation of MUSE and the publication of data in peer-reviewed
journals.
 
     The Company's goal is to market and sell its products through distribution,
co-promotion or license agreements with corporate partners. The Company is
currently holding discussions with several large pharmaceutical companies
seeking a partner for its products within the U.S. marketplace. If the Company
cannot establish such a relationship, it will have to develop an alternative
strategy for marketing, distributing and selling its products in the U.S.
 
  International
 
     The Company has entered into international marketing agreements with ASTRA
and Janssen, which cover all significant countries, except Japan. The Company is
currently seeking a partner to market, distribute and sell its products in
Japan.
 
     The Company entered into an international marketing agreement with ASTRA in
May 1996, to purchase the Company's products for resale in Europe, South
America, Central America, Australia and New Zealand. To date, ASTRA has launched
MUSE in several countries, including The United Kingdom and Sweden and is
expected to launch in several European countries during the second quarter of
1999.
 
     The Company signed an international marketing agreement with Janssen in
January 1997, 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. In October 1997, the Company
signed an agreement that expanded Janssen's territories to include the Middle
East, Russia, the Indian sub-continent, and Africa. To date, Janssen has
launched MUSE in several countries, including Canada and Mexico.
 
                                        5

<PAGE>   8
 
     A significant number of MUSE approvals and launches are anticipated during
the course of 1999. As of March, 1999, approved/licensed countries include:
 

<TABLE>
<CAPTION>
                                           MARKETING
      COUNTRY            APPROVED           PARTNER
- --------------------     --------          ---------
<S>                   <C>              <C>
Argentina             November 1997        ASTRA
Australia             December 1998        ASTRA
Austria -- EU         March 1999           ASTRA
Bahrain               September 1998       Janssen
Brazil                January 1998         ASTRA
Canada                August 1998          Janssen
Chile                 December 1998        ASTRA
Cyprus                November 1998        ASTRA
Denmark -- EU         December 1998        ASTRA
France -- EU          March 1999           ASTRA
Finland -- EU         December 1998        ASTRA
Germany -- EU         February 1999        ASTRA
Hong Kong             July 1998            Janssen
Ireland -- EU         February 1999        ASTRA
Israel                October 1998         Janssen
Kuwait                January 1999         Janssen
Luxembourg -- EU      December 1998        ASTRA
Macau                 September 1998       Janssen
Mexico                May 1998             Janssen
The                   February 1999        ASTRA
  Netherlands -- EU
New Zealand           July 1998            ASTRA
Norway                December 1998        ASTRA
Philippines           June 1998            Janssen
Portugal -- EU        February 1999        ASTRA
Singapore             July 1998            Janssen
South Africa          May 1998             Janssen
South Korea           January 1998         Janssen
Sweden -- EU          April 1998           ASTRA
Switzerland           February 1998        ASTRA
Thailand              May 1998             Janssen
United Arab Emirates  June 1998            Janssen
United Kingdom -- EU  November 1997        ASTRA
</TABLE>

 
RESEARCH & DEVELOPMENT
 
     VIVUS' objective is to become a global leader in the development and
commercialization of innovative therapies for the treatment of sexual
dysfunction and urologic disorders. To this end, the Company utilizes its
expertise and patent portfolio by focusing its R&D activities on male and female
sexual dysfunction, incontinence and premature ejaculation. The Company also
investigates novel patentable uses of pharmacologic agents for which significant
safety data already exists. The Company believes that such agents present a
lower development risk profile and may progress more rapidly through the
clinical development and regulatory process than agents without preexisting
data.
 
                                        6

<PAGE>   9
 
DEVELOPMENT PROJECTS CURRENTLY INCLUDE:
 

<TABLE>
<CAPTION>
                                         PRODUCT/TECHNOLOGY
             DEVELOPMENT AREA            UNDER INVESTIGATION                STATUS
             ----------------            -------------------                ------
        <S>                          <C>                          <C>
 
        SEXUAL DYSFUNCTION
        Male Erectile Dysfunction    ALIBRA (alprostadil plus     Phase III
                                     prazosin)
        Female Sexual Dysfunction    Topical application of       Preclinical
                                     vasodilator
        Male Premature Ejaculation                                Preclinical
 
        UROLOGIC DISORDERS
        Urologic Cancers             Gene therapy                 Preclinical
                                     Hormone Substitution         Preclinical
                                     Therapy
        Incontinence                 Novel drug delivery          Preclinical
</TABLE>

 
     The Company will continue to assess the feasibility and relevance of these
and other R&D projects, as determined by the Company's management and Board of
Directors.
 
CLINICAL STUDIES
 
     In 1998 the Company completed a pharmacokinetic study of the combination of
alprostadil and prazosin in men with erectile dysfunction. This study helped the
Company determine the best formulation for its second-generation transurethral
product containing the combination of alprostadil 125 mcg and prazosin 500 mcg
(ALIBRA(R)). Based on this information, the Company initiated a 19-site Phase
III study of ALIBRA for the treatment of men with erectile dysfunction. This
study completed enrollment of approximately 300 patients in March 1999. Results
of this trial will be submitted as part of a New Drug Application (NDA). In 1999
the Company anticipates conducting a long-term (1-year) study of ALIBRA in men
with erectile dysfunction.
 
     The Company has also completed a meta-analysis of the risks of
cardiovascular adverse events in men using MUSE. This analysis from the
Company's Phase III studies was prompted by the reported concerns about the
potential health risks of resuming sexual relations in men with ED. The VIVUS
meta-analysis showed that in men using MUSE there was no associated increase in
cardiovascular adverse events. In addition, the Company's post-marketing
surveillance experience with MUSE has not suggested any increased risk to the
patient with cardiovascular disease.
 
     The Company also published results of an international study of the effect
of MUSE on the quality-of-life of men with erectile dysfunction and their
spouses. This important study, published in December in The British Journal of
Urology, demonstrated in a placebo-controlled manner that the use of MUSE
resulted in improvement in a patient's self-esteem and in the relationship of
the couple.
 
     During 1998, VIVUS completed two clinical studies that examined the utility
of combining the ACTIS (venous flow controller) with MUSE for the treatment of
men with erectile dysfunction. Together these protocols enrolled approximately
500 couples. These studies demonstrated that the use of ACTIS could improve the
efficacy of MUSE and that the drug-device combination was well tolerated.
Results of these studies were presented at the meetings of the American
Urological Association in June 1998 and for the International Society for
Impotence Research in August 1998. In addition, the Company initiated a study to
examine the efficacy of MUSE in patients who were contraindicated from using
sildenafil, had a significant side effect from sildenafil, or who had failed to
have an adequate response to sildenafil therapy. The results of this study will
be presented at the 1999 meeting of the American Urological Association in
Dallas, May 1-6, 1999.
 
MANUFACTURING AND RAW MATERIALS
 
     The Company has limited experience in manufacturing and selling MUSE in
commercial quantities. The Company had initially experienced product shortages
due to higher than expected demand and difficulties encountered in scaling up
production of MUSE. The Company leased 90,000 square feet of space in New
                                        7

<PAGE>   10
 
Jersey in which it has constructed manufacturing and testing facilities. The FDA
and MCA authorized the Company to begin commercial production and shipment of
MUSE from its new facility in June and March 1998, respectively. In September
1998, the Company closed its contract manufacturing site within PACO
Pharmaceutical Services, Inc. and significantly scaled back its manufacturing
operations in the New Jersey facility, as a result of lower domestic and
international demand for MUSE. Production is currently significantly below
capacity for the plant resulting in a higher per unit cost. As a result, the
Company expects that gross margin from the sale of MUSE will be lower in future
periods, which will have a material adverse affect 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 a.s. in Neratovice, Czech Republic ("Spolana")
pursuant to a supply agreement that was executed in May 1997. In January 1996,
the Company entered into an alprostadil supply agreement with CHINOIN
Pharmaceutical and Chemical Works Co., Ltd. ("Chinoin"). Chinoin is the
Hungarian subsidiary of the French pharmaceutical company Sanofi Winthrop. Both
agreements were amended in December 1998, as a result of excess inventory on
hand to reduce future commitments for alprostadil purchases.
 
     The Company relies on a single injection molding company, The Kipp Group
("Kipp"), for its supply of plastic applicator components. In turn, Kipp obtains
its supply of resin, a key ingredient of the applicator, from a single source,
Huntsman Corporation. The Company also relies on a single source, E-Beam
Services, Inc. ("E-Beam"), for sterilization of its product. There can be no
assurance that the Company will be able to identify and qualify additional
sources of plastic components and an additional sterilization facility. SEE
"RISK FACTORS -- DEPENDENCE ON SINGLE SOURCE OF SUPPLY" ON PAGE 12.
 
GOVERNMENT REGULATION
 
     The Company's research, pre-clinical 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, to the
FDA in March 1996. In November 1996, the Company received final marketing
clearance from the FDA for MUSE. In November 1997, the Company obtained
regulatory marketing clearance by the MCA to market MUSE in the United Kingdom.
MUSE has also been approved in a significant number of countries around the
globe. After regulatory approval is obtained, the Company's products are subject
to continual review. SEE "RISK FACTORS -- GOVERNMENT REGULATION AND UNCERTAINTY
OF PRODUCT APPROVALS" ON PAGES 13 AND 14.
 
     In 1998, the Company leased 90,000 square feet of manufacturing space in
Lakewood, New Jersey in which it has constructed manufacturing and testing
facilities for the production of MUSE. The FDA and MCA authorized the Company to
begin commercial production and shipment of MUSE from its new facility in June
and March 1998, respectively.
 
     VIVUS also obtained approval of MUSE through the Mutual Recognition process
for the European Union on December 1, 1998. This approval triggered the
individual country licensing process. Licenses are expected during the first and
second quarters of 1999. MUSE launches by ASTRA into these countries are
anticipated shortly after licensing.
 
EMPLOYEES
 
     As of February 26, 1998, the Company employed 101 persons. Of these
employees, 73 are located at the manufacturing facility in Lakewood, New Jersey,
23 are located at the Company's corporate headquarters in Mountain View, CA and
5 are in our international office. 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.
 
                                        8

<PAGE>   11
 
     This Form 10-K contains "forward-looking" statements about future financial
results, future products and other events that have not yet occurred. For
example, statements like we "expect," we "anticipate" or we "believe" are
forward-looking statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of risks and
uncertainties about the future. We will not necessarily update the information
in this Form 10-K if any forward-looking statement later turns out to be
inaccurate. Details about risks affecting various aspects of our business are
discussed throughout this Form 10-K. Investors should read all of these risks
carefully, and should pay particular attention to risks affecting the following
areas: future capital needs and uncertainty of additional financing (page 9);
history of losses and limited operating history (pages 9 and 10); limited sales
and marketing experience and dependent on third parties (pages 10 and 11);
intense competition (page 11); dependence on key personnel (page 11); and other
risk factors as stated (pages 12 through 17).
 
                                  RISK FACTORS
 
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING
 
     Cash and cash equivalents at December 31, 1998 were $23.9 million, a
decrease of $67.8 million from December 31, 1997. The Company anticipates that
its existing capital resources combined with anticipated future revenues might
not be sufficient to support the Company's operations through the commercial
introduction of MUSE in all international markets or for the introduction of any
additional future products. The Company is currently seeking other sources of
financing to support its operations.
 
     On October 5, 1998, the Company's Lessor ("plaintiff") named the Company in
a civil action in connection with the Company's leased manufacturing facilities,
located in Lakewood, New Jersey. The Company's lease requires that the Company
provide a removal security deposit in the form of cash or letter of credit. The
Company and the Lessor ("plaintiff") have not been able to agree on the amount
of the deposit, and the Lessor filed suit asking for specific performance in the
amount of $3.3 million. The Company believes the $3.3 million security deposit
is excessive and not mandated by the terms of the lease. However, if the Company
is required to post a certificate of deposit of $3.3 million, this will have a
material adverse effect on the Company's business and financial condition.
 
     The Company expects that it will be required to issue additional equity or
debt securities or use other financing sources including, but not limited to
corporate alliances and lease financing to fund operations and 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) results of
operations; (ii) demand for MUSE; (iii) the outcome of litigations; (iv) the
activities of competitors; (v) the progress of the Company's research and
development programs; (vi) the timing and results of pre-clinical testing and
clinical trials; (vii) technological advances; and (viii) the level of resources
that the Company devotes to sales and marketing capabilities.
 
HISTORY OF LOSSES AND LIMITED OPERATING HISTORY
 
     The Company has generated a cumulative net loss of $109.8 million for the
period from its inception through December 31, 1998. In order to sustain
profitable operations, the Company must successfully manufacture and market MUSE
and adjust its expenditures in conjunction with lower product revenues. The
Company is subject to a number of risks including its ability to successfully
market, distribute and sell its product, intense competition, and its reliance
on a single therapeutic approach to erectile dysfunction and its ability to
secure additional operating capital. 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.
 
     Since the launch of sildenafil, a competitive oral product, MUSE
prescriptions have declined by approximately 80% in the U.S. As sildenafil is
offered in other countries, it is likely that a large number of current and
future impotence patients will want to try this new oral therapy and
international demand for
 
                                        9

<PAGE>   12
 
MUSE will be negatively impacted. As a result of this and approvals to market
MUSE in Europe occurring later than anticipated, the Company's international
marketing partners, Janssen and Astra, have significantly reduced orders for
MUSE which will have a material effect on the Company's business, financial
conditions and results of operations. Furthermore, there can be no assurances
that Janssen and Astra will not further reduce their orders.
 
     During 1998, the Company took significant steps to restructure its
operations in an attempt to bring the cost structure of the business in line
with current demand for MUSE. These steps included significant reductions in
personnel, closing the contract-manufacturing site located in PACO
Pharmaceutical Services, Inc., the termination of the lease for the Company's
leased corporate offices, and recorded significant write-down of property,
equipment and inventory. As a result of these and other factors the Company
experienced an operating loss of $80.3 million, or $2.52 per share, in the year
ended December 31, 1998.
 
     In September 1998, the Company significantly scaled back its manufacturing
operations as a result of lower demand domestically and internationally for
MUSE. Production is currently significantly below capacity for the plant
resulting in a higher unit cost, and the Company expects that gross margin from
the sale of MUSE will be lower in future periods, which will have a material
adverse affect on the Company's business, financial condition and results of
operations.
 
LIMITED SALES AND MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES
 
     The Company intends to market and sell its products through distribution,
co-promotion or license agreements with corporate partners. To date, the Company
has entered into marketing agreements with ASTRA and Janssen for certain
international markets. The Company is currently seeking a major pharmaceutical
partner to market, distribute and sell its products in the United States and
Japan. 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.
 
     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 for U.S.
distribution, takes customer orders, picks, and 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 that 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. 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, 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
Integrated Commercialization Services ("ICS,") a subsidiary of Bergen Brunswig
Corporation. ICS provides "direct-to-physician" distribution, telemarketing and
customer service capabilities in support of U.S. marketing and sales efforts. As
a result of this distribution agreement with ICS, the Company is dependent on
ICS'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 Pharmaceutica, 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. In October 1997,
the Company signed an international marketing agreement that amended the earlier
agreement with
 
                                       10

<PAGE>   13
 
Janssen and expanded Janssen's territories to include the Middle East, Russia,
the Indian sub-continent, and Africa. The marketing agreements do not have
minimum purchase commitments and the Company is dependent on Janssen's efforts
to distribute and sell the Company's products effectively in the above mentioned
markets. Janssen may take up to twelve months to introduce a product in a given
country following regulatory approval in such country. There can be no assurance
that such efforts will be successful.
 
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 ED exist, such as oral
medications, needle injection therapy, vacuum constriction devices and penile
implants, and the manufacturers of these products will continue to improve these
therapies. The most significant competitive therapy is sildenafil, an oral
medication marketed by Pfizer, which received regulatory approvals in the U.S.
in March 1998 and in the European Union in September 1998. The commercial launch
of sildenafil in the U.S. in April 1998 dramatically increased the number of men
seeking treatment for impotence and significantly decreased demand for MUSE.
Since the launch of sildenafil, MUSE prescriptions have declined approximately
80% in the U.S. The Company anticipates that the commercial launch of sildenafil
in Europe and other international countries will decrease the international
demand for MUSE and will have a material adverse effect on the Company's
business, financial condition, and results of operations.
 
     Additional competitive products in the erectile dysfunction market include
needle injection therapy products from Pharmacia Upjohn and Schwartz Pharma,
which were approved by the FDA in July 1995 and June 1997, respectively. Other
large pharmaceutical companies are also actively engaged in the development of
therapies for the treatment of ED. These companies have substantially greater
research and development capabilities as well as substantially greater
marketing, financial and human resources than the Company. In addition, many of
these companies have significantly greater experience than the Company in
undertaking pre-clinical 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 ED. For instance, Zonagen, Inc. has filed for FDA
approval of its oral treatment and has received approval in Mexico; Pentech
Pharmaceutical, Inc. has an oral medication in Phase III clinical trials; ICOS
Corporation has an oral medication in phase II clinical trials; and Senetek has
a needle injection therapy product approved recently in Denmark and has filed
for approval in other countries. These entities may market commercial products
either on their own or through collaborative efforts. For example, Zonagen, Inc.
announced a worldwide marketing agreement with Schering-Plough in November 1997;
and ICOS Corporation formed a joint venture with Eli Lilly in October 1998 to
jointly develop and market its oral treatment. The Company's competitors may
develop technologies and products that are more effective than those currently
marketed or 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.
 
DEPENDENCE ON KEY PERSONNEL
 
     The Company's success is highly dependent upon the skills of a limited
number of key management personnel. To reach its business objectives, the
Company will need to retain and hire qualified personnel in the areas of
manufacturing, research and development, clinical trial management and
pre-clinical testing. Due to decreases in the Company's stock price and demand
for MUSE, there can be no assurance that the Company will be able to retain or
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.
 
                                       11

<PAGE>   14
 
DEPENDENCE ON SINGLE SOURCE OF SUPPLY
 
     The Company relies on a single injection molding company, The Kipp Group,
for its supply of plastic applicator components. In turn, Kipp obtains its
supply of resin, a key ingredient of the applicator, from a single source,
Huntsman Corporation. The Company also relies on a single source, E-Beam
Services, Inc., for sterilization of its product. There can be no assurance that
the Company will be able to identify and qualify additional sources of plastic
components and an additional sterilization facility. The Company is required to
receive FDA approval for suppliers. 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 plastic components or an additional
sterilization facility, it will be entirely dependent upon the existing supplier
and E-Beam. If interruptions in these supplies or services were to occur for any
reason, including a decision by existing suppliers and/or E-Beam to discontinue
manufacturing or services, political unrest, labor disputes or a failure of the
existing suppliers and/or E-Beam to follow regulatory guidelines, the
development and commercial marketing of MUSE and other potential products could
be delayed or prevented. An interruption in sterilization services or the
Company's supply plastic components would have a material adverse effect on the
Company's business, financial condition and results of operations.
 
LIMITED MANUFACTURING EXPERIENCE
 
     The Company has limited experience in manufacturing and selling MUSE in
commercial quantities. The Company initially experienced product shortages due
to higher than expected demand and difficulties encountered in scaling up
production of MUSE. The Company leased 90,000 square feet of space in New Jersey
in which it has constructed manufacturing and testing facilities. The FDA and
MCA authorized the Company to begin commercial production and shipment of MUSE
from its new facility in June and March 1998, respectively. In September 1998,
the Company closed its contract manufacturing site within PACO Pharmaceutical
Services, Inc. and significantly scaled back its manufacturing operations in the
New Jersey facility, as a result of lower domestic and international demand for
MUSE. Production is currently significantly below capacity for the plant
resulting in higher per unit cost. As a result, the Company expects that gross
margin from the sale of MUSE will be lower in future periods, which will have a
material adverse affect on the Company's business, financial condition and
results of operations.
 
DEPENDENCE ON THE COMPANY'S TRANSURETHRAL SYSTEM FOR ERECTION
 
     The Company currently markets a single therapeutic approach to treat ED,
its transurethral system for erection. Certain side effects have been found to
occur with the use of MUSE. MUSE is applied into the urinary opening and is not
for men with sickle cell trait, disease, or other blood disorders. One third of
men reported genital pain, causing some to stop use. A few men reported
dizziness and, less commonly, fainting. To date, the incidence of post-launch
adverse side effects is consistent with that experienced in clinical trials.
 
     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 as a therapy for the treatment of erectile dysfunction
thereby affecting the commercial viability of MUSE. In addition, technological
changes or medical advancements could diminish or eliminate the commercial
viability of the Company's product. As a result of the Company's single
therapeutic approach and its current focus on MUSE, 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.
 
RISKS RELATING TO INTERNATIONAL OPERATIONS
 
     The Company's product is currently marketed 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
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 product is 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
 
                                       12

<PAGE>   15
 
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.
 
GOVERNMENT REGULATION AND UNCERTAINTY OF PRODUCT APPROVALS
 
     The Company's research, pre-clinical development, clinical trials,
manufacturing and marketing of its products are subject to extensive regulation,
rigorous testing and approval processes of the FDA and equivalent foreign
regulatory agencies. In November 1996, the Company received final marketing
clearance from the FDA for MUSE. In November 1997, the Company obtained
regulatory marketing clearance by the MCA to market MUSE in the United Kingdom.
In 1998, MUSE was also approved in many other countries.
 
     After regulatory approval is obtained, the Company's products are subject
to continual review. Manufacturing, labeling and promotional activities are
continually regulated by the FDA and equivalent foreign regulatory agencies, and
the Company must also report certain adverse events involving its drugs to these
agencies. Previously unidentified adverse events or an increased frequency of
adverse events that occur post-approval could result in labeling modifications
of approved products, which could adversely effect future marketing of a drug.
Finally, approvals may be withdrawn if compliance with regulatory standards is
not maintained or if problems occur following initial marketing. 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 has submitted applications for approval of MUSE in several
other countries. These applications will be subject to rigorous approval
processes. There can be no assurance that approval in these or other countries
will be granted or that these approvals if granted, 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 generate 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
would 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.
 
     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 and other regulatory review, and later discovery of previously unknown
problems with a product, manufacturer or facility may result in the FDA and
other regulatory agencies requiring further clinical research or restrictions on
the product or the 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 as well as certain services, such as testing and
sterilization, from third parties. The Company currently contracts with
suppliers and service providers, including foreign manufacturers that are
required to comply with strict standards established by the Company. Certain
suppliers and service providers are required by the Federal Food, Drug, and
Cosmetic Act, as amended, and by FDA regulations to follow cGMP requirements and
are subject to routine periodic inspections by the FDA and certain state and
foreign regulatory agencies for compliance with cGMP and other applicable
regulations. Certain of the Company's suppliers were inspected for cGMP
compliance as part of the approval process. However, upon routine re-inspection
of these facilities, there can be no assurance that the FDA and other regulatory
agencies will find the manufacturing process or facilities to be in compliance
with cGMP and other regulations. Failure to achieve satisfactory cGMP compliance
as confirmed by routine inspections could have a material 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
 
                                       13

<PAGE>   16
 
regulatory Warning Letter or seizure or recall of products, injunction and/or
civil fines or closure of the Company's manufacturing facility until cGMP
compliance is achieved.
 
PATENTS AND PROPRIETARY RIGHTS
 
     The Company's policy is to aggressively maintain its patent position 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 with a vasodilator-containing ointment that is
administered either topically or transurethrally.
 
     The Company is also the exclusive licensee of patents and patent
applications filed in the name of Dr. Nils G. Kock, in numerous countries. Three
United States patents have issued directed to methods and compositions for
treating erectile dysfunction by transurethrally administering an active agent.
Two additional United States patent applications are still pending, and patents
have been granted in Australia, Austria, Belgium, Canada, Finland, France,
Germany, Great Britain, Greece, Ireland, Italy, Japan, Luxembourg, the
Netherlands, New Zealand, Spain, Sweden and South Africa. Patent applications
are pending in Denmark and Romania. The foreign patents and applications, like
the U.S. patents and applications, are directed to the treatment of erectile
dysfunction by transurethral administration of certain active substances
including alpha-receptor blockers, vasoactive polypeptides, prostaglandins or
nitroglycerin dispersed in a hydrophilic vehicle. An opposition against the
granted European patent application was filed with the European Patent Office
("EPO") by the Pharmedic Company. As a result of the opposition, certain claims
of the European patent application are still on appeal. Failure to defend the
Company's patent position in the appeal could have a material adverse effect on
the Company's business, financial condition and results of operations.
 
     The Company is the sole assignee of three United States patents, one
divisional patent application and two continuation applications all deriving
from patent applications originally filed by Alza, covering inventions of Dr.
Virgil Place made while he was an employee of Alza. The patents and patent
applications are directed to 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. The divisional and continuation applications were filed in the
United States on June 7, 1995. All patents issuing on applications filed before
June 8, 1995 will automatically have a term that is the greater of twenty years
from the patent's effective filing date or seventeen years from the date of
patent grant. Foreign patents have been granted in Australia, Europe (including
Austria, Belgium, Denmark, France, Germany, Great Britain, Greece, Italy,
Luxembourg, Norway, the Netherlands, Spain, Sweden and Switzerland), New
Zealand, South Africa and South Korea, and foreign applications are pending in
Canada, Finland, Ireland, Mexico, Portugal, and Japan.
 
     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 to the Voss, Kock and Place patents and applications identified
above, the Company has six issued United States patents, seventeen pending
United States patent applications, three Patent Cooperation Treaty ("PCT")
applications, two granted foreign patents, and two pending foreign patent
applications. Of these, the three PCT applications were filed in 1998, as were
five of the United States patent applications. Several of these patents and
applications further address the prevention, treatment and diagnosis of erectile
dysfunction, while others are directed to prevention and/or treatment of other
types of sexual dysfunction, including premature ejaculation in men, and female
sexual dysfunction, generally. One of the Company's issued patents covers the
Company's ACTIS(R) venous flow control device. Other pending patent applications
focus on prevention and/or treatment of conditions other than sexual
dysfunction, including vascular disorders such as peripheral vascular disease
("PVD").
 
                                       14

<PAGE>   17
 
     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. The claims of a U.S.
or foreign patent application may be denied or significantly narrowed and
patents that ultimately issue may not provide significant commercial protection
to the Company. The Company could incur substantial costs in proceedings before
the United States Patent and Trademark 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 presently involved in an opposition proceeding that was
instigated by the Pharmedic Company against a European patent, inventors Nils G.
Kock et al., that is exclusively licensed to VIVUS. As a result of the
opposition proceeding, certain pharmaceutical composition claims in the European
patent were held unpatentable by the Opposition Division of the EPO. The
patentability of all other claims in the patent was confirmed, i.e., those
claims directed to the use of active agents in the treatment of erectile
dysfunction, and to a pharmaceutical composition claim for prazosin. The Company
appealed the EPO's decision with respect to the pharmaceutical composition
claims that were held unpatentable. The Pharmedic Company appealed the EPO's
decision with respect to the claims that were held patentable, but has since
withdrawn the appeal. Despite the withdrawal of the Pharmedic Company from the
appeal process, the Company has continued with its own appeal in an attempt to
reinstate the composition claims. The EPO Appeals Board must make its own
finding whether the claims that were deemed unpatentable by the Opposition
Division are indeed patentable before it can reverse the Opposition Division's
decision. There can be no assurance that the appeal will be successful or that
further challenges to the Company's European patent will not occur should the
Company try to enforce the patent in the various European courts.
 
     The Company was also the first to file a Notice of Opposition to Pfizer's
European patent application claiming the use of phosphodiesterase inhibitors to
treat erectile dysfunction. Numerous other companies have also opposed the
patent, and the Company will support these other entities in their oppositions
as necessary.
 
     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.
 
     In addition to its patent portfolio, 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 or 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.
 
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT
 
     In the U.S. and elsewhere, sales of pharmaceutical products 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.
With the introduction of sildenafil, third party payors have begun to restrict
or eliminate reimbursement for erectile dysfunction treatments. While more than
70 percent of prescriptions in the U.S. for MUSE have been
 
                                       15

<PAGE>   18
 
reimbursed by third party payors since its commercial launch in January 1997,
there can be no assurance that the Company's products will be considered cost
effective and that reimbursement to the consumer will continue to 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 MUSE 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, reimbursement
for MUSE could be adversely affected by changes in reimbursement policies of
governmental or private health care payors.
 
PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE
 
     The commercial launch of MUSE exposes the Company to a significant risk of
product liability claims due to its availability to a large population of
patients. In addition, pharmaceutical products are subject to heightened risk
for product liability claims due to inherent side effects. The Company details
potential side effects in the patient package insert and the physician package
insert, both of which are distributed with MUSE, and the Company maintains
product liability insurance coverage. However, the Company's product liability
coverage is limited and may not be adequate to cover potential product liability
exposure. Product liability insurance is expensive, difficult to maintain and
current or increased coverage may not be available on acceptable terms, if at
all. Product liability claims brought against the Company in excess of its
insurance coverage, if any, could have a material adverse effect upon the
Company's business, financial condition and results of operations.
 
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 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.
 
POTENTIAL VOLATILITY OF STOCK PRICE
 
     The stock market has 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 has been highly volatile and is
likely to continue to be so. Factors such as the Company's ability to increase
demand for its product in the U.S., the Company's ability to successfully sell
its product in the U.S. and internationally, variations in the Company's
financial results and its ability to obtain needed financing, announcements of
technological innovations or new products by the Company or its competition,
comments by security analysts, adverse regulatory actions or decisions, any loss
of key management, the results of the Company's clinical trials or those of 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.
 
                                       16

<PAGE>   19
 
ANTI-TAKEOVER EFFECT OF PREFERRED SHARES 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
Preferred Shares Rights Plan. The Company's reincorporation into the State of
Delaware was approved by its stockholders and became effective in May 1996. The
Preferred Shares 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 percent 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
percent 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 percent or more of the
Company's Common Stock.
 
     The Preferred Shares 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 Preferred Shares 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 leases 90,000 square feet of space in New Jersey in which it
has constructed manufacturing and testing facilities. The FDA and MCA authorized
the Company to begin commercial production and shipment of MUSE from its new
facility in June and March 1998, respectively. In September 1998, the Company
closed its contract manufacturing site within PACO Pharmaceutical Services, Inc.
and significantly scaled back its manufacturing operations in the New Jersey
facility, as a result of lower demand domestically and internationally for MUSE.
 
     In November 1998, the Company and its Lessor agreed to terminate the lease
of approximately 53,000 square feet of space in Mountain View, California, which
served as the principal site for administration, clinical trial management,
regulatory affairs and monitoring of product production and quality control, as
well as its research and development lab. The Company was able to secure a
sub-lease that expires November 30, 1999 for significantly reduced space within
the same building.
 

ITEM 3. LEGAL PROCEEDINGS
 
     On February 18, 1998, a purported shareholder class action entitled Crain
et al. v. Vivus, Inc. et al., was filed in Superior Court of the State of
California for the County of San Mateo. Five identical complaints were
subsequently filed in the same court. These complaints were filed on behalf of a
purported class of persons who purchased stock between May 15, 1997 and December
9, 1997. The complaints allege that the Company and certain current and former
officers or directors artificially inflated the Company's stock price by issuing
false and misleading statements concerning the Company's prospects and issuing
false financial statements. The complaints do not specify the damages resulting
from the alleged conduct. The state court cases have been consolidated, and the
Company anticipates that the plaintiffs will file a consolidated and amended
complaint.
 
                                       17

<PAGE>   20
 
On March 16, 1998, a purported shareholder class action entitled Cramblit et al.
v. Vivus, Inc. et al. was filed in the United States District Court for the
Northern District of California. Five additional complaints were subsequently
filed in the same court. The federal complaints were filed on behalf of a
purported class of persons who purchased stock between May 2, 1997 and December
9, 1997. The federal complaints assert the same factual allegations as the state
court complaints, but assert legal claims under the Federal Securities Laws. The
federal court cases were consolidated, and a lead plaintiff has been appointed
and the plaintiff filed a consolidated and amended complaint in 1998. The
Company believes the complaints lack merit and the Company will vigorously
defend itself in the pending actions.
 
     On October 5, 1998, the Company was named in a civil action filed in the
Superior Court of New Jersey. This complaint seeks specific performance and
other relief in connection with the Company's leased manufacturing facilities,
located in Lakewood, New Jersey. The Company's lease agreement requires that the
Company provide a removal security deposit in the form of cash or a letter of
credit. The Company and lessor ("plaintiff") have not been able to agree on the
amount of such deposit and the plaintiff filed suit asking for specific
performance in the amount of $3.3 million. The Company believes that the amount
sought by the plaintiff is excessive and not mandated by the terms of the lease.
However, if the Company is required to post a certificate of deposit of $3.3
million, this will have a material adverse effect on the company's business and
financial condition.
 
     In the normal course of business, the Company receives and makes inquiries
regarding patent infringement and other legal matters. The Company believes that
it has meritorious claims and defenses and intends to pursue any such matters
vigorously. The Company is not aware of any asserted or unasserted claims
against it where the resolution would have an adverse material impact on the
operations or financial position of the Company.
 

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, 1998.
 

                                    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
                                         --------------------------------------------------
                                         MARCH 31    JUNE 30    SEPTEMBER 30    DECEMBER 31
                                         --------    -------    ------------    -----------
<S>                                      <C>         <C>        <C>             <C>
1998
High...................................   $15.50     $14.25        $10.25         $ 4.00
Low....................................     9.63       5.81          2.06           2.19
1997
High...................................   $39.06     $25.88        $38.13         $40.56
Low....................................    18.75      15.31         22.81           9.94
</TABLE>

 
     As of February 26, 1999, there were no outstanding shares of Preferred
Stock and 762 holders of record of 31,721,292 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.
 
                                       18

<PAGE>   21
 

ITEM 6. SELECTED FINANCIAL DATA
 
                            SELECTED FINANCIAL DATA
               (IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYEE DATA)
 
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 

<TABLE>
<CAPTION>
                                                                 QUARTER ENDED,
                                               ---------------------------------------------------
                                               MARCH 31    JUNE 30     SEPTEMBER 30    DECEMBER 31
                                               --------    --------    ------------    -----------
<S>                                            <C>         <C>         <C>             <C>
1998
Net income (loss)............................  $(2,389)    $(24,179)     $(54,725)       $1,040
Net income (loss) per diluted share..........  $ (0.07)    $  (0.76)     $  (1.72)       $ 0.03
1997
Net income...................................  $ 9,554     $  9,958      $ 11,259        $5,846
Net income per diluted share.................  $  0.27     $   0.28      $   0.31        $ 0.17
</TABLE>

 
SELECTED ANNUAL FINANCIAL DATA
 

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                             -----------------------------------------------------
                                               1998        1997       1996       1995       1994
                                             ---------   --------   --------   --------   --------
<S>                                          <C>         <C>        <C>        <C>        <C>
Income Statement Data:
Product revenue -- US......................  $  39,041   $128,320   $     --   $     --   $     --
Product revenue -- International...........     32,658      1,017         --         --         --
Milestone revenue..........................      3,000      9,000     20,000         --         --
                                             ---------   --------   --------   --------   --------
          Total revenue....................     74,699    138,337     20,000         --         --
  Gross margin.............................     19,083    100,049     20,000         --         --
Operating expenses:
  Research and development.................     16,178     12,123     28,279     21,313     13,916
  Selling, general and administrative......     40,477     47,931     11,733      4,389      2,587
  Write-offs and other charges.............     44,653      5,050         --         --         --
                                             ---------   --------   --------   --------   --------
          Total operating expenses.........    101,308     65,104     40,012     25,702     16,503
                                             ---------   --------   --------   --------   --------
Income (loss) from operations..............    (82,225)    34,945    (20,012)   (25,702)   (16,503)
Interest and other income..................      1,972      4,856      3,485      2,891      1,639
                                             ---------   --------   --------   --------   --------
     Income (loss) before taxes............    (80,253)    39,801    (16,527)   (22,811)   (14,864)
     Net income (loss).....................  $ (80,253)  $ 36,617   $(16,527)  $(22,811)  $(14,864)
                                             =========   ========   ========   ========   ========
  Net income (loss) per diluted share......  $   (2.52)  $   1.03   $  (0.55)  $  (0.85)  $  (0.63)
  Shares used in per share computation.....     31,876     35,559     29,833     26,914     23,488
Financial position at year end:
  Working capital..........................  $  10,324   $ 54,888   $ 60,388   $ 19,878   $ 21,656
  Total assets.............................  $  54,108   $150,669   $ 96,532   $ 44,049   $ 43,021
  Accumulated deficit......................  $(109,790)  $(29,537)  $(66,154)  $(49,627)  $(26,816)
  Stockholders' equity.....................  $  21,677   $123,930   $ 89,780   $ 41,181   $ 40,307
Additional information:
  Common shares outstanding................     31,890     33,168     32,454     26,952     23,448
  Number of employees......................        101        215         95         38         28
</TABLE>

 
                                       19

<PAGE>   22
 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
OVERVIEW
 
     In the Management Discussion and Analysis section of the 10-K we are
providing more detailed information about our operating results and changes in
financial position over the past three years. This section should be read in
conjunction with the Consolidated Financial Statements and related Notes
beginning on page 25.
 
     VIVUS, Inc., is the developer and manufacturer of MUSE and ACTIS, two
advancements in the treatment of men with erectile dysfunction ("ED"), also
known as impotence. The Company's objective is to become a global leader in the
development and commercialization of innovative therapies for the treatment of
sexual dysfunction and urologic disorders. The Company intends to market and
sell its products through distribution, co-promotion or license agreements with
corporate partners. Currently VIVUS markets MUSE and ACTIS in the United States
and has maintained its rights to market the products in Japan. Elsewhere around
the globe, MUSE is partnered with ASTRA and Janssen through licensing and
distribution agreements. VIVUS has active research, development and clinical
programs, and it is currently conducting Phase III clinical trials for ALIBRA,
its second-generation male ED treatment.
 
1998 HIGHLIGHTS
 
  First Quarter 1998
 
     During the first quarter, in anticipation of Pfizer's launch of Viagra
(sildenafil), VIVUS increased the size of its sales force and expanded its
physician call universe of Urologists and ED Specialists to include primary care
physicians who prescribed treatments for ED. In March, Pfizer announced the
approval of sildenafil in the U.S. by the Food and Drug Administration ("FDA")
and proceeded to launch sildenafil through a multi-million dollar
direct-to-consumer advertising campaign, aided by intense media interest.
Pfizer's campaign for sildenafil became the largest pharmaceutical launch to
date in the history of the U.S. pharmaceutical market.
 
     Outside the U.S., MUSE gained international regulatory approvals. VIVUS'
marketing partner ASTRA launched MUSE into the United Kingdom in February. In
March, the European Medicine Controls Agency ("MCA") approved VIVUS'
manufacturing facility for MUSE.
 
  Second quarter 1998
 
     The ED marketplace in the U.S. changed dramatically during the second
quarter of 1998. Primarily based on the media attention engendered by the launch
of sildenafil, patients were requesting prescriptions for sildenafil from their
primary care physician. Urologists, VIVUS' most cultivated audience, ceased to
serve as the leading prescribers of erectile dysfunction therapy. This shift in
the marketplace away from the urologist dramatically reduced the impact of
VIVUS' sales organization.
 
     VIVUS' MUSE had positive data presented in several forums during this
period. The June edition of The British Journal of Urology reported on a
landmark European study in 13 hospitals in the UK, France, Germany, Ireland and
The Netherlands where it was demonstrated that 64% of men who used MUSE achieved
an erection sufficient for sexual intercourse. VIVUS also released long-term
safety data (in excess of 24 months) with regard to MUSE-related serious adverse
effects. Serious adverse events in this long-term study were found to be similar
to treatment with placebo; MUSE did not increase the incidence of heart attack,
stroke, hospitalization, disability or death. Also during the second quarter,
MUSE was approved in South Africa, the first Janssen territory.
 
  Third Quarter 1998
 
     In July, VIVUS announced a strategic shift in its business model; VIVUS
decided to seek a major pharmaceutical partner to promote MUSE in the U.S.
marketplace. This change was necessary due to the erosion of market share MUSE
suffered, and the very large expense associated with maintaining a
 
                                       20

<PAGE>   23
 
competitively sized sales force for a primary care physician marketplace. The
Company transferred its sales organization to ALZA Corporation ("ALZA"), and as
part of the transfer, the ALZA urology sales representatives continued to detail
MUSE to urologists through December 31, 1998. Additionally, the Company
terminated its contract sales force agreement with Innovex.
 
     In August, the Company announced that it had retained Credit Suisse First
Boston Corporation to assist the Company in evaluating various strategic
alternatives including marketing collaborations or partnerships, acquisition of
the Company or other transactions.
 
     In September, Pfizer received approval in the European Union for
sildenafil. Based on the VIVUS' U.S. sales experience post-launch of sildenafil,
VIVUS' distribution partners for MUSE notified the Company that they would
significantly reduce their orders for MUSE.
 
     The Company took significant steps to restructure its operations in an
attempt to bring the cost structure in line with current and projected revenues.
These steps included significant reductions in personnel, the closing of the
contract manufacturing site located in PACO Pharmaceutical Services, Inc., and
the termination of the lease for the Company's corporate offices. The Company
recorded a significant write-down of property, equipment and inventory. The
Company significantly scaled back its manufacturing operations as a result of
lower domestic and international demand for MUSE. As a result, the Company
experienced an operating loss of $54.7 million, or $1.72 per share, in the third
quarter of 1998.
 
  Fourth Quarter 1998
 
     As a result of the restructuring effort VIVUS initiated in the third
quarter among other things, the Company reported net income of $1 million, or
$0.03 per share. All Company expenses for the fourth quarter of 1998 were less
than the preceding quarters of 1998 as well as the same period in 1997. The
Company anticipates that these steps have brought its cost structure in line
with current revenue projections, however, there can be no assurance that
product demand will not weaken further or that these steps will result in
sustained profitability in the future.
 
     VIVUS made significant progress during the fourth quarter in the area of
international approvals. MUSE was approved and launched in Canada and it also
received approval for licensing within the European Union.
 
     The Company announced high efficacy rates for MUSE in the severely
dysfunctional radical prostatectomy patient group. VIVUS also reiterated its
findings regarding the safety of MUSE in combination with renewed sexual
activity in older Americans.
 
     In November, VIVUS was issued U.S. patent number 5,820,587 for "Method and
Kit for Preventing Erectile Dysfunction." The patent describes and protects the
use of MUSE, or other transurethral therapies, as a periodically administered
treatment to prevent erectile dysfunction. The patent is based on the concept
that regular administration of an appropriate therapy transurethrally increases
blood flow to the penis, thereby maintaining functional erectile tissue within
the penis.
 
RESULTS OF OPERATIONS
 
  Years Ended December 31, 1998 and 1997
 
     Product revenues for year ended December 31, 1998 were $39.0 million in the
U.S. and $32.7 million internationally compared to $128.3 million in the U.S.
and $1.0 internationally for the same period in 1997. The significant decline in
U.S. product revenue is due to lower demand for the Company's product MUSE which
resulted from the U.S. launch of sildenafil, a competitive oral treatment for
erectile dysfunction. Underlying demand for MUSE domestically, as measured by
retail prescriptions, has declined approximately 80% since the commercial launch
of sildenafil in April 1998. Internationally, revenues increased to $32.7
million in 1998 as the Company's international marketing partners, Janssen and
ASTRA, prepared to launch in various countries. As sildenafil is offered in
other countries, it is likely that a large number of current and future
impotence patients will want to try this new oral therapy and international
demand for MUSE will be negatively impacted. As a result of this and approvals
to market MUSE in Europe occurring later than
 
                                       21

<PAGE>   24
 
anticipated, the Company's international marketing partners, Janssen and ASTRA,
have significantly reduced orders for MUSE which will have a material effect on
the Company's business, financial conditions and results of operations.
 
     Milestone revenue for the year ended December 31, 1998 included a $1
million and $2 million milestone payment from Janssen related to regulatory
approvals of MUSE in South Korea and Canada respectively. This compared to the
year ended December 31, 1997 which included a $5 million and $2 million in
milestone payment related to signing the initial and expanded distribution
agreement with Janssen, and a $2 million milestone payment associated with
clearance from the MCA to market MUSE in the United Kingdom.
 
     Cost of goods sold for the year ended December 31, 1998 were $55.6 million
compared to $38.3 million for the same period in 1997. The increase was
primarily a result of an inventory valuation reserve of $16.0 million, primarily
related to excess raw materials and future inventory purchase commitments for
raw materials in excess of anticipated future demand recorded as a part of the
Company's restructuring in the third quarter of 1998. The Company expects higher
costs per unit in future periods resulting from lower demand and production at
significantly reduced levels.
 
     Research and development expenses for the year ended December 31, 1998 were
$16.2 million compared to $12.1 million in the year ended December 31, 1997. The
increase was mainly due to increased spending associated with new product
development. The Company's expects that research and development expense in
future periods will decrease from 1998.
 
     Selling, general and administrative expenses for the year ended December
31, 1998 were $40.5 million compared to $47.9 million in the year ended December
31, 1997. The decrease was primarily the result of lower marketing and
advertising expenses in addition to personnel reductions in administration,
sales and marketing. During 1998, the Company discontinued its
direct-to-consumer-advertising, terminated its sales force services agreement
with Innovex and agreed to facilitate the transition of its direct sales force
to ALZA. The Company also announced its decision to seek a major pharmaceutical
partner to market, distribute and sell MUSE in the U.S. and its comprehensive
effort to reduce expenses.
 
     During fiscal 1998, the Company took significant steps to restructure its
operations in an attempt to bring the cost structure of the business in line
with current revenue projections. These steps included significant reductions in
headcount in all departments, as well as the closing of VIVUS' contract
manufacturing site located within PACO Pharmaceutical Services, Inc., and the
consolidation of employees at the Company's corporate headquarters into a
smaller space within its current building. As a result, the Company recorded
$60.7 million of costs and write downs during fiscal 1998; including a $16.0
million write-down of inventory, primarily raw materials and commitments, which
is included in "Cost of Sales;" a $33.2 million write down of property; $8.3
million of other restructuring costs primarily related to personnel costs and
operating lease commitments, and $3.2 million resulting from the termination of
certain marketing and promotional programs.
 
     Interest and other income for the year ended December 31, 1998 was $2.0
million, compared with $4.9 million for the same period in 1997. The decrease
was primarily the result of lower average invested cash balances. The Company
expects lower interest income for fiscal 1999 due to lower average invested cash
balances.
 
  Years Ended December 31, 1997 and 1996
 
     Product revenue of $129.3 million and cost of goods sold of $38.3 million
were recorded in 1997 compared with none in 1996. Product revenue and related
cost of sales in 1997 were the result of the commercial launch of MUSE in the
U.S. Product gross margin for 1997 was 70%.
 
     Milestone revenue of $9.0 million was recorded in 1997 compared with $20.0
million in 1996. In 1997, milestone revenue was recorded as a result of signing
the international marketing agreement with Janssen ($5 million) in January 1997,
expanding the Janssen agreement ($2 million) in October 1997, and an Astra
milestone payment associated with marketing approval from the MCA to market MUSE
in the United Kingdom ($2 million) in November 1997. In 1996, milestone revenue
was recorded as the result of signing the
 
                                       22

<PAGE>   25
 
international marketing agreement with ASTRA ($10 million), and upon filing the
application for marketing authorization in the United Kingdom ($10 million).
 
     Research and development expenses in 1997 decreased by 57% from 1996. This
decrease resulted primarily from 1996 having higher pre-launch manufacturing
costs, higher expenses associated with the preparation and filing of the
Company's new drug application for MUSE and a $5.8 million charge related to the
issuance of 400,000 shares of common stock to ALZA Corporation to maintain
exclusive rights to certain patents and patent applications beyond 1998.
 
     Selling, general and administrative expenses in 1997 increased by 309% from
1996. This increase resulted primarily from the addition of a direct sales
force, higher product marketing expenses and costs associated with adding
personnel to support the growth of the Company's operations and commercial
launch of MUSE.
 
     During the fourth quarter of 1997, the Company recorded a settlement of a
lawsuit with a former consultant. Payment of the $5.1 million settlement was
made on January 5, 1998.
 
     Interest income in 1997 was $4.9 million compared with $3.5 million in
1996. The increase resulted from higher average invested cash balances primarily
due to higher cash flows from operating activities which were partially offset
by property and equipment purchases.
 
     The provision for income taxes in 1997 was $3.2 million compared with none
for 1996. The increase is the result of having pre-tax income primarily due to
product revenue in 1997 as compared to a net loss in 1996. The effective tax
rate computation for 1997 includes the effect of operating losses carried
forward from prior years.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Since inception, the Company has financed operations primarily from the
sale of preferred and common stock. Through December 31, 1998, VIVUS has raised
$153.4 million from financing activities. Cash, cash equivalents and
available-for-sale securities totaled $23.9 million at December 31, 1998
compared with $91.7 million at December 31, 1997. The $67.8 million decrease in
cash during 1998 resulted from several factors, including the net loss for 1998,
adjusted for non-cash expenses resulting from restructuring and write-downs, the
Company's repurchase of its Common Stock during the first quarter of 1998,
capital spending associated with the new manufacturing facility in New Jersey,
raw material inventory purchases, and payments in the first quarter of 1998 for
1997 sales commissions and a lawsuit settlement payment.
 
     Accounts receivable at December 31, 1998 was $5.2 million compared with
$11.8 million at December 31, 1997. The decrease was primarily due to lower
product sales.
 
     Current liabilities were $24.6 million at December 31, 1998, compared with
$26.7 million at December 31, 1997. Total liabilities were $32.4 million at
December 31, 1998, compared with $26.7 million at December 31, 1997. The
increase in liabilities primarily relates to costs associated with the
restructuring, partially offset by the lawsuit settlement payment and payment of
1997 sales commissions.
 
     Capital expenditures in the year ended December 31, 1998 were $18.6 million
compared with $32.3 million for the same period in 1997. The higher capital
expenditures in 1997 were primarily due to the initial phase of construction of
the new manufacturing facility, in Lakewood, New Jersey and the purchase of
additional manufacturing equipment. The Company anticipates that capital
expenditures for 1999 will be minimal.
 
     The Company anticipates that its existing capital resources combined with
anticipated future revenues may not be sufficient to support the Company's
operations through the commercial introduction of MUSE in all markets or for the
introduction of any additional future products. The Company expects that it will
be required to issue additional equity or debt securities or use other financing
sources including, but not limited to corporate alliances and lease financing to
fund operations and 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) results of operations; (ii) demand for MUSE; (iii) the outcome of
litigation; (iv) the activities of competitors; (v) the progress of the
Company's research and development programs; (vi) the timing and results of
pre-clinical testing and clinical trials; (vii) technological advances; and
(viii) the level of resources that the Company devotes to sales and marketing
capabilities.
 
                                       23

<PAGE>   26
 
     This Form 10-K contains "forward-looking" statements about future financial
results, future products and other events that have not yet occurred. For
example, statements like we "expect," we "anticipate" or we "believe" are
forward-looking statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of risks and
uncertainties about the future. We will not necessarily update the information
in this Form 10-K if any forward-looking statement later turns out to be
inaccurate. Details about risks affecting various aspects of our business are
discussed throughout this Form 10-K. Investors should read all of these risks
carefully, and should pay particular attention to risks affecting the following
areas: future capital needs and uncertainty of additional financing (page 9);
history of losses and limited operating history (pages 9 and 10); limited sales
and marketing experience and dependent on third parties (pages 10 and 11);
intense competition (page 11); dependence on key personnel (page 11); and other
risk factors as stated (pages 12 through 17).
 
                                       24

<PAGE>   27
 

I
TEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                                  VIVUS, INC.
 
 1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
     The following financial statements are filed as part of this Report:
 

<TABLE>
<CAPTION>
                                                                  PAGE
                                                                  ----
    <S>                                                           <C>
    Report of Arthur Andersen LLP, independent auditors.........   26
    Consolidated Balance Sheets as of December 31, 1997 and
      1998......................................................   27
    Consolidated Statements of Operations for the three years
      ended December 31, 1998...................................   28
    Consolidated Statements of Comprehensive Income for the
      three years ended December 31, 1998.......................   29
    Consolidated Statements of Stockholders' Equity for the
      three years ended
      December 31, 1998.........................................   30
    Consolidated Statements of Cash Flows for the three years
      ended December 31, 1998...................................   31
    Notes to Consolidated Financial Statements..................   32

</TABLE>

 
                                       25

<PAGE>   28
 

                    REPORT 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, 1998 and 1997, and
the related consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
 
     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred significant losses during 1998
and has an accumulated deficit of approximately $110 million; at December 31,
1998, which raises substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
 
                                          /s/ ARTHUR ANDERSEN LLP
 
San Jose, California
January 22, 1999

 
                                       26

<PAGE>   29
 
                          CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
 
                                     ASSETS
 

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                1998         1997
                                                              ---------    --------
<S>                                                           <C>          <C>
Current assets:
  Cash......................................................  $   2,989    $  6,161
  Available-for-sale securities.............................     20,903      52,955
  Accounts receivable (net of allowance for doubtful
     accounts of $341 and $137 at December 31, 1998 and 1997
     )......................................................      5,197      11,791
  Inventories...............................................      5,272       9,084
  Prepaid expenses and other assets.........................        534       1,636
                                                              ---------    --------
       Total current assets.................................     34,895      81,627
Property and equipment......................................     19,213      36,462
Available-for-sale securities, non-current..................         --      32,580
Other.......................................................         --          --
                                                              ---------    --------
       Total................................................  $  54,108    $150,669
                                                              =========    ========
                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $   3,277    $  6,574
  Accrued and other liabilities.............................     21,294      20,165
                                                              ---------    --------
       Total current liabilities............................     24,571      26,739
 
  Accrued and other long-term liabilities...................      7,860          --
                                                              ---------    --------
       Total liabilities....................................     32,431      26,739
 
Commitments (Notes 8 and 9)
 
Stockholders' equity:
  Common stock; $.001 par value; shares authorized --
  200,000 at December 31, 1998 and 1997;
  shares outstanding -- December 31, 1998, 31,890,
  and December 31, 1997, 33,168.............................         32          33
  Paid in capital...........................................    131,466     153,336
  Accumulated other comprehensive income (loss).............        (31)         98
  Accumulated deficit.......................................   (109,790)    (29,537)
                                                              ---------    --------
       Total stockholders' equity...........................     21,677     123,930
                                                              ---------    --------
       Total................................................  $  54,108    $150,669
                                                              =========    ========
</TABLE>

 
                See notes to consolidated financial statements.
                                       27

<PAGE>   30
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                             --------------------------------
                                                               1998        1997        1996
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
Revenue
  US product...............................................  $ 39,041    $128,320    $     --
  International product....................................    32,658       1,017          --
  Milestone................................................     3,000       9,000      20,000
                                                             --------    --------    --------
     Total revenue.........................................    74,699     138,337      20,000
 
Operating expenses:
  Cost of goods sold.......................................    55,616      38,288
  Research and development.................................    16,178      12,123      28,279
  Selling, general and administrative......................    40,477      47,931      11,733
  Settlement of lawsuit....................................        --       5,050          --
  Write-down of property...................................    32,163          --          --
  Other restructuring costs................................    12,490          --          --
                                                             --------    --------    --------
 
     Total operating expenses..............................   156,924     103,392      40,012
                                                             --------    --------    --------
 
Income (loss) from operations..............................   (82,225)     34,945     (20,012)
 
Interest and other income..................................     1,972       4,856       3,485
                                                             --------    --------    --------
     Income (loss) before taxes............................   (80,253)     39,801     (16,527)
Provision for income taxes.................................        --       3,184          --
                                                             --------    --------    --------
 
     Net income (loss).....................................  $(80,253)   $ 36,617    $(16,527)
                                                             ========    ========    ========
 
Net income (loss) per share:
  Basic....................................................  $  (2.52)   $   1.11    $  (0.55)
  Diluted..................................................  $  (2.52)   $   1.03    $  (0.55)
 
Shares used in per share computation:
  Basic....................................................    31,876      32,996      29,833
  Diluted..................................................    31,876      35,559      29,833
</TABLE>

 
                See notes to consolidated financial statements.
 
                                       28

<PAGE>   31
 
                                  VIVUS, INC.
 
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                                1998       1997        1996
                                                              --------    -------    --------
<S>                                                           <C>         <C>        <C>
Net Income (loss)...........................................  $(80,253)   $36,617    $(16,527)
Other comprehensive income:
  Unrealized gain (loss) on securies........................      (129)        21         (37)
  Income tax expense (benefit)..............................        --         (4)         --
                                                              --------    -------    --------
                                                                  (129)        17         (37)
                                                              --------    -------    --------
Comprehensive income (loss).................................  $(80,382)   $36,634    $(16,564)
                                                              ========    =======    ========
</TABLE>

 
                See notes to consolidated financial statements.
 
                                       29

<PAGE>   32
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 

<TABLE>
<CAPTION>
                                           COMMON STOCK
                                               AND            UNREALIZED
                                         PAID IN CAPITAL      GAIN (LOSS)
                                        ------------------        ON          DEFERRED     ACCUMULATED
                                        SHARES     AMOUNT     SECURITIES    COMPENSATION     DEFICIT
                                        ------    --------    -----------   ------------   -----------
<S>                                     <C>       <C>         <C>           <C>            <C>
BALANCES, December 31, 1995...........  26,952    $ 91,485       $ 114         $(791)       $ (49,627)
Issuance of common stock at $14.56 per
  share for patent rights.............     400       5,821
Sale of common stock at $13.38 per
  share for cash (net of issuance
  costs of $4,057)....................   4,600      57,468
Sale of common stock through employee
  stock purchase plan.................      20         226
Exercise of common stock options for
  cash................................     482       1,205
Unrealized loss on securities.........                             (37)
Amortization of deferred
  compensation........................                                           443
Net loss..............................                                                        (16,527)
                                        ------    --------       -----         -----        ---------
BALANCES, December 31, 1996...........  32,454     156,205          77          (348)         (66,154)
Warrants exercised, net...............     166          --
Sale of common stock through employee
  stock purchase plan.................      34         486
Exercise of common stock options for
  cash................................     851       4,254
Repurchase of common stock for cash...    (337)     (7,716)
Stock compensation costs..............                 140                       348
Unrealized gain on securities.........                              21
Net income............................                                                         36,617
                                        ------    --------       -----         -----        ---------
BALANCES, December 31, 1997...........  33,168     153,369          98            --          (29,537)
Sale of common stock through employee
  stock purchase plan.................      77         489
Exercise of common stock options for
  cash................................     288         576
Repurchase of common stock for cash...  (1,663)    (23,584)
Stock compensation costs..............      20         648
Unrealized loss on securities.........                            (129)
Net loss..............................                                                        (80,253)
                                        ------    --------       -----         -----        ---------
BALANCES, December 31, 1998...........  31,890    $131,498       $ (31)        $  --        $(109,790)
                                        ======    ========       =====         =====        =========
</TABLE>

 
                See notes to consolidated financial statements.
 
                                       30

<PAGE>   33
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                          -----------------------------------
                                                            1998         1997         1996
                                                          ---------    ---------    ---------
<S>                                                       <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss).....................................  $ (80,253)   $  36,617    $ (16,527)
  Adjustments to reconcile net income (loss) to net cash
     provided by (used for) operating activities:
     Depreciation and amortization......................      3,688        2,138        1,238
     Property write-down................................     32,163           --           --
     Inventory write-down...............................     16,083           --           --
     Stock compensation costs...........................        648          488          443
     Issuance of common stock for patent rights.........         --           --        5,821
  Changes in assets and liabilities:
     Accounts receivable................................      6,594      (11,791)          --
     Inventories........................................    (12,271)      (4,544)      (4,540)
     Prepaid expenses and other assets..................      1,102         (301)        (698)
     Accounts payable...................................     (3,297)       3,250        2,971
     Accrued and other liabilities......................      8,989       16,737          913
                                                          ---------    ---------    ---------
       Net cash provided by (used for) operating
          activities....................................    (26,554)      42,594      (10,379)
                                                          ---------    ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Property and equipment purchases......................    (18,602)     (32,268)      (3,682)
  Investment purchases..................................   (180,791)    (323,609)    (177,074)
  Proceeds from sale/maturity of securities.............    245,294      321,865      131,818
                                                          ---------    ---------    ---------
       Net cash provided by (used for) investing
          activities....................................     45,901      (34,012)     (48,938)
                                                          ---------    ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Sale of common stock..................................         --           --       57,468
  Exercise of common stock options......................        576        4,254        1,205
  Sale of common stock through employee stock purchase
     plan...............................................        489          486          226
  Repurchase of common stock............................    (23,584)      (7,716)          --
                                                          ---------    ---------    ---------
       Net cash provided by (used for) financing
          activities....................................    (22,519)      (2,976)      58,899
                                                          ---------    ---------    ---------
Net increase (decrease) in cash.........................     (3,172)       5,606         (418)
CASH:
  Beginning of year.....................................      6,161          555          973
                                                          ---------    ---------    ---------
  End of year...........................................  $   2,989    $   6,161    $     555
                                                          =========    =========    =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
  Unrealized gain (loss) on securities..................  $     108    $      21    $     (37)
SUPPLEMENTAL CASH FLOW DISCLOSURE:
  Income taxes paid.....................................  $      71    $   1,653           --
</TABLE>

 
                 See notes to consolidated financial statements
 
                                       31

<PAGE>   34
 
                                  VIVUS, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
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 obtained clearance from the U.S. Food and Drug Administration
("FDA") to manufacture and market MUSE in the U.S. in November 1996. The Company
received approval to market MUSE in the United Kingdom from the Medicines
Control Agency ("MCA") in November 1997, as well as approval to market MUSE by
the European Union in December 1998. The Company is currently seeking marketing
clearance in other countries. The Company commercially introduced MUSE in the
U.S. in January 1997, and through the Company's partners, ASTRA and Janssen,
launched MUSE in the United Kingdom, Sweden, Canada, and several other
countries.
 
     The Company is subject to a number of risks including its future capital
needs and ability to obtain additional financing, its ability to successfully
market, distribute and sell its products, 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.
 
     During 1998, the Company incurred a loss of $80 million and had negative
operating cash flow of $26 million. These operating results were caused by a
significant decline in market demand for the Company's product. This decline
resulted from the domestic introduction of a competitor's product. International
introductions of the competitor's products are also expected to have a similar
adverse impact on demand for the Company's product in international markets. To
address this adverse market condition, management recorded significant
restructuring charges during 1998 (See note 6).
 
     Management believes that these restructuring charges are adequate to bring
future operating expenses in line with anticipated market demand, however, there
can be no assurance that restructuring measures taken to date will be
sufficient. In addition to the restructuring measures taken, the Company has
plans to increase working capital by (i) obtaining approvals for the Company's
products in various countries and realizing milestone payments associated with
such approvals and (ii) continue its efforts related to obtaining additional
marketing agreements. The Company's ability to continue as a going concern is
dependent on the stabilization of market demand for the Company's product, and
adequate downsizing by the Company to operate profitably at the reduced level of
demand. Management plans to continue to monitor market demand and adjust
operating expenses accordingly. The Company's financial statements have been
prepared assuming it will continue as a going concern and do not reflect any
costs or charges that could result from this uncertainty.
 
SIGNIFICANT ACCOUNTING POLICIES
 
  Revenue Recognition
 
     Product revenue is generally recognized upon shipment. While there were US
product shipments in December 1996 in the U.S., the Company did not recognize
product revenue nor the associated cost of sales on these shipments until 1997
because of extended rights-of-return privileges that were granted to customers
only during this initial selling period. The Company invoices its international
partners based on an agreed billing price per unit, that is subject to revision
based on contractual formulas either up or down upon periodic reconciliations.
Final pricing for product shipments to international partners is subject to
contractual formulas based on the partners' net realizable price to their
customers and the Company's cost of goods among other things. At the time of
product shipment, the Company recognizes revenue at the lowest possible price in
accordance with contractual formulas and will recognize additional revenue, if
any, upon finalization of pricing with its international partners. As of
December 31, 1998, the Company had deferred revenue of $5 million, representing
amounts billed in excess of revenue recognized.
                                       32

<PAGE>   35
                                  VIVUS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The Company recognized revenues of $9 million, $20 million, and $3 million
in the years ended December 31, 1998, 1997, and 1996, respectively, as a result
of achieving certain milestones related to its international marketing
agreements. The amounts are not refundable and do not involve any significant
future performance obligations.
 
  Principles of Consolidation
 
     The consolidated financial statements include VIVUS, Inc., VIVUS
International Limited, a wholly-owned subsidiary, and VIVUS Ireland Limited,
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 all raw material purchases prior to October 1, 1996. Certain of
these expensed raw material costs benefited 1997 and 1998 by reducing cost of
sales by $4.7 million and $2.7 million, respectively. During the quarter ended
September 30, 1998, the Company wrote down its inventory to align with new
estimates of expected future demand for MUSE. The Company had built up its
inventory level prior to and after Pfizer's launch of sildenafil and had not
anticipated the impact that sildenafil (a competing product) would have on the
demand for MUSE. The Company anticipated sales to ultimately increase as a
result of an expanding impotence market. Given the protracted decline in demand
for MUSE, the Company recorded a valuation reserve of $16.0 million, primarily
related to excess raw materials and future inventory purchase commitments for
raw materials. This write-down is included in "Cost of Sales," in 1998 as part
of the Company's restructuring. See Note 3.
 
  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 in
"Accumulated Other Comprehensive Income," 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 and equipment is stated at cost. For financial reporting,
depreciation and amortization are computed using the straight-line method over
estimated useful lives of three to seven years. Leasehold improvements are
amortized using the straight-line method over the lesser of the estimated useful
lives on remaining lease term. During 1998, the Company took multiple steps to
restructure the operations of the Company to bring the cost structure in line
with current and anticipated future revenues. These steps included the closing
of the Company's contract manufacturing facility within PACO Pharmaceutical
Services, Inc.,
                                       33

<PAGE>   36
                                  VIVUS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
and the termination of the Company's leased corporate offices. The Company
recorded a $32.2 million write-down of property and equipment. This write-down
was calculated in accordance with the provisions of SFAS No. 121 and represents
the excess of the carrying values of, property and equipment, primarily the
Company's New Jersey manufacturing leaseholds and equipment, over the projected
future discounted cash flows for the Company. See Note 4.
 
  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 MUSE under several licensing agreements. These agreements
generally required milestone payments during the development period and
royalties on product sales. Royalties on product sales are included in cost of
goods sold. Milestone payments are included in research and development expenses
in 1997 and prior years.
 
  Net Income (Loss) Per Share
 
     Basic earnings per share are computed using the weighted average number of
common shares outstanding during the periods. Diluted earnings per share is
based on the weighted average number of common and common equivalent shares,
which represent shares that may be issued in the future upon the exercise of
outstanding stock options and warrants under the treasury stock method. The
computation of basic and diluted earnings per share for the years ended December
31, 1998, 1997 and 1996 are as follows:
 

<TABLE>
<CAPTION>
  (IN THOUSANDS, EXCEPT PER SHARE DATA)         1998       1997        1996
  -------------------------------------       --------    -------    --------
<S>                                           <C>         <C>        <C>
Net income (loss).........................    $(80,253)   $36,617    $(16,527)
                                              ========    =======    ========
Net income (loss) per share -- Basic......    $  (2.52)   $  1.11    $  (0.55)
Common equivalent shares:
  Options.................................          --      (0.07)         --
  Warrants................................          --      (0.01)         --
                                              --------    -------    --------
Net income (loss) per share -- Diluted....    $  (2.52)   $  1.03    $  (0.55)
                                              ========    =======    ========
Shares used in the computation of net
  income (loss) per share -- Basic........      31,876     32,996      29,833
Common equivalent shares:
  Options.................................          --      2,215          --
  Warrants................................          --        348          --
                                              --------    -------    --------
Diluted shares............................      31,876     35,559      29,833
                                              ========    =======    ========
</TABLE>

 
     Options to purchase 286,500 shares at prices ranging from $24.81 to $37.38
which were outstanding at December 31, 1997 are not included in the computation
of diluted EPS for 1997 because the option prices were greater than the average
market price of common shares.
 
                                       34

<PAGE>   37
                                  VIVUS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
  Foreign Currency
 
     Assets and liabilities recorded in foreign currencies are translated at the
exchange rate on the balance sheet date. Revenue, cost and expenses are
translated at average rates of exchange in effect during the year. Net gains and
losses resulting from foreign exchange transactions were not material in all
periods.
 
  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.
 
  Reclassifications
 
     Reclassifications have been made to the prior years' Consolidated Financial
Statements to conform to the fiscal 1998 presentation.
 
NOTE 2. AVAILABLE-FOR-SALE SECURITIES
 
     The fair value and the amortized cost of available-for-sale securities at
December 31, 1998 and 1997 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, 1998 available-for-sale securities with
maturities between one and two years, which total $12.7 million, are classified
as short term assets as it is the Company's intention to sell these securities
before maturity as necessary to meet current liability obligations.
 
     As of December 31, 1998 (in thousands):
 

<TABLE>
<CAPTION>
                                                                 UNREALIZED   UNREALIZED
                                       AMORTIZED   FAIR MARKET    HOLDING      HOLDING
                                         COST         VALUE        GAINS        LOSSES
                                       ---------   -----------   ----------   ----------
<S>                                    <C>         <C>           <C>          <C>
U.S. government securities...........   $16,379      $16,380        $  7        $  (6)
Corporate debt.......................     4,558        4,568          10           --
                                        -------      -------        ----        -----
          Total......................   $20,937      $20,948        $ 17        $  (6)
                                        =======      =======        ====        =====
</TABLE>

 
     As of December 31, 1997 (in thousands):
 

<TABLE>
<CAPTION>
                                                                 UNREALIZED   UNREALIZED
                                       AMORTIZED   FAIR MARKET    HOLDING      HOLDING
                                         COST         VALUE        GAINS        LOSSES
                                       ---------   -----------   ----------   ----------
<S>                                    <C>         <C>           <C>          <C>
U.S. government securities...........   $36,255      $36,276        $148        $(127)
Corporate debt.......................    49,182       49,259          79           (2)
                                        -------      -------        ----        -----
          Total......................   $85,437      $85,535        $227        $(129)
                                        =======      =======        ====        =====
</TABLE>

 
                                       35

<PAGE>   38
                                  VIVUS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 3. INVENTORIES
 
     Inventories are recorded net of reserves of $14.8 million and $5.4 million
as of December 31, 1998 and 1997, respectively, and consist of (in thousands):
 

<TABLE>
<CAPTION>
                                                               1998     1997
                                                               ----     ----
<S>                                                           <C>      <C>
Raw materials...............................................  $4,021   $8,603
Work in process.............................................     162      190
Finished goods..............................................   1,089      291
                                                              ------   ------
          Total.............................................  $5,272   $9,084
                                                              ======   ======
</TABLE>

 
NOTE 4. FIXED ASSETS
 
     Property and equipment as of December 31 consists of (in thousands):
 

<TABLE>
<CAPTION>
                                                              1998      1997
                                                              ----      ----
<S>                                                          <C>       <C>
Machinery and equipment....................................  $18,762   $10,247
Computers and software.....................................    3,866     2,884
Furniture and fixtures.....................................    2,195       781
Building Improvements......................................   11,642        --
Construction in progress...................................       --    27,067
                                                             -------   -------
                                                              36,465    40,979
Accumulated depreciation and amortization..................  (17,252)   (4,517)
                                                             -------   -------
          Property and equipment, net......................  $19,213   $36,462
                                                             =======   =======
</TABLE>

 
NOTE 5. ACCRUED AND OTHER LIABILITIES
 
     Accrued and other liabilities as of December 31 consist of (in thousands):
 

<TABLE>
<CAPTION>
                                                            1998       1997
                                                           -------    -------
<S>                                                        <C>        <C>
Restructuring............................................   15,058         --
Unearned revenue.........................................    5,040         --
Research and clinical expenses...........................    2,337      1,579
Royalties................................................    2,133      1,155
Income taxes.............................................    2,082      1,531
Employee compensation and benefits.......................      902      2,308
Sales and marketing expenses.............................      664      4,913
Manufacturing expenses...................................      368      2,619
Other....................................................      570      1,009
Settlement of lawsuit....................................       --      5,050
                                                           -------    -------
                                                           $29,154    $20,165
                                                           =======    =======
</TABLE>

 
NOTE 6. RESTRUCTURING AND RELATED CHARGES
 
     During the second quarter of 1998, the Company recorded restructuring and
related costs of $6.5 million. The charge included costs of $3.2 million
resulting from the termination of certain marketing and promotional programs, a
provision of $2.3 million for reductions in the Company's workforce that
includes severance compensation and benefit costs, and a $1.0 million in
write-down of fixed assets.
 
                                       36

<PAGE>   39
                                  VIVUS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     During the third quarter of 1998, the Company took additional steps to
restructure its operations and recorded $54.2 million of costs and write-downs.
These charges included a $16.0 million write-down of inventory, primarily raw
materials and commitments to buy raw materials, a $32.2 million write-down in
property, and $6.0 million of other restructuring costs primarily related to
personnel costs and operating lease commitments. These write-downs were
calculated in accordance with the provisions of SFAS No. 121 and represents the
excess of the carrying value of property and equipment, primarily the Company's
New Jersey manufacturing leaseholds and equipment, over the projected future
discounted cash flows for the Company.
 
RESTRUCTURING AND RELATED CHARGES IN FISCAL 1998 (IN THOUSANDS):
 

<TABLE>
<CAPTION>
                                          INVENTORY      PROPERTY
                       SEVERANCE AND     AND RELATED    AND RELATED    MARKETING
                       EMPLOYEE COSTS    COMMITMENTS    COMMITMENTS    PROGRAMS      OTHER      TOTAL
                       --------------    -----------    -----------    ---------    -------    --------
<S>                    <C>               <C>            <C>            <C>          <C>        <C>
Restructuring
  provision..........     $ 3,069         $ 16,083       $ 34,884       $ 3,191     $ 3,708    $ 60,735
Incurred to date.....     $(1,159)        $(10,699)      $(30,020)      $(1,884)    $(1,915)   $(45,677)
                          -------         --------       --------       -------     -------    --------
Balance at December
  31, 1998...........     $ 1,910         $  5,384       $  4,664       $ 1,307     $ 1,793    $ 15,058
                          =======         ========       ========       =======     =======    ========
</TABLE>

 
     The Company expects that during the fiscal year 1999 it will make cash
payments of approximately $7.2 million related to the restructuring, with the
remaining $7.8 million in cash payments to occur over the fiscal years 2000,
2001 and 2002.
 
NOTE 7. STOCKHOLDERS' EQUITY
 
  Common Stock
 
     The Company is authorized to issue 200 million shares of common stock. As
of December 31, 1998 and 1997, 31,890,091, and 33,167,964 shares were issued and
outstanding.
 
     The Company's Board of Directors approved a stock repurchase program in May
1997 whereby the Company could purchase up to two million shares of its common
stock. As of December 31, 1997, the Company had repurchased 336,700 shares at a
cost of $7,716,000. During January and February 1998, the Company repurchased
1,663,300 additional shares of its common stock at a cost of $23,583,990.
 
     In June 1997, the Company effected a two-for-one common stock split. All
common stock data in the accompanying consolidated financial statements for all
years presented have been adjusted to reflect this stock split.
 
  Preferred Stock
 
     The Company is authorized to issue 5,000,000 shares of undesignated
preferred stock. 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 exercisable for up to 528,600 shares of common stock at
an exercise price of $4.31 per share. In June 1997, 203,590 warrants were
exercised and the Company issued 165,928 net shares based on the market price on
June 23, 1997. The remaining 325,010 warrants outstanding as of December 31,
1998 expire in 1999.
 
                                       37

<PAGE>   40
                                  VIVUS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 8. STOCK OPTION AND PURCHASE PLANS
 
  Stock 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
7, 800,000 shares of common stock have been authorized for issuance under the
Plan. The Plan allows the Company to grant incentive stock options (ISOs) to
employees and nonstatutory stock options (NSOs) to 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 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 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, 1998, no SPRs have been granted under the Plan.
 
     Under the 1994 Director Option Plan (the Director Option Plan), the Company
reserved 400,000 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 32,000
shares of common stock when they join the Board of Directors. These options vest
25% after one year and 25% annually thereafter. Each director shall receive an
option to purchase 8,000 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 - 6% 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% in all years.
 
Details of option activity under these plans are as follows:
 

<TABLE>
<CAPTION>
                                                    NUMBER      WEIGHTED AVERAGE
                                                  OF SHARES      EXERCISE PRICE
                                                  ----------    ----------------
<S>                                               <C>           <C>
Outstanding, December 31, 1995..................   3,264,632           4.93
Granted.........................................   1,444,746          16.40
Exercised.......................................    (485,796)          2.48
Canceled........................................     (25,732)         10.24
                                                  ----------         ------
Outstanding, December 31, 1996..................   4,197,850           9.13
Granted.........................................   1,289,722          22.32
Exercised.......................................    (850,550)          5.00
Canceled........................................    (115,827)         12.90
                                                  ----------         ------
Outstanding, December 31, 1997..................   4,521,195         $13.57
Granted.........................................   1,093,338           4.96
Exercised.......................................    (379,375)          4.23
Canceled........................................  (2,163,416)         14.23
Canceled -- re-priced options...................  (1,910,523)         15.16
Issued -- re-priced options.....................   1,910,523           3.42
                                                  ----------         ------
Outstanding December 31, 1998...................   3,071,742           3.90
                                                  ==========         ======
</TABLE>

 
                                       38

<PAGE>   41
                                  VIVUS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 

<TABLE>
<CAPTION>
                        OPTIONS OUTSTANDING                                 OPTIONS EXERCISABLE
- -------------------------------------------------------------------   -------------------------------
                    NUMBER                                               NUMBER
                 OUTSTANDING    WEIGHTED-AVERAGE                      EXERCISABLE
   RANGE OF      DECEMBER 31,      REMAINING       WEIGHTED-AVERAGE   DECEMBER 31,   WEIGHTED-AVERAGE
EXERCISE PRICES      1998       CONTRACTUAL LIFE    EXERCISE PRICE        1998        EXERCISE PRICE
- ---------------  ------------   ----------------   ----------------   ------------   ----------------
<S>              <C>            <C>                <C>                <C>            <C>
$0.09 - $ 2.72      994,617        8.16 Years           $2.08           315,779           $0.76
    $2.94         1,128,727         7.3 Years            2.94                --              --
$3.00 - $25.88      948,398        7.08 Years            6.96           332,326            9.15
                  ---------                                             -------
$0.09 - $25.88    3,071,742        7.51 Years           $3.90           648,105           $5.06
                  =========                                             =======
</TABLE>

 
     At December 31, 1998, 6,261,743 options remained authorized and unissued
and options to purchase 648,105 shares were exercisable under these plans. The
weighted averages of fair values of options granted during 1998, 1997, and 1996,
respectively, were $4.96, $9.32, and $6.76.
 
     During 1997, options to purchase 100,000 shares of common stock were
granted to research consultants at the fair market value on the date of grant.
Compensation costs, including the impact of re-pricing, using the Black-Scholes
option-pricing model are estimated to be approximately $1.1 million over the
option's vesting period of which $648,000 and $140,000 were recorded as expenses
for the years ended December 31, 1998 and December 31, 1997, respectively.
 
     In October 1998, the Company's Board of Directors authorized the re-pricing
of all non-executive employees' options, certain consultants' options, and 50%
of executives' options to the closing value as of October 19, 1998. The
remaining 50% of executive options were re-priced at 150% of the closing value
as of the same date. All re-priced stock options have a six-month "black out"
period, whereby the re-priced stock options are not exercisable, even if vested.
 
     The Company accounts for these plans under APB Opinion No. 25. Except for
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 generally vest over four years, and all
options expire after ten years.
 
     Under FASB Statement No. 123 (FASB 123), "Accounting for Stock-based
Compensation", the estimated fair value of options is amortized to expense over
the options' vesting period. In accordance with the disclosure requirements of
FASB 123, if the Company had elected to recognize this expense, income (loss)
and income (loss) per share would have been reduced to the following pro forma
amounts (In thousands, except per share data):
 

<TABLE>
<CAPTION>
                                                                1998       1997        1996
                                                              --------    -------    --------
<S>                                                           <C>         <C>        <C>
Pro forma net income (loss).................................  $(83,129)   $31,958    $(20,039)
Pro forma net income (loss) per share:
  Basic.....................................................  $  (2.61)   $  0.97    $  (0.67)
  Diluted...................................................  $  (2.61)   $  0.90    $  (0.67)
</TABLE>

 
     Because the FASB 123 method of accounting has not been applied to options
granted prior to January 1, 1996, the resulting pro forma amounts may not be
representative of that to be expected in future years.
 
  Stock Purchase Plan
 
     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 400,000 shares were reserved for issuance under the
employee stock purchase
 
                                       39

<PAGE>   42
                                  VIVUS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
plan. As of December 31, 1998, 172,346 shares have been issued to employees.
During 1998, the weighted average fair market value of shares issued under the
employee stock purchase plan was $6.32 per share.
 
NOTE 9. 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 $2,175,000 was paid prior to December 31, 1997 and $400,000 was paid in
January 1998); (2) issue 896,492 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 400,000
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. In
1997 and 1998, the Company recorded royalty expenses as cost of goods sold based
on product sales.
 
NOTE 10. LEASE COMMITMENTS
 
     The Company leases its manufacturing facilities under a five-year
non-cancelable operating lease expiring in 2002. The Company has the option to
extend this lease for two renewal terms of five years each. The Company
cancelled the lease on its principal administrative and research and development
laboratory facility that had a fifteen-year term expiring in 2012. The Company
was able to secure a sub-lease that expires in November 1999 for significantly
reduced space within the same building.
 
     Future minimum lease payments under operating leases are as follows (In
thousands):
 

<TABLE>
<S>                                                           <C>
1999........................................................  $  961
2000........................................................     763
2001........................................................     763
2002........................................................     163
2003........................................................       9
                                                              ------
                                                              $2,659
                                                              ======
</TABLE>

 
     Rent expense under operating leases totaled $2,472,000, $1,302,000,
$560,000, for the years ended December 31, 1998, 1997, 1996, respectively.
 
                                       40

<PAGE>   43
                                  VIVUS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
NOTE 11. 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 (in thousands):
 

<TABLE>
<CAPTION>
                                                          1998           1997
                                                         -------       --------
<S>                                                      <C>           <C>
Deferred tax assets:
  Net operating loss carryforwards.....................  $17,309       $     --
  Research and development credit carryforwards........    4,625             --
  Capitalized research and development expenses........    1,385          1,947
  Inventory reserve....................................    5,808          3,022
  Amortization.........................................       --             --
  Accruals and other...................................   11,007            648
  Deferred gain........................................     (573)          (859)
  Depreciation.........................................    5,466          1,260
                                                         -------       --------
                                                          45,027          6,018
Valuation allowance....................................  (45,027)         6,018
                                                         -------       --------
          Total........................................  $    --       $     --
                                                         =======       ========
</TABLE>

 
     For federal and state income tax reporting purposes, net operating loss
carryforwards of approximately $53,304,000 and $8,981,000 are available to
reduce future taxable income, if any. These carryforwards begin to expire in
2018. 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.
 
     The provision for income taxes consisted of the following components as of
December 31, 1997, (in thousands):
 

<TABLE>
<CAPTION>
                                                               1997
                                                              ------
<S>                                                           <C>
Current
  Federal...................................................  $2,170
  State.....................................................   1,332
                                                              ------
          Total current.....................................   3,502
Deferred (prepaid)
  Federal...................................................    (318)
  State.....................................................       0
                                                              ------
          Total deferred (prepaid), net.....................    (318)
                                                              ------
          Total provision for income taxes..................  $3,184
                                                              ======
</TABLE>

 
                                       41

<PAGE>   44
                                  VIVUS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The provisions for income taxes differs from the amount computed by
applying the statutory federal income tax rates as follows, as of December 31,
1997:
 

<TABLE>
<CAPTION>
                                                              1997
                                                              ----
<S>                                                           <C>
Provision computed at federal statutory rates...............   35%
State income taxes, net of federal tax effect...............    6
Net operating losses utilized...............................  (20)
Tax credits utilized........................................  (10)
Income not subject to federal and state taxation............   (4)
Other.......................................................    1
                                                              ---
          Provision for income taxes........................    8%
                                                              ===
</TABLE>

 
NOTE 12. LEGAL MATTERS
 
     In December 1997, the Company reached a settlement agreement with a former
consultant of the Company whereby the former consultant dropped his claims
against the Company and certain of its officers and directors. The Company
agreed to pay the former consultant $5.1 million. The Company recorded the
settlement in 1997 and paid the $5.1 million on January 5, 1998 in accordance
with the agreement.
 
     In February 1998, the Company and certain of its officers and directors
were named in a class action lawsuit filed in California state court alleging
violations of state securities laws. The lawsuit involves events which allegedly
took place between May 15, 1997 and December 9, 1997. In March 1998, a purported
shareholder class action was filed in the United States District Court for the
Northern District in California. The federal complaints were filed on behalf of
a purported class of persons who purchased stock between May 2, 1997 and
December 9, 1997. The Company believes that the allegations of this lawsuits are
without merit and intends to vigorously defend these cases. The Company does not
believe that resolution of these cases will have an adverse material impact on
the operations or financial position of the Company.
 
     In October 1998, the Company was named in a civil action filed in the
Superior Court of New Jersey. This complaint seeks specific performance and
other relief in connection with the Company's leased manufacturing facilities,
located in Lakewood, New Jersey. The Company's lease agreement requires that the
Company provide a removal security deposit in the form of cash or a letter of
credit. The Company and lessor ("plaintiff") have not been able to agree on the
amount of such deposit and the plaintiff filed suit asking for specific
performance in the amount of $3.3 million. The Company believes that the amount
sought by the plaintiff is excessive and not mandated by the terms of the lease.
However, if the Company is required to post a deposit of $3.3 million, this will
have a material adverse effect on the financial condition of the Company.
 
     In the normal course of business, the Company receives and makes inquiries
regarding patent infringement and other legal matters. The Company believes that
it has meritorious claims and defenses and intends to pursue any such matters
vigorously. The Company is not aware of any asserted or unasserted claims
against it, excluding the settlement above, where the resolution would have an
adverse material impact on the operations or financial position of the Company.
 
NOTE 13. COMPREHENSIVE INCOME
 
     The Company has adopted SFAS No. 130, "Reporting Comprehensive Income" in
1998. Accordingly, the Consolidated Statements of Comprehensive Income appear on
page 29 of this report.
 
NOTE 14. SEGMENT INFORMATION
 
     During 1998, the Company adopted Statement of Financial Accounting
Statement SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information." SFAS 131 requires a new basis of
 
                                       42

<PAGE>   45
                                  VIVUS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
determining reportable business segments, i.e. the management approach. This
approach requires that business segment information used by management to assess
performance and manage company resources for information disclosure. On this
basis, the Company primarily sells its product through wholesale channels in the
United States. International sales are made only to the Company's two
international partners. All transactions are denominated in U.S. dollars,
therefore, the Company considers the arrangement as operating in a single
segment.
 
     During 1998, five customers accounted for 35%, 13%, 11%, 11%, and 10% of
total product revenue, and during 1997, five customers accounted for 24%, 18%,
14%, 13% and 11% of total product revenue.
 
                                       43

<PAGE>   46
 

I
TEM 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 Company's 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 Company's 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 Company's 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 Company's 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
 
     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
       ------
    <C>            <S>
         ##3.2     Amended and Restated Certificate of Incorporation of the
                   Company
       ****3.3     Bylaws of the Registrant, as amended
        ###3.4     Certificate of Designations of Rights, Preferences and
                   Privileges of Series A Participating Preferred Stock
         ##4.1     Specimen Common Stock Certificate of the Registrant
          *4.2     Registration Rights, as amended
          *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
</TABLE>

 
                                       44

<PAGE>   47
 

<TABLE>
<CAPTION>
       NUMBER
       ------
    <C>            <S>
        ###4.5     Second Amended and Restated Preferred Shares Rights
                   Agreement, dated as of April 15, 1997 by and between the
                   Registrant and Harris Trust Company of California, including
                   the Certificate of Determination, the form of Rights
                   Certificate and the Summary of Rights attached thereto as
                   Exhibits A, B, and C, respectively
        *+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 Agreement 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
        *+10.5A    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
         *10.10    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
         *10.13    1994 Director Option Plan and Form of Agreement
         *10.14    Form of 1994 Employee Stock Purchase Plan and Form of
                   Subscription Agreement
         *10.17    Letter Agreement between the Registrant and Leland F. Wilson
                   dated June 14, 1991 concerning severance pay
      ***+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
                   20, 1995
</TABLE>

 
                                       45

<PAGE>   48
 

<TABLE>
<CAPTION>
       NUMBER
       ------
    <C>            <S>
        ++10.22A   Amendment One, dated as of December 11, 1997, to the
                   Manufacturing Agreement by and between VIVUS and CHINOIN
                   Pharmaceutical and Chemical Works Co., Ltd. dated December
                   20, 1995
        #+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 Jenssen Pharmaceutical International, a
                   division of Cilag AG International
        ++10.27A   Amended and Restated Addendum 1091, dated as of October 29,
                   1997, between VIVUS International Limited and Janssen
                   Pharmaceutical 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
     #####10.29A   Lease Amendment No. 2 dated July 24, 1997 by and between the
                   Registrant and Airport Associates
     #####10.29B   Lease Amendment No. 3 dated July 24, 1997 by and between the
                   Registrant and Airport Associates
        ##10.30    Lease agreement by and between 605 East Fairchild
                   Associates, L.P. and Registrant dated as of March 5, 1997
    ####++10.31    Manufacture and Supply Agreement between Registrant and
                   Spolana Chemical Works, A.S. dated May 30, 1997
         @10.32A   Agreement between ADP Marshall, Inc. and the Registrant
                   dated December 19, 1997
         @10.32B   General Conditions of the Contract for Construction
         @10.32C   Addendum to General Conditions of the Contract for
                   Construction
        @+10.33    Sales Force Services Agreement dated as of February 1, 1998
                   between the Registrant and Innovex, Inc.
       @@+10.34    Agreement dated as of June 30, 1998 between Registrant and
                   Alza Corporation.
       @@+10.35    Sales Force Transition Agreement dated July 6, 1998 between
                   Registrant and Alza Corporation.
          10.36    Form of, "Change of Control Agreements", dated July 8, 1998
                   by and between the Registrant and certain Executive Officers
                   of the Company.
          10.30A   Amendment of lease agreement made as of October 19, 1998 by
                   and between Registrant and 605 East Fairchild Associates,
                   L.P.
          10.37    Sublease agreement made as of November 17, 1998 between
                   Caliper Technologies, Inc. and Registrant.
        ++10.22B   Amendment Two, dated as of December 18, 1998 by and between
                   VIVUS, Inc. and CHINOIN Pharmaceutical and Chemical Works
                   Co.
</TABLE>

 
                                       46

<PAGE>   49
 

<TABLE>
<CAPTION>
       NUMBER
       ------
    <C>            <S>
        ++10.31A   Amendment One, dated as of December 12, 1998 by and between
                   VIVUS, Inc. and Spolana Chemical Works, A.S.
          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, as
           amended.
 
**         Incorporated by reference to the same numbered exhibit filed with the
           Registrant's Registration Statement on Form S-1 No. 33-90390, as
           amended.
 
***        Incorporated by reference to the same-numbered exhibit filed with the
           Registrant's Annual Report on Form 10-K for the year ended December
           31, 1995, as amended.
 
****       Incorporated by reference to the same numbered exhibit filed with the
           Registrant's Form 8-B filed with the Commission on June 24, 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.
 
##        Incorporated by reference to the same-numbered exhibit filed with the
          Registrant's Annual Report on Form 10-K for the year ended December
          31, 1996, as amended.
 
###      Incorporated by reference to exhibit 99.1 filed with Registrant's
         Amendment Number 2 to the Registration Statement of Form 8-A (File No.
         0-23490) filed with the Commission on April 23, 1997.
 
####    Incorporated by reference to the same-numbered exhibit filed with the
        Registrant's Quarterly Report on Form 10-Q for the quarter ended June
        30, 1997.
 
#####  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, 1997.
 
@         Incorporated by reference to the same-numbered exhibit filed with the
          Registrant's Annual Report on form 10-K for the year ended December
          31, 1997.
 
@@       Incorporated by reference to the same-numbered exhibit filed with the
         Registrant's Quarterly Report on form 10-Q for the quarter ended June
         30, 1998.
 
+          Confidential treatment granted.
 
++         Confidential treatment requested.
 
     (b) Reports on Form 8-K
 
        None
 
     (c) Exhibits
 
        See Item 14(a)(3) above
 
     (d) Financial Statement Schedule
 
        See Item 14(a)(2) above
 
                                       47

<PAGE>   50
 

                                   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/ RICHARD WALLISER
                                            ------------------------------------
                                            Richard Walliser
                                            Vice President of Finance and
                                            Chief Financial Officer
                                            (Principal Financial and Accounting
                                              Officer)
 
Date: March 30, 1999
 
                                       48

<PAGE>   51
 

                                                                    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 Richard
Walliser 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
                   ---------                                      -----                      ----
<C>                                                 <C>                                 <S>
 
              /s/ LELAND F. WILSON                  President, Chief Executive Officer  March 30, 1999
- ------------------------------------------------       (Principal Executive Officer)
                Leland F. Wilson                               and Director
 
              /s/ VIRGIL A. PLACE                    Chairman of the Board and Chief    March 30, 1999
- ------------------------------------------------      Scientific Officer and Director
                Virgil A. Place
 
              /s/ RICHARD WALLISER                    Vice President of Finance and     March 30, 1999
- ------------------------------------------------          Chief Financial Officer
                Richard Walliser                          (Principal Financial and
                                                            Accounting Officer)
 
              /s/ JOSEPH E. SMITH                                Director               March 30, 1999
- ------------------------------------------------
                Joseph E. Smith
 
               /s/ BRIAN H. DOVEY                                Director               March 30, 1999
- ------------------------------------------------
                 Brian H. Dovey
 
               /s/ LINDA JENCKES                                 Director               March 30, 1999
- ------------------------------------------------
                 Linda Jenckes
</TABLE>

 
                                       49

<PAGE>   52
 
                                  VIVUS, INC.
 
                            REPORT ON FORM 10-K FOR
                        THE YEAR ENDED DECEMBER 31, 1998
 
                               INDEX TO EXHIBITS*
 

<TABLE>
<CAPTION>
    EXHIBIT                                                                    SEQUENTIALLY
     NUMBER                            EXHIBIT NAME                            NUMBERED PAGE
    -------                            ------------                            -------------
    <C>         <S>                                                            <C>
     10.36      Form of, "Change of Control Agreements," dated July 1998 by
                and between the Registrant and Executive Officers of the
                Company....................................................
 
     10.30A     Amendment of lease agreement made as of October 19, 1998 by
                and between Registrant and 605 East Fairchild Associates,
                L.P. ......................................................
 
     10.37      Sublease agreement made as of November 17, 1998 between
                Caliper Technologies, Inc. and Registrant. ................
 
    **10.22.B   Amendment Two, dated as of December 18, 1998 by and between
                VIVUS, Inc. and CHINOIN Pharmaceutical and Chemical Works
                Co. .......................................................
 
    **10.31A    Amendment One, dated as of December 12, 1998 by and between
                VIVUS, Inc. and Spolana Chemical Works, A.S. ..............
 
      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
                                                                  EXHIBIT 10.22B
                              
                                AMENDMENT TWO
                         TO THE MANUFACTURING AGREEMENT
                        BY AND BETWEEN VIVUS AND CHINOIN

     This Amendment Two ("Amendment Two"), effective as of December 18, 1998
("Amendment Date"), by and between VIVUS, Inc., having a principal place of
business at 605 East Fairchild Drive, Mountain View, CA 94043, United States of
America ("VIVUS"), and CHINOIN Pharmaceutical and Chemical Works, Ltd., having a
principal place of business at H-1045, Budapest, To u. 1-5 Hungary ("CHINOIN")
(VIVUS and CHINOIN collectively, the "Parties"), amends (i) that certain
Manufacturing Agreement by and between and Parties dated December 20, 1995 (the
"Agreement") and (ii) Amendment One to the Agreement dated December 11, 1997
("Amendment One").

     The Parties desire to amend the Agreement and Amendment One as set forth
herein below;

     NOW, THEREFORE, the Parties agree as follows:

1.   AMENDMENT. This Amendment Two hereby amends the Agreement to incorporate
the terms and conditions set forth in this Amendment Two. The relationship of
the Parties shall continue to be governed by the terms and conditions of the
Agreement and Amendment One, as amended herein; and in the event that there is
any conflict between the terms and conditions of the Agreement or Amendment One
and
 this Amendment Two, the terms and conditions of this Amendment Two shall
control. As used in this Amendment Two, all capitalized terms shall have the
meanings defined for such terms in this Amendment Two or, if not defined in this
Amendment Two, the meanings defined in the Agreement.

2.   MODIFICATION TO THE AGREEMENT

     2.1   The Parties confirm that in the frame of the Agreement VIVUS has
firmly ordered from CHINOIN under PO# [*] the supply of [*] Product for the year
1998. After CHINOIN having delivered [*], VIVUS has requested CHINOIN to stop
manufacturing and to postpone all further shipments. [*] of Product already
manufactured remained on stock at CHINOIN. A further [*] of Product ordered and
the [*] minimum purchasing obligation of VIVUS for the calendar year of 1999,
total [*], an obligation of VIVUS, has not been manufactured by CHINOIN.

     2.2   The Parties agree that VIVUS shall not be required to purchase from
CHINOIN any amount of the Product in the remainder of calendar year 1998 and
VIVUS shall have only the following firm commitments to purchase the Product
from CHINOIN during the validity of the Agreement:

     2.2.1.   VIVUS agrees to take delivery of [*] of the Product already
     manufactured and in stock at CHINOIN by December 31, 1999,


*Certain information on this page has been omitted and filed separately with 
 the Commission. Confidential treatment has been requested with respect to 
 omitted portions.

<PAGE>   2
    latest. Notwithstanding any provisions in the Agreement or Amendment One to
    the contrary, including but not limited to Section 2.9, VIVUS agrees to pay
    CHINOIN in full for this [*] of the Product or any part thereof in four
    equal monthly installments within four months after accepting delivery.

    VIVUS will place with CHINOIN not less than eighty percent (80%) of its
    orders for the Product (based on mass) until VIVUS accepts delivery from
    CHINOIN all of this [*] of the Product.

    2.2.2.  VIVUS agrees to purchase an additional [*] of the Product (i.e., in
    addition to the [*] referred to in Section 2.2.1. above) at a later date
    during the validity of the Agreement.

    VIVUS will place with CHINOIN not less than sixty percent (60%) of its new
    orders for the Product (based on mass) until VIVUS accepts delivery from
    CHINOIN of all of this additional [*] of the Product.

    2.2.3.  VIVUS agrees to place not less than sixty percent (60%) of its
    orders for the Product (based on mass), if any at all, from CHINOIN after
    having completed all of its purchasing obligations as detailed above in
    Sections 2.2.1 and 2.2.2 of this Amendment Two. However, CHINOIN will not be
    obliged to supply in any case more than [*] of Product annually.

    2.2.4  Section 2.12 of the Agreement, as originally agreed upon and amended
    by Amendment One, is hereby deleted in its entirety.

    2.2.5  Parties agree that any minor quantity deviations less than plus-minus
    100 grams of the quantity of Product available at the time VIVUS accepting
    shipment from the quantity stipulated in this Amendment Two will be accepted
    without correction at the next shipment or stipulated quantity. CHINOIN
    agrees to notify VIVUS about any reduction of its [*] stock exceeding [*]
    due to sale to third parties or to other reasons. Such variation will be
    added to the [*] obligation of VIVUS as stipulated in Section 2.2.2 above.

    2.2.6  In the event VIVUS terminates the Agreement without cause prior to
    accepting delivery, or the Agreement expires on December 31, 2002 without
    VIVUS accepting delivery of a part or all of the quantities of the Product
    stipulated in Section 2.2.2 as amended by the stipulations of Section 2.2.5,
    VIVUS will pay to CHINOIN before leaving the Agreement a monetary settlement
    to compensate reasonable lost net profits consistent with CHINOIN's
    historical net profits on the manufacture of the Product. Such historical
    net profit to be determined by an audit performed by a certified public
    accountant or other representative acceptable to CHINOIN of CHINOIN
    financial records.


*Certain information on this page has been omitted and filed separately with 
 the Commission. Confidential treatment has been requested with respect to 
 omitted portions.


                                       2

<PAGE>   3
        All sales values of the quantities not accepted for delivery by VIVUS
        and subject to monetary settlement as above will be calculated as if
        delivered in the calendar year of termination or expiry above the
        quantities actually delivered in that year, if any, with prices
        stipulated in Section 2.7 of this Agreement as amended by Amendment One.

        CHINOIN agrees that the settlement of such agreed monetary settlement by
        VIVUS will satisfy in full any and all of VIVUS' obligations referred to
        in the Sections above to CHINOIN under the Agreement, Amendment One, and
        this Amendment Two.

        2.3 CHINOIN agrees that it will not manufacture the [*] of the Product 
referred to in Sections 2.2.2 and 2.2.5 above unless and until VIVUS requests in
writing that CHINOIN do so. CHINOIN will not be entitled to receive from VIVUS
any lost profits based on any portions of such 4.35 kilograms that CHINOIN
manufactures without having received a written request from VIVUS to do so.

3. ENTIRE AGREEMENT. The Agreement and any Exhibits and Addenda thereto 
together with this Amendment Two and Amendment One constitute the entire 
agreement between the Parties with respect to the subject matter thereof and 
supersede all prior and contemporaneous communications, representations, 
agreements or understandings, either written or oral, between the Parties.

IN WITNESS WHEREOF, the parties hereto have executed this Amendment Two.


                                          CHINOIN PHARMACEUTICAL AND
VIVUS, INC.                               CHEMICAL WORKS CO., LTD.

By: /s/ LELAND F. WILSON                  By: /s/ PHILIPPE BESSE       
   ------------------------------             ------------------------------  
                                                                              
Name: Leland F. Wilson                    Name:  Philippe Besse 
     ----------------------------               ----------------------------  
                                                                              
Title: President and CEO                  Title: Executive Vice President  
      ---------------------------               ----------------------------



*Certain information on this page has been omitted and filed separately with 
 the Commission. Confidential treatment has been requested with respect to 
 omitted portions.


                                       3




<PAGE>   1

                                                                  EXHIBIT 10.30A


                                    AGREEMENT


            This Agreement is executed as of this 19th day of October, 1998 by
and between VIVUS, INC., a Delaware corporation ("Tenant"), and 605 EAST
FAIRCHILD ASSOCIATES, L.P. a California limited partnership ("Landlord").

            1.    Recitals. This Agreement is being entered into with respect to
the following facts and objectives.

                  (a)   Tenant and Landlord are parties to that certain Lease
Agreement dated as of March 7, 1997 covering property generally known as 605
East Fairchild Drive, Mountain View, California ("Lease").

                  (b)   Tenant has requested that Landlord agree to (i) amend
the Lease to provide for an early expiration date, (ii) return the amount of its
Security Deposit that remains unused as of the Closing Date (defined below) and
(iii) pay Tenant certain amounts following the Closing Date. Landlord has agreed
to Tenant's requests subject to the terms and conditions of this Agreement.

                  (c)   The Real Estate Taxes (as defined in the Lease) for
which Tenant is responsible pursuant to the Lease have not yet been fully
assessed due to the recent completion of construction of the Building (as
defined in the Lease). Tenant and Landlord wish to provide for a deposit to be
made by Tenant on the Closing Date for the estimated amount
 of unpaid Real
Estate Taxes ("Tax Payment") for the period applicable to Tenant 


                                       1

<PAGE>   2
or, in the event Tenant does not make the Tax Payment, for Landlord to be
entitled to use a portion of the Security Deposit as the Tax Payment.

            2.    Agreement.

                  (a)   Subject to terms and conditions of subparagraph (b)
below Tenant and Landlord agree as follows: (i) the Lease shall be deemed
amended on the Closing Date to provide for a lease term ending on the Closing
Date, and the term of the Lease shall expire on the Closing Date, (ii) Landlord
shall be obligated to make the payments provided for in subparagraph (d) below,
and (iii) Tenant shall make the Tax Payment provided for in subparagraph (e)
below, and (iv) Landlord shall return to Tenant any prepaid monthly rent that
would be applicable to periods after the Closing Date and to pay Tenant any
overpaid Additional Charges after reconciliation pursuant to paragraph 4(c)(3)
of the Lease. Nothing herein shall in any way relieve either party of
obligations under the Lease for periods prior to the Closing Date and for
obligations that survive the termination or expiration of the Lease, including
the provisions of paragraphs 12 and 40 of the Lease.

                  (b)   The obligations of Landlord hereunder are subject to the
occurrence of the following conditions precedent on or before December 1, 1998,
which date may be extended for a period of up to fifteen (15) days by written
notice given to Tenant by Landlord ("Outside Date"): (i) Landlord and Caliper
Technologies Corp. ("Caliper") shall have executed and delivered 


                                       2

<PAGE>   3
a binding lease on terms and conditions acceptable to Landlord ("New Lease") for
the 605 East Fairchild Drive building, and the New Lease shall be in full force
and effect, (ii) Landlord shall have received approval from General American
Life Insurance Company ("Lender") of the New Lease and this Agreement, (iii)
Tenant shall have (A) vacated the Premises (as defined in the Lease) and removed
all of its furniture, equipment and other personal property (excepting that
Tenant shall not be required to vacate any portion of the Premises which Tenant
has subleased from Caliper via a sublease agreement which has been approved by
Landlord, such approval not to be un-reasonably withheld or delayed, and Tenant
shall not be required to remove any property purchased by Caliper from Tenant)
and (B) delivered to Landlord a letter confirming that it has surrendered
possession of the Premises (subject to the possible sublease relationship with
Caliper).

                  (c)   The "Closing Date" shall be the date when all of the
conditions specified in subparagraph (b) above are satisfied or waived in
writing by Landlord, but no later than the Outside Date.

                  (d)   Landlord shall pay Tenant One Hundred Thousand Dollars
($100,000) in ten (10) monthly installment payments of Ten Thousand Dollars
($10,000) each commencing thirty (30) days following the Close Date; provided,
however, Landlord shall be entitled to suspend such payments if Caliper is in
default (beyond any applicable notice) under the New Lease. Such 


                                       3

<PAGE>   4
payments shall resume if and when default has been cured or otherwise satisfied
by Caliper.

                  (e)   The Tax Payment to be made by Tenant hereunder shall be
the amount of Real Estate Taxes payable by Tenant under the Lease applicable to
the period beginning January 1, 1998 and ending on the Closing Date. The Tax
Payment shall be determined in good faith by Landlord based upon the advise of a
third party consulting firm engaged by Landlord with expertise in such matters.
Landlord shall give Tenant written notice of the amount of the Tax Payment upon
such determination. In the event Tenant fails or refuses to make the Tax Payment
within five (5) days following written notice to Tenant of the amount thereof,
Landlord shall be entitled to proceed against the Security Deposit for the
amount of the Tax Payment hereunder. Upon the Closing Date the Tax Payment shall
become the property of Landlord, subject only to reconciliation required
pursuant to this subparagraph. At such time as the actual Real Estate Taxes for
said period are determined, Landlord shall perform a reconciliation and refund
any excess payment or bill Tenant for any short fall and Tenant shall pay such
amount within ten (10) days after receipt of such bill. Such bill shall be
accompanied by reasonable supporting documentation.

            3.    Attorneys' Fees. If either party commences an action against
the other party arising out of or in connection with this Agreement, the
prevailing party shall be entitled to recover from the other party reasonable
attorneys' fees and costs 


                                       4

<PAGE>   5
of suit.

      IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.

                                       "Tenant"

                                       Vivus, INC., a Delaware corporation

                                       By: /s/ Richard Wallisen
                                          --------------------------------------
                                          Its  Chief Financial Officer
                                             -----------------------------------





                                       "Landlord"


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


                                       By: M-D Ventures, Inc.
                                       Its: General Partner

                                            By: /s/ Steve Dostart
                                               ---------------------------------
                                                Its: Vice President


                                       5



<PAGE>   1
                                                                  EXHIBIT 10.31A


                 AMENDMENT TO MANUFACTURE AND SUPPLY AGREEMENT

     This Amendment ("Amendment"), effective as of December 12, 1998
("Amendment Date") by and between VIVUS, Inc., having a principal place of 
business at 605 East Fairchild Drive, Mountain View, CA 94043, United States
of America ("VIVUS"), and Spolana Chemical Works, A.S., having a place of 
business at 27711 Neratovice, Czech Republic ("Spolana") including all Exhibits
and addenda thereto (VIVUS and Spolana collectively, the "Parties"), amends 
that certain Manufacturing and Supply Agreement by and between the Parties as
of May 1997, including all Exhibits and addenda thereto (the "Agreement") as of
the Amendment Date.

     The Parties desire to amend the Agreement as set forth herein below:

     NOW, THEREFORE, the Parties agree as follows:

1.   AMENDMENT. This Amendment hereby amends the Agreement to incorporate the 
terms and conditions set forth in this Amendment. The relationship of the 
Parties shall continue to be governed by the terms and conditions of the 
Agreement, as amended herein; and in the event that there is any conflict 
between the terms and conditions of the Agreement and this Amendment, the terms 
and conditions of this Amendment shall control. As used in this Amendment,
 all 
capitalized terms shall have the meanings defined for such terms in this 
Amendment or, if not defined in the Amendment, the meanings defined in the 
Agreement.

2.   MODIFICATION TO THE AGREEMENT.

     2.1  VIVUS agrees to pay to Spolana the remaining balance of invoices
outstanding as of the Amendment Date, which total [*], within fifteen (15)
business days after the Amendment Date.

     2.2  Sections 2.2, 2.3.1 and 2.3.3 of the Agreement are hereby deleted in 
their entirety.

     2.3  The Parties agree that VIVUS shall not be required to purchase from 
Spolana any amount of the Product in the remainder of calendar year 1998 or in 
calendar year 1999 and VIVUS shall have only the following commitment to 
purchase the Product from Spolana:

          a)  VIVUS shall purchase from Spolana [*]



*Certain information on this page has been omitted and filed separately with 
 the Commission. Confidential treatment has been requested with respect to 
 omitted portions.

<PAGE>   2
                  (b) VIVUS agrees to place any new orders of the Product with 
its existing suppliers on a pro rata basis (based on historical quantities 
purchased from such suppliers) until the Existing Inventory is fully delivered.

         2.4 The Parties agree that, other than as provided in Section 2.3 of 
this Amendment, during the period from the Amendment Date until the termination 
of the Agreement, VIVUS shall not be required to purchase from Spolana any 
minimum amount of the Product.

         2.5 The Agreement is hereby amended to add the following new Section 
3.7:

         "3.7 Change Notification. Spolana shall notify VIVUS through written
correspondence to Vice President, Regulatory Affairs, Mountain View, California,
copied to Director, Corporate QA, Lakewood, New Jersey, of any proposed changes
in the chemistry, manufacturing or controls for pharmaceutical grade Alprostadil
(Prostaglandin E(1))(for purposes of this Section 3.7, a "Proposed Change").
VIVUS shall provide written acknowledgement of the receipt of such
correspondence within ten (10) business days. The Parties understand that such
acknowledgement of receipt does not necessarily represent VIVUS' agreement with
or acceptance of the proposed change. Within thirty (30) working days following
such acknowledgement of receipt, VIVUS will inform Spolana that (i) VIVUS
accepts such Proposed Change, (ii) VIVUS does not accept such Proposed Change,
or (iii) VIVUS requires further clarification, information or action by Spolana
before it can assess such Proposed Change (for purposes of this Section 3.7,
such communication a "Change Assessment"). The Parties understand and agree that
in the event that Spolana does not receive from VIVUS a Change Assessment with
respect to a particular Proposed Change, Spolana may assume VIVUS accepts such
Proposed Change."

         2.5 Section 6.1 of the Agreement is hereby amended to read in its 
entirety as follows:
                
                  "6.1 Term. The term of this Agreement shall commence on the 
Effective Date and shall continue in full force until the second anniversary of 
the Amendment Date, unless this Agreement is terminated earlier in accordance 
with this Article 6."

         2.6 Section 6.2 of the Agreement is hereby amended to read in its 
entirety as follows: 

                  "6.2 Termination for Convenience. Spolana may terminate this 
Agreement upon thirty (30) days prior written notice to VIVUS; provided, 
however, that VIVUS shall not be required to purchase any amount of the Product 
from Spolana that VIVUS has not ordered prior to such termination."


                                      -2-

 

<PAGE>   3


3.  ENTIRE AGREEMENT. The Agreement and any Exhibits and addenda thereto
together with this Amendment constitute the entire agreement between the Parties
with respect to the subject matter thereof and supersede all prior and
contemporaneous communications, representations, agreements or understandings,
either written or oral, between the Parties.


IN WITNESS WHEREOF, the Parties have executed this Amendment.


VIVUS, INC.                               SPOLANA CHEMICAL WORKS, A.S.

By: /s/ LELAND F. WILSON                  By: /s/ JIRI ZERZANI
   ------------------------------             ------------------------------  
                                                                              
Name: Leland F. Wilson                    Name:  Jiri Zerzani
     ----------------------------               ----------------------------  
                                                                              
Title: President and CEO                  Title: Commercial Director          
      ---------------------------               ----------------------------




                                      -3-



<PAGE>   1
                                                                   EXHIBIT 10.36



                           CHANGE OF CONTROL AGREEMENT

        This Change of Control Agreement (the "Agreement") is made and entered
into effective as of _______________, by and between _______________ (the
"Employee") and Vivus, Inc., a Delaware corporation (the "Company").

                                    RECITALS

        A. It is expected that another company or other entity may from time to
time consider the possibility of acquiring the Company or that a change in
control may otherwise occur, with or without the approval of the Company's Board
of Directors (the "Board"). The Board recognizes that such consideration can be
a distraction to the Employee and may cause the Employee to consider alternative
employment opportunities. The Board has determined that it is in the best
interests of the Company and its shareholders to assure that the Company will
have the continued dedication and objectivity of the Employee, notwithstanding
the possibility, threat or occurrence of a Change of Control (as defined below)
of the Company.

        B. The Board believes that it is in the best interests of the Company
and its shareholders to provide the Employee with an incentive to continue his
or her employment with the Company.

        C. The Board believes that it is imperative to provide the Employee with
certain benefits upon a
 Hostile Takeover and, under certain circumstances, upon
termination of the Employee's employment in connection with a Change of Control,
which benefits are intended to provide the Employee with financial security and
provide sufficient income and encouragement to the Employee to remain with the
Company notwithstanding the possibility of a Change of Control.

        D. To accomplish the foregoing objectives, the Board of Directors has
directed the Company, upon execution of this Agreement by the Employee, to agree
to the terms provided in this Agreement.

        E. Certain capitalized terms used in the Agreement are defined in
Section 4 below.

        In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:

        1. At-Will Employment. The Company and the Employee acknowledge that the
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control, the
Employee shall not be entitled to any payments or benefits, other than as
provided by this Agreement. The terms of this Agreement shall terminate upon the
earlier of (i) the date on which Employee ceases to be employed by the Company,
(ii) the date that all obligations of the parties hereunder have been satisfied,
or (iii) twenty-four (24) months after a Change of Control. A termination of the
terms of this Agreement pursuant to the preceding sentence


<PAGE>   2

shall be effective for all purposes, except that such termination shall not
affect the payment or provision of compensation or benefits on account of a
termination of employment occurring prior to the termination of the terms of
this Agreement.

        2.     Change of Control.

               (a) Termination Following A Change of Control. Subject to Section
4 below, if the Employee's employment with the Company is terminated at any time
within twenty-four (24) months after a Change of Control, then the Employee
shall be entitled to receive severance benefits as follows:

                     (i) Voluntary Resignation; Termination For Cause. If the
Employee voluntarily resigns from the Company (other than as an Involuntary
Termination (as defined below)) or if the Company terminates the Employee's
employment for Cause (as defined below), then the Employee shall not be entitled
to receive severance payments. The Employee's benefits will be terminated under
the Company's then existing benefit plans and policies in accordance with such
plans and policies in effect on the date of termination or as otherwise
determined by the Board of Directors of the Company.

                    (ii) Involuntary Termination. If the Employee's employment
is terminated as a result of an Involuntary Termination other than for Cause,
the Employee shall be entitled to receive the following benefits: (i) monthly
severance payments during the period from the date of the Employee's termination
until the date twenty-four (24) months after the effective date of the
termination (the "Severance Period") equal to the monthly salary which the
Employee was receiving immediately prior to the Change of Control; (ii) monthly
severance payments during the Severance Period equal to 1/12th of the Employee's
"target bonus" (as defined herein) for the fiscal year in which the termination
occurs for each month in which severance payments are made to the Employee
pursuant to subsection (i) above (iii) the pro-rated amount of the Employee's
"target bonus" for the fiscal year in which the termination occurs, calculated
based on the number of months during such fiscal year in which the Employee was
employed by the Company (or a successor corporation) with such payment being
made on the termination date (iv) continuation of benefits through the end of
the Severance Period substantially identical to those to which the Employee was
entitled immediately prior to the Change of Control; and (v) outplacement
services with a total value not to exceed Twenty Thousand Dollars ($20,000). The
severance payments described in subsections (i) and (ii) above shall be paid
during the Severance Period in accordance with the Company's standard payroll
practices.

               (b) Termination Apart from A Change of Control. In the event the
Employee's employment terminates for any reason, either prior to the occurrence
of a Change of Control or after the twenty-four (24) month period following the
effective date of a Change of Control, then the Employee shall not be entitled
to receive any severance payments under this Agreement. The Employee's benefits
will be terminated under the terms of the Offer Letter and the Company's then



                                      -2-

<PAGE>   3

existing benefit plans and policies in
accordance with such plans and policies in effect on the date of termination or
as otherwise determined by the Board of Directors of the Company.

        3. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:

               (a) Change of Control. "Change of Control" shall mean the
occurrence of any of the following events:

                     (i) Ownership. Any "Person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is
or becomes the "Beneficial Owner" (as defined in Rule l3d-3 under said Act),
directly or indirectly, of securities of the Company representing fifteen
percent (15%) or more of the total voting power represented by the Company's
then outstanding voting securities without the approval of the Board of
Directors of the Company; or

                    (ii) Merger/Sale of Assets. A merger or consolidation of the
Company whether or not approved by the Board of Directors of the Company, other
than a merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the shareholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
of the Company's assets.

                   (iii) Change in Board Composition. A change in the
composition of the Board of Directors of the Company, as a result of which fewer
than a majority of the directors are Incumbent Directors. "Incumbent Directors"
shall mean directors who either (A) are directors of the Company as of July 1,
1998 or (B) are elected, or nominated for election, to the Board of Directors of
the Company with the affirmative votes of at least a majority of the Incumbent
Directors at the time of such election or nomination (but shall not include an
individual whose election or nomination is in connection with an actual or
threatened Proxy contest relating to the election of directors to the Company).

               (b) Cause. "Cause" shall mean (i) gross negligence or willful
misconduct in the performance of the Employee's duties to the Company where such
gross negligence or willful misconduct has resulted or is likely to result in
substantial and material damage to the Company or its subsidiaries, (ii)
repeated unexcused absences from the Company, (iii) commission of any act of
fraud with respect to the Company, or (v) conviction of a felony or a crime
involving moral turpitude and causing material harm to the standing and
reputation of the Company, in each case as determined in good faith by the Board
of Directors of the Company.



                                      -3-

<PAGE>   4

               (c) Involuntary Termination. "Involuntary Termination" shall
include any termination by the Company other than for Cause and/or the
Employee's voluntary termination, upon 30 days prior written notice to the
Company, after any one of the following events: (i) a material reduction or
change in job duties, responsibilities and requirements inconsistent with the
Employee's position with the Company and the Employee's prior duties,
responsibilities and requirements; (ii) any reduction of the Employee's base
compensation (other than in connection with a general decrease in base salaries
to become in sync with employees of the acquirer); or (iii) the Employee's
refusal to relocate to a facility or location more than 30 miles from the
Company's current location.

               "Target bonus" shall mean that percentage of the Employee's base
salary that is prescribed by the Company under its Management Bonus Program as
the percentage of such base salary payable to the Company as a bonus if the
Company pays bonuses at one-hundred percent (100%) of its operating plan.

        4. Limitation on Payments. In the event that the severance and other
benefits provided for in this Agreement to the Employee constitute "parachute
payments" within the meaning of Section 28OG of the Internal Revenue Code of
1986, as amended (the "Code") and, but for this Section 4, would be subject to
the excise tax imposed by Section 4999 of the Code, the Company shall reduce the
aggregate amount of such payments and benefits such that the present value
thereof (as determined under the Code and the applicable regulations) is equal
to 2.99 times the Employee's "base amount" as defined in Section 28OG(b)(3) of
the Code.

        5. Certain Business Combinations. In the event it is determined by the
Board, upon receipt of a written opinion of the Company's independent auditors,
that the enforcement of any Section of this Agreement, would preclude accounting
for any proposed business combination of the Company involving a Change of
Control as a pooling of interests, and the Board otherwise desires to approve
such a proposed business transaction which requires as a condition to the
closing of such transaction that it be accounted for as a pooling of interests,
then any such Section of this Agreement shall be null and void. For purposes of
this Section, the Board's determination shall require the unanimous approval of
the non-employee Board members.

        6. Successors. Any successor to the Company (whether direct or indirect
and whether by purchase, lease, merger, consolidation, liquidation or otherwise)
to all or substantially all of the Company's business and/or assets shall assume
the obligations under this Agreement and agree expressly to perform the
obligations under this Agreement in the same manner and to the same extent as
the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of the Employee's rights
hereunder shall inure to the benefit of, and be enforceable by, the Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.

        7. Notice. Notices and all other communications contemplated by this 
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. Mailed



                                      -4-

<PAGE>   5

notices to the Employee shall be addressed to the Employee at the home address
which the Employee most recently communicated to the Company in writing. In the
case of the Company, mailed notices shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its
Secretary.

        8.     Miscellaneous Provisions.

               (a) No Duty to Mitigate. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor, except as otherwise
provided in this Agreement, shall any such payment be reduced by any earnings
that the Employee may receive from any other source.

               (b) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the other
party shall be considered a waiver of any other condition or provision or of the
same condition or provision at another time.

               (c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
supersedes any agreement of the same title and concerning similar subject matter
dated prior to the date of this Agreement, and by execution of this Agreement
both parties agree that any such predecessor agreement shall be deemed null and
void.

               (d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California without reference to conflict of laws provisions.

               (e) Severability. If any term or provision of this Agreement or
the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and
provisions to circumstances other than those as to which it is held invalid or
unenforceable, and a suitable and equitable term or provision shall be
substituted therefor to carry out, insofar as may be valid and enforceable, the
intent and purpose of the invalid or unenforceable term or provision.



                                      -5-

<PAGE>   6

               (f) Arbitration. Any dispute or controversy arising under or in
connection with this Agreement may be settled at the option of either party by
binding arbitration in the County of Santa Clara, California, in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator's award in any court having jurisdiction.

               (g) Legal Fees and Expenses. The parties shall each bear their
own expenses, legal fees and other fees incurred in connection with this
Agreement.

               (h) No Assignment of Benefits. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (h) shall be
void.

               (i) Employment Taxes. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.

               (j) Assignment by Company. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of assignment. In
the case of any such assignment, the term "Company" when used in a section of
this Agreement shall mean the corporation that actually employs the Employee.

               (k) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.


        IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duty authorized officer, as of the day and year
first above written.

VIVUS, INC.                             (Name of Employee)


___________________________________     ________________________________________
Leland F. Wilson
President & Chief Executive Officer


Date:______________________________     Date:___________________________________



                                      -6-



<PAGE>   1

                                                                   EXHIBIT 10.37

                                    SUBLEASE

THIS SUBLEASE ("Sublease"), dated November 17, 1998 for reference purposes
only, is entered into by and between Caliper Technologies Corp., a Delaware
corporation ("Sublandlord") and VIVUS, INC., a Delaware corporation,
("Subtenant").

                                    RECITALS

      A.    Sublandlord leases certain premises (the "Master Lease Premises")
located in that certain building ("Building") at 605 East Fairchild Drive,
Mountain View, California, from 605 East Fairchild Associates, L.P., a
California limited partnership ("Master Landlord"), pursuant to that certain
Lease Agreement dated October 15, 1998 (the "Master Lease"). Capitalized terms
used but not defined herein have the same meanings as they have in the Master
Lease.

      B.    Sublandlord desires to sublease a portion of the Master Lease
Premises to Subtenant, and Subtenant desires to sublease a portion of the Master
Lease Premises from Sublandlord on the terms and provisions hereof.

      NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, Sublandlord and Subtenant covenant and agree as follows:

                                    AGREEMENT

      1.    SUBLEASED PREMISES. On and subject to the terms and conditions
below, Sublandlord hereby leases to Subtenant, and Subtenant hereby leases
 from
Sublandlord, the premises described in Exhibit A (the "Subleased Premises"). The
Subleased Premises contain approximately 6000 square feet.

      2.    TERM. Subject to obtaining the consent of Master Landlord as
described below, this Sublease shall commence on December 1, 1998, (the
"Commencement Date") and shall expire, at 11:59 p.m. on November 30, 1999,
unless extended or sooner terminated pursuant to any provision hereof. Provided
Subtenant is not in default hereunder, following expiration of the initial term
of this Sublease, the term hereof shall be deemed extended on a month to month
basis, unless either party shall give sixty days prior written notice of its
election to terminate this Sublease.

      3.    POSSESSION. If for any reason Sublandlord cannot deliver possession
of the Subleased Premises to Subtenant on the Commencement Date, Sublandlord
shall not be subject to any liability therefor, nor shall such failure affect
the validity of this Sublease or the obligations of Subtenant hereunder or
extend the term hereof

      4.    RENT.

            (a)   Commencing on the Commencement Date and continuing throughout
the term of this Sublease, Subtenant shall pay monthly rent ("Rent") to
Sublandlord in the amount of Eighteen Thousand Dollars ($18,000).



<PAGE>   2
Rent shall be payable to Sublandlord in lawful money of the United States, in
advance, without prior notice, demand, or offset, on or before the first day of
each calendar month during the term hereof. All Rent shall be paid to
Sublandlord at the address specified for notice to Sublandlord below. If the
Commencement Date does not fall on the first day of a calendar month, Rent for
the first month shall be prorated on a daily basis based upon a thirty day
calendar month. It is the intention of the parties hereto that the foregoing
Rent shall constitute gross rent for fully serviced Subleased Premises and
Subtenant shall not be liable for any additional rent, operating charges,
maintenance, taxes, utilities, or expenses, except for telephone and
telecommunication services and except as hereinafter provided.

            (b)   Upon execution of this Sublease, Subtenant shall pay to
Sublandlord the sum of Thirty Six Thousand Dollars ($36,000), constituting
payment in advance of the first month's Rent, together with the Security
Deposit, as set forth in Section 5 below.

      5.    SECURITY DEPOSIT. Upon execution of this Sublease, Subtenant shall
deposit with Sublandlord the sum of Eighteen Thousand Dollars ($18,000) as a
security deposit ("Security Deposit"). If Subtenant fails to pay Rent or other
charges when due under this Sublease, or fails to perform any of its other
obligations hereunder, Sublandlord may use or apply all or any portion of the
Security Deposit for the payment of any Rent or other amount then due hereunder
and unpaid, for the payment of any other sum for which Sublandlord may become
obligated by reason of Subtenant's default or breach, or for any loss or damage
sustained by Sublandlord as a result of Subtenant's default or breach. If
Sublandlord so uses any portion of the Security Deposit, Subtenant shall restore
the Security Deposit to the full amount originally deposited within ten days
after Sublandlord's written demand. Sublandlord shall not be required to keep
the Security Deposit separate from its general accounts, and shall have no
obligation or liability for payment of interest on the Security Deposit. The
Security Deposit, or so much thereof as had not theretofore been applied by
Sublandlord, shall be returned to Subtenant within ten days of the expiration or
earlier termination of this Sublease, provided Subtenant has surrendered
possession of the Subleased Premises in accordance with the terms of this
Sublease.

      6.    ASSIGNMENT AND SUBLETTING. Subtenant may not assign, sublet,
transfer, pledge, hypothecate or otherwise encumber the Subleased Premises, in
whole or in part, or permit the use or occupancy of the Subleased Premises by
anyone other than Subtenant unless Subtenant has obtained Sublandlord's consent
thereto (which shall not be unreasonably withheld) and the consent of Master
Landlord. Regardless of Sublandlord's consent, no subletting or assignment shall
release Subtenant from its obligations hereunder.

      7.    ACCEPTANCE OF SUBLEASED PREMISES IN "AS-IS" CONDITION. Sublandlord
does not warrant the condition of the Subleased Premises. Subtenant
acknowledges, represents and warrants that it has been in possession of the
Subleased Premises, and of the entire Master Lease Premises, prior to the
commencement of this Sublease, pursuant to the terms of a separate lease between
Master Landlord and Subtenant, and hereby accepts the Subleased Premises in its
"as-is" condition.


                                       2

<PAGE>   3
      8.    TENANT IMPROVEMENTS; ALTERATIONS.

            a.    NO INITIAL IMPROVEMENTS; AS-IS. Sublandlord has no obligation
to construct any initial tenant improvements and Subtenant acknowledges that it
accepts the Subleased Premises in its "as-is" condition.

            b.    ADDITIONAL ALTERATIONS. Subtenant shall not make or suffer to
be made any additional alterations, additions or improvements to the Subleased
Premises without the prior written consent of both Sublandlord and Master
Landlord, which may be withheld in the sole discretion of either.

      9.    USE. Subtenant may use the Subleased Premises only for general
office purposes and no other purpose. Subtenant shall promptly comply with all
applicable statutes, ordinances, rules, regulations, orders, restrictions of
record, and requirements in effect during the term of this Sublease governing,
affecting and regulating Subtenant's use of the Subleased Premises. Subtenant
shall not use or permit the use of the Subleased Premises in a manner that will
create waste or a nuisance, interfere with or disturb other tenants in the
Building or violate the provisions of the Master Lease.

      10.   PARKING. Subtenant shall have the right to use 35 parking spaces.

      11.   INCORPORATION OF SUBLEASE.

            (a)   All of the terms and provisions of the Master Lease, except as
provided in subsection (b) below, are incorporated into and made a part of this
Sublease and the rights and obligations of the parties under the Master Lease
are hereby imposed upon the parties hereto with respect to the Subleased
Premises, Sublandlord being substituted for the "Landlord" (referred to herein
as the Master Landlord) in the Master Lease, Subtenant being substituted for the
"Tenant" in the Master Lease and the "term of this Sublease" being substituted
for any reference to the initial or any extended term of the Master Lease. It is
further understood that where reference is made in the Master Lease to the
"Premises," the same shall mean the Subleased Premises as defined herein; where
reference is made to the "Commencement Date," the same shall mean the
Commencement Date as defined herein; and where reference is made to "this
Lease," the same shall mean this Sublease.

            (b)   The following Sections of the Master Lease are not
incorporated herein: Sections 1, 2, 3, 4, 5, 8, 9a, 9d, 11, 12c, 12e, 14a, 14b,
22, 23, 26, 34, 36, 38, 39, 40c, 41, 42, 43, 44, 45, and all exhibits thereto.

            (c)   Subtenant hereby assumes and agrees to perform for
Sublandlord's benefit, during the term of this Sublease, all of Sublandlord's
obligations with respect to the Subleased Premises under the Master Lease,
except as otherwise provided herein. Subtenant shall not commit or permit to be
committed any act or omission which violates any term or condition of the Master
Lease. Except as otherwise provided herein, this Sublease shall be subject and
subordinate to all of the terms of the Master Lease.

To the extent that the provision of any services or the performance of any
maintenance or any other act respecting the Subleased Premises or Building is
the responsibility of Master Landlord 


                                       3

<PAGE>   4
(collectively "Master Landlord Obligations"), upon Subtenant's request,
Sublandlord shall use reasonable efforts to cause Master Landlord to perform
such Master Landlord Obligations. It is expressly understood that the services
and repairs which are incorporated herein by reference, will in fact be
furnished by Master Landlord, and not by Sublandlord, except to the extent
otherwise provided in the Master Lease. In addition, Sublandlord shall not be
liable for any maintenance, restoration (following casualty or destruction) or
repairs in or to the Building or Subleased Premises, other than its obligation
hereunder to use reasonable efforts to cause Master Landlord to perform its
obligations under the Master Lease. In addition, Subtenant shall have the right
to contact Master Landlord directly to cause it to so perform.

      12.   INSURANCE. Subtenant shall be responsible for insuring its personal
property, tenant improvements and equipment in the amount of their full
replacement value and shall maintain comprehensive general liability insurance
in the amount of One Million Dollars ($1,000,000) per occurrence respecting the
use and occupancy of the Subleased Premises. Such insurance shall insure the
performance by Subtenant of its indemnification obligations hereunder and shall
name Master Landlord and Sublandlord as additional insureds. All insurance
required under this Sublease shall contain an endorsement requiring thirty (30)
days written notice from the insurance company to Subtenant and Sublandlord
before cancellation or change in the coverage, insureds or amount of any policy.
Subtenant shall provide Sublandlord with certificates of insurance evidencing
such coverage prior to the commencement of this Sublease.

      13.   DAMAGE, DESTRUCTION, CONDEMNATION. If the Master Lease terminates as
a result of a casualty or condemnation, this Sublease shall terminate as well.
In the event that the Subleased Premises are damaged, destroyed, or subject to a
taking by condemnation and the rent for the space within the Subleased Premises
is abated under the Master Lease, the rent under this Sublease shall be
proportionately abated.

      14.   NOTICES. The addresses specified in the Master Lease for receipt of
notices to each of the parties are deleted and replaced with the following:

            TO SUBLANDLORD AT:    Caliper Technologies Corp.
                                  605 E. Fairchild Drive
                                  Mountain View, CA  94043

                                         Attn: VP of Operations

            WITH COPY TO:         Cooley Godward LLP
                                  One Maritime plaza, 20th Floor
                                  San Francisco, Ca 94111-3580

                                         Attn:  Anna B. Pope, Esq.

            TO SUBTENANT AT:             the Subleased Premises.


                                       4

<PAGE>   5
      15.   EARLY TERMINATION OF SUBLEASE. If, without the fault of Sublandlord,
the Sublease should terminate prior to the expiration of this Sublease,
Sublandlord shall have no liability to Subtenant on account of such termination.
To the extent that the Master Lease grants Sublandlord any discretionary right
to terminate the Master Lease, whether due to casualty, condemnation, or
otherwise, Sublandlord shall be entitled to exercise or not exercise such right
without Subtenant's approval. Within forty eight hours of Sublandlord's receipt
of any notice of default under the Master Lease, Sublandlord shall give a copy
of such notice to Subtenant.

      16.   CONSENT OF SUBLANDLORD AND MASTER LANDLORD. If Subtenant desires to
take any action which requires the consent or approval of Sublandlord pursuant
to the terms of this Sublease, prior to taking such action, including, without
limitation, making any alterations, then, notwithstanding anything to the
contrary herein, (a) Sublandlord shall have the same rights of approval or
disapproval as Master Landlord has under the Master Lease, and (b) Subtenant
shall not take any such action until it obtains the consent of Sublandlord and
Master Landlord, as may be required under this Sublease or the Master Lease.
This Sublease shall not be effective unless and until any required written
consent of the Master Landlord shall have been obtained.

      17.   BROKERS. Each party hereto represents and warrants that it has dealt
with no broker, in connection with this Sublease and the transactions
contemplated herein. Each party shall indemnify, protect, defend and hold the
other party harmless from all costs and expenses (including reasonable
attorneys' fees) arising from or relating to a breach of the foregoing
representation and warranty. Sublandlord shall pay all brokerage commissions to
such brokers.

      18.   SURRENDER OF SUBLEASED PREMISES. Upon the expiration or earlier
termination of this Sublease, Subtenant shall surrender the Subleased Premises
in the same condition as they were in on the Commencement Date, except for
ordinary wear and tear and damage due to casualty not caused by Subtenant or
condemnation.

      19.   NO THIRD PARTY RIGHTS. The benefit of the provisions of this
Sublease is expressly limited to Sublandlord and Subtenant and their respective
permitted successors and assigns. Under no circumstances will any third party be
construed to have any rights as a third party beneficiary with respect to any of
said provisions.

      20.   COUNTERPARTS. This Sublease may be signed in two or more
counterparts, each of which shall be deemed an original and all of which shall
constitute one agreement.

        IN WITNESS WHEREOF, the parties have executed this Sublease as of the
date first written above.


SUBLANDLORD




By: /s/ 
   -----------------------------------------------------------------------------

Its:
    ----------------------------------------------------------------------------


                                       5

<PAGE>   6
SUBTENANT

VIVUS, INC.


By: /s/ Richard Walliser
   -----------------------------------------------------------------------------

Its: CFO
    ----------------------------------------------------------------------------


CALIPER TECHNOLOGIES CORP.


By: /s/ 
   -----------------------------------------------------------------------------

Its: Orlando Romera, Director of Facilities
    ----------------------------------------------------------------------------


                                       6



<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 PUBLIC ACCOUNTANTS


As independent public accountants, we hereby consent to the incorporation of our
report dated January 22, 1999 included in this Form 10-K, into the Company's
previously filed Registration Statements (File No. 333-06486 and 333-299939) on 
Form S-8.


                                       ARTHUR ANDERSEN LLP
                                       


San Jose, California
March 30, 1999






<TABLE> <S> <C>

<ARTICLE> 5
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-START>                             JAN-01-1998
<PERIOD-END>                               DEC-31-1998
<CASH>                                           2,989
<SECURITIES>                                    20,903
<RECEIVABLES>                                    5,538
<ALLOWANCES>                                       341
<INVENTORY>                                      5,272
<CURRENT-ASSETS>                                34,895
<PP&E>                                          36,465
<DEPRECIATION>                                (19,213)
<TOTAL-ASSETS>                                  54,108
<CURRENT-LIABILITIES>                           24,571
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                            32
<OTHER-SE>                                      21,645
<TOTAL-LIABILITY-AND-EQUITY>                    54,108
<SALES>                                         71,699
<TOTAL-REVENUES>                                74,699
<CGS>                                           55,616
<TOTAL-COSTS>                                   55,616
<OTHER-EXPENSES>                               101,308
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                               (80,253)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                           (80,253)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                  (80,253)
<EPS-PRIMARY>                                   (2.52)<F1>
<EPS-DILUTED>                                   (2.52)
<FN>
<F1>For Purposes of this Exhibit, Primary Means Basic
</FN>
        

</TABLE>