10-K

   1
 
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
                                 ANNUAL REPORT
                        PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
                                            
          FOR THE FISCAL YEAR ENDED                        COMMISSION FILE NUMBER
              DECEMBER 31, 1997                                   0-23490


 
                            ------------------------
 
                                  VIVUS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                                            
                   DELAWARE                                      94-3136179
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NUMBER)


 
           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 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 27, 1998, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $350,150,127 (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 27, 1998, the number of outstanding shares of the
Registrant's Common Stock was 31,721,292.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Certain information required by Items 6, 7 and 8 of Form 10-K is
incorporated by reference from the Registrant's annual report to security
holders furnished pursuant to Rule 14a-3 (the "Annual Report"). Certain
information required by Items 10, 11, 12 and 13 of Form 10-K is incorporated by
reference from the Registrant's proxy statement for the 1998 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, 1997.
 
================================================================================
   2
 
     This Form 10-K contains forward looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward looking statements. Factors that might cause
such differences include, but are not limited to, the risk factors described
beginning on page 15, in addition to the other information contained in this
Form 10-K.
 
                                     PART I
 
ITEM 1. BUSINESS
 
OVERVIEW
 
     VIVUS, Inc. ("VIVUS" or the "Company") is a leader in the development of
advanced therapeutic systems for the treatment of erectile dysfunction. Erectile
dysfunction, commonly referred to as impotence, is the inability to achieve and
maintain an erection of sufficient rigidity for sexual intercourse. The
Company's transurethral system for erection is a minimally invasive, easy to use
system that delivers pharmacologic agents topically to the urethral lining. In
November 1996, the Company obtained marketing clearance by the U.S. Food and
Drug Administration (the "FDA") to manufacture and market its first product,
MUSE(R) (alprostadil). The Company commenced product shipments to wholesalers in
December 1996 and commercially introduced MUSE (alprostadil) in the United
States through its direct sales force beginning in January 1997. Furthermore,
the Company received FDA clearance in December 1996 for ACTIS(R), an adjustable
elastomeric venous flow control device designed for those patients who suffer
from veno-occlusive dysfunction (commonly referred to as venous leak syndrome).
The Company commenced commercial sales of ACTIS in the United States through its
direct sales force in July 1997. ACTIS is currently being studied for adjunctive
use with MUSE (alprostadil); however, there can be no assurance that such
studies will be completed and if completed that such studies will demonstrate
that adjunctive use of ACTIS with MUSE (alprostadil) is a safe and effective
treatment for erectile dysfunction.
 
     The Company has entered into international marketing agreements with Astra
AB ("Astra") and Janssen Pharmaceutica International ("Janssen") under which
Astra and Janssen will purchase MUSE (alprostadil) for resale in various
international markets. In November 1997, the Company obtained regulatory
marketing clearance by the Medicines Control Agency ("MCA") to market MUSE
(alprostadil) in the United Kingdom. The Company began selling MUSE
(alprostadil) to Astra in the fourth quarter of 1997. Astra began selling MUSE
(alprostadil) in the United Kingdom in February 1998. In addition, applications
for regulatory approval to market MUSE (alprostadil) have been submitted in
several other countries, including China, Australia, Canada and Mexico. These
applications will be subject to rigorous approval processes, and there can be no
assurance such approval will be granted in a timely manner, if at all.
 
     The Company has limited experience in manufacturing and selling MUSE
(alprostadil) in commercial quantities. Since the commercial launch of MUSE
(alprostadil) in January 1997, the Company has experienced product shortages due
to higher than expected demand and difficulties encountered in scaling up
production of MUSE (alprostadil). The Company leased 90,000 square feet of space
in New Jersey in which it has constructed additional manufacturing and testing
facilities. The Company has filed for regulatory authorization of this facility
with both the FDA and MCA. In March 1998, the MCA authorized the Company to
begin commercial production and shipment of MUSE (alprostadil) from its new
facility. In addition, the Company has negotiated a long-term lease for a site
in Ireland for construction of a European manufacturing operation. Until the
Company receives the required approvals for its new New Jersey facility,
domestic and certain international markets will need to be supplied from its
current facility at Paco Pharmaceutical Services, Inc. ("Paco"). There can be no
assurance that such approvals will be granted in a timely manner, if at all. If
international sales increase as anticipated, product available for the domestic
market will be reduced and gross margins will be adversely impacted. If the
Company encounters further difficulties with its current manufacturing facility
or delays in regulatory approvals of its new manufacturing facility, capacity
constraints could continue for an extended period of time, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
                                        1
   3
 
     The Company anticipates an operating loss in the first quarter of 1998
primarily due to the impact of the continued capacity constraints, allocation of
product to international markets which results in a lower gross margin, higher
costs of goods sold as the Company ramps up its new manufacturing facility, and
higher marketing and sales costs related to the Company's direct to consumer
marketing campaign.
 
     In connection with post-approval inspections of the Company's New Jersey
manufacturing facility at Paco, the FDA issued to the Company FDA Form 483s and
a Warning Letter, which detailed specific areas where the FDA observed that the
Company's operations were not in full compliance with some areas of the current
Good Manufacturing Practices (cGMP) requirements. On November 19, 1997, after
taking corrective action and providing the FDA with a written response to the
FDA observations, the Company received a letter from the FDA affirming that the
Company's facility at Paco is in substantial compliance with cGMP requirements.
Failure to maintain satisfactory cGMP compliance would have a material adverse
effect on the Company's ability to continue to market and distribute its
products and, in the most serious cases, could result in the issuance of
additional Warning Letters, seizure or recall of products, civil fines or
closure of the Company's manufacturing facility until cGMP compliance is
achieved.
 
     Because of the production capacity constraints, the Company did not
initiate significant MUSE advertising programs throughout 1997 and experienced
declining demand for MUSE (alprostadil) in late 1997. In anticipation of
receiving regulatory approvals of its new manufacturing facility and because of
available inventories at the wholesale level, the Company launched its first
domestic direct-to-consumer advertising campaign in January 1998. This campaign
includes major television, newspaper and magazine placements. In February 1998,
the FDA notified the Company that it objected to, among other things, the
prominence and balance of side effect information relative to efficacy
information in certain written materials and the Company's television
advertisements. The Company is no longer utilizing the prior written materials
and has modified its written materials in response to the FDA's comments. If the
FDA does not believe the modified written materials respond to its concerns then
further modifications will be required resulting in additional cost and delay
prior to the Company resuming its written advertising. The Company has ceased
running its television advertisements and requested a meeting with the FDA to
discuss necessary changes to the Company's television advertisements. If the
Company and the FDA cannot reach a prompt resolution regarding the necessary
changes to the Company's television advertisements, this could result in
additional cost and delay, and may prevent broadcast advertising on major
networks. Cost and delay associated with the FDA's objections to the Company's
direct-to-consumer advertising materials could have a negative effect upon the
Company's domestic sales and marketing efforts. There can be no assurance that
the Company's domestic sales and marketing efforts will be successful at
increasing the demand for MUSE (alprostadil). In addition, there can be no
assurance that the Company's capacity constraints will not prevent the Company
from supplying any increased demand.
 
     The Company has sought and will continue to seek pharmacologic agents
suitable for transurethral delivery for which significant safety data already
exists. The Company believes that such agents may progress more rapidly through
clinical development and the regulatory process than agents without preexisting
safety data. The Company expects to begin a Phase III multi-center trial in 1998
for its second product candidate, a combination of alprostadil and prazosin
delivered via the Company's transurethral system for erection. The Company has
several other product candidates in preclinical development.
 
     Based on a published study of more than 1,200 men in Massachusetts, the
Company estimates that more than 30 percent of males in the United States
between the ages of 40 and 70 suffer from moderate to complete erectile
dysfunction. The Company believes that similar rates of erectile dysfunction
prevail outside the United States. An estimate from the National Institutes of
Health ("NIH") Consensus Statement on Impotence (1992) suggests that the number
of men in the United States with erectile dysfunction may be 10 to 20 million.
The rate of erectile dysfunction increases significantly with age. In addition
to the Company's transurethral system for erection, the primary medical
therapies currently used to treat erectile dysfunction are needle injection of
pharmacologic agents into the penis, vacuum constriction devices, penile
implants and oral medications. Despite the detrimental effect erectile
dysfunction may have on a couple's quality of life, the Company believes that,
due in part to the limitations of available therapies, less than 10 percent of
men
 
                                        2
   4
 
suffering from erectile dysfunction received medical treatment prior to the
introduction of MUSE (alprostadil).
 
BACKGROUND
 
     Erectile dysfunction results from (i) an inadequate supply of blood to the
penis, (ii) a failure to relax the smooth muscle tissue in the penis so it can
become engorged with blood, or (iii) a failure to retain blood in the penis.
Blood is carried to the penis in two large arteries that terminate in a maze of
blood vessels contained in the three erectile bodies of the penis, the corpus
spongiosum, which surrounds the urethra, and two corpora cavernosa. Smooth
muscle tissue surrounds each individual blood vessel in the erectile bodies.
When the penis is flaccid, the smooth muscle tissue is in a contracted state,
which constricts the blood vessels resulting in reduced blood flow. During
stimulation, a signal is sent to nerve endings in the penis that causes the
smooth muscle tissue to relax. This relaxation allows the blood vessels to
expand, and, as arterial blood fills the erectile bodies, the penis becomes
engorged with blood and erect. As the erectile bodies expand, the venous outflow
of blood is restricted so that the erection can be maintained.
 
  CAUSES OF ERECTILE DYSFUNCTION
 
     Historically, psychological factors were considered the primary cause of
erectile dysfunction. It is now widely understood that a substantial majority of
all cases have a physiological cause. The Company believes that its therapeutic
treatments of erectile dysfunction can be effective, whether the cause is
psychological or physiological. The primary physiological causes of erectile
dysfunction fall into the following general categories:
 
          Vascular Diseases. Atherosclerosis, hypertension and other diseases
     can impede or obstruct the flow of blood to the penis.
 
          Neurological Diseases. Multiple sclerosis, Parkinson's disease and
     other diseases can interrupt nerve impulses to the penis.
 
          Diabetes. Diabetes mellitus can alter both nerve function and vascular
     flow, inhibiting the ability to achieve an erection.
 
          Prescription Drugs. Certain antihypertensive and cardiac medications,
     as well as a number of other prescription drugs, can affect nerve function
     in the penis by altering neurotransmitter levels.
 
          Spinal Injury. Injury to the spinal column can interrupt nerve
     impulses from the spinal cord to the penis.
 
          Pelvic Surgery. Radical prostatectomies, cystoprostatectomies and
     colectomies may traumatize or cut nerves or blood vessels to the penis.
 
          Other Causes. Hormonal imbalance, renal failure and dialysis, and drug
     and substance abuse (particularly smoking) can also impair the
     neurovascular system and cause erectile dysfunction.
 
  MARKET SIZE
 
     Based on a published study of more than 1,200 men in Massachusetts, the
Company estimates that over 30 percent of males in the United States between the
ages of 40 to 70 suffer from moderate to complete erectile dysfunction. The
Company believes that similar rates prevail outside the United States. An
estimate from the NIH Consensus Statement on Impotence (1992) suggests that the
number of men in the United States with erectile dysfunction may be 10 to 20
million men. The rate of erectile dysfunction increases significantly with age.
 
                                        3
   5
 
  CURRENT THERAPIES
 
     In addition to the Company's first product, MUSE (alprostadil), the primary
physiological therapies currently utilized for the treatment of erectile
dysfunction are:
 
          Needle Injection Therapy. This form of treatment involves the needle
     injection of pharmacologic agents directly into the penis. These agents are
     generally vasoactive compounds such as alprostadil alone or in combination
     with phentolamine and papaverine. This form of treatment requires a
     prescription from a physician and instruction on self-injection. Side
     effects may include pain associated with injection, local pain and aching,
     priapism (persistent prolonged erections), fibrosis (build-up of scar
     tissue) and bleeding.
 
          Vacuum Constriction Devices. This form of treatment involves the use
     of a mechanical system that creates a vacuum around the penis, causing the
     erectile bodies to fill with blood. A constriction band is then placed
     around the base of the penis to impede blood drainage and maintain the
     erection. Vacuum constriction devices are large, mechanical devices that
     can be unwieldy and somewhat difficult to use. In addition, the erection
     may not seem natural since only the part of the penis beyond the
     constriction band is rigid, and the penis can become cold and discolored
     due to the constriction of blood flow. Complications encountered by some
     users of vacuum constriction devices include pain and difficulty
     ejaculating.
 
          Penile Implants. This therapy involves the surgical implantation of a
     semi-rigid, rigid or inflatable device into the penile structure to
     mechanically simulate an erection. In addition to the risks associated with
     surgical procedures, there is a significant rate of complication with
     implants such as infection and mechanical failure of the device. This may
     necessitate a second surgical procedure to remove or reposition the device.
     In addition, due to the scarring associated with the implant procedure, the
     patient may no longer be a viable candidate for less radical therapies.
 
          Oral Medications. In March 1998, Pfizer Inc. received marketing
     approval from the FDA for its oral treatment for erectile dysfunction,
     Viagra. Commercial introduction of this new competitive product could have
     a material adverse effect on the Company's business, financial condition
     and results of operations. Before the approval of Viagra, yohimbine had
     been the primary oral medication currently prescribed in the United States
     for the treatment of erectile dysfunction. While easily administered,
     yohimbine must be taken multiple times daily and may cause irritability,
     sweating, nausea and possibly hypertension. See "Business -- Competition".
 
THE VIVUS SOLUTION
 
     VIVUS is addressing the significant market opportunity for erectile
dysfunction therapy with its transurethral system for erection. The Company's
transurethral system for erection represents a unique approach to treating
erectile dysfunction and is based on the discovery that the urethra, although an
excretory duct, can absorb certain pharmacologic agents into the surrounding
erectile tissues. This results in enhanced blood flow to the penis. The Company
believes that MUSE (alprostadil), introduced in the United States in 1997, is a
leading treatment and has contributed to the increase in the number of men who
seek and receive treatment for erectile dysfunction. The Company's transurethral
system for erection is designed to overcome the limitations of other available
therapies through its unique product attributes which include:
 
          Ease of Administration. The Company's transurethral system for
     erection is easy to use with minimal instruction, unlike needle injection
     therapy that requires precise injection into a corpus cavernosum.
 
          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, easily carried, single-use disposable applicator that can be
     discreetly applied and is easily integrated into the normal sexual life of
     the patient. Administration takes less than a minute.
 
                                        4
   6
 
          Quality of Erection. The Company's transurethral system for erection
     therapy mimics the normal vasoactive process, producing an erection that is
     more natural than those resulting from needle injection therapy, vacuum
     constriction devices or penile implants.
 
THE TRANSURETHRAL SYSTEM FOR ERECTION
 
     Administration. Administration of the transurethral system for erection is
an easy and painless procedure. The end of the applicator is less than half the
diameter of a man's urine stream and is inserted approximately three centimeters
into the urethra. To use the transurethral system for erection, a patient
urinates, shakes the penis to remove excess urine, inserts the transurethral
system for erection into the urethra, releases the medication and then 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.
 
     Initial Pharmacologic Agent. Alprostadil is the first pharmacologic agent
used in the transurethral system for erection. Alprostadil is the generic name
for the synthetic version of prostaglandin E1, a naturally occurring vasodilator
present throughout the body and at high levels in seminal fluid.
 
     Other Pharmacologic Agents. The Company is also engaged in the evaluation
and development of additional pharmacologic agents to treat erectile dysfunction
either alone or in combination with other agents. One such agent is prazosin, a
generic alpha-receptor blocker. The Company expects to begin a Phase III
multi-center trial in 1998 for its second product candidate, a combination of
alprostadil and prazosin delivered via the Company's transurethral system for
erection. The Company has several other product candidates in preclinical
development.
 
THE VIVUS STRATEGY
 
     The Company's objective is to become the global leader in the development
and commercialization of innovative therapies for erectile dysfunction. The
Company is pursuing this objective with the following strategies:
 
          Focus on Clinical Development and Regulatory Review. The Company has
     sought and plans to continue to seek additional pharmacologic agents
     suitable for transurethral delivery for which significant safety data
     already exists. The Company believes that such agents may progress more
     rapidly through the clinical development and regulatory process than agents
     without preexisting safety data.
 
          Expand the Market. The Company is seeking to increase the number of
     men receiving treatment for erectile dysfunction by developing safe,
     effective, discreet, easy to use, minimally-invasive products and by
     heightening physician and consumer awareness of erectile dysfunction
     through education.
 
          Maintain Proprietary Technology. The Company has sought and will
     continue to seek a strong proprietary position for the Company's
     transurethral system for erection by pursuing patent protection in the
     United States and key international countries.
 
          Develop Novel Pharmacologic Agents. The Company is engaged in the
     research and development of and may seek to license novel pharmacologic
     agents that may provide an enhanced therapeutic benefit in the treatment of
     erectile dysfunction, either alone or in combination with other agents.
 
          Achieve Broad Distribution. The Company is initially marketing and
     selling its products through a direct sales force in the United States, and
     through distribution, co-promotion or license agreements with corporate
     partners in foreign markets. In May 1996, the Company completed an
     international marketing agreement with Astra AB (Astra) whereby Astra will
     purchase the Company's products for resale in Europe, South America,
     Central America, Australia and New Zealand. In January 1997, the Company
 
                                        5
   7
 
     signed an international marketing agreement with Janssen, a subsidiary of
     Johnson & Johnson, whereby 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, amending the earlier agreement with
     Janssen, that expanded Janssen's territories to include the Middle East,
     Russia, the Indian sub-continent, and Africa.
 
MANUFACTURING AND RAW MATERIALS
 
     The Company has limited experience in manufacturing and selling MUSE
(alprostadil) in commercial quantities. Since the commercial launch of MUSE
(alprostadil) in January 1997, the Company has experienced product shortages due
to higher than expected demand and difficulties encountered in scaling up
production of MUSE (alprostadil). The Company leased 90,000 square feet of space
in New Jersey in which it has constructed additional manufacturing and testing
facilities. The Company has filed for regulatory authorization of this facility
with both the FDA and MCA. In March 1998, the MCA authorized the Company to
begin commercial production and shipment of MUSE (alprostadil) from its new
facility. In addition, the Company has negotiated a long-term lease for a site
in Ireland for construction of a European manufacturing operation. Until the
Company receives the required approvals for its new New Jersey facility,
domestic and certain international markets will need to be supplied from its
current facility at Paco. There can be no assurance that such approvals will be
granted in a timely manner, if at all. If international sales increase as
anticipated, product available for the domestic market will be reduced and gross
margins will be adversely impacted. If the Company encounters further
difficulties with its current manufacturing facility or delays in regulatory
approvals of its new manufacturing facility, capacity constraints could continue
for an extended period of time, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
 
     The Company obtains its supply of alprostadil from two sources. The first
is Spolana Chemical Works 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.
Alprostadil, a generic drug, is extremely difficult to manufacture and is only
available to the Company from a limited number of other suppliers, none of which
currently produce it in commercial quantities. The Company is seeking additional
sources of alprostadil. In addition, 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 alprostadil and 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 alprostadil and plastic components and an
additional sterilization facility, it will be entirely dependent upon the
existing suppliers 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 existing suppliers and/or E-Beam to follow applicable
regulations, the development and commercial marketing of MUSE (alprostadil) and
other potential products could be delayed or prevented. An interruption in
sterilization services or the Company's supply of alprostadil or plastic
components would have a material adverse effect on the Company's business,
financial condition and results of operations.
 
     The formulation, filling and packaging of MUSE (alprostadil) is performed
at Paco at its facility in Lakewood, New Jersey. In April 1995, Paco was
acquired by The West Company. In June 1995, the Company completed construction
of its approximately 6,000 square feet of dedicated manufacturing and testing
space within Paco's facility. This space is dedicated to manufacturing and
testing activities for the Company. Until the Company further develops its
in-house manufacturing capability, it will be substantially dependent upon Paco
for the manufacture of its products. There can be no assurance that the
Company's
 
                                        6
   8
 
reliance on Paco will not result in problems with product supply. Interruptions
in the availability of MUSE (alprostadil) and other potential products could
have a material adverse effect on the Company's business, financial condition
and results of operations.
 
     The Company obtains the necessary raw materials and components for the
manufacture of MUSE (alprostadil), 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 will find the
manufacturing process or facilities to be in compliance with cGMP and other
regulations. A routine re-inspection of Chinoin, one of the Company's two
sources of alprostadil, resulted in the issuance of an FDA Form 483 which set
forth areas where Chinoin was not in compliance with cGMP requirements. 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 regulatory Warning Letter or seizure or recall of products,
injunction and/or civil fines.
 
     In connection with post-approval inspections of the Company's New Jersey
manufacturing facility at Paco, the FDA issued the Company FDA Form 483s and a
Warning Letter, which detailed specific areas where the FDA observed that the
Company's operations were not in full compliance with some areas of cGMP
requirements. On November 19, 1997, after taking corrective action and providing
the FDA with a written response to the FDA observations, the Company received a
letter from the FDA affirming that the Company's facility at Paco is in
substantial compliance with cGMP requirements. Failure to maintain satisfactory
cGMP compliance would have a material adverse effect on the Company's ability to
continue to market and distribute its products and, in the most serious cases,
could result in the issuance of additional Warning Letters, seizure or recall of
products, civil fines or closure of the Company's manufacturing facility until
cGMP compliance is achieved.
 
SALES AND MARKETING
 
     Before commercially launching its first product, MUSE (alprostadil), in
January 1997, the Company had no experience in the sale, marketing and
distribution of pharmaceutical products. The Company is marketing and selling
its products through a direct sales force in the United States. VIVUS currently
employs approximately 75 sales representatives who call upon urologists and
other specialists. Effective February 1998, the Company entered into a Sales
Force Services Agreement with Innovex Inc. ("Innovex"). Pursuant to the Sales
Force Services Agreement, Innovex will provide approximately 200 additional
contract sales representatives, the substantial majority of whom will be calling
upon primary care physicians. Accordingly, the Company's ability to increase
sales will be highly dependent upon the efforts of Innovex. There can be no
assurance that Innovex's sales efforts will be successful or that primary care
physicians will recommend the use of MUSE (alprostadil).
 
     Because of production capacity constraints experienced by VIVUS, the
Company did not initiate significant MUSE advertising programs throughout 1997
and experienced declining demand for MUSE (alprostadil) in late 1997. In
anticipation of receiving regulatory approvals of its new manufacturing facility
and because of available inventories at the wholesale level, the Company
launched its first domestic direct-to-consumer advertising campaign in January
1998. This campaign includes major television, newspaper and magazine
placements. In February 1998, the FDA notified the Company that it objected to,
among other things, the prominence and balance of side effect information
relative to efficacy information in certain written materials and the Company's
television advertisements. The Company is no longer utilizing the prior written
materials and has modified its written materials in response to the FDA's
comments. If the FDA does not believe the modified written materials respond to
its concerns then further modifications would be required resulting in
additional cost and delay prior to the Company resuming its written advertising.
The Company has
 
                                        7
   9
 
ceased running its television advertisements and requested a meeting with the
FDA to discuss necessary changes to the Company's television advertisements. If
the Company and the FDA cannot reach a prompt resolution regarding the necessary
changes to the Company's television advertisements, this could result in
additional cost and delay, and may prevent broadcast advertising on major
networks. Cost and delay associated with the FDA's objections to the Company's
direct-to-consumer advertising materials could have a negative effect upon the
Company's domestic sales and marketing efforts. There can be no assurance that
the Company's domestic sales and marketing efforts will be successful. In
addition, there can be no assurance that the Company's capacity restraints will
not prevent the Company from supplying any increased demand.
 
     The Company markets and sells its products in foreign markets through
distribution, co-promotion or license agreements with corporate partners. To
date, the Company has entered into international marketing agreements with Astra
and Janssen. There can be no assurance that the Company will be able to
successfully enter into additional agreements with corporate partners upon
reasonable terms, if at all. To the extent that the Company enters into
distribution, co-promotion or license agreements for the sale of its products,
the Company will be dependent upon the efforts of third parties. There can be no
assurance that such efforts will be successful.
 
     In February 1996, the Company entered into a distribution agreement with
CORD Logistics, Inc. ("CORD"), a wholly-owned subsidiary of Cardinal Health,
Inc. Under this agreement, CORD warehouses the Company's finished goods, takes
customer orders, picks, packs and ships its product, invoices customers and
collects related receivables. The Company also has access to CORD information
systems that support these functions. As a result of this distribution agreement
with CORD, the Company is heavily dependent on CORD's efforts to fulfill orders
and warehouse its products effectively. There can be no assurance such efforts
will be successful.
 
     In May 1996, the Company entered into an international marketing agreement
with Astra to purchase the Company's products for resale in Europe, South
America, Central America, Australia and New Zealand. As consideration for
execution of the marketing agreement, Astra paid the Company $10 million in June
1996. In September 1996, the Company received a $10 million milestone payment
from Astra upon filing an application for marketing authorization for MUSE
(alprostadil) in the United Kingdom, and, in December 1997, received a $2
million milestone payment upon receiving approval of this application by the
MCA. The Company will be paid up to an additional $8 million in the event
certain other milestones are achieved. However, there can be no assurance that
such milestones will be achieved. As a result of this marketing agreement with
Astra, the Company is dependent on Astra's efforts to market, distribute and
sell the Company's products effectively in the above mentioned markets. There
can be no assurance that such efforts will be successful.
 
     In July 1996, the Company entered into a distribution agreement with
Alternate Site Distributors, Inc. ("ASD"), a subsidiary of Bergen Brunswig
Corporation. ASD provides "direct-to-physician" distribution, telemarketing and
customer service capabilities in support of the U.S. marketing and sales
efforts. Pursuant to the terms of this agreement, ASD developed a customer
service organization to respond to all the Company's sales representative and
physician inquiries. A central feature of this customer service is a dedicated
Company owned toll free number with an automated response menu covering various
options. As a result of this distribution agreement with ASD, the Company is
dependent on ASD's efforts to distribute, telemarket, and provide customer
service effectively. There can be no assurance that such efforts will be
successful.
 
     In January 1997, the Company signed an international marketing agreement
with Janssen, a subsidiary of Johnson & Johnson. Janssen will purchase the
Company's products for resale in China, multiple Pacific Rim countries
(excluding Japan), Canada, Mexico and South Africa. As consideration for
execution of the international marketing agreement, Janssen paid the Company $5
million. In October 1997, the Company signed an international marketing
agreement, amending the earlier agreement with Janssen, that expanded Janssen's
territories to include the Middle East, Russia, the Indian sub-continent, and
Africa. As consideration for execution of the expanded international territory
marketing agreement, Janssen paid the Company $2 million. The Company will
receive additional payments in the event certain other milestones are achieved.
However, there can be no assurance that such milestones will be achieved. As a
result of this distribution
 
                                        8
   10
 
agreement with Janssen, the Company is dependent on Janssen's efforts to
distribute and sell the Company's products effectively in the above mentioned
markets. There can be no assurance that such efforts will be successful.
 
CLINICAL STUDIES AND COMMERCIAL EXPERIENCE
 
     In mid-1995, the Company completed its Phase III Confirmatory studies for
MUSE (alprostadil) that were used as a basis for the New Drug Application
("NDA") submitted to the FDA in March 1996. MUSE (alprostadil) was cleared for
marketing by the FDA in November 1996. During in-clinic titration, 66 percent of
patients treated with MUSE (alprostadil) achieved an erection judged to be
sufficient for intercourse and tolerated the treatment. Of patients successfully
titrated, successful intercourse was reported by 64.9 percent of participants
using MUSE (alprostadil) versus 18.6 percent receiving placebo. Of all active
doses administered, 50.2 percent resulted in intercourse, compared to 10.4
percent of placebo doses. No increased risk of serious adverse events due to
MUSE (alprostadil) was found, and there were no reports of priapism (persistent
abnormal erection) or penile scarring. Eighty-eight (88) percent of patient
couples that commenced the Phase III Confirmation Study completed it. The most
common side effect reported was transient penile pain and less than one percent
of participants discontinued use due to discomfort. In patients who responded to
treatment with MUSE (alprostadil), there was a statistically significant
improvement in the patient's perception of his emotional well-being and in his
relationship with his partner compared to patients treated with placebo. From
the partner's perspective, there also was a statistically significant
improvement in her relationship with the patient compared to partners in the
placebo group. The Company has continued open label Extended Maintenance studies
for those patients electing to continue treatment.
 
     During 1997, the first year of commercial use of MUSE (alprostadil), the
incidence of adverse side effects was consistent with that experienced in
clinical trials.
 
     The Company's ongoing clinical trials will evaluate the long-term safety of
MUSE (alprostadil) for both the patient and his partner. Additional adverse side
effects may arise during the course of ongoing clinical trials or during
post-marketing surveilance. There can be no assurance that additional adverse
side effects will not arise that result in the FDA requiring limitations on use
or warnings that make the Company's products not commercially viable. Any
additional adverse side effects could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
LICENSED PATENTS AND PROPRIETARY RIGHTS
 
     The Company's policy is to aggressively maintain its patent 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 by the topical application of an ointment
containing a vasodilator. There are also claims to methods of treatment
involving the insertion of a catheter into the urethra to deliver vasodilators.
 
     The Company is the exclusive licensee of patents and patent applications
filed in the name of Dr. Nils Kock in numerous countries. Five United States
patent applications are pending, and patents have been issued in Australia,
Canada, Japan, New Zealand, Sweden, South Africa and Europe (Austria, Belgium,
Germany, France, Great Britain, Ireland, Italy, Luxembourg, Netherlands, Sweden,
Greece and Spain). Patent applications are pending in Denmark and Finland. The
European patents claim compositions for the treatment of erectile dysfunction
through the urethra of certain active substances including alpha-receptor
blockers, vasoactive polypeptides, prostaglandins or nitroglycerin dispersed in
a hydrophilic vehicle. A competitor has filed a patent opposition against this
patent with the European Patent Office. The Company is vigorously defending this
patent, however, an adverse decision could affect the Company's ability, based
on its patent rights, to prevent potential competition in Europe. Failure to
defend its patent position could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
                                        9
   11
 
     The Company is the exclusive assignee of two United States patents and
divisional patent applications from Alza Corporation ("Alza"), covering
inventions of Dr. Virgil Place made while he was an employee of Alza. The
patents and patent applications describe dosage forms for administering a
therapeutic agent to the urethra, methods for treating erectile dysfunction and
specific drug formulations that can be delivered transurethrally for the
treatment of erectile dysfunction. Five additional divisional or continuation
applications claiming subject matter disclosed but not claimed in the issued
patents or applications were filed in the United States on June 7, 1995; one of
these was re-filed October 28, 1997. All patents in force on June 8, 1995, or
that will issue on an application filed before June 8, 1995, will automatically
have a term that is the greater of twenty years from effective filing date or
seventeen years from the date of patent grant. Patent applications filed on or
after June 8, 1995 will be granted for a term which begins on the date the
patent issues and ends twenty years from the date on which the application was
filed in the United States or, if the application claims priority to an early
United States application, twenty years from the earliest effective United
States filing date. Foreign patents have been issued in South Africa and
Australia and foreign applications are pending in Canada, Finland, Ireland,
Mexico, Portugal, New Zealand, Japan, South Korea, Norway and Europe (Austria,
Belgium, Switzerland, Germany, Denmark, Spain, France, United Kingdom, Italy,
Luxembourg, Netherlands, Sweden and Greece).
 
     The Company's license and assignment agreements for these patents and
patent applications are royalty bearing and do not expire until the licensed
patents expire. These license and assignment agreements provide that the Company
may assume responsibility for the maintenance and prosecution of the patents and
bring infringement actions.
 
     In addition, the Company filed fifteen patent applications in the United
States, forty patent applications in foreign jurisdictions, and two Patent
Cooperation Treaty applications in 1997. Several of these 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. Other applications focus on prevention and/or treatment
of other conditions, including incontinence, prostate disorders such as benign
prostatic hyperplasia ("BPH"), and vascular disorders including peripheral
vascular disease ("PVD").
 
     The Company's success will depend in large part on the strength of its
current and future patent position relating to the transurethral delivery of
pharmacologic agents for the treatment of erectile dysfunction. The Company's
patent position, like other pharmaceutical companies, is highly uncertain and
involves complex legal and factual questions. Claims made under patent
applications may be denied or significantly narrowed and the issued patents may
not provide significant commercial protection to the Company. The Company could
incur substantial costs in proceedings before the United States Patent 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 that is
exclusively licensed to VIVUS. As a result of the opposition proceeding, certain
claims in the European patent were held to be unpatentable by the Opposition
Division of the European Patent Office ("EPO"). These claims all related to
pharmaceutical compositions that include prostaglandin E1. The patentability of
all other claims in the patent was confirmed (i.e., claims directed to the use
of active agents in the treatment of erectile dysfunction by administration via
the urethra to the corpora cavernosa, and 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. 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.
 
                                       10
   12
 
     There can be no assurance that the Company's products do not or will not
infringe on the patent or proprietary rights of others. The Company may be
required to obtain additional licenses to the patents, patent applications or
other proprietary rights of others. There can be no assurance that any such
licenses would be made available on terms acceptable to the Company, if at all.
If the Company does not obtain such licenses, it could encounter delays in
product introductions while it attempts to design around such patents, or the
development, manufacture or sale of products requiring such licenses could be
precluded. The Company believes there will continue to be significant litigation
in the pharmaceutical industry regarding patent and other intellectual property
rights.
 
     A former consultant to the Company had claimed that he was the inventor of
certain technology disclosed in two of the Company's patents. The former
consultant further claimed that the Company and certain of its officers and
directors defrauded him by allegedly failing to inform him that it intended to
use and patent this technology and by failing to compensate him for the
technology in the manner allegedly promised. In May 1996, the Company filed a
complaint for declaratory judgment against the former consultant in the United
States District Court for the Northern District of California, which sought a
declaration from the court that the former consultant was not an inventor of any
of the technology. In September 1996, the consultant filed his counterclaim. In
December 1997, the Company reached a settlement with the former consultant
whereby the former consultant dismissed his claims against the Company and the
Company's officers and directors involved in the lawsuit. In return, the Company
paid the consultant $5.1 million. The Company recorded the settlement on its
books in the fourth quarter of 1997 and paid the settlement on January 5, 1998.
 
     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, that the Company will have adequate remedies for any
breach or that the Company's trade secrets will not otherwise become known or be
independently developed by competitors. In addition, protracted and costly
litigation may be necessary to enforce and determine the scope and validity of
the Company's proprietary rights.
 
COMPETITION
 
     Competition in the pharmaceutical and medical products industries is
intense and characterized by extensive research efforts and rapid technological
progress. Certain treatments for erectile dysfunction exist, such as needle
injection therapy, vacuum constriction devices, penile implants and oral
medications, and the manufacturers of these products will continue to improve
these therapies. In July 1995, the FDA approved the use of alprostadil in The
Upjohn Company's needle injection therapy product for erectile dysfunction.
Previously, Upjohn had obtained approval in a number of European countries. In
June 1997, Schwartz Pharma announced the FDA approval of their needle injection
treatment for erectile dysfunction. Additional competitive therapies include an
oral medication by Pfizer Inc., for which they received regulatory approval in
the United States in March 1998 and have filed for regulatory approvals in
Europe. Commercial introduction of Pfizer Inc.'s oral medication could have a
material adverse affect on the Company's business, financial condition and
results of operations. Other large pharmaceutical companies are also actively
engaged in the development of therapies for the treatment of erectile
dysfunction. These companies have substantially greater research and development
capabilities as well as substantially greater marketing, financial and human
resources than the Company. In addition, these companies have significantly
greater experience than the Company in undertaking preclinical testing, human
clinical trials and other regulatory approval procedures. There are also small
companies, academic institutions, governmental agencies and other research
organizations that are conducting research in the area of erectile dysfunction.
For instance, Zonagen, Inc. and Pentech Pharmaceutical, Inc. have oral
medications in Phase III clinical trials. These entities may also 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. The Company's competitors may develop
technologies and products that are more effective than those currently marketed
or
 
                                       11
   13
 
being developed by the Company. Such developments would render the Company's
products less competitive or possibly obsolete. The Company is also competing
with respect to marketing capabilities and manufacturing efficiency, areas in
which it has limited experience.
 
GOVERNMENT REGULATION
 
     The production and marketing of the Company's proposed products and its
research and development activities are subject to regulation for safety,
effectiveness and quality by numerous governmental authorities in the United
States and other countries. In the United States, drug products are subject to
rigorous FDA regulation. The Federal Food, Drug, and Cosmetic Act, as amended,
the regulations promulgated thereunder, and other federal and state statutes and
regulations, govern, among other things, the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, advertising and promotion of
the Company's products. Product development and approval within this regulatory
framework takes a number of years to achieve and involves the expenditure of
substantial resources.
 
     The steps required before a pharmaceutical agent may be marketed in the
United States include (i) preclinical laboratory tests, in vivo preclinical
studies and formulation studies, (ii) the submission to the FDA of an
Investigational New Drug ("IND") application for human clinical testing, which
must become effective before human clinical trials commence, (iii) adequate and
well-controlled human clinical trials to establish the safety and effectiveness
of the drug, (iv) the submission of an NDA to the FDA, and (v) the FDA clearance
for marketing of the NDA prior to any commercial sale or shipment of the drug.
In addition to obtaining FDA approval for each product, each domestic drug
manufacturing establishment must be registered with, and approved by, the FDA.
Domestic and foreign manufacturing establishments are subject to biennial
inspections by the FDA and must comply with cGMPs for both drugs and devices. To
supply products for use in the United States, foreign manufacturing
establishments must comply with cGMPs and are subject to periodic inspection by
the FDA or by corresponding regulatory agencies in such countries under
reciprocal agreements with the FDA. The Company's contract manufacturing and new
manufacturing sites, both located in New Jersey, must also be licensed by the
State of New Jersey and must comply with New Jersey's regulatory requirements.
 
     Preclinical tests include laboratory evaluation of product chemistry and
formulation, as well as animal studies to assess the potential safety and
effectiveness of the product. Compounds must be adequately manufactured and
preclinical safety tests must be conducted by laboratories that comply with FDA
requirements. The results of the preclinical tests are submitted to the FDA as
part of an IND and are reviewed by the FDA prior to the commencement of human
clinical trials. There can be no assurance that submission of an IND will result
in FDA authorization to commence clinical trials.
 
     Clinical trials involve the administration of the investigational new drug
to patients, under the supervision of a qualified clinical investigator.
Clinical trials are conducted in accordance with Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the effectiveness criteria to be evaluated. Each protocol
must be submitted to the FDA as part of the IND. Further, each clinical study
must be conducted under the auspices of an independent Institutional Review
Board ("IRB"). The IRB will consider, among other things, ethical factors, the
safety of human subjects and the possible liability of the institution.
 
     Clinical trials are typically conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into
healthy subjects, the drug is tested for safety, dosage tolerance, absorption,
distribution, metabolism, excretion and pharmacodynamics (clinical
pharmacology). Phase II involves studies in a limited patient population to (i)
determine the effectiveness of the drug for specific, targeted indications, (ii)
determine dosage tolerance and optimal dosage and (iii) identify possible
adverse effects and safety risks. When a compound is found to be effective and
to have an acceptable safety profile in Phase II evaluations, Phase III trials
are undertaken to further evaluate clinical effectiveness and to further test
for safety within an expanded patient population at geographically dispersed
clinical study sites. There can be no assurance that Phase I, Phase II or Phase
III testing will be completed within any specific time period, if at all, with
respect to any of the Company's products subject to such testing. Furthermore,
the Company or
 
                                       12
   14
 
the FDA may suspend clinical trials at any time if it is believed that the
patients are being exposed to an unacceptable health risk.
 
     The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the drug. The Company submitted an NDA
for MUSE (alprostadil) in March 1996, and the FDA approved the NDA in November
1996. Although MUSE (alprostadil) received FDA approval, the testing and
approval process for the Company's other potential products will require
substantial time and effort, and there can be no assurance that any approval
will be granted on a timely basis, if at all. The FDA may deny an NDA if
applicable regulatory criteria are not satisfied, require additional testing or
information, or require postmarketing testing and surveillance to monitor the
safety of the Company's products if they do not view the NDA as containing
adequate evidence of the safety and effectiveness of the drug. Notwithstanding
the submission of such data, the FDA may ultimately decide that the application
does not satisfy its regulatory criteria for approval. Moreover, if regulatory
approval of a drug is granted, such approval may entail limitations on the
indicated uses for which it may be marketed. In addition, 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 the Company must also report certain adverse events involving its
drugs to the FDA under regulations issued by the Agency. 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.
 
     Among the conditions for an NDA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to cGMPs. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the area of
production and quality control to ensure full technical compliance.
 
     The Company and certain of its suppliers and service providers 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 and service providers 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 will find the
manufacturing process or facilities to be in compliance with cGMP and other
regulations. A routine re-inspection of Chinoin, one of the Company's two
sources of alprostadil, resulted in the issuance of an FDA Form 483 which set
forth areas where Chinoin was not in compliance with cGMP requirements. Failure
to achieve satisfactory cGMP compliance as confirmed by routine regulatory
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
cases, result in the issuance of a regulatory Warning Letter or seizure or
recall of products, injunction and/or civil fines.
 
     In connection with post-approval inspections of the Company's New Jersey
manufacturing facility at Paco, the FDA issued the Company FDA Form 483s and a
Warning Letter, which detailed specific areas where the FDA observed that the
Company's operations were not in full compliance with some areas of cGMP
requirements. On November 19, 1997, after taking corrective action and providing
the FDA a written response to the FDA observations, the Company received a
letter from the FDA affirming that the Company's facility at Paco is in
substantial compliance with cGMP requirements. Failure to maintain satisfactory
cGMP compliance could have a material adverse effect on the Company's ability to
continue to market and distribute its products and, in the most serious cases,
could result in the issuance of additional Warning Letters, seizure or recall of
products, civil fines or closure of the Company's manufacturing facility until
cGMP compliance is achieved.
 
     For clinical investigation and marketing in Europe, the Company is also
subject to foreign regulatory requirements governing human clinical trials and
marketing approval for drugs. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely for European
countries both within and outside the European Union ("EU"). The Company's
approach to the European regulatory process involved the identification of
respected clinical investigators in the member states of the EU and other
 
                                       13
   15
 
European countries to conduct clinical studies. The Company designed these
studies to meet FDA, EU and other European countries' standards. Within the EU,
while marketing authorizations must be supported by clinical trial data of a
type and extent set out by EU directives and guidelines, the approval process
for the commencement of clinical trials is just beginning to be harmonized by EU
law, and still varies from country to country. The system for obtaining
marketing authorizations within the EU changed on January 1, 1995. The new EU
registration system is a dual one in which certain products, such as
biotechnology and high-technology products and those containing new active
substances, have access to a central regulatory system that provides
registration throughout the entire EU. Other products will be registered by
national authorities in individual EU member states, operating on a principle of
mutual recognition. As far as possible, the Company's studies were designed to
develop a regulatory package sufficient for multi-country approval in the
European markets without the need to duplicate studies for individual country
approvals. In November 1997, the Company obtained regulatory marketing clearance
by the MCA to market MUSE (alprostadil) in the United Kingdom. In addition,
applications for regulatory approval to market MUSE (alprostadil) have been
submitted in several other European countries, including Sweden, Norway and
Switzerland. These applications will be subject to rigorous approval processes,
and there can be no assurance such approval will be granted in a timely manner,
if at all.
 
     Outside the United States and Europe, the Company's ability to market a
product is contingent upon receiving a marketing authorization from the
appropriate regulatory authority. Applications for regulatory approval have been
filed in several other countries, including China, Australia, Canada and Mexico.
These foreign regulatory approval processes include all of the risks associated
with FDA approval previously discussed.
 
EMPLOYEES
 
     As of February 27, 1998 the Company employed 233 persons, of whom four are
part-time. Of these employees, 62 are in manufacturing, 16 are in clinical and
regulatory affairs, 10 are in research and development, 29 are in quality
assurance, 90 are in sales and marketing, one is in corporate development and 25
are in finance and administration. None of the Company's current employees are
represented by a labor union or are the subject of a collective bargaining
agreement. The Company believes that it maintains good relations with its
employees.
 
                                       14
   16
 
     This Annual Report on Form 10-K contains forward looking statements that
involve risks and uncertainties. The Company's actual results could differ from
those set forth in such forward looking statements as a result of certain
factors, including those set forth in this Risk Factors section.
 
                                  RISK FACTORS
 
LIMITED MANUFACTURING EXPERIENCE; CAPACITY CONSTRAINTS
 
     The Company has limited experience in manufacturing MUSE (alprostadil) in
commercial quantities. Since the commercial launch of MUSE (alprostadil) in
January 1997, the Company has experienced product shortages due to higher than
expected demand and difficulties encountered in scaling up production of MUSE
(alprostadil). The Company leased 90,000 square feet of space in New Jersey in
which it has constructed additional manufacturing and testing facilities. The
Company has filed for regulatory authorization of this facility with both the
FDA and MCA. In March 1998, the MCA authorized the Company to begin commercial
production and shipment of MUSE (alprostadil) from its new facility. Before the
new facility in New Jersey can produce commercial product for the United States
and certain other markets, the Company must obtain FDA approval. There is no
assurance FDA approval will be completed and obtained in a timely manner, if at
all. Until the Company receives the required approvals for its new New Jersey
facility, domestic and certain international markets will need to be supplied
from its current facility at Paco Pharmaceutical Services, Inc. ("Paco"). If
international sales increase as anticipated, product available for the domestic
market will be reduced and gross margins will be adversely impacted. If the
Company encounters further difficulties with its current manufacturing facility
or delays in regulatory approval of its new manufacturing facility, capacity
constraints could continue for an extended period of time. Such extended
capacity constraints could strain relationships with distribution partners due
to the need to allocate product between domestic and international markets, and
possibly cause patients to seek alternative therapies. Such events could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company anticipates an operating loss in the first
quarter of 1998 primarily due to the impact of the continued capacity
constraints, allocation of product to international markets which results in a
lower gross margin, higher costs of goods sold as the Company ramps up its new
manufacturing facility, and higher marketing and sales costs related to the
Company's direct to consumer marketing campaign.
 
     The formulation, filling and packaging of MUSE (alprostadil) is performed
at Paco, a wholly owned subsidiary of The West Company, at its facility in
Lakewood, New Jersey. In June 1995, the Company completed construction of its
approximately 6,000 square feet of dedicated manufacturing and testing space
within Paco's facility. Due to higher than expected demand, the Company has
leased two adjacent buildings in New Jersey, totalling 90,000 square feet, in
which it has constructed additional manufacturing and testing facilities. Until
the Company further develops its in-house manufacturing capability, it will be
substantially dependent upon Paco for the manufacture of its products. There can
be no assurance that the Company's reliance on Paco for the manufacture of its
products will not result in problems with product supply, and there can be no
assurance that the Company will receive FDA approval for or be able to ramp-up
its second manufacturing facility in a timely manner, if at all. Interruptions
in the availability of products could delay or prevent the further development
and commercial marketing of MUSE (alprostadil) and other potential products and
would have a material adverse effect on the Company's business, financial
condition and results of operations.
 
     The Company and certain of its suppliers and service providers 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 compliance with cGMP
requirements as part of the approval process. However, upon routine
re-inspection of these facilities, there can be no assurance that the FDA will
find the manufacturing process or facilities to be in compliance with cGMP and
other regulations. A routine re-inspection of Chinoin, one of the Company's two
sources of alprostadil, resulted in the issuance of an FDA Form 483 which set
forth areas where Chinoin was not in compliance with cGMP requirements. Failure
to achieve satisfactory cGMP compliance as confirmed by routine regulatory
inspections would have a significant adverse effect on the Company's ability to
continue to manufacture and distribute its
 
                                       15
   17
 
products and, in the most serious cases, result in the issuance of a regulatory
warning letter or seizure or recall of products, injunction and/or civil fines.
 
     In connection with post-approval inspections of the Company's New Jersey
manufacturing facility at Paco, the FDA issued the Company FDA Form 483s and a
Warning Letter, which detailed specific areas where the FDA observed that the
Company's operations were not in full compliance with some areas of cGMP
requirements. On November 19, 1997, after taking corrective action and providing
the FDA a written response to the FDA observations, the Company received a
letter from the FDA affirming that the Company's facility at Paco is in
substantial compliance with cGMP requirements. Failure to maintain satisfactory
cGMP compliance could have a material adverse effect on the Company's ability to
continue to market and distribute its products and, in the most serious cases,
could result in the issuance of additional Warning Letters, seizure or recall of
products, civil fines or closure of the Company's manufacturing facility until
cGMP compliance is achieved.
 
LIMITED SALES AND MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES
 
     Before commercially launching its first product, MUSE (alprostadil), in
January 1997, the Company had no experience in the sale, marketing and
distribution of pharmaceutical products. The Company is marketing and selling
its products initially through a direct sales force in the United States. VIVUS
currently employs approximately 75 sales representatives who call upon
urologists and other specialists. Effective February 1998, the Company entered
into a Sales Force Services Agreement with Innovex Inc. ("Innovex"). Pursuant to
the Sales Force Services Agreement, Innovex will provide approximately 200
additional contract sales representatives, the substantial majority of whom will
be calling upon primary care physicians. Accordingly, the Company's ability to
increase sales will be highly dependent upon the efforts of Innovex. There can
be no assurance that Innovex's sales efforts will be successful or that primary
care physicians will recommend the use of MUSE (alprostadil).
 
     Because of production capacity constraints experienced by VIVUS, the
Company did not initiate significant MUSE (alprostadil) advertising programs
throughout 1997 and experienced declining demand for MUSE (alprostadil) in late
1997. In anticipation of receiving regulatory approvals of its new manufacturing
facility and because of available inventories at the wholesale level, the
Company launched its first domestic direct-to-consumer advertising campaign in
January 1998. This campaign includes major television, newspaper and magazine
placements. In February 1998, the FDA notified the Company that it objected to,
among other things, the prominence and balance of side effect information
relative to efficacy information in certain written materials and the Company's
television advertisements. The Company is no longer utilizing the prior written
materials and has modified its written materials in response to the FDA's
comments. If the FDA does not believe the modified written materials respond to
its concerns then further modifications would be required resulting in
additional cost and delay prior to the Company resuming its written advertising.
The Company has ceased running its television advertisements and requested a
meeting with the FDA to discuss necessary changes to the Company's television
advertisements. If the Company and the FDA cannot reach a prompt resolution
regarding the necessary changes to the Company's television advertisements, this
could result in additional cost and delay, and may prevent broadcast advertising
on major networks. Cost and delay associated with the FDA's objections to the
Company's direct-to-consumer advertising materials could have a negative effect
upon the Company's domestic sales and marketing efforts. There can be no
assurance that the Company's domestic sales and marketing efforts will be
successful at increasing the demand for MUSE (alprostadil). In addition, there
can be no assurance that the Company's capacity restraints will not prevent the
Company from supplying any increased demand.
 
     In February 1996, the Company entered into a distribution agreement with
CORD Logistics, Inc. ("CORD"), a wholly-owned subsidiary of Cardinal Health,
Inc. Under this agreement, CORD warehouses the Company's finished goods, takes
customer orders, picks, packs and ships its product, invoices customers and
collects related receivables. The Company also has access to CORD's information
systems that support these functions. As a result of this distribution agreement
with CORD, the Company is heavily dependent on CORD's efforts to fulfill orders
and warehouse its products effectively. There can be no assurance such efforts
will be successful.
 
                                       16
   18
 
     In May 1996, the Company entered into an international marketing agreement
with Astra to purchase the Company's products for resale in Europe, South
America, Central America, Australia and New Zealand. As consideration for
execution of the international marketing agreement, Astra paid the Company $10
million in June 1996. In September 1996, the Company received a $10 million
milestone payment from Astra upon filing an application for marketing
authorization for MUSE (alprostadil) in the United Kingdom, and, in December
1997, received a $2 million milestone payment upon receiving approval of this
application by the MCA. The Company will be paid up to an additional $8 million
in the event certain other milestones are achieved. However, there can be no
assurance that such milestones will be achieved. The marketing agreement does
not have minimum purchase commitments, and Astra may take up to twelve months to
introduce a product in a given country following regulatory approval in such
country. As a result of this marketing agreement with Astra, the Company is
dependent on Astra's efforts to market, distribute and sell the Company's
products effectively in the above mentioned markets. There can be no assurance
that such efforts will be successful.
 
     In July 1996, the Company entered into a distribution agreement with ASD, a
subsidiary of Bergen Brunswig Corporation. ASD provides "direct-to-physician"
distribution, telemarketing and customer service capabilities in support of the
U.S. marketing and sales efforts. As a result of this distribution agreement
with ASD, the Company is dependent on ASD's efforts to distribute, telemarket,
and provide customer service effectively. There can be no assurance that such
efforts will be successful.
 
     In January 1997, the Company signed an international marketing agreement
with Janssen, a subsidiary of Johnson & Johnson. Janssen will purchase the
Company's products for resale in China, multiple Pacific Rim countries
(excluding Japan), Canada, Mexico and South Africa. As consideration for
execution of the international marketing agreement, Janssen paid the Company $5
million. In October 1997, the Company signed an international marketing
agreement, amending the earlier agreement with Janssen, that expanded Janssen's
territories to include the Middle East, Russia, the Indian sub-continent, and
Africa. As consideration for execution of the expanded international territory
marketing agreement, Janssen paid the Company $2 million. The Company will
receive additional payments in the event certain other milestones are achieved.
However, there can be no assurance that such milestones will be achieved. As a
result of this distribution agreement with Janssen, the Company is dependent on
Janssen's efforts to distribute and sell the Company's products effectively in
the above mentioned markets. There can be no assurance that such efforts will be
successful.
 
     The Company intends to market and sell its products in other foreign
markets through distribution, co-promotion or license agreements with corporate
partners. To date, the Company has entered into international marketing
agreements with Astra and Janssen. There can be no assurance that the Company
will be able to successfully enter into additional agreements with corporate
partners upon reasonable terms, if at all. To the extent that the Company enters
into distribution, co-promotion or license agreements for the sale of its
products, the Company will be dependent upon the efforts of third parties. These
third parties may have other commitments, and there can be no assurance that
they will commit the necessary resources to effectively market, distribute and
sell the Company's product.
 
INTENSE COMPETITION
 
     Competition in the pharmaceutical and medical products industries is
intense and is characterized by extensive research efforts and rapid
technological progress. Certain treatments for erectile dysfunction exist, such
as needle injection therapy, vacuum constriction devices, penile implants and
oral medications, and the manufacturers of these products will continue to
improve these therapies. In July 1995, the FDA approved the use of alprostadil
in The Upjohn Company's needle injection therapy product for erectile
dysfunction. Previously, Upjohn had obtained approval in a number of European
countries. In June 1997, Schwartz Pharma announced the FDA approval of their
needle injection treatment for erectile dysfunction. Additional competitive
therapies include an oral medication by Pfizer Inc., for which they received
regulatory approval in the United States in March 1998 and have filed for
regulatory approval in Europe. Commercial introduction of Pfizer Inc.'s oral
medication could have a material adverse affect on the Company's business,
financial condition and results of operations. Other large pharmaceutical
companies are also actively engaged in the
 
                                       17
   19
 
development of therapies for the treatment of erectile dysfunction. These
companies have substantially greater research and development capabilities as
well as substantially greater marketing, financial and human resources than the
Company. In addition, these companies have significantly greater experience than
the Company in undertaking preclinical testing, human clinical trials and other
regulatory approval procedures. There are also small companies, academic
institutions, governmental agencies and other research organizations that are
conducting research in the area of erectile dysfunction. For instance, Zonagen,
Inc. and Pentech Pharmaceutical, Inc. have oral medications in Phase III
clinical trials. 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. 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 THE COMPANY'S TRANSURETHRAL SYSTEM FOR ERECTION
 
     The Company currently relies upon a single therapeutic approach to treat
erectile dysfunction, its transurethral system for erection. Certain side
effects have been found to occur with the use of MUSE (alprostadil). Mild to
moderate transient penile/perineal pain was experienced by 21 percent to 42
percent of patients (depending on dosage) treated with MUSE (alprostadil) in the
Company's Phase II/III Dose Ranging study. Moderate to severe decreases in blood
pressure were experienced by 1 percent to 4 percent of patients (depending on
dosage) treated with MUSE (alprostadil) in such study, and rarely (0.4 percent)
patients experienced syncope (fainting). During 1997, the first year of
commercial use of MUSE (alprostadil), the incidence of adverse side effects was
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 (alprostadil) as a therapy for the treatment of erectile
dysfunction thereby affecting the commercial viability of MUSE (alprostadil). In
addition, technological changes or medical advancements could diminish or
eliminate the commercial viability of the Company's products. As a result of the
Company's single therapeutic approach and its current focus on MUSE
(alprostadil), the failure to successfully commercialize such product would have
an adverse effect on the Company and could threaten the Company's ability to
continue as a viable entity.
 
GOVERNMENT REGULATION AND UNCERTAINTY OF PRODUCT APPROVALS
 
     The Company's research, preclinical development, clinical trials,
manufacturing and marketing of its products are subject to extensive regulation
by numerous governmental authorities in the United States and other countries.
Clinical trials, manufacturing and marketing of the Company's products will be
subject to the rigorous testing and approval processes of the FDA and equivalent
foreign regulatory agencies. The process of obtaining FDA and other required
regulatory approvals is lengthy and expensive. The Company completed pivotal
clinical trials in 1995 and submitted an NDA for its first product, MUSE
(alprostadil), to the FDA in March 1996. In November 1996, the Company received
final marketing clearance from the FDA for MUSE (alprostadil). In November 1997,
the Company obtained regulatory marketing clearance by the MCA to market MUSE
(alprostadil) in the United Kingdom.
 
     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 the Company must also report certain
adverse events involving its drugs to the Agency under regulations issued by the
FDA. Additionally, 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.
 
                                       18
   20
 
     The Company has submitted applications for approval of MUSE (alprostadil)
in several other countries, including China, Australia, Canada and Mexico. These
applications will be subject to rigorous approval processes. There can be no
assurance that approval in these or other countries will be granted on a timely
basis, if at all, or if granted, that such approval will not contain significant
limitations in the form of warnings, precautions or contraindications with
respect to condition of use. Any delay in obtaining, or failure to obtain such
approval would adversely affect the Company's ability to generate product
revenue.
 
     The Company's clinical trials for future products will 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
will be completed successfully within any specified time period, if at all.
Furthermore, the FDA may suspend clinical trials at any time if it is believed
that the subjects participating in such trials are being exposed to unacceptable
health risks. There can be no assurance that FDA or other regulatory approvals
for any products developed by the Company will be granted on a timely basis, if
at all, or if granted, that such approval will not contain significant
limitations in the form of warnings, precautions or contraindications with
respect to conditions of use. Any delay in obtaining, or failure to obtain, such
approvals would adversely affect the Company's ability to generate product
revenue. Failure to comply with the applicable regulatory requirements can,
among other things, result in fines, suspensions of regulatory approvals,
product recalls, operating restrictions and criminal prosecution. In addition,
the marketing and manufacturing of pharmaceutical products are subject to
continuing FDA review, and later discovery of previously unknown problems with a
product, manufacturer or facility may result in the FDA requiring further
clinical research or restrictions on the product or the manufacturer, including
withdrawal of the product from the market. The restriction, suspension or
revocation of regulatory approvals or any other failure to comply with
regulatory requirements would have a material adverse effect on the Company's
business, financial condition and results of operations.
 
     The Company obtains the necessary raw materials and components for the
manufacture of MUSE (alprostadil) 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 will find the
manufacturing process or facilities to be in compliance with cGMP and other
regulations. A routine re-inspection of Chinoin, one of the Company's two
sources of alprostadil, resulted in the issuance of an FDA Form 483 which set
forth areas where Chinoin was not in compliance with cGMP requirements. 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 regulatory Warning Letter or seizure or recall of products,
injunction and/or civil fines.
 
     In connection with post-approval inspections of the Company's New Jersey
manufacturing facility at Paco, the FDA issued the Company FDA Form 483s and a
Warning Letter, which detailed specific areas where the FDA observed that the
Company's operations were not in full compliance with some areas of cGMP
requirements. On November 19, 1997, after taking corrective action and providing
the FDA a written response to the FDA observations, the Company received a
letter from the FDA affirming that the Company's facility at Paco is in
substantial compliance with cGMP requirements. Failure to maintain satisfactory
cGMP compliance could have a material adverse effect on the Company's ability to
continue to market and distribute its products and, in the most serious cases,
could result in the issuance of additional Warning Letters, seizure or recall of
products, civil fines or closure of the Company's manufacturing facility until
cGMP compliance is achieved.
 
PROPRIETARY RIGHTS AND RISK OF PATENT LITIGATION
 
     The Company's success will depend, in large part, on the strength of its
current and future patent position relating to the transurethral delivery of
pharmacologic agents for the treatment of erectile dysfunction. The
 
                                       19
   21
 
Company's patent position, like that of other pharmaceutical companies, is
highly uncertain and involves complex legal and factual questions. Claims made
under patent applications may be denied or significantly narrowed and issued
patents may not provide significant commercial protection to the Company. The
Company could incur substantial costs in proceedings before the United States
Patent Office, including interference proceedings. These proceedings could also
result in adverse decisions as to the priority of the Company's licensed or
assigned inventions. There is no assurance that the Company's patents will not
be successfully challenged or designed around by others.
 
     The Company is presently involved in an opposition proceeding that was
instigated by the Pharmedic Company against a European patent that is
exclusively licensed to VIVUS. As a result of the opposition proceeding, certain
claims in the European patent were held to be unpatentable by the Opposition
Division of the European Patent Office ("EPO"). These claims all related to
pharmaceutical compositions that include prostaglandin E1. The patentability of
all other claims in the patent was confirmed (i.e., claims directed to the use
of active agents in the treatment of erectile dysfunction by administration via
the urethra to the corpora cavernosa, and 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. 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.
 
     There can be no assurance that the Company's products do not or will not
infringe on the patent or proprietary rights of others. The Company may be
required to obtain additional licenses to the patents, patent applications or
other proprietary rights of others. There can be no assurance that any such
licenses would be made available on terms acceptable to the Company, if at all.
If the Company does not obtain such licenses, it could encounter delays in
product introductions while it attempts to design around such patents, or the
development, manufacture or sale of products requiring such licenses could be
precluded. The Company believes there will continue to be significant litigation
in the pharmaceutical industry regarding patent and other intellectual property
rights.
 
     A former consultant to the Company had claimed that he was the inventor of
certain technology disclosed in two of the Company's patents. The former
consultant further claimed that the Company and certain of its officers and
directors defrauded him by allegedly failing to inform him that it intended to
use and patent this technology and by failing to compensate him for the
technology in the manner allegedly promised. In May 1996, the Company filed a
complaint for declaratory judgment against the former consultant in the United
States District Court for the Northern District of California, which sought a
declaration from the court that the former consultant was not an inventor of any
of the technology. In September 1996, the consultant filed his counterclaim. In
December 1997, the Company reached a settlement with the former consultant
whereby the former consultant dismissed his claims against the Company and the
Company's officers and directors involved in the lawsuit. In return, the Company
paid the consultant $5.1 million. The Company recorded the settlement on its
books in the fourth quarter of 1997 and paid the settlement on January 5, 1998.
 
     The Company also relies on trade secrets and other unpatented proprietary
technology. No assurance can be given that the Company can meaningfully protect
its rights in such unpatented proprietary technology or that others will not
independently develop substantially equivalent proprietary products and
processes or otherwise gain access to the Company's proprietary technology. The
Company seeks to protect its trade secrets and proprietary know-how, in part,
with confidentiality agreements with employees and consultants. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. In
addition, protracted and costly litigation may be necessary to enforce and
determine the scope and validity of the Company's proprietary rights.
 
                                       20
   22
 
DEPENDENCE ON DUAL AND SINGLE SOURCE OF SUPPLY
 
     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.
Alprostadil, a generic drug, is extremely difficult to manufacture and is only
available to the Company from a limited number of other suppliers, none of which
currently produce it in commercial quantities. The Company is seeking additional
sources of alprostadil. In addition, 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 alprostadil and 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 alprostadil and plastic components and an
additional sterilization facility, it will be entirely dependent upon the
existing suppliers 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
(alprostadil) and other potential products could be delayed or prevented. An
interruption in sterilization services or the Company's supply of alprostadil or
plastic components would have a material adverse effect on the Company's
business, financial condition and results of operations.
 
HISTORY OF LOSSES AND LIMITED OPERATING HISTORY
 
     The Company has generated a cumulative net loss of $29.5 million for the
period from its inception through December 31, 1997. To sustain profitability,
the Company must successfully manufacture and market MUSE (alprostadil). The
Company is subject to a number of risks including its ability to scale-up
manufacturing capabilities and secure adequate supplies of raw materials, its
ability to successfully market, distribute and sell its product, its reliance on
a single therapeutic approach to erectile dysfunction and intense competition.
There can be no assurance that the Company will be able to achieve profitability
on a sustained basis. Accordingly, there can be no assurance of the Company's
future success. The Company anticipates an operating loss in the first quarter
of 1998 primarily due to the impact of the continued capacity constraints,
allocation of product to international markets which results in a lower gross
margin, higher cost of goods sold as the Company ramps up its new manufacturing
facility, and higher marketing and sales costs related to the Company's direct
to consumer marketing campaign.
 
     The Company began generating revenues from product sales in January 1997.
The Company has limited experience in manufacturing and selling MUSE
(alprostadil) in commercial quantities. Until the Company receives FDA approval
for its New New Jersey manufacturing facility, domestic and certain
international markets will need to be supplied from its current facility at
Paco. There can be no assurance such approval will be granted in a timely
manner, if at all. If international sales increase as anticipated, product
available for the domestic market will be reduced and gross margins will be
adversely impacted. If the Company encounters further difficulties with its
current manufacturing facility or delays in regulatory approval of its new
manufacturing facility, capacity constraints could continue for an extended
period of time. Such extended capacity constraints could strain relationships
with distribution partners due to the need to allocate product between domestic
and international markets, and possibly cause patients to seek alternative
therapies. Such events could have a material adverse effect on the Company's
business, financial condition and results of operations. Whether the Company can
successfully manage the transition to a large scale commercial enterprise will
depend upon successful further development of its manufacturing capability and
its distribution network and attainment of foreign regulatory approvals for MUSE
(alprostadil). Failure to make such a
 
                                       21
   23
 
transition successfully would have a material adverse effect on the Company's
business, financial condition and results of operations.
 
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING
 
     The Company expects to incur substantial additional costs, including
expenses related to building its marketing and sales organization, ramping up
its second manufacturing plant in the United States, building another
manufacturing plant in Ireland, new product preclinical and clinical costs,
ongoing research and development activities, and general corporate purposes. The
Company anticipates that its existing capital resources will be sufficient to
support the Company's operations through commercial introduction of MUSE
(alprostadil) internationally but may not be sufficient for the introduction of
any additional future products. Accordingly, the Company anticipates that it may
be required to issue additional equity or debt securities and may use other
financing sources including, but not limited to, corporate alliances and lease
financing to fund the future development and possible commercial launch of its
future products. The sale of additional equity securities would result in
additional dilution to the Company's stockholders. There can be no assurance
that additional funds will be available on terms satisfactory to the Company, if
at all. Failure to obtain adequate funding could cause a delay or cessation of
the Company's product development and marketing efforts and would have a
material adverse effect upon the Company's business, financial condition and
results of operations. The Company's working capital and additional funding
requirements will depend upon numerous factors, including: (i) the level of
resources that the Company devotes to sales and marketing capabilities; (ii) the
level of resources that the Company devotes to expanding manufacturing capacity;
(iii) the activities of competitors; (iv) the progress of the Company's research
and development programs; (v) the timing and results of preclinical testing and
clinical trials; (vi) technological advances; and (vii) operating results.
 
DEPENDENCE ON KEY PERSONNEL
 
     The Company's progress to date has been highly dependent upon the skills of
a limited number of key management personnel. To reach its future business
objectives, the Company will need to hire and retain numerous qualified
personnel in the areas of sales, manufacturing, clinical trial management and
preclinical testing. There can be no assurance that the Company will be able to
hire and retain 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.
 
RISKS RELATING TO INTERNATIONAL OPERATIONS
 
     As the Company receives necessary foreign regulatory approvals, the Company
will market its products internationally. Changes in overseas economic and
political conditions, currency exchange rates, foreign tax laws or tariffs or
other trade regulations could have a material adverse effect on the Company's
business, financial condition and results of operations. The anticipated
international nature of the Company's business is also expected to subject it
and its representatives, agents and distributors to laws and regulations of the
foreign jurisdictions in which they operate or the Company's products are sold.
The regulation of drug therapies in a number of such jurisdictions, particularly
in the European Union, continues to develop, and there can be no assurance that
new laws or regulations will not have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the laws
of certain foreign countries do not protect the Company's intellectual property
rights to the same extent as do the laws of the United States.
 
PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE
 
     The commercial launch of MUSE (alprostadil) 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 included with MUSE (alprostadil),
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
 
                                       22
   24
 
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 OF PHARMACEUTICAL PRICING AND REIMBURSEMENT
 
     In the United States and elsewhere, sales of pharmaceutical products
currently are dependent, in part, on the availability of reimbursement to the
consumer from third party payors, such as government and private insurance
plans. Third party payors are increasingly challenging the prices charged for
medical products and services. While more than 70 percent of prescriptions for
MUSE (alprostadil) were reimbursed by third party payors in 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 its transurethral system for erection for
reimbursement in the managed care environment. However, the Company is unable to
predict the reimbursement policies employed by third-party health care payors.
Furthermore, attempts at qualifying its transurethral system for erection for
reimbursement could be adversely affected by changes in reimbursement policies
of governmental or private health care payors.
 
UNCERTAINTY AND POSSIBLE NEGATIVE EFFECTS OF HEALTHCARE REFORM
 
     The healthcare industry is undergoing fundamental changes that are the
result of political, economic and regulatory influences. The levels of revenue
and profitability of pharmaceutical companies may be affected by the continuing
efforts of governmental and third party payors to contain or reduce healthcare
costs through various means. Reforms that have been and may be considered
include mandated basic healthcare benefits, controls on healthcare spending
through limitations on the 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 recently experienced significant price and volume
fluctuations unrelated to the operating performance of particular companies. In
addition, the market price of the Company's Common Stock has been highly
volatile and is likely to continue to be so. Factors such as variations in the
Company's financial results, comments by security analysts, the Company's
ability to scale up its manufacturing capability to commercial levels, adverse
regulatory actions or decisions, the Company's ability to increase demand for
its product in the United States, the Company's ability to successfully sell its
product in the United States and internationally, any loss of key management,
the results of the Company's clinical trials or those of its competition,
announcements of technological innovations or new products by the Company or its
competition, changing governmental regulations, patents or other proprietary
rights, product or patent litigation or public concern as to the safety of
products developed by the Company, may have a significant effect on the market
price of the Company's Common Stock.
 
                                       23
   25
 
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 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.
 
ITEM 2. PROPERTIES
 
     The Company currently occupies approximately 53,000 square feet of space in
Mountain View, California under a fifteen year non-cancelable operating lease
which expires in 2012. The Company's facility serves 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.
 
     In June 1995, the Company completed constructing and equipping to its
specifications approximately 6,000 square feet of manufacturing and testing
space within Paco's facility in Lakewood, New Jersey. In January and February
1997, the Company executed a five year lease for two buildings in New Jersey
totalling 90,000 square feet in which it has constructed additional
manufacturing and testing facilities.
 
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. Two identical complaints were
subsequently filed in the same court. The complaints were filed on behalf of a
purported class of persons who purchased stock between May 15 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 by
issuing false financial statements. The complaints do not specify the damages
resulting from the alleged conduct. On March 20, 1998, the Company learned that
a federal class action had been filed against the Company and certain current
and former officers and directors in the United States District Court for the
Northern District of California. The federal complaint asserts the same factual
allegations, but asserts legal claims under the Federal Securities Laws. The
Company believes the complaints lack merit and the Company will vigorously
defend itself in the pending actions.
 
                                       24
   26
 
     A former consultant to the Company had claimed that he was the inventor of
certain technology disclosed in two of the Company's patents. The former
consultant further claimed that the Company and certain of its officers and
directors defrauded him by allegedly failing to inform him that it intended to
use and patent this technology and by failing to compensate him for the
technology in the manner allegedly promised. In May 1996, the Company filed a
complaint for declaratory judgment against the former consultant in the United
States District Court for the Northern District of California, which sought a
declaration from the court that the former consultant was not an inventor of any
of the technology. In September 1996, the consultant filed his counterclaim. In
December 1997, the Company reached a settlement with the former consultant
whereby the former consultant dismissed his claims against the Company and the
Company's officers and directors involved in the lawsuit. In return, the Company
paid the consultant $5.1 million. The Company recorded the settlement on its
books in the fourth quarter of 1997 and paid the settlement on January 5, 1998.
 
     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, 1997.
 
                                       25
   27
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Company's Common Stock trades publicly on The Nasdaq Stock Market under
the symbol "VVUS". The following table sets forth for the periods indicated the
quarterly high and low closing sales prices of the Common Stock on The Nasdaq
Stock Market.
 


                                                  THREE MONTHS ENDED
                                    -----------------------------------------------
                                    MARCH 31   JUNE 30   SEPTEMBER 30   DECEMBER 31
                                    --------   -------   ------------   -----------
                                                            
1997
High..............................   $39.06    $25.88       $38.13        $40.56
Low...............................    18.75     15.31        22.81          9.94
 
1996*
High..............................   $15.63    $16.38       $20.38        $19.00
Low...............................    11.88     13.00        14.44         14.50

 
- ---------------
* Adjusted to reflect the Company's two-for-one stock split reflected on the
  Nasdaq Stock Market on June 24, 1997.
 
     As of February 27, 1998, there were no outstanding shares of Preferred
Stock and 659 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.
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The information required by this item is incorporated by reference from the
section captioned "Selected Financial Data" of the Registrant's Annual Report.
Such information is also set forth in Exhibit 13.1 attached hereto.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     The information required by this item is incorporated by reference from the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of the Registrant's Annual Report. Such information
is also set forth in Exhibit 13.1 attached hereto.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
 
     The information required by this item is incorporated by reference from the
sections captioned "Consolidated Balance Sheets", "Consolidated Statements of
Operations", "Consolidated Statements of Shareholders' Equity", "Consolidated
Statements of Cash Flows", "Notes to Consolidated Financial Statements" and
"Report of Independent Public Accountants" of the Registrant's Annual Report.
Such information is also set forth in Exhibit 13.1 attached hereto.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                    PART III
 
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
 
     The information required by this item is incorporated by reference from the
discussion in the Proxy Statement captioned "Proposal One: Election of
Directors."
 
                                       26
   28
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The information required by this item is incorporated by reference from the
discussion in the Proxy Statement captioned "Executive Compensation."
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this item is incorporated by reference from the
discussion in the Proxy Statement captioned "Record Date and Share Ownership."
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     This information required by this item is incorporated by reference from
the discussion in the Proxy Statement captioned "Certain Transactions and
Reports."
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
 
(a) The following documents are filed as part of this Report:
 
     1. FINANCIAL STATEMENTS
 
     Financial statements have been incorporated by reference to the
Registrant's Annual Report.
 
     2. FINANCIAL STATEMENT SCHEDULES
 
     Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the consolidated financial
statements or notes thereto incorporated by reference herein.
 
     3. EXHIBITS
 


          NUMBER
          ------
                    
             ##3.2     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
            ###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

 
                                       27
   29
 


          NUMBER
          ------
                    
            *+10.4     License Agreement by and between Gene A. Voss, M.D., Allen
                       C. Eichler, M.D., and the Registrant dated Decmeber 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
            ++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

 
                                       28
   30
 


          NUMBER
          ------
                    
           ##+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.
              13.1     Portions of the 1997 Annual Report to Security Holders......
              21.2     List of Subsidiaries........................................
              23.1     Consent of Independent Public Accountants...................
              24.1     Power of Attorney (see "Power of Attorney").................
              27.1     Financial Data Schedule

 
- ---------------
        * 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.
 
                                       29
   31
 
    ### 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.
 
+         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
 
                                       30
   32
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:
 
                                        VIVUS, INC.,
                                        a Delaware Corporation
 
                                        By: /s/ DAVID C. YNTEMA
                                           -------------------------------------
                                           David C. Yntema
                                           Vice President of Finance and Chief
                                            Financial Officer
                                           (Principal Financial and Accounting
                                            Officer)
Date: March 31, 1998
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints each of Leland F. Wilson and David C.
Yntema as his attorney-in-fact for him, in any and all capacities, to sign each
amendment to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact or his substitute or substitutes may lawfully do or cause to be
done by virtue hereof.
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
 


                       SIGNATURE                                      TITLE                   DATE
                       ---------                                      -----                   ----
                                                                                   
                  /s/ LELAND F. WILSON                     President, Chief Executive    March 31, 1998
- --------------------------------------------------------  Officer (Principal Executive
                    Leland F. Wilson                          Officer) and Director
 
                  /s/ VIRGIL A. PLACE                       Chairman of the Board and    March 31, 1998
- --------------------------------------------------------  Chief Scientific Officer and
                    Virgil A. Place                                 Director
 
                  /s/ DAVID C. YNTEMA                     Vice President of Finance and  March 31, 1998
- --------------------------------------------------------     Chief Financial Office
                    David C. Yntema                         (Principal Financial and
                                                               Accounting Officer)
 
                  /s/ RICHARD L. CASEY                              Director             March 31, 1998
- --------------------------------------------------------
                    Richard L. Casey
 
                  /s/ JOSEPH E. SMITH                               Director             March 31, 1998
- --------------------------------------------------------
                    Joseph E. Smith
 
                   /s/ BRIAN H. DOVEY                               Director             March 31, 1998
- --------------------------------------------------------
                     Brian H. Dovey
 
                   /s/ LINDA JENCKES                                Director             March 31, 1998
- --------------------------------------------------------
                     Linda Jenckes
 
                /s/ ELIZABETH A. FETTER                             Director             March 31, 1998
- --------------------------------------------------------
                  Elizabeth A. Fetter

 
                                       31
   33
 
                                  VIVUS, INC.
 
            REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
 
                               INDEX TO EXHIBITS*
 


EXHIBIT                                                                  SEQUENTIALLY
 NUMBER                            EXHIBIT NAME                          NUMBERED PAGE
- -------                            ------------                          -------------
                                                                   
**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....................................................
**10.27A   Amended and Restated Addendum 1091, dated as of October 29,
           1997, between VIVUS International Limited and Janssen
           Pharmaceutica International.................................
 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.....................
 13.1      Portions of the 1997 Annual Report to Security Holders......
 21.2      List of Subsidiaries........................................
 23.1      Consent of Independent Public Accountants...................
 24.1      Power of Attorney (see "Power of Attorney").................
 27.1      Financial Data Schedule.....................................

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

EX-10.22A

   1

                                                                  EXHIBIT 10.22A

                                  AMENDMENT ONE
                         TO THE MANUFACTURING AGREEMENT
                        BY AND BETWEEN VIVUS AND CHINOIN



        This AMENDMENT ONE to the Manufacturing Agreement by and between VIVUS,
Inc., having a principal place of business at 545 Middlefield Road, Suite 200,
Menlo Park, CA 94025, United States of America ("VIVUS"), and CHINOIN
PHARMACEUTICAL AND CHEMICAL WORKS CO., LTD., having a principal place of
business at H-1045 Budapest, To u. 1-5 Hungary ("Chinoin") is entered into as of
December 11, 1997. Terms that are capitalized in this Amendment and not defined
herein shall have the meanings ascribed to them in the Agreement (as defined
below).


        WHEREAS, VIVUS and Chinoin have entered into that certain Manufacturing
Agreement dated December 12, 1995 (the "Agreement");

        WHEREAS, the parties desire to amend the Agreement to modify, among
other things, terms related to price and quantity;

        NOW, THEREFORE, in consideration of the mutual covenants and promises
herein contained, the parties hereto agree to amend the Agreement as follows:

        1. The parties hereby acknowledge and agree that the Agreement was
           between Chinoin and VIVUS, Inc., a California corporation, which has
           been merged into its wholly subsidiary, VIVUS, Inc., a Delaware
           corporation. The parties hereby agree that VIVUS, Inc., a Delaware
           corporation, assumes all rights and benefits of VIVUS, Inc., a
           California corporation, under the Agreement. The parties further
           agree that for purposes of the Agreement and this Amendment, "VIVUS"
           shall mean VIVUS, Inc., a Delaware corporation.

        2. The parties hereby agree that the First Agreement Year as defined in
           the Agreement is 1997.

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

               2.6  Maximum Quantities. Chinoin shall not be obligated to supply
                    to VIVUS more than [*] of the Product in any Agreement Year,
                    provided that Chinoin agrees to use all reasonable efforts
                    to supply any quantities in excess of such amounts as VIVUS
                    may order at a price agreed between the parties pursuant to
                    Section 2.7.


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



                                       1
   2

        4. Section 2.7 of the Agreement is hereby amended in its entirety to
           read as follows:

               2.7  Price. The price to be paid by VIVUS per gram of the Product
                    ordered by VIVUS shall be based upon the quantities of the
                    Product ordered by VIVUS for delivery during the particular
                    Agreement Year, as follows:

                      Quantity Ordered for Delivery
                      During the Agreement Year           U.S. $/gram

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

           The price of any quantity in excess of [*] grams in each Agreement
           Year, if any, shall be agreed upon by the parties. It is understood
           that the foregoing prices are based upon the total cumulative
           quantities ordered by VIVUS for delivery during the particular
           Agreement Year, and not only on the size of the particular order. It
           is also understood that the prices are for the incremental quantities
           (i.e. the first [*] will be at [*], the next quantities will be at
           [*] and so on). These prices shall be effective beginning calendar
           year 1998.

        5. Section 2.9 of the Agreement is hereby amended in its entirety to
           read as follows:

               2.9  Terms. All prices set forth in section 2.7 shall be
                    Delivered Duty Unpaid (DDU) to a U.S. airport (in the case
                    of shipment by airfreight) or to any U.S. address ( in the
                    case of shipment by courier service). The manner of shipment
                    shall be designated by Chinoin and the U.S. airport or
                    address shall be designated by VIVUS. The title and risk of
                    loss will transfer to VIVUS at such a delivery point.
                    Payments shall be made in U.S. dollars by settling each of
                    Chinoin's invoices in two equal installments, the first of
                    which shall be made thirty (30) days from the date of the
                    invoice accompanying the shipment and the second of which
                    shall be made sixty (60) days from the date of the invoice
                    accompanying the shipment. Payment shall be made by direct
                    bank transfer to an account designated by Chinoin.

        6. Section 2.11 of the Agreement is hereby amended in its entirety to
           read as follows:

               2.11  Packaging.   [*]


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



                                       2
   3

        7.  Section 2.12.1 of the Agreement is hereby amended in its entirety to
            read as follows:

               2.12.1 Minimum Quantities. VIVUS agrees to purchase the [*]
                      during the [*] Areement Years, provided, however, that
                      VIVUS is experiencing ordinary business conditions. In the
                      case of an unexpected decrease of its consumption of
                      Product, VIVUS may notify Chinoin that it will be unable
                      to meet the Initial Annual quantity obligation, and it may
                      purchase a lower quantity of the Product in the Agreement
                      Year concerned, provided, however, that in no event shall
                      the minimum quantity purchased by VIVUS in such Agreement
                      Year fall below [*].

        8.  Sections 2.12.2 and 2.12.3 of the Agreement are hereby deleted in
            their entirety.

        9.  Section 2.12.4 of the Agreement is hereby amended in its entirety to
            read as follows:

               2.12.4 Effect of the Minimum Quantities. The minimum quantities
                      indicated in 2.12.1 above shall have no effect on the
                      obligations of the parties with respect to quantities
                      already ordered for supply or included in the [*]
                      stipulated in Section 2.3.

        10. Schedule A of the Agreement is hereby amended in its entirety and is
            replaced with Amended Schedule A attached hereto.

        11. All other terms of the Agreement shall remain in full force and
            effect. In the event there is an inconsistency between this
            Amendment and the Agreement, this Amendment shall prevail.


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




                                       3
   4

        IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
representatives to execute this Amendment.


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



By: /s/ Leland F. Wilson                       By: /s/ Philpee Besse
   ------------------------------                ------------------------------
Name:    Leland F. Wilson                      Name:  Philippe Besse
     ----------------------------                   ---------------------------
Title:  Presidend and CEO                      Title: Executive Vice Presidnent
      ---------------------------                    --------------------------


                                     4
   5

                                        A

Manufacturing Agreement between VIVUS and CHINOIN

CHINOIN                             QUALITY          Code:
Quality Control - Prostaglandins    SPECIFICATION    A-PGU/SZME/0648/01/97
                                    PGE(1)

        Prepared on:  20-Oct-97                                  ID#:

        Effective from:  01-Dec-97                               Page: 1/12

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


                                   ALPROSTADIL
                                     (PGE1)



                              QUALITY REQUIREMENTS


                      [*]                              [*]

                      [*]                              [*]

                      [*]                              [*]

                      [*]                              [*]

                      [*]                              [*]

- --------------------------------------------------------------------------------
Translated by:  Pal Vofely


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



                                       5
   6

Controlled by:  Ervin Vajda  /s/ Ervin Vajda
        PG Chemical Development

                                        Approved by:  /s/ Dr. Zoltan Szeverenyi
                                                      PG Quality Control manager


                                      6
   7

                                        A

Manufacturing Agreement between VIVUS and CHINOIN

CHINOIN                             QUALITY          Code:
Quality Control - Prostaglandins    SPECIFICATION    A-PGU/SZME/0648/01/97
                                    PGE(1)

        Prepared on:  20-Oct-97                                  ID#:

        Effective from:  01-Dec-97                               Page: 1/12

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









                                       [*]










- --------------------------------------------------------------------------------
Translated by:  Pal Vofely

Controlled by:  Ervin Vajda  /s/ Ervin Vajda
        PG Chemical Development

                                        Approved by:  /s/ Dr. Zoltan Szeverenyi
                                                      PG Quality Control manager



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



                                       7

EX-10.27A

   1

                                                                  EXHIBIT 10.27A

                       AMENDED AND RESTATED ADDENDUM 1097

        This Amended and Restated Addendum (hereinafter "Addendum 1097R")
effective as of the 29th day of October 1997, between VIVUS International
Limited, a company organized under the laws of Bermuda and having a place of
business at Clarendon House, Church Street, Hamilton, Bermuda ("VIVUS"), a
wholly-owned subsidiary of VIVUS, Inc., a Delaware corporation ("VIVUS, Inc."),
and Janssen Pharmaceutica International, a division of Cilag AG International,
and having its registered office at Kollerstrasse 38, CH-6300, Zug., Switzerland
("Janssen").

                                    RECITALS

WHEREAS VIVUS and Janssen along with certain of their Affiliates have entered
into a Distribution Agreement dated January 22, 1997 ("Agreement 197").

WHEREAS VIVUS and Janssen entered into an addendum to Agreement 197 dated
October 29, 1997, pursuant to which the parties expanded the Territory for which
Janssen is responsible under Agreement 197 ("Addendum 1097").

WHEREAS VIVUS and Janssen wish to supersede and replace Addendum 1097 in its
entirety with this Addendum 1097R.

NOW, THEREFORE, VIVUS and Janssen agree to modify or supplement obligations
under Agreement 197 as follows:

1. This Addendum 1097R hereby amends and revises Agreement 197 to incorporate
the terms and conditions set forth in this Addendum 1097R. In addition, this
Addendum 1097R hereby supersedes and replaces Addendum 1097. The relationship of
the parties shall continue to be governed by the terms and conditions of the
Agreement 197, as amended and revised herein; and in the event that there is any
conflict between the terms and conditions of the Agreement 197 and this Addendum
1097R, the terms and conditions of this Addendum 1097R shall control. As used in
this Addendum 1097R all capitalized terms shall have the meanings defined for
such terms in this Addendum 1097R or, if not defined in the Addendum 1097R, the
meanings defined in the Agreement 197.

2. "Territory" as defined in Section 1.15 shall be expanded to include the
countries listed in Exhibit 1097A ("Expansion Territory") along with the Janssen
Subdistributors presently responsible for each country.


   2

3. Addendum 1097 Initial and Milestone Payments. Without modification of the
rights and obligations of Agreement 197, in consideration of the costs incurred
by VIVUS in connection with the research and development of the Product and in
exchange for the exclusive rights granted herein, Janssen shall pay VIVUS the
following non-refundable one time fees:

(a) [*] of the end of the first year in which [*] of Product in the Expansion
Territories [*];

(b) [*] of the end of the first year in which [*] of Product in the Expansion
Territories [*];

(c) [*] of the end of the first year in which [*] of Product in the Expansion
Territories [*];

and 

(d) [*] of the end of the first year in which [*] of Product in the Expansion
Territories [*]. For avoidance of doubt, the milestone payments for (a) through
(d) above are cumulative. For example, if in the first year of sales of Product
[*] in the Expansion Territory were in [*] then Janssen would owe VIVUS [*] ([*]
for [*] in [*] for [*] in [*] and [*] for [*] in [*]).

As additional consideration for the exclusive rights granted herein, Janssen
paid to VIVUS $2 million on or about November 7, 1997, the receipt of which is
hereby acknowledged by VIVUS.

4. For the "fraction" calculated in Section 4.1.2, the calculation of the
numerator and the denominator will include only the countries of [*].

5. Add a Section 4.3:

   4.3  Expansion Territory Diligence and Marketing.

        4.3.1 Diligence. Janssen will meet all obligations of Agreement 197 for
        countries of the Expansion Territory as if they were countries of the
        Territory as defined in Section 1.15. Regardless of the foregoing,
        Janssen shall be presumed to meet (i) its required [*] to register First
        Product of Section 3.3 and (ii) its required [*] to launch and sell
        First Product of Section 4.1.1 and (iii) its requirement to "launch" the
        First Product [*] of MAA approval of Section 4.1.2 for the countries of
        the Expansion Territory listed as follows: 
        (a) [*]; 
        (b) [*]; 
        (c) [*];
        (d) [*]; 
        [*] In each case of (a) through (d) for so long as Janssen is using


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





                                      -2-
   3


        4.3.2 Expansion Territory Reversion. In the event that one of the
        following countries cease to be a part of the Territory or of the
        Expansion Territory then the countries named below in association
        therewith may at VIVUS' option on a country by country basis also cease
        to be a part of the Territory or of the Expansion Territory if Janssen
        and/or its Affiliates or Sublicensees are not marketing in such
        associated country or countries: 
        (a) [*]; 
        (b) [*]; 
        (c) [*]; 
        (d) [*]; 
        (e) [*].

        4.3.3 Marketing. For the Expansion Territory, [*], Janssen may meet its
        obligation to "prepare reasonably detailed marketing plans" of Section
        3.4.1 by consolidating the individual country plans into [*] regional
        plans.

6. In accordance with the terms of Section 4.2, VIVUS will provide one-time
training in English at two additional locations.

7. In Section 6.2.1(b), for "All other countries together" the value of [*] will
be amended to [*] and [*] will be amended to [*].

8. In accordance with the terms of Section 9.3, VIVUS agrees to file, register,
and maintain a registration for the VIVUS Trademark in the countries of the
Expansion Territory listed as follows: [*].

9. The Parties agree to adhere strictly to applicable laws of the United States
in the conduct of international commercial transactions. Notwithstanding
anything herein to the contrary, where the United States maintains an embargo
against a country of the Territory, Janssen shall be presumed to meet (i) its
required [*] to register First Product of Section 3.3 and (ii) its required [*]
to launch and sell First Product of Section 4.1.1 and (iii) its requirement to
"launch" the First Product [*] of MAA approval of Section 4.1.2 for the term of
such embargo.

10. Sales of Product in the countries [*] will not operate to begin the running
of the two year period referred to in Section 6.2.1(c)(i).

11. The Agreement 197, Addendum 497 and this Addendum 1097R and the Exhibits


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




                                      -3-
   4

hereto and thereto constitute the entire agreement between the parties in
connection with the subject matter thereof and supersede all prior and
contemporaneous agreements, understandings, negotiations and discussions,
whether oral or written, of the parties, including without limitation Addendum
1097.

IN WITNESS WHEREOF, the parties hereto have caused this Addendum 1097R to be
executed by their duly authorized representatives on the dates indicated below.


                 VIVUS                                  JANSSEN

BY:  /s/ Leland F. Wilson                     BY:  /s/ Heinz Schmid
    ------------------------------                ------------------------------
                                                       Heinz Schmid
                                                       General Manager

DATE:   Jan. 7, 1998                          DATE:   Jan. 16, 1998
      ----------------------------                  ----------------------------












                                      -4-
   5

                                  EXHIBIT 1097A

                               EXPANSION TERRITORY
                         COUNTRIES OF RESPONSIBILITY AND
                     JANSSEN AFFILIATES AND SUBDISTRIBUTORS


Countries of the Former Soviet Union and Related Area
- -----------------------------------------------------

Armenia                      Lambron Pharmimpex Co., Ltd.
                             22 K. Parpetsi Street
                             Yerevan, 375002
                             Republic of Armenia
                             (currently representing McNeil Tylenol)

Azerbaijan                   agency agreements currently being negotiated

Belarus                      Belpharm
                             Masherov Ave. 23
                             220004 Minsk
                             Belarus

Georgia                      Beta-2 Ltd.
                             45, Vazha Pshavela Ave.
                             Tbilisi, Georgia

Kazachstan                   Interfarma K
                             Park of Republic
                             Spartak Stadium, Build. 1
                             480100 Almaty
                             Kazachstan

Krygyzstan                   currently no representation

Mongolia                     currently no representation

Russia                       Janssen-Cilag
                             A division of Johnson & Johnson Ltd.
                             43, Bolshaya Tulskaya
                             Moscow 113191
                             Russia

Tajikistan                   currently no representation

Turkmenistan                 agency agreements currently being negotiated

Ukraine                      B. D. Lux SA
                             Leontovitch Str. 9





                                      -5-
   6

                             252030 Kiev
                             Ukraine

Uzbekistan                   Berlin Chemie (Janssen-Cilag)
                             Uzbekistanski av. 98
                             Tashkent 700027
                             Uzbekistan

Countries of the Mideast and Related Area
- -----------------------------------------

Afghanistan                  currently no representation

Bahrain                      Wael Pharmacy & Drug Store
                             P. O. Box 648 Manama
                             Arabian Gulf

Egypt                        Sofico Pharm
                             12 Ismail El Kabani Street
                             Nasr City, Cairo

Iran                         Jahan Behbood Co.
                             Farbro Bldg. No. 17
                             Seventh Str. Naft Ave., Mirdamad Blvd.
                             Teheran

Iraq                         currently no representation

Jordan                       Mina Drug Stores & Co.
                             P. O. Box 1010, Basman Str,
                             11118 Amman

Kuwait                       Al Mojil Drug Co.
                             P. O. Box 2761 - Al-Kwful Bldg. No. 11
                             Flat 27, Hilali Str.
                             Safat 13028

Lebanon                      Mersaco S.A.L.
                             Sami Sohl Street
                             P. O. Box 11-9073
                             Beirut

Libya                        A. M. Mangion Ltd.
                             U.B. 42 Industrial Estate, San Gwann
                             Malta

Oman                         Waleed Pharmacy
                             P. O. Box 437 Muscat 113
                             Sultanate of Oman





                                      -6-
   7

Qatar                        EBN Sina Medical Est.
                             P.O. Box 337, Bin Jassem Al Thani
                             Doha

Saudi Arabia                 Al Haya Medical Company
                             P. O. Box 442
                             Marwan Bin Malek Str., Hay Al Moe'tarat
                             Riyadh 11411

Sudan                        Dr. Nabil Pharmaceutical Ent.
                             P.O. Box 2989
                             Khartoum West

Syria                        Damascus Scientific Office
                             Ain el Kurch, Jadet Zarka, Soubhi Dabbas Bldg.
                             No. 10, 3rd Floor
                             P.O. Box 2659 Damascus

United Arab Emirates         City Pharmacy
                             P.O. Box 23841
                             Dubai
                             U.A.R.

Yemen                        Arra'Afah Corporation
                             Ali Abdulmughni Street
                             P. O. Box 1090 Sana'a


Countries of the Indian Sub-Continent and Related Area
- ------------------------------------------------------

Bangladesh                   Fisons Ltd.
                             Fisons House
                             6/2/A Segun Bagicha
                             GPO Box 676
                             Dahaka - 1000

India                        J&J/Janssen Cilag
                             30 Forjett Street
                             P.O. Box 9301 Mumbai
                             Bombay 400 036

Pakistan                     J&J/Janssen Cilag
                             Plots 10 + 25, Sektor 20
                             Korangi, Industrial Area
                             Karachi 75180

Sri Lanka                    Pettah Pharmacy Ltd.





                                      -7-
   8

                             8-4/2 Leyden Bastian Road
                             York Aecade Building
                             Colombo 1

Countries of Africa
- -------------------

Burundi                      Dispopharm AG
                             Baseler Strasse 364
                             P.O. Box 36
                             CH-1241 Allschwil

Ethiopia                     640-123Pharma (Share Company)
                             P. O. Box 1122, Addis Abada
                             Mahatama Gandhi Road, Addia Ababax

Ghana                        Abba Promotions, West Africa
                             P. O. Box 1820 Mamprobi Accra
                             1st Floor, Sedco Publishing House
                             Tabon Street, North Ridge, Accra

Kenya                        Twiga Chemical Industries Limited
                             P. O. Box 30172 Nairobi
                             16th Floor, View Park tower
                             Uhuru Highway, Nairobi

Malawi                       Pharma Chemie Ltd.
                             P. O. Box 392 Blantyre
                             Kidney Crescent, off Kamazu, Blantyre

                             Pharma Vet
                             P. O. Box 2957, Blantyre, Malawi

Namibia                      Geka Pharma Pty. Ltd.
                             Box 683, Windhoek, Namibia
                             46 Mandume Ndemufayo Ave.
                             Windhoek

Rwanda                       Dispopharm AG
                             Baseler Strasse 364
                             P. O. Box 36
                             CH-1241 Allschwil

Tanzania                     Diocare Limited
                             P. O. Box 70257, Dar Es Salaam





                                      -8-
   9

                             Mansoor Daya Chemicals Limited
                             P. O. Box 2999 Dar Es Salaam
                             JPS Building, Pugu Road, Dar Es Salaam

                             Medipharm Limited
                             P. O. Box 77032 Dar Es Salaam
                             Samora Avenue, Dar Es Salaam

                             Twiga Chemical Industries (Tanzania) Ltd.
                             P. O. Box 20786, Dar Es Salaam
                             Saza Rd., Chang'ombe
                             Dar Es Salaam

Uganda                       Twiga Chemical Industries (Uganda) Ltd.
                             P. O. Box 4800, Kampala
                             Plot No. 71, 7th Street, Industrial Area
                             Kampala

Zaire                        Dispopharm AG
                             Baseler Strasse 364
                             P. O. Box 36
                             CH-1241 Allschwil

Zambia                       Gamma Pharmaceuticals Ltd.
                             P O. Box 70286 Ndola
                             Zambia Road, Ndola

Zimbabwe                     Johnson & Johnson (Pvt.) Limited
                             P. O. Box 3355, Harare
                             310 Woodlands Estate
                             Masasa, Harare

Other

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

North Korea                  currently no representation








                                      -9-
   10


                                  EXHIBIT 1097A


COUNTRY                             RESPONSIBLE COUNTRY

Algeria                             Janssen-Cilag France
Benin                               Janssen-Cilag France
Burkina Faso                        Janssen-Cilag France
Cameroon                            Janssen-Cilag France
Central African Republic            Janssen-Cilag France
Chad                                Janssen-Cilag France
Comoros                             Janssen-Cilag France
Congo                               Janssen-Cilag France
Cote d'Ivoire                       Janssen-Cilag France
Djibouti                            Janssen-Cilag France
Gabon                               Janssen-Cilag France
Guinea                              Janssen-Cilag France
Ivory Coast                         Janssen-Cilag France
Madagascar                          Janssen-Cilag France
Maji                                Janssen-Cilag France
Mauritania                          Janssen-Cilag France
Morocco                             Janssen-Cilag France
Niger                               Janssen-Cilag France
Senegal                             Janssen-Cilag France
Togo                                Janssen-Cilag France
Tunisia                             Janssen-Cilag France

Angola                              Janssen-Cilag South Africa
Bophuthatswana                      Janssen-Cilag South Africa
Botswana                            Janssen-Cilag South Africa
Ethiopia                            Janssen-Cilag South Africa
Kenya                               Janssen-Cilag South Africa
Lesotho                             Janssen-Cilag South Africa
Malawi                              Janssen-Cilag South Africa
Mozambique                          Janssen-Cilag South Africa
Namibia                             Janssen-Cilag South Africa
Swaziland                           Janssen-Cilag South Africa
Tanzania                            Janssen-Cilag South Africa
Tanskei                             Janssen-Cilag South Africa
Uganda                              Janssen-Cilag South Africa
Zambia                              Janssen-Cilag South Africa
Zimbabwe                            Janssen-Cilag South Africa
Zansibar                            Janssen-Cilag South Africa

Burundi                             Janssen-Cilag Zug
Egypt                               Janssen-Cilag Zug
Eritrea                             Janssen-Cilag Zug





                                      -10-
   11

Gambia                              Janssen-Cilag Zug
Ghana                               Janssen-Cilag Zug
Liberia                             Janssen-Cilag Zug
Libya                               Janssen-Cilag Zug
Nigeria                             Janssen-Cilag Zug
North Korea                         Janssen-Cilag Zug
Rwanda and Burundi                  Janssen-Cilag Zug
Seychelles                          Janssen-Cilag Zug
Sierra Leone                        Janssen-Cilag Zug
Somalia                             Janssen-Cilag Zug
Sudan                               Janssen-Cilag Zug
Zaire                               Janssen-Cilag Zug












                                      -11-

EX-10.32A

   1

                                                                  EXHIBIT 10.32A

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

                                AIA Document A111

                           STANDARD FORM OF AGREEMENT
                          BETWEEN OWNER AND CONTRACTOR

                        where the basis of payment is the
                           COST OF THE WORK PLUS A FEE
                   with or without a Guaranteed Maximum Price

                                  1987 EDITION

        THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES: CONSULTATION WITH AN
ATTORNEY IS ENCOURAGED WITH RESPECT TO ITS COMPLETION OR MODIFICATION.

        The 1987 Edition of AIA Document A201. General Conditions of the
        Contract for Construction is adopted in this document by reference. Do
        not use with other general conditions unless this document is modified.

  This document has been approved and endorsed by The Associated General
Contractors of America.

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

AGREEMENT

made as of the 19th day of December in the year of Nineteen Hundred and Ninety
Seven.

BETWEEN the Owner:
(Name and Address)           VIVUS, INC.
                             545 Middlefield Road, Suite 200
                             Menlo Park, CA  94025

and the Contractor:          ADP MARSHALL, INC.
(Name and address)           75 Newman Avenue
                             Rumford, RI  02916

the Project is:              VIVUS MANUFACTURING FACILITY IMPROVEMENT PROJECT
                             735 and 745 Airport Road
                             Lakewood, NJ  08701

the Architect is:            O'BRIEN - ATKINS ASSOCIATES
(Name and address)           P.O. Box 12037
                             Morrisville, NC  27709

The Owner and Contractor agree as set forth below.


   2

                                    ARTICLE 1
                             THE CONTRACT DOCUMENTS

1.1 The Contract Documents consist of this Agreement, Conditions of the Contract
General, Supplementary and other Conditions, Drawings, Specifications, addenda
issued prior to execution of this Agreement, other documents listed in this
Agreement and Modifications issued after execution of this Agreement: these form
the Contract and are as fully a part of the Contract as if attached to this
Agreement or repeated herein. The Contract represents the entire and integrated
agreement between the parties hereto and supersedes prior negotiations,
representations or agreements, either written or oral. An enumeration of the
Contract Documents, other than Modifications, appears in Article 16. If anything
in the other Contract Documents is inconsistent with this Agreement, this
Agreement shall govern.

                                    ARTICLE 2
                            THE WORK OF THIS CONTRACT

2.1 The Contractor shall execute the entire Work described in the Contract
Documents, except to the extent specifically indicated in the Contract Documents
to be the responsibility of others.

2.2 The Work includes Preconstruction Services (as defined in 2.3 below) and all
labor, materials, equipment and services contemplated by the Construction
Documents (including, without limitation, the Drawings ("Drawings") and
Specifications ("Specifications") prepared by the Architect, as more
particularly described in Exhibit A attached hereto and made a part hereof) for
the following improvements:

        2.2.1 The installation and construction of a cold box, five thousand
(5,000) square feet of office space, four (4) packaging rooms (with an equipment
mezzanine overhead), shipping/receiving docks and related utilities/services
within the single-story metal building located at 735 Airport Road, Lakewood,
New Jersey in the area south of the existing masonry demising wall
(collectively, the "735 Improvements");

        2.2.2 The installation and construction of eight thousand five hundred
(8,500) square feet of "Class 10,000 Cleanrooms" and an additional forty-one
thousand (41,000) square feet of space consisting of office, laboratory and
warehouse space, including utilities, services and an equipment mezzanine above
the proposed packaging areas therein within the single-story metal building
located at 745 Airport Road, Lakewood, New Jersey, underground utility, pad and
equipment site work and cleanroom validation assistance (collectively, the "745
Improvements");

        2.2.3 The installation of a cold box and related service upgrades at the
E-Beam Services, Inc. facility located at 32 Melrich Road in Cranbury, New
Jersey (collectively, the E-Beam Improvements"); and

        2.2.4 The installation of base cabinet, cart and counter top
improvements at the Paco Facility located on Paco Way in Lakewood, New Jersey
(collectively, the "Paco Improvements").





                                      -2-
   3

        2.2.5 The 735 Improvements, 745 Improvements, E-Beam Improvements, and
Paco Improvements are collectively referred to herein as the "Work."

2.3 The preconstruction activities and services (the "Preconstruction Services")
associated with the design and construction of the Work to be performed by the
Contractor include, without limitation, the following:

        2.3.1 Provide recommendations on relative feasibility of construction
methods, availability of materials and labor, time requirements for procurement,
installation and construction, and factors related to cost including, costs of
alternative designs or materials, preliminary budgets and possible economies.

        2.3.2 Review designs and details during their development. Advise on use
and improvements, selection of materials, building systems and equipment and
methods of Project delivery. Provide recommendations on relative feasibility of
construction methods, availability of materials and labor, time requirements for
procurement, installation and construction, and factors related to cost
including, without limitation, costs of alternative designs or materials.

        2.3.3 Provide for the Architect's and the Owner's review and acceptance,
and periodically update, a Project schedule that coordinates and integrates the
Contractor's services hereunder and the Owner's responsibilities with
anticipated construction schedules for each component of the Project.

        2.3.4 Advise on the method to be used for selecting Subcontractors and
awarding Subcontracts. Review the drawings and specifications and make
recommendations as required to provide that the Work of the Subcontractors is
coordinated.

        2.3.5 Provide recommendations and information to the Owner and the
Architect regarding the assignment of responsibilities for safety precautions
and programs; temporary Project facilities; and equipment, materials and
services for common use of Subcontractors.

        2.3.6 Advise on the separation of the Project into contracts for various
categories of Work. Advise on the method to be used for selecting Subcontractors
and awarding Subcontracts. Review the Drawings and Specifications and make
recommendations as required to provide that (1) the Work of the Subcontractors
is coordinated, (2) all requirements of the Project have been assigned to the
appropriate Subcontract, (3) the likelihood of jurisdictional disputes has been
minimized, and (4) proper coordination has been provided for phased
construction.

        2.3.7 Develop a Project critical path or network construction schedule
showing the relationship of the various phases of the Work which provides for
all major elements such as times of commencement and completion required of each
Subcontractor.

        2.3.8 Investigate and recommend a schedule for the Owner's purchase of
materials, equipment and third party vendors requiring long lead time
procurement, and coordinate the schedule with the early preparation of portions
of the Contract Documents by the Architect.





                                      -3-
   4

        2.3.9 Provide an analysis of the types and quantities of labor required
for the Project and review the availability of appropriate categories of labor
required for critical components of the Work. Make recommendations for actions
designed to minimize adverse effects of labor shortages.

        2.3.10 Make recommendations for pre-qualification criteria for bidders
and develop bidders' interest in the Project. Establish bidding schedules for
each component of Work. Issue bidding documents only to bidders approved by
Owner. Conduct pre-bid conferences to familiarize bidders with the bidding
documents and management techniques and with any special systems, materials or
methods. Cooperate with the Architect in responding to questions from bidders,
and with the issuance of addenda. Receive bids and prepare bid analyses and make
recommendations to the Owner for award of Subcontracts or rejection of bids.

        2.3.11 Prepare construction contracts and purchase orders for
Subcontractors for Owner's approval and advise the Owner of the acceptability of
Subcontractors and materials suppliers proposed by the Contractor.

2.4 The Contractor acknowledges that the Owner holds only a leasehold estate in
the various premises where the Work is to be performed pursuant to separate
lease agreements between the Owner and the landlords of each of the separate
premises, and that such landlords have no responsibility for the Work or the
Owner's obligations under this Agreement.

                                    ARTICLE 3
                           RELATIONSHIP OF THE PARTIES

3.1 The Contractor accepts the relationship of trust and confidence established
by this Agreement and covenants with the Owner to cooperate with the Architect
and Owner and utilize the Contractor's best skill, efforts and judgment in
furthering the interests of the Owner; to furnish efficient business
administration and supervision; to make best efforts to furnish at all times an
adequate supply of workers and materials; and to perform the Work in the best
way and most expeditious and economical manner consistent with the interests of
the Owner. The Owner agrees to exercise best efforts to enable the Contractor to
perform the Work in the best way and most expeditious manner by furnishing and
approving in a timely way information required by the Contractor and making
payments to the Contractor in accordance with requirements of the Contract
Documents.

                                    ARTICLE 4
                 DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION

4.1 The date of commencement is the date from which the Contract Time of
Subparagraph 4.2 is measured.

4.2 The Work under this Agreement commenced in January of 1997.

4.3 On or before October 15, 1997 (the "RFE Milestone Date"), the Contractor
shall complete the "Class 10,000 Cleanrooms" included as part of the 745
Improvements to the extent required for the





                                      -4-
   5

installation of the Owner's process systems production equipment therein (the
"RFE Completion Milestone"). The Work associated with the RFE Completion
Milestone shall not be deemed complete unless and until the Contractor has
substantiated to the reasonable satisfaction of the Owner that the assembly
inspection, dispensing, compounding, filling and pouching cleanrooms are
functioning in strict accordance with the design parameters set forth in the
Drawings and Specifications for such cleanrooms. [The Owner and the Contractor
acknowledge that the RFE Completion Milestone was achieved by the Contractor on
the RFE Milestone Date and that the Contractor is entitled to receive a
Ninety-Six Thousand Four Hundred Twenty Dollar ($96,420) schedule incentive in
connection therewith.]

4.4 The Contractor shall achieve Substantial Completion of the entire Work
(except for the procurement and installation of laboratory furniture for the
analytical laboratory space at 745 Airport Road, stainless steel casework and
counters for the compounding areas and the "hot" USP Water System (collectively,
the "Laboratory Furniture Installation")) on or before December 19, 1997 (the
"Scheduled Substantial Completion Date"). Contractor is required to complete all
Work related to the Laboratory Furniture Installation by no later than January
24, 1998. Time is of the essence in the completion of the Work. As more fully
set forth in Article 5 hereof, the guaranteed maximum price established for the
various components of the Work include contingency funds for, among other items,
overtime and acceleration of the Work, which are intended to ensure that the
Contractor will (1) complete all Work required for the RFE Completion Milestone
by no later than the RFE Milestone Date, and (2) Substantially Complete the
entire Work (except for the Laboratory Furniture Installation) by no later than
the Scheduled Substantial Completion Date.

                                    ARTICLE 5
                                  CONTRACT SUM

5.1 The Owner shall pay the Contractor in current funds for the Contractor's
performance of the Contract the Contract Sum consisting of the Cost of the Work
as defined in Article 7 and the Contractor's Fee determined as follows:

        5.1.1 In consideration of the full and complete performance of the Work
and all other related obligations of the Contractor hereunder in connection
therewith, the Owner shall pay to the Contractor a sum of money equal to the
"Contract Sum" which is defined to be the total of the Cost of the Work (as
defined in Article 7) and the Contractor's Fee (as determined pursuant to 5.2
below). The Contract Sum is guaranteed by the Contractor not to exceed
Twenty-One Million Seventy-Four Thousand Eight Hundred Dollars ($21,074,800)
(the "Guaranteed Maximum Price").

5.2 Contractor's Fee. The Contractor's Fee shall be the amount equal to four and
one-half percent (4.5%) of the sum of the Cost of the Work, subject to the
Guaranteed Maximum Price; provided, however, that in no event will the
Contractor be entitled to charge any Contractor's fee or other additional
mark-up on any schedule incentive paid by the Owner to the Contractor,
including, without limitation, the $96,420 schedule incentive payable by the
Owner in connection with the RFE Completion Milestone.





                                      -5-
   6

5.3 Construction Contingency. The Guaranteed Maximum Price shall include a
contingency of Six Hundred Eighty-Two Thousand Two Hundred Seven Dollars
($682,207) (the "Construction Contingency"). It is understood that the
Construction Contingency represents the maximum sum available for the
Contractor's use to cover the Cost of the Work (including impact costs)
resulting from events not evidenced at the time of execution of this Agreement,
such as (1) refinement of details of the Drawings and Specifications within the
scope and standards of quality and quantities on which the Guaranteed Maximum
Price is based (but excluding additions to the scope of the Work requested by
the Owner), (2) abnormal field conditions, (3) impact costs on materials and
labor intended to be included as a part of the Work, but not reasonably
foreseeable by the Contractor, such as impact costs on materials and labor due
to Change Orders, (4) time extensions, (5) delays due to labor disputes and
severe weather conditions (other than hurricanes and blizzards), (6) other
causes of lost time which are not recoverable pursuant to Article 6 hereof; (7)
labor disputes within transportation or manufacturing industries, fixed job site
costs that continue during on-site or off-site labor disputes that materially
affect job site manpower levels, (9) delays in receipt of materials not the
fault of Contractor (10) costs for Subcontractor and Contractor overtime, (11)
costs for expediting the delivery of necessary equipment and materials, (12)
cost for higher than expected Subcontractor bids and (13) costs for bonuses to
be paid by the Owner to the Contractor for completing the Work in accordance
with the contract schedules.

        5.3.1  Intentionally Omitted.

        5.3.2 The Contractor shall not charge any sum to the Construction
Contingency without the Owner's prior written approval, which approval shall not
be unreasonably withheld or delayed. The Contractor shall deliver to the Owner
all supporting back-up documentation for such charges reasonably requested by
the Owner. No sums may be charged to the Construction Contingency to cover any
costs disapproved by the Owner pursuant to this Section 5.3. Sums may only be
charged to the extent that such amounts have been paid or are to be paid by the
Contractor.

5.4 Savings. If upon final completion of the Work, the sum of the Cost of the
Work and Contractor's Fee is less than the Guaranteed Maximum Price, then all
such savings shall benefit the Owner; if any such sum is more than the
Guaranteed Maximum Price then the Contractor shall pay such excess from its own
funds, the Owner shall not be required to pay any part of such excess, and the
Contractor shall have no claim against Owner on account thereof. The Guaranteed
Maximum Price shall be modified only as provided by Change Order.

                                    ARTICLE 6
                               CHANGES IN THE WORK

6.1     Contracts with a Guaranteed Maximum Price

        6.1.1 Adjustments to the Guaranteed Maximum Price on account of changes
in the Work may be determined by any of the methods listed in subparagraph 7.3.3
of the General Conditions, as amended by the Addendum to General Conditions.





                                      -6-
   7

        6.1.2 In calculating adjustments to subcontracts (except those awarded
with the Owner's prior consent on the basis of cost plus a fee), the terms
"cost" and "fee" as used in Clause 7.3.3.3 of the General Conditions as amended
by the Addendum to General Conditions and the terms "costs" and "a reasonable
allowance for overhead and profit" as used in Subparagraph 7.3.6 of the General
Conditions as amended by the Addendum to General Conditions shall have the
meanings assigned to them in the General Conditions and shall not be modified by
Article 5.7 and 8 of this Agreement. Adjustments to subcontracts awarded with
the Owner's prior consent on the basis of cost plus a fee shall be calculated in
accordance with the terms of those subcontracts.

        6.1.3 In calculating adjustments to this Contract, the terms "cost" and
"costs" as used in the above-referenced provisions of the General Conditions
shall mean the Cost of the Work as defined in Article 7 of this Agreement and
the terms "fee" and "a reasonable allowance for overhead and profit" shall mean
the Contractor's Fee as defined in Paragraph 5.1 of this Agreement.

                                    ARTICLE 7
                             COSTS TO BE REIMBURSED

7.1 The term Cost of the Work shall mean costs necessarily incurred by the
Contractor in the proper performance of the Work. Such costs shall be at rates
not higher than the standard paid at the place of the Project except with prior
consent of the Owner. The Cost of the Work shall include only the items set
forth in this Article 7.

        7.1.1  Labor Costs

               7.1.1.1 Wages of construction workers directly employed by the
Contractor to perform the construction of the Work at the site or, with the
Owner's prior written agreement, at off-site workshops, pursuant to the Wage and
Salary Schedule attached hereto as Exhibit A.

               7.1.1.2 Wages or salaries of the Contractor's supervisory and
administrative personnel when stationed at the site with the Owner's agreement
pursuant to the Wage and Salary Schedule attached hereto as Exhibit A.

               7.1.1.3 Wages and salaries of the Contractor's supervisory or
administrative personnel engaged, at factories, workshops or on the road, in
expediting the production or transportation of materials or equipment required
for the Work, but only for that portion of their time required for the Work.

               7.1.1.4 Costs paid or incurred by the Contractor for taxes,
insurance, contributions, assessments and benefits required by law or collective
bargaining agreements and, for personnel not covered by such agreements,
customary benefits such as sick leave, medical and health benefits, holidays,
vacations and pensions, provided such costs are based on wages and salaries
included in the Cost of the Work under Clauses 7.1.1.1 through 7.1.1.3.





                                      -7-
   8

        7.1.2  Subcontract Costs

        Payments made by the Contractor to Subcontractors in accordance with the
requirements of the subcontracts approved by Owner pursuant to Article 10.

        7.1.3 Costs of Materials and Equipment Incorporated in the Completed
Construction

               7.1.3.1 Costs, including transportation, or materials and
equipment incorporated or to be incorporated in the completed construction.

               7.1.3.2 Costs of materials described in the preceding Clause
7.1.3.1 in excess of those actually installed but required to provide reasonable
allowance for waste and for spoilage. Unused excess materials, if any, shall be
handed over to the Owner at the completion of the Work or, at the Owner's
option, shall be sold by the Contractor; amounts realized, if any, from such
sales shall be credited to the Owner as a deduction from the Cost of the Work.

        7.1.4 Costs of Other Materials and Equipment, Temporary Facilities and
Related Items

               7.1.4.1 Costs, including transportation, installation,
maintenance, dismantling and removal of materials, supplies, temporary
facilities, machinery, equipment, and hand tools not customarily owned by the
construction workers, which are provided by the Contractor at the site and fully
consumed in the performance of the Work; and cost less salvage value on such
items if not fully consumed, whether sold to others or retained by the
Contractor. Cost for items previously used by the Contractor shall mean fair
market value.

               7.1.4.2 Rental charges for necessary temporary facilities not
provided by the Owner machinery, equipment, and hand tools not customarily owned
by the construction workers, which are provided by the Contractor at the site,
whether rented from the Contractor or others, and costs of transportation,
installation, minor repairs and replacements, dismantling and removal thereof.
Rates and quantities of equipment rented shall be subject to the Owner's prior
approval.

               7.1.4.3 Costs of removal of debris from the site.

               7.1.4.4 Costs of telegrams and long-distance telephone calls,
postage and parcel delivery charges, telephone service at the site and
reasonable petty cash expenses of the site office.

               7.1.4.5 That portion of the reasonable travel and subsistence
expenses of the Contractor's personnel incurred while traveling in discharge of
duties connected with the Work only with the Owner's prior written consent.

               7.1.4.6 Costs for spares or "attic stock" as specified in the
Drawings or Specifications.





                                      -8-
   9

        7.1.5  Miscellaneous Costs

               7.1.5.1 That portion directly attributable to this Contract of
premiums for insurance and bonds required to be carried by the Contractor under
the Contract Documents.

               7.1.5.2 Sales, use or similar taxes imposed by a governmental
authority which are related to the Work and for which the Contractor is liable.

               7.1.5.3 Fees and assessments for the building permit and for
other permits, licenses and inspections for which the Contractor is required by
the Contract Documents to pay.

               7.1.5.4 Fees of testing laboratories for tests required by the
Contract Documents, except those related to defective or nonconforming Work and
which do not fall within the scope of Subparagraphs 7.2.2 through 7.2.4 below.

               7.1.5.5 Royalties and license fees paid for the use of a
particular design, process or product required by the Contract Documents; the
cost of defending suits or claims for infringement of patent rights arising from
such requirement by the Contract Documents; payments made in accordance with
legal judgments against the Contractor resulting from such suits or claims and
payments of settlements made with the Owner's consent; provided, however, that
such costs of legal defenses, judgment and settlements shall not be included in
the calculation of the Contractor's Fee or of a Guaranteed Maximum Price, if
any, and provided that such royalties, fees and costs are not excluded by the
last sentence of Subparagraph 3.17.1 of the General Conditions or other
provisions of the Contract Documents.

               7.1.5.6 Deposits lost for causes other than the Contractor's
fault or negligence.

        7.1.6  Other Costs

               7.1.6.1 Other costs incurred in the performance of the Work if
and to the extent approved in advance in writing by the Owner.

               7.1.6.2 A reserve has been included as part of the Construction
Contingency for Buildings 735 and 745 to address the need for the Contractor to
provide supervision on second, third or weekend shifts so that the
Subcontractors can staff the Project in the most productive way possible to
shorten the overall Project schedule. A second shift will be permanently
instituted upon commencement of the cleanroom construction in Building 745 and
will continue until its effectiveness is determined by the Owner and the
Contractor to be minimal. Third and weekend shift work will be scheduled at the
convenience of the Subcontractors with the prior agreement of the Owner.

               7.1.6.3 A reserve for Selective Subcontractor overtime has been
included in the Construction Contingency for Buildings 735 and 745 to address
the need for the Contractor to induce individual Subcontractors to work on a
selective overtime basis in limited areas that will have the greatest
opportunity to shorten the overall Project schedule. This overtime item accounts
for shift





                                      -9-
   10

differentials and premiums beyond what the individual Subcontractors had planned
in order to achieve the schedule milestones contained within their individual
contracts. All selective Subcontractor overtime must be pre-approved by the
Owner and the Contractor prior to the directive to proceed on selective
overtime.

               7.1.6.4 A reserve for material expediting surcharges has been
included in the Construction Contingency for Buildings 735 and 745 to address
the need for the Contractor to selectively induce material suppliers and
equipment venders to fabricate and/or deliver their products in a more timely
fashion in concert with opportunities in the field to shorten the installation
period in Project schedule. All requests to pay material expediting surcharges
must be pre-approved by the Owner and the Contractor.

7.2     Emergencies:  Repairs to Damaged, Defective or Nonconforming Work

        The Cost of the Work shall also include costs described in Paragraph 7.1
which are incurred by the Contractor.

        7.2.1 In taking action to prevent threatened damage, injury or loss in
case of an emergency affecting the safety of persons and property, as provided
in Paragraph 10.3 of the General Conditions.

        7.2.2 In repairing or correcting Work damaged or improperly executed by
construction workers in the employ of the contractor, provided such damage or
improper execution did not result from the fault or negligence of the Contractor
or the Contractor's foremen, engineers or superintendents, or other supervisory,
administrative or managerial personnel of the Contractor.

        7.2.3 In repairing damaged Work other than that described in
Subparagraph 7.2.2, provided such damage did not result from the fault or
negligence of the Contractor or the Contractor's personnel, and only to the
extent that the cost of such repairs is not recoverable by the Contractor from
others and the Contractor is not compensated therefor by insurance or otherwise.

        7.2.4 In correcting defective or nonconforming Work performed or
supplied by a Subcontractor or material supplier and not corrected by them,
provided such defective or nonconforming Work did not result from the fault or
neglect of the Contractor or the Contractor's personnel adequately to supervise
and direct the Work of the Subcontractor or material supplier, and only to the
extent that the cost of correcting the defective or nonconforming Work is not
recoverable by the Contractor from the Subcontractor or material supplier.

                                    ARTICLE 8
                           COSTS NOT TO BE REIMBURSED

8.1 The Cost of the Work shall not include:





                                      -10-
   11

        8.1.1 Salaries and other compensation of the Contractor's personnel
stationed at the Contractor's principal office or offices other than the site
office, except as specifically provided in Clauses 7.1.1.2 and 7.1.1.3 or as may
be provided in Article 14.

        8.1.2 Expenses of the Contractor's principal office and offices other
than the site office.

        8.1.3 Overhead and general expenses, except as may be expressly included
in Article 7.

        8.1.4 The Contractor's capital expenses, including interest on the
Contractor's capital employed for Work.

        8.1.5 Rental costs of machinery and equipment, except as specifically
provided in Clause 7.1.4.2.

        8.1.6 Except as provided in Subparagraphs 7.2.2 through 7.2.4 and
Paragraph 13.5 of this Agreement, costs due to the fault, negligence or breach
of the Contract Documents by the Contractor, Subcontractors, Material Suppliers,
anyone directly or indirectly employed by any of them, or for whose acts any of
them may be liable, including but not limited to costs for the correction of
damaged, defective or nonconforming Work, disposal and replacement of materials
and equipment incorrectly ordered or supplied, and making good damage to
property not forming part of the Work.

        8.1.7 Any cost not specifically and expressly described in Article 7.

        8.1.8 Costs which would cause the Guaranteed Maximum Price, if any, to
be exceeded.

        8.1.9 Costs, losses, expenses, bonds and/or insurance incurred by reason
of the Contractor's general operations which the Contractor would customarily
incur or carry without reference to Contractor's obligations under this
Agreement.

        8.1.10 Losses and expenses not covered by insurance if the Contractor
shall fail to obtain and/or maintain in effect the insurance required by the
Contract Documents and insurance deductibles.

                                    ARTICLE 9
                         DISCOUNTS, REBATES AND REFUNDS

9.1 Cash discounts obtained on payments made by the Contractor shall accrue to
the Owner if (1) before making the payment, the Contractor included them in an
Application for Payment and received payment therefor from the Owner, or (2) the
Owner has deposited funds with the Contractor with which to make payments;
otherwise, cash discounts shall accrue to the Contractor. Trade discounts,
rebates, refunds and amounts received from sales of surplus materials and
equipment shall accrue to the Owner, and the Contractor shall make provisions so
that they can be secured. The contractor shall notify the Owner of the
availability of cash discounts and provide Owner with a





                                      -11-
   12

reasonable opportunity to make the payments described in clauses (1) and (2) of
the preceding sentence in order to realize such discounts.

9.2 Amounts which accrue to the Owner in accordance with the provisions of
paragraph 9.1 shall be credited to the Owner as a deduction from the Cost of the
Work.

                                   ARTICLE 10
                        SUBCONTRACTS AND OTHER AGREEMENTS

10.1 Those portions of the Work that the Contractor does not customarily perform
with the Contractor's own personnel shall be performed under subcontracts or by
other appropriate agreements with the Contractor. The Contractor shall obtain
bids from Subcontractors and from suppliers of materials or equipment fabricated
especially for the Work and shall deliver such bids to the Owner. The Owner will
then determine, with the advice of the Contractor and subject to the reasonable
objection of the Architect, which bids will be accepted. The Owner may designate
specific persons or entities from whom the contractor shall obtain bids;
however, if a Guaranteed Maximum Price has been established, the Owner may not
prohibit the Contractor from obtaining bids from others. The Contractor shall
not be required to contract with anyone to whom the Contractor has reasonable
objection.

10.2 If a Guaranteed Maximum Price has been established and a specific bidder
among those whose bids are delivered by the Contractor to the Owner (1) is
recommended to the Owner by the Contractor; (2) is qualified to perform that
portion of the Work; and (3) has submitted a bid which conforms to the
requirements of the Contract Documents without reservations or exceptions, but
the Owner requires that another bid be accepted; then the Contractor may require
that a Change Order be issued to adjust the Guaranteed Maximum Price by the
difference between the bid of the person or entity recommended to the Owner by
the Contractor and the amount of the subcontract or other agreement actually
signed with the person or entity designated by the Owner.

10.3 Subcontracts or other agreements shall conform to the payment provisions of
Paragraphs 12.7 and 12.8, and shall not be awarded on the basis of cost plus a
fee without the prior consent of the Owner.

10.4 The Contractor shall invite bids from, and enter into contracts and
material orders with only Subcontractors and suppliers who have first been
approved by the Owner. The Owner shall have the right to require the Contractor
to include additional Subcontractors or suppliers, and/or to delete certain
Subcontractors or suppliers from the list of Subcontractors and suppliers from
whom the Contractor shall invite bids. For each such subcontract and purchase
order, the Contractor shall receive bids from at least three (3) Subcontractors
or suppliers. The Owner may attend all bid openings relating to such
subcontracts and/or purchase orders. After receiving such bids, the Contractor
shall analyze them and shall award the subcontract or purchase order to the
Subcontractor or supplier selected by the Contractor and approved by the Owner.
The Contractor shall contract solely in its own name and behalf, and not in the
name or behalf of the Owner, with the specified Subcontractor or supplier. The
Contractor's subcontract form shall be subject to the prior approval of





                                      -12-
   13

the Owner and shall provide that the Subcontractor shall perform its portion of
the Work in accordance with all applicable provisions of this Agreement and the
other Contract Documents.

10.5 All subcontracts shall, so far as practicable, contain unit prices and any
other feasible formula for use in the determination of the cost of changes in
the Work and shall contain (where applicable) warranties, conditions and
covenants which are substantively similar to the Contract Documents. Upon
request by the Owner, the Contractor shall furnish the Owner with copies of all
warranties provided by manufacturers, laborers or material suppliers relating to
any subcontracts or purchase orders.

10.6 The Contractor shall hold all Subcontractors, including all persons
directly or indirectly employed by them, responsible for any damages due to
breach of contract or any negligent act and to endeavor diligently to effect
recoveries of such damages. All subcontracts shall contain a clause approved by
the Owner allowing for the direct assignment of each subcontract to the Owner
upon termination or full performance of this Agreement.

10.7 Owner may require Contractor to change any Subcontractor previously
approved and, if at such time Contractor is not then in default under this
Agreement, the Guaranteed Maximum Price shall be increased or decreased by the
difference in cost, if any, occasioned by such change.

                                   ARTICLE 11
                               ACCOUNTING RECORDS

11.1 The Contractor shall keep full and detailed accounts and exercise such
controls as may be necessary for proper financial management under this
Contract; the accounting and control systems shall be satisfactory to the Owner.
The Owner and the Owner's accountants shall be afforded access to the
Contractor's records, books, correspondence, instructions, drawings, receipts,
subcontracts, purchase orders, vouchers, memoranda and other data relating to
this Contract and the Contractor shall preserve these for a period of three
years after final payment, or for such longer period as may be required by law.

                                   ARTICLE 12
                                PROGRESS PAYMENTS

12.1 Based upon Applications for Payment submitted to the Architect and approved
by the Owner, the Owner shall make progress payments on account of the Contract
Sum to the Contractor as provided below and elsewhere in the Contract Documents.

12.2 The period covered by each Application for Payment shall be one calendar
month ending on the last day of the month, or as follows:

12.3 Provided an Application for Payment is received by the Owner not later than
the twenty-fifth (25th) day of a month, the Owner shall make payment to the
Contractor not later than the thirty (30) days thereafter. If an Application for
Payment is received by the Owner after the application date





                                      -13-
   14

fixed above, payment shall be made by the Owner not later than forty-five (45)
days after the Owner approves the Application for Payment.

12.4 With each Application for Payment the Contractor shall submit payrolls,
petty cash accounts, receipted invoices or invoices with check vouchers
attached, and any other evidence required by the Owner or Architect to
demonstrate that cash disbursements already made by the Contractor on account of
the Cost of the Work equal or exceed (1) progress payments already received by
the Contractor; less (2) that portion of those payments attributable to the
Contractor's Fee; plus (3) payrolls for the period covered by the present
Application for Payment; plus (4) retainage provided in Subparagraph 12.5.4, if
any, applicable to prior progress payments.

12.5    Contracts with a Guaranteed Maximum Price

        12.5.1 Each Application for Payment shall be based upon the most recent
schedule of values submitted by the Contractor and approved in writing by the
Owner in accordance with the Contract Documents. The schedule of values shall
allocate the entire Guaranteed Maximum Price among the various portions of the
Work, except that the Contractor's Fee shall be shown as a single separate item.
The schedule of values shall be prepared in such form and supported by such data
to substantiate its accuracy as the Architect and the Owner may require. This
schedule, unless objected to by the Owner, shall be used as a basis for
reviewing the Contractor's Applications for Payment.

        12.5.2 Applications for Payment shall show the percentage completion of
each portion of the work as indicated on the approved Schedule of Values as of
the end of the period covered by the Application for Payment. The percentage
completion shall be the lesser of (1) the percentage of that portion of the Work
which has actually been completed or (2) the percentage obtained by dividing (a)
the expense which has actually been incurred by the Contractor on account of
that portion of the Work for which the Contractor has made or intends to make
actual payment prior to the next Application for Payment by (b) the share of the
Guaranteed Maximum Price allocated to that portion of the Work in the schedule
of values.

        12.5.3 Subject to other provisions of the Contract Documents, the amount
of each progress payment shall be computed in accordance with the provisions of
clauses 12.5.3.1 and 12.5.3.2 attached hereto as follows:

               12.5.3.1 Each Application for Payment (other than the final
Application for Payment) shall include a sum equal to one hundred percent (100%)
of the Cost of the Work in place which was performed through the period covered
by the Application for Payment.

               12.5.3.2 Each Application for Payment (other than the final
Application for Payment) shall also include the amount of the Contractor Fee
determined in accordance with the provisions of 5.2 to which Contractor is
entitled for the period covered by the Application for Payment; provided,
however, that after the Contractor has received a total of Four Hundred Fifty
Thousand Dollars ($450,000) of the Contractor Fee, all remaining Contractor Fee
shall be held by the Owner as retention, and any unused retention shall be
released to the Contractor within thirty (30)





                                      -14-
   15

days after the date that the Contractor achieves the Substantial Completion of
the entire Work, except for the Laboratory Furniture Installation.

               12.5.3.3 Subtract the aggregate of previous payments made by the
Owner for the Cost of the Work and the Contractor's Fee.

               12.5.3.4 Subtract the shortfall, if any, indicated by the
Contractor in the documentation required by Paragraph 12.4 to substantiate prior
Applications for Payment, or resulting from errors subsequently discovered by
the Owner's accountants in such documentation.

               12.5.3.5 Subtract amounts, if any, which the Owner has rejected
as provided in Paragraph 9.5 of the General Conditions.

        12.5.4 Additional retainage, if any, shall be as follows:

        In accordance with Article 9 of the General Conditions, as amended.

12.6 Except with the Owner's prior approval, payments to Subcontractors included
in the Contractor's Applications for Payment shall not exceed an amount for each
Subcontractor calculated as follows:

        12.6.1 Take that portion of the Subcontract Sum properly allocable to
completed Work as determined by multiplying the percentage completion of each
portion of the Subcontractor's Work by the share of the total Subcontract Sum
allocated to that portion in the Subcontractor's schedule of values, less
retainage of _______________________ percent (______%). Pending final
determination of amounts to be paid to the Subcontractor for changes in the
Work, amounts not in dispute may be included as provided in Subparagraph 7.3.7
of the General Conditions even through the Subcontract Sum has not yet been
adjusted by Change Order.

        12.6.2 Add that portion of the Subcontract Sum properly allocable to
materials and equipment delivered and suitably stored at the site for subsequent
incorporation in the Work or, if approved in advance by the Owner, suitably
stored off the site at a location agreed upon in writing, less retainage of
_______________ percent (______%).

        12.6.3 Subtract the aggregate of previous payments made by the
Contractor to the Subcontractor or higher amount as the Owner has paid the
Contractor with respect to Subcontractor's Work.

        12.6.4 Subtract amounts, if any, which the Owner has not approved for
reasons which are the fault of the Subcontractor.

        12.6.5 Add, upon Substantial Completion of the entire Work of the
Contractor, a sum sufficient to increase the total payments to the Subcontractor
to one hundred percent (100%) of the Subcontract Sum, less amounts, if any, for
incomplete Work and unsettled claims; and, if final





                                      -15-
   16

completion of the entire Work is thereafter materially delayed through no fault
of the Subcontractor, add any additional amounts or other sum properly withheld
under the Contract Documents payable on account of Work of the Subcontractor in
accordance with Subparagraph 9.10.3 of the General Conditions.

The Subcontract Sum is the total amount stipulated in the subcontract to be paid
by the Contractor to the Subcontractor for the Subcontractor's performance of
the subcontract.

12.7 Except with the Owner's prior approval, the Contractor shall not make
advance payments to suppliers for materials or equipment which have not been
delivered and stored at the site.

12.8 In taking action on the Contractor's Applications for Payment, the
Architect and the Owner shall be entitled to rely on the accuracy and
completeness of the information furnished by the Contractor and shall not be
deemed to represent that the Architect or the Owner has made a detailed
examination, audit or arithmetic verification of the documentation submitted in
accordance with Paragraph 12.4 or other supporting data; that the Architect or
the Owner has made exhaustive or continuous on-site inspections or that the
Architect or the Owner has made examinations to ascertain how or for what
purposes the Contractor has used amounts previously paid on account of the
Contract. Such examinations, audits and verifications, if required by the Owner,
will be performed by the Owner's accountants acting in the sole interest of the
Owner.

                                   ARTICLE 13
                                  FINAL PAYMENT

13.1 Final payment shall be made by the Owner to the Contractor when (1) the
Contract has been fully performed by the Contractor except for the Contractor's
responsibility to correct defective or nonconforming Work, as provided in
Subparagraph 12.2.2 of the General Conditions, and to satisfy other
requirements, if any, which necessarily survive final payment; (2) a final
Application for Payment and a final accounting for the Cost of the Work have
been submitted by the Contractor and reviewed by the Owner's accountants; and
(3) the final Application for Payment has been approved by the Owner. Such final
payment shall be made by the Owner not more than 30 days after the Owner has
approved the final Application for Payment and the conditions set forth in
Paragraph 9.1 of the Addendum to General Conditions have been satisfied.

13.2 The amount of the final payment shall be calculated as follows:

        13.2.1 Take the sum of the Cost of the Work substantiated by the
Contractor's final accounting and the Contractor's Fee; but not more than the
Guaranteed Maximum Price, if any.

        13.2.2 Subtract amounts, if any, for which the Owner withholds, in whole
or in part its approval of the final Application for Payment as provided in
Subparagraph 9.5.1 of the General Conditions or other provisions of the Contract
Documents.

        13.2.3 Subtract the aggregate of previous payments made by the Owner.





                                      -16-
   17

        If the aggregate of previous payments made by the Owner exceeds the
amount due the Contractor, the Contractor shall reimburse the difference to the
Owner.

13.3 The Owner's accountants will review and report in writing on the
Contractor's final accounting within 30 days after delivery of the final
accounting to the Architect and the Owner by the Contractor. Based upon such
Cost of the Work as the Owner's accountants report to be substantiated by the
Contractor's final accounting, and provided the other conditions of Paragraph
13.1 have been met, the Architect will, within seven days after receipt of the
written report of the Owner's accountants, either make final payment to the
Contractor or notify the Contractor in writing of the Owner's reasons for
withholding a payment as provided in Subparagraph 9.5.1 of the General
Conditions. The time periods stated in this Paragraph 13.3 supersede those
stated in Subparagraph 9.4.1 of the General Conditions.

13.4 If, subsequent to final payment and at the Owner's request, the Contractor
incurs costs described in Article 7 and not excluded by Article 8 to correct
defective or nonconforming Work, the Owner shall reimburse the Contractor such
costs and the Contractor's Fee applicable thereto on the same basis as if such
costs had been incurred prior to final payment, but not in excess of the
Guaranteed Maximum Price, if any. If the Contractor has participated in savings
as provided in Paragraph 5.2, the amount of such savings shall be recalculated
and appropriate credit given to the Owner in determining the net amount to be
paid by the Owner to the Contractor.

                                   ARTICLE 14
                            MISCELLANEOUS PROVISIONS

14.1 Where reference is made in this Agreement to a provision of the General
Conditions or another Contract Document, the reference refers to that provision
as amended or supplemented by other provisions of the Contract Documents.

14.2 Payments due and unpaid under the Contract shall bear interest from the
date payment is due at the rate stated below, or in the absence thereof, at the
legal rate prevailing from time to time at the place where the Project is
located.

        14.2.1 Two percent above the current prime rate as documented in The
Wall Street Journal on the last Friday of the month of the period covered by the
affected Request for Payment.

14.3    Other provisions:

        14.3.1 Contractor and all Subcontractors shall keep confidential any
information required from Owner's employees or from inspection of Owner's
property relating to Owner's designs, business plans, business opportunities,
financial or other confidential information. Contractor and those of its
employees as may be designated by Owner, and all Subcontractors, shall execute
Owner's standard form confidentiality agreement.





                                      -17-
   18

        14.3.2 Any Work performed by Contractor or its predecessor, Marshall
Contractor's Inc., prior to the date of this Agreement, shall be and hereby is
incorporated into this Agreement and covered by the conditions and requirements
set forth herein.

                                   ARTICLE 15
                            TERMINATION OR SUSPENSION

15.1 The Contract may be terminated by the Contractor as provided in Article 14
of the General Conditions; however, amount to be paid to the Contractor under
Subparagraph 14.1.2 of the General Conditions shall not exceed the amount the
Contractor would be entitled to receive under Paragraph 15.3 below, except that
the Contractor's Fee shall be calculated as if the Work has been fully completed
by the Contractor, including a reasonable estimate of the Cost of the Work for
Work not actually completed.

15.2 If a Guaranteed Maximum Price is established in Article 5, the Contract may
be terminated by the Owner for cause as provided in Article 14 of the General
Conditions; however, the amount, if any, to be paid to the Contractor under
Subparagraph 14.2.4. of General Conditions shall not cause the Guaranteed
Maximum Price to be exceeded, nor shall it exceed the amount the Contractor
would be entitled to receive under Paragraph 15.3 below.

15.3 If no Guaranteed Maximum Price is established in Article 5, the Contract
may be terminated by the Owner for cause as provided in Article 14 of the
General Conditions; however, the Owner shall then pay the Contractor an amount
calculated as follows:

        15.3.1 Take the Cost of the Work incurred by the Contractor to the date
of termination.

        15.3.2 Add the Contractor's Fee computed upon the Cost of the Work to
the date of termination at the rate stated in Paragraph or, if the Contractor's
Fee is stated as a fixed sum in that Paragraph, an amount which bears the same
ratio to that fixed-sum Fee as Cost of the Work at the time of termination bears
to a reasonable estimate of the probable Cost of the Work upon its completion.

        15.3.3 Subtract the aggregate of previous payments made by the Owner.

        The Owner shall also pay the Contractor fair compensation, either by
purchase or rental at the election of the Owner, for any equipment owned by the
Contractor which the Owner elects to retain and which is not otherwise included
in the Cost of the Work under Subparagraph 15.3.1. To the extent that the Owner
elects to take legal assignment of subcontracts and purchase orders (including
rental agreements), the Contractor shall, as a condition of receiving the
payments referred to in this Article 15, execute and deliver such papers and
take all such steps, including the legal assignment of such subcontracts and
other contractual rights of the Contract as the Owner may require for the
purpose of fully vesting in the Owner the rights and benefits of the Contractor
under such subcontracts or purchase orders.





                                      -18-
   19

15.4 The Work may be suspended by the Owner as provided in Article 14 of the
General Conditions; in such case, the Guaranteed Maximum Price, if any, shall be
increased as provided in Subparagraph 14.3.2 of the General Conditions except
that the term "cost performance of the Contract" in that Subparagraph shall be
understood to mean the Cost of the Work and the term "profit" shall be
understood to mean the Contractor's Fee as described in Paragraphs 5.1 and 6.3
of this Agreement.

                                   ARTICLE 16
                        ENUMERATION OF CONTRACT DOCUMENTS

16.1 The Contract Documents, except for Modifications issued after execution of
this Agreement, are enumerated as follows:

        16.1.1 The Agreement is this executed Standard Form of Agreement Between
Owner and Contractor, AIA Document A111.1987 Edition.

        16.1.2 The General Conditions are the General Conditions of the Contract
for Construction. AIA Document A201. 1987 Edition.

        16.1.3 The Supplementary and other Conditions of the Contract are those
contained in the Project Manual dated ____________________, and are as follows:

        [Not Applicable.]

        16.1.4 The Specifications are those contained in the Project Manual
dated as in Paragraph 16.1.3, and are as follows:

        [See Exhibit B Attached.]

        16.1.5 The Drawings are as follows and are dated _______________________
unless a different date is shown below:

        [See Exhibit B Attached.]

        16.1.6 The addenda, if any, are as follows:

        Any and all Addenda to the Drawings and Specifications on Exhibit B
attached hereto, and any new or supplemental drawings and specifications for the
Project, issued by Owner or Architect through and including November 5, 1997.

        Portions of Addenda relating to bidding requirements are not part of the
Contract Documents unless the bidding requirements are also enumerated in this
Article 16.





                                      -19-
   20

        16.1.7 Other Documents, if any, forming part of the Contract Documents
are as follows:

        Exhibit A to AIA A111    -  Wage Schedule
        Exhibit B to AIA A111    -  Drawings and Specifications
        Addendum to AIA A201     -  General Conditions




















                                      -20-
   21


        This Agreement is entered into as of the day and year first written
above and is executed in at least three original copies of which one is to be
delivered to the Contractor, one to the Architect for use in the administration
of the Contract, and the remainder to the Owner.


OWNER                                          CONTRACTOR


/s/ DAVID C. YNTEMA                            /s/ S. JAMES BUSAM
- ---------------------------------              ---------------------------------
(Signature)                                    (Signature)


David C. Yntema, CFO                           S. James Busam, Sr. V.P.
- ---------------------------------              ---------------------------------
(Printed name and title)                       (Printed name and title)



















                                      -21-


   22
                                    EXHIBIT A

                                  WAGE SCHEDULE

SCHEDULE OF STANDARD HOURLY RATES

VIVUS, INC. - Lakewood, New Jersey
                                                       Marshall Contractors Inc.



- -----------------------------------------------------------------------------
    COST                                                              HOURLY
    CODE                     POSITION                   NAME           RATE
- -----------------------------------------------------------------------------
                                                            
   01035     Project Executive              John Magyar              $102.64

   01039     Contracts Manager              Bob Kimmel                 78.49

   01040     Project Manager                Lorranie Marsden           56.35

   01041     Gen. Superintendent            Greg Kisshauer             54.34

   01042     Superintendent-745             Dick Piscitelli            40.25
- -----------------------------------------------------------------------------
   01043     2nd Shift Super.               Ken Duval                  40.25

   01044     Project Engineer               Kim Pepe                   32.20

   01144     MEP Coordinator                Gerry Consoio              44.28

   01115     MEP Super - 735                Sean Gaffney               44.27

   01115     MEP Super - 745                Ken Higby                  61.38
- -----------------------------------------------------------------------------
   01215     Admin. Asst.                   Tinamarie Falasco          28.18

   01300     Tech. SVCS. Mgr.               Bob Lewis                  48.78

   01305     Estimator                      Emery Vaughn               61.38

   01305     Estimator                      Art Caron                  61.38

   01305     Estimator                      Steve Kieman               61.38
- -----------------------------------------------------------------------------
   01306     Elect. Estimator               Andrea Mollo               61.38

   01306     Sr. Mech. Estimator            Phil Wald                  79.86

   01306     Mech. Estimator                Steve Pagiiuca             61.38

   01310     Sr. Scheduler                  Bob Edwards                66.41

   01310     Scheduler                      Umberto Donato             44.28
- -----------------------------------------------------------------------------
   01314     Purch. Manager                 Brian Fugere               56.35

   01315     Purch. Agent                   Peter Capone               40.61

   01318     Purch. Clerical                Nancy Blatchley            23.08

   01325     Dir. Preconst. SVCS.           Mark Hanchar               90.56

   01330     Accounting Clerk               Susan Feuti                23.48
- -----------------------------------------------------------------------------
   01340     Safety Manager                 Tony O'Dea                 47.46

   01370     Accounting Manager             John Habershaw             37.28

   01400     Manager - Process              Bob Graf                   66.41

   01410     Certification Coord.           Chuck White                40.25
- -----------------------------------------------------------------------------




   23

                                    EXHIBIT B

                           DRAWINGS AND SPECIFICATIONS


                                  Building 735
                             Contract Document List


DRAWINGS BY O'BRIEN ATKINS ASSOCIATES
- -------------------------------------



Sheet Number                     Title                                      Date
- ------------                     -----                                      ----
                                                                
     N/A              Cover                                           April 15, 1997

Landscape
     LA-1             Site Plan                                        April 4, 1997

Structural
     3S1              Foundation Plan                                 March 19, 1997
     3S2              Mezzanine Framing Plan                          March 19, 1997
     3S3              Details                                         March 19, 1997

Architectural
     3A-1             First Floor Plan                                April 15, 1997
     3A-2             Mezzanine Floor Plan                            March 20, 1997
     3A-3             First Floor Reflected Ceiling Plan              April 15, 1997
     3A-5             Finish Schedule/Door Schedule
                        Window & Frame Types/Details                  April 15, 1997
     3A-6             Enlarged Plans/Schedule                         April 15, 1997
     3A-7             Sections                                        April 15, 1997
     3A-8             Details                                         April 15, 1997

Plumbing - Phase 1
     3P0.1            Schedules, Symbol Legend, Building Data         March 20, 1997
     3P1.1            Floor Plan                                      March 20, 1997
     3P1.2            Floor Plans & Riser Diagrams                    March 20, 1997
     3P2.0            Fire Stop Details                               March 20, 1997

Mechanical - Phase 1

     3HVAC0.1         Legend                                          March 20, 1997
     3HVAC1.1         First floor - HVAC Ductwork Plan                March 20, 1997
     3HVAC1.2         First Floor - HVAC Piping Plan                  March 20, 1997






                                      -3-
   24

                                                                
     3HVAC2.1         Mezzanine - Enlarged HVAC Plan                  March 20, 1997
     3HVAC2.2         Enlarged Boiler Room Plans/Sections             March 20, 1997
     3HVAC3.1         Details                                         March 20, 1997
     3HVAC3.2         Details                                         March 20, 1997
     3HVAC3.3         Firestopping Details                            March 20, 1997
     3HVAC4.1         Chilled/Hot Water Schedule                      March 20, 1997
     3HVAC4.2         Controls                                        March 20, 1997
     3HVAC5.1         Schedules                                       March 20, 1997

Electrical

     3E-1             Abbreviations/Details                           March 19, 1997
     3E-2             First Floor Lighting Plan                       March 19, 1997
     3E-3             Mezzanine Lighting Plan                         March 19, 1997
     3E-4             First Floor Power Plan                          March 19, 1997
     3E-5             Mezzanine Power Plan                            March 19, 1997
     3E-6             Single Line Diagrams                            March 19, 1997
     3E-7             Panel Schedules                                 March 19, 1997
     3E-8             Panel Schedules                                 March 19, 1997
     3E-9             Details                                         March 19, 1997

SPECIFICATIONS BY O'BRIEN ATKINS ASSOCIATES
- -------------------------------------------

                      Division 3 - Concrete
                      ---------------------
     03310            Concrete                                                  #      14 pages

                      Division 5 - Metals
                      ---------------------
     05120            Structural Steel                                          #      7 pages
     05210            Steel Joists                                              #      3 pages
     05300            Metal Decking                                             #      3 pages
     05500            Miscellaneous Metals                                      #      6 pages

                      Division 6 - Wood and Plastics
                      ------------------------------
     06100            Carpentry                                                 #      4 pages
     06400            Architectural Woodwork                                    #      6 pages

                      Division 7 - Thermal and Moisture Protection
                      --------------------------------------------
     07200            Thermal Insulation                                        #      1 page
     07250            Sprayed-on Fireproofing                                   #      4 pages
     07255            Firestopping                                              #      3 pages
     07900            Joint Sealers                                             #      3 pages






                                      -4-
   25

                                                                
                      Division 8 - Doors and Windows
                      ------------------------------
     08100            Hollow Metal Work                                         #      5 pages
     08211            Flush Wood Doors                                          #      4 pages
     08330            Overhead Coiling doors                                    #      3 pages
     08710            Builders Hardware                                         #      2 pages

                      Division 9 - Finishes
                      ---------------------
     09100            Metal Studs                                               #      4 pages
     09250            Gypsum Drywall                                            #      5 pages
     09510            Acoustical Panel Ceilings                                 #      4 pages
     09650            Resilient flooring                                        #      5 pages
     09680            Carpet                                                    #      5 pages
     09900            Carpet                                                    #      6 pages

                      Division 10 - Specialties
                      -------------------------
     10200            Louvers                                                   #      5 pages
     10400            Miscellaneous Specialties                                 #      1 page
     10618            Demountable Metal Partitions and Integrated               #      5 pages
                        Ceiling Grid

                      Division 13 - Special construction
                      ----------------------------------
     13038            Environmental Room                                        #      3 pages

                      Division 15 - Mechanical
                      ------------------------
     15010            General Mechanical                                        #      9 pages
     15020            Firestopping                                              #      3 pages
     15035            Pipe Testing                                              #      1 page
     15055            Piping Specialities and Accessories                       #      3 pages
     15100            Valves                                                    #      4 pages
     15110            Hydronic Water specialties                                #      4 pages
     15135            Meters and Gauges                                         #      2 pages
     15140            Roof Curbs, Supports & Equipment Pads                     #      1 page
     15150            Motors and Electrical Work                                #      3 pages
     15175            Variable Speed Drive                                      #      5 pages
     15190            Mechanical Identification                                 #      7 pages
     15192            Painting                                                  #      1 page
     15200            Noise Control                                             #      3 pages
     15205            Vibration Isolation                                       #      17 pages
     15250            Mechanical Insulation                                     #      9 pages
     15405            Piping and Equipment Insulation                           #      2 pages
     15409            Plumbing Pipe and Pipe Fittings                           #      2 pages
     15411            Plumbing Systems                                          #      6 pages
     15440            Plumbing Fixtures                                         #      6 pages
     15510            Pipe and Pipe Fittings                                    #      3 pages






                                      -5-
   26

                                                                
     15540            Pumps (HVAC)                                              #      2 pages
     15556            Low Pressure Hot Water Fire Box Water Boilers             #      3 pages
     15683            Water Chiller (Air Cooled Package)                        #      3 pages
     15830            Hot Water Unit Heaters                                    #      2 pages
     15852            Air Handling Units                                        #      4 pages
     15862            Exhaust Fans                                              #      3 pages
     15885            Air Filtration                                            #      2 pages
     15891            Ductwork                                                  #      5 pages
     15910            Duct Accessories                                          #      4 pages
     15932            Air Distribution Devices                                  #      2 pages
     15933            VAV Terminals                                             #      3 pages
     15940            Chemical Treatment and Cleaning                           #      3 pages
     15950            Building Management and Automatic Temperature             #      27 pages
                        Control Systems
     15990            Testing, Adjusting, & Balancing                           #      6 pages

                      Division 16 - Electrical
                      ------------------------
     16001            Summary of Electrical Work                                #      2 pages
     16002            Electrical General Provisions                             #      10 pages
     16010            Basic Electrical Requirements                             #      6 pages
     16025            Division of Work, Divisions 15/16                         #      2 pages
     16040            Demolition                                                #      3 pages
     16110            Raceways                                                  #      12 pages
     16111            Cable Trays                                               #      5 pages
     16120            Secondary Voltage Wire and Cables                         #      7 pages
     16135            Electrical Boxes and Fittings                             #      6 pages
     16142            Electrical Connections for Equipment                      #      5 pages
     16143            Wiring Devices                                            #      6 pages
     16170            Circuit and Motor Disconnects                             #      4 pages
     16183            Molded Case Circuit Breakers (MCCB's)                     #      2 pages
     16195            Electrical Identification                                 #      5 pages
     16425            Switchboards                                              #      7 pages
     16452            Grounding                                                 #      5 pages
     16460            Transformers                                              #      5 pages
     16470            Panelboards                                               #      7 pages
     16477            Fuses, Low Voltage                                        #      3 pages
     16495            Automatic Transfer Switches                               #      8 pages
     16515            Interior Lighting Fixtures                                #      7 pages
     16621            Diesel Generator Set                                      #      8 pages
     16721            Addressable Fire Alarm System                             #      14 pages
     16741            Telephone/Data Communication System                       #      6 pages






                                      -6-
   27


                                                                
                      Pre-Purchased Equipment
                      -----------------------
     No Section       Hot Water Heating Boilers and Air-Cooled Screw
                        Chillers                                                @      1 page

     Legend:          # These specifications were not dated by the Issuer, but were dated
                      received by Marshall Contractors on March 20, 1997

                      @ This specification was not dated by the issuer, but was dated received
                      by Marshall Contractors on March 19, 1997

































                                      -7-
   28

                                 E-BEAM COLD BOX
                             CONTRACT DOCUMENT LIST

DRAWINGS BY O'BRIEN ATKINS ASSOCIATES

Sheet Number          Title                                           Date

     SK-1             Vivus, Inc. - E-Beam Cold Box               May 23, 1997






































                                      -8-

   29

                                  BUILDING 745
                             CONTRACT DOCUMENT LIST


DRAWINGS BY O'BRIEN ATKINS ASSOCIATES
- -------------------------------------



Sheet Number                     Title                                      Date
- ------------                     -----                                      ----
                                                                   
     N/A              Cover                                              April 15, 1997

Landscape

     LA-1             Site Plan                                           April 4, 1997

Structural

     4S1              Foundation Plan                                    March 19, 1997
     4S2              Mezzanine Framing Plan                             March 19, 1997
     4S3              Details                                            March 19, 1997

Architectural

     4A-1             First Floor Plan                                    April 9, 1997
     4A-2             Mezzanine Floor Plan                                april 9, 1997
     4A-3             Reflected Ceiling Plan                              April 9, 1997
     4A-4             Finish Schedule                                     April 9, 1997
     4A-5             Door Schedule/Details                               April 9, 1997
     4A-6             Enlarged Plans/Schedule                             April 9, 1997
     4A-7             Sections                                            April 9, 1997
     4A-8             Details                                             April 9, 1997

Plumbing

     4P0.1            Schedules, Symbol Legend, Building Data             April 9, 1997
     4P1.0            Floor Plan - Plumbing - DWV                         April 9, 1997
     4P1.1            Floor Plan - Plumbing - Piping Services             April 9, 1997
     4P1.2            Mezzanine Floor Plans                               April 9, 1997
     4P2.0            Enlarged Plans                                      April 9, 1997
     4P2.1            Enlarged Plans                                      April 9, 1997
     4P3.0            Plumbing Details                                    April 9, 1997
     4P3.1            Riser Diagrams                                      April 9, 1997
     4P4.0            Fire Stop Details                                   April 9, 1997





                                      -9-
   30


                                                                   
Mechanical

     4HVAC0.1         Legend                                              April 9, 1997
     4HVAC1.1         First Floor - HVAC Ductwork                         April 9, 1997
     4HVAC1.2         First Floor - HVAC Piping Plan                      April 9, 1997
     4HVAC2.1         Mezzanine - HVAC Plan                               April 9, 1997
     4HVAC2.2         Enlarged Boiler Room Plans/Sections                 April 9, 1997
     4HVAC3.1         Details                                             April 9, 1997
     4HVAC3.2         Details                                             April 9, 1997
     4HVAC3.3         Firestopping Details                                April 9, 1997
     4HVAC4.1         Chilled/Hot Water Schedule                          April 9, 1997
     4HVAC4.2         Controls                                            April 9, 1997
     4HVAC5.1         Schedules                                           April 9, 1997

Electrical

     4E-1             Abbreviations/Details                               April 9, 1997
     4E-2             First Floor Lighting Plan                           April 9, 1997
     4E-3             Mezzanine Lighting Plan                             April 9, 1997
     4E-4             First Floor Power Plan                              April 9, 1997
     4E-5             Mezzanine Power Plan                                April 9, 1997
     4E-6             Single Line Diagrams                                April 9, 1997
     4E-7             Panel Schedules                                     April 9, 1997
     4E-8             Panel Schedules                                     April 9, 1997
     4E-9             Details                                             April 9, 1997
     4E-10            Details                                             April 9, 1997


SPECIFICATIONS O'BRIEN ATKINS ASSOCIATES
- ----------------------------------------

Cover                 Project Manual - Upfit/Permit Package               April 9, 1997

                      Division 5 - Metals
                      -------------------
     05500            Miscellaneous Metals                                      *      6 pages

                      Division 6 - Wood and Plastics
                      ------------------------------
     06100            Carpentry                                                 *      4 pages
     06400            Architectural Woodwork                                    *      6 pages

                      Division 7 - Thermal and Moisture Protection
                      --------------------------------------------
     07200            Thermal Insulation                                        *      2 pages
     07250            Sprayed-on Fireproofing                                   *      4 pages
     07255            Firestopping                                              *      3 pages
     07900            Joint Sealers                                             *      4 pages







                                      -10-
   31


                                                                   
                      Division 8 - Doors and Windows
                      ------------------------------
     08100            Hollow Metal Work                                         *      5 pages
     08211            Flush Wood Doors                                          *      4 pages
     08330            Overhead Coiling Doors                                    *      3 pages
     08710            Builders Hardware                                         *      2 pages

                      Division 9 - Finishes
                      ---------------------
     09100            Metal Studs                                               *      4 pages
     09250            Gypsum Drywall                                            *      5 pages
     09300            Tile Work                                                 *      4 pages
     09510            Acoustical Panel Ceilings                                 *      4 pages
     09650            Resilient Flooring                                        *      5 pages
     09680            Carpet                                                    *      5 pages
     09900            Painting                                                  *      7 pages

                      Division 10 - Specialties
                      -------------------------
     10200            Louvers                                                   *      5 pages
     10400            Miscellaneous Specialties                                 *      3 pages
     10618            Demountable Metal Partitions and Integrated               *      5 pages
                        Ceiling Grid
     10650            Operable Partitions                                       *      3 pages

                      Division 11 - Equipment
                      -----------------------
     11600            Laboratory Equipment                                      *      5 pages

                      Division 12 - Furnishings
                      -------------------------
     12345            Metal Laboratory Equipment                                *      21 pages

                      Division 13 - Special Construction
                      ----------------------------------
     13038            Environmental Room                                        *      3 pages

                      Division 15 - Equipment
                      -----------------------
     15010            General Mechanical                                        #      9 pages
     15020            Firestopping                                              #      3 pages
     15035            Pipe Testing                                              #      1 page
     15055            Piping Specialties and Accessories                        #      3 pages
     15100            Valves                                                    #      4 pages
     15110            Hydronic Water Specialties                                #      4 pages
     15135            Meters and Gauges                                         #      2 pages
     15140            Roof Curbs, Supports & Equipment Pads                     #      1 page
     15150            Motors and Electrical Work                                #      3 pages
     15175            Variable Speed drive                                      #      5 pages
     15190            Mechanical Identification                                 #      7 pages
     15192            Painting                                                  #      1 page








                                      -11-
   32


                                                                   
     15200            Noise control                                             #      3 pages
     15205            Vibration Isolation                                       #      17 pages
     15250            Mechanical Insulation                                     #      9 pages
     15405            Piping and Equipment Insulation                           #      2 pages
     15409            Plumbing Pipe and Pipe Fittings                           #      2 pages
     15411            Plumbing Systems                                          #      6 pages
     15440            Plumbing Fixtures                                         #      6 pages
     15510            Pipe and Pipe Fittings                                    #      3 pages
     15540            Pumps (HVAC)                                              #      2 pages
     15556            Low Pressure Hot Water Fire Box Water Boilers             #      3 pages
     15683            Water Chiller (Air Cooled Package)                        #      3 page
     15830            Hot Water Unit Heaters                                    #      2 pages
     15852            Air Handling Units                                        #      4 pages
     15862            Exhaust Fans                                              #      3 pages
     15885            Air filtration                                            #      2 pages
     15891            Ductwork                                                  #      5 pages
     15910            Duct Accessories                                          #      4 pages
     15932            Air Distribution Devices                                  #      2 pages
     15933            VAV Terminals                                             #      3 pages
     15940            Chemical Treatment and Cleaning                           #      3 pages
     15950            Building Management and Automatic Temperature             #      27 pages
                        Control Systems
     15990            Testing, Adjusting and Balancing                          #      6 pages

                      Division 16 - Electrical
                      ------------------------
     16001            Summary of Electrical Work                                #      2 pages
     16002            Electrical General Provisions                             #      10 pages
     16010            Basic Electrical Requirements                             #      6 pages
     16025            Division of Work, Divisions 15/16                         #      2 pages
     16040            Demolition                                                #      3 pages
     16110            Raceways                                                  #      12 pages
     16111            Cable Trays                                               #      5 pages
     16120            Secondary Voltage Wire and Cables                         #      7 pages
     16135            Electrical Boxes and Fittings                             #      6 pages
     16142            Electrical Connections for Equipment                      #      5 pages
     16143            Wiring Devices                                            #      6 pages
     16170            Circuit and Motor Disconnects                             #      4 pages
     16183            Molded Case Circuit Breakers (MCCB's)                     #      2 pages
     16195            Electrical Identification                                 #      5 pages
     16425            Switchboards                                              #      7 pages
     16452            Grounding                                                 #      5 pages
     16460            Transformers                                              #      5 pages
     16470            Panelboards                                               #      7 pages
     16477            Fuses, Low Voltage                                        #      3 pages







                                      -12-
   33


                                                                   
     16495            Automatic Transfer Switches                               #      8 pages
     16515            Interior Lighting Fixtures                                #      7 pages
     16621            Diesel Generator Set                                      #      8 pages
     16721            Addressable Fire Alarm System                             #      14 pages
     16741            Telephone/Data Communication System                       #      6 pages

                      Pre-Purchased Equipment
                      -----------------------
     No Section       Hot Water Heating Boilers and Air-Cooled Screw
                        Chillers                                                @      1 page


     Legend:          * Only the cover of the project manual was dated April 9, 1997, no
                      individual specification sections were dated.

                      # These specifications were not dated by the Issuer, but
                      were dated received by Marshall Contractors on March 20,
                      1997

                      @ This specification was not dated by the issuer, but was dated received
                      by Marshall Contractors on March 19, 1997






                                      -13-
   34

                      THE AMERICAN INSTITUTE OF ARCHITECTS


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


                                AIA Document A201

                       GENERAL CONDITIONS OF THE CONTRACT
                                FOR CONSTRUCTION

          THIS DOCUMENT HAS IMPORTANT LEGAL CONSEQUENCES; CONSULTATION
         WITH AN ATTORNEY IS ENCOURAGED WITH RESPECT TO ITS MODIFICATION


- --------------------------------------------------------------------------------
                                  1987 EDITION
                                TABLE OF ARTICLES


1.      GENERAL PROVISIONS
2.      OWNER
3.      CONTRACTOR
4.      ADMINISTRATION OF THE CONTRACT
5.      SUBCONTRACTORS
6.      CONSTRUCTION BY OWNER OR BY SEPARATE CONTRACTORS
7.      CHANGES IN THE WORK
8.      TIME
9.      PAYMENTS AND COMPLETION
10.     PROTECTION OF PERSONS AND PROPERTY
11.     INSURANCE AND BONDS
12.     UNCOVERING AND CORRECTION OF WORK
13.     MISCELLANEOUS PROVISIONS
14.     TERMINATION OR SUSPENSION OF THE CONTRACT

        This document has been approved and endorsed by the Associated General
Contractors of America.

Copyright 1911, 1915, 1918, 1925, 1937, 1951, 1958, 1961, 1963, 1966, 1967,
1970, 1976, (c)1987 by The American Institute of Architects, 1735 New York
Avenue, N.W., Washington, D.C., 20006. Reproduction of the material herein or
substantial quotation of its provisions without written permission of the AIA
violates the copyright laws of the United States and will be subject to legal
prosecutions.


   35

                                      INDEX
                                                    
ACCEPTANCE OF NONCONFORMING WORK................................................9.6.6, 9.9.3, 12.3
Acceptance of Work.............................................9.6.6, 9.8.2, 9.9.3, 9.10.1, 9.10.3
ACCESS TO WORK...................................................................3.16, 6.2.1, 12.1
Accident Prevention......................................................................4.2.3, 10
Acts and Omissions................................3.2.1, 3.2.2, 3.3.2, 3.12.8, 3.18, 4.2.3, 4.3.2,
                                                  4.3.9, 8.3.1, 10.1.4, 10.2.5, 13.4.2, 13.7, 14.1
Addenda................................................................................1.1.1, 3.11
Additional Cost, Claims for.......................................4.3.6, 4.3.7, 4.3.9, 6.1.1, 10.3
Additional Inspections and Testing......................................4.2.6, 9.8.2, 12.2.1, 13.5
Additional Time, Claims for.............................................4.3.6, 4.3.8, 4.3.9, 8.3.2
ADMINISTRATION OF THE CONTRACT..................................................3.3.3, 4, 9.4, 9.5
Advertisement or Invitation to Bid...........................................................1.1.1
Aesthetic Effect.....................................................................4.2.13, 4.5.1
ALLOWANCES.....................................................................................3.8
All-risk Insurance........................................................................11.3.1.1
APPLICATIONS FOR PAYMENT................................4.2.5, 7.3.7, 9.2, 9.3, 9.4, 9.5.1, 9.6.3,
                                                     9.8.3, 9.10.1, 9.10.3, 9.10.4, 11.1.3, 14.2.4
Approvals...................................2.4.3.3.3, 3.5, 3.10.2, 3.12.4 through 3.12.8, 3.18.3,
                                                              4.2.7, 9.3.2, 11.3.1.4, 13.4.2, 13.5
ARBITRATION.......................................................4.1.4, 4.3.2, 4.3.4, 4.4.4, 4.5,
                                                                    8.3.1, 10.1.2, 11.3.9, 11.3.10
ARCHITECT......................................................................................4.1
Architect, Definition of.....................................................................4.1.1
Architect, Extent of Authority.....................................2.4, 3.12.6, 4.2, 4.3.2, 4.3.6,
                                                                      4.4, 5.2, 6.3, 7.1.2, 7.2.1,
                                                          7.3.6, 7.4, 9.2, 9.3.1, 9.4, 9.5, 9.6.3,
                                                       9.8.2, 9.8.3, 9.10.1, 9.10.3, 12.1, 12.2.1,
                                                                    13.5.1, 13.5.2, 14.2.2, 14.2.4
Architect, Limitations of Authority and Responsibility..............................3.3.3, 3.12.8,
                                3.12.11, 4.1.2, 4.2.1, 4.2.2, 4.2.3, 4.2.6, 4.2.7, 4.2.10, 4.2.12,
                                                    4.2.13, 4.3.2, 5.2.1, 7.4, 9.4.2, 9.6.4, 9.6.6
Architect's Additional Services and Expenses...........................................2.4, 9.8.2,
                                                                         11.3.1.1, 12.2.1, 12.2.4,
                                                                            13.5.2, 13.5.3, 14.2.4
ARCHITECT'S ADMINISTRATION OF THE CONTRACT.............................................4.2, 4.3.6,
                                                                              4.3.7, 4.4, 9.4, 9.5
Architect's Approvals............................2.4, 3.5.1, 3.10.2, 3.12.6, 3.12.8, 3.18.3, 4.2.7
Architect's Authority to Reject Work..................................3.5.1, 4.2.6, 12.1.2, 12.2.1
Architect's Copyright..........................................................................1.3
Architect's Decisions........................................................4.2.6, 4.2.7, 4.2.11,
                                                                            4.2.12, 4.2.13, 4.3.2,
                                                                    4.3.6, 4.4.1, 4.4.4, 4.5, 6.3,
                                                             7.3.6, 7.3.8, 8.1.3, 8.3.1, 9.2, 9.4,
                                               9.5.1, 9.8.2, 9.9.1, 10.1.2, 13.5.2, 14.2.2, 14.2.4







                                      -2-
   36

                                                    
Architect's Inspections.........................................4.2.2, 4.2.9, 4.3.6, 9.4.2, 9.8.2,
                                                                               9.9.2, 9.10.1, 13.5
Architect's Instructions...........................4.2.6, 4.2.7, 4.2.8, 4.3.7, 7.4.1, 12.1, 13.5.2
Architect's Interpretations..................................................4.2.11, 4.2.12, 4.3.7
Architect's On-Site Observations.......................................4.2.2, 4.2.5, 4.3.6, 9.4.2,
                                                                               9.5.1, 9.10.1, 13.5
Architect's Project Representative..........................................................4.2.10
Architect's Relationship with Contractor......................................1.1.2, 3.2.1, 3.2.2,
                                                       3.3.3, 3.5.1, 3.-.3, 3.11, 3.12.8, 3.12.11,
                                                          3.16, 3.18, 4.2.3, 4.2.4, 4.2.6, 4.2.12,
                                                      5.2, 6.2.2, 7.3.4, 9.8.2, 11.3.7, 12.1, 13.5
Architect's Relationship with Subcontractors..................................1.1.2, 4.2.3, 4.2.4,
                                                                       4.2.6, 9.6.3, 9.6.4, 11.3.-
Architect's Representations...................................................9.4.2, 9.5.1, 9.10.1
Architect's Site Visits..................................4.2.2, 4.2.5, 4.2.9, 4.3.6, 9.4.2, 9.5.1,
                                                                        9.8.2, 9.9.2, 9.10.1, 13.5
Asbestos......................................................................................10.1
Attorney's Fees.............................................................3.18.1, 9.10.2, 10.1.4
Award of Separate Contracts..................................................................6.1.1
AWARD OF SUBCONTRACT AND OTHER CONTRACTS FOR
        PORTIONS OF THE WORK...................................................................5.2
BASIC DEFINITIONS..............................................................................1.1
Bidding Requirements...................................................1.1.1, 1.1.7, 5.2.1, 11.4.1
BOILER AND MACHINERY INSURANCE..............................................................11.3.2
Bonds, Lien.................................................................................9.10.2
Bonds, Performance and Payment.......................................7.3.6.4, 9.10.3, 11.3.9, 11.4
Building Permit..............................................................................3.7.1
CAPITALIZATION.................................................................................1.4
Certificate of Substantial Completion........................................................9.8.2
CERTIFICATES FOR PAYMENT.....................................4.2.5, 4.2.9, 9.3.3, 9.4, 9.5, 9.6.1,
                                       9.6.6, 9.7.1, 9.8.3, 9.10.1, 9.10.3, 13.7, 14.1.1.3, 14.2.4
Certificates of Inspection, Testing or Approval....................................3.12.11, 13.5.4
Certificates of Insurance....................................................9.3.2, 9.10.2, 11.1.3
CHANGE ORDERS....................................1.1.1, 2.4.1, 3.8.2.4, 3.11, 4.2.8, 4.3.3, 5.2.3,
                                                7.1, 7.2, 7.3.2, 8.3.1, 9.3.1.1, 9.10.3, 11.3.1.2,
                                                                            11.3.4, 11.3.9, 12.1.2
Change Orders, Definition of.................................................................7.2.1
CHANGES........................................................................................7.1
CHANGES IN THE WORK.........................................3.11, 4.2.8, 7, 8.3.1, 9.3.1.1, 10.1.3
Claim, DEFINITION of.........................................................................4.3.1
CLAIMS AND DISPUTES...................................................4.3, 4.4, 4.5, 6.2.5, 8.3.2,
                                                                    9.3.1.2, 9.3.3, 9.10.4, 10.1.4
CLAIMS AND TIMELY ASSERTION OF CLAIMS........................................................4.5.6
CLAIMS FOR ADDITIONAL COST........................................4.3.6, 4.3.7, 4.3.9, 6.1.1, 10.3







                                      -3-
   37


                                                    
CLAIMS FOR ADDITIONAL TIME...............................................4.3.6, 4.3.8, 4.3.9, 8.32
CLAIMS FOR CONCEALED OR UNKNOWN CONDITIONS...................................................4.3.6
Claims for Damages...............................3.18, 4.3.9, 6.1.1, 6.2.5, 8.3.2, 9.5.1.2, 10.1.4
Claims Subject to Arbitration..................................................4.3.2, 4.4.4, 4.5.1
CLEANING UP..............................................................................3.15, 6.3
COMMENCEMENT OF STATUTORY LIMITATION PERIOD...................................................13.7
Commencement of the Work, Conditions Relating to............................................2.1.2,
                                         2.2.1, 3.2.1, 3.2.2, 3.7.1, 3.10.1, 3.12.6, 4.3.7, 5.2.1,
                                                  6.2.2, 8.1.2, 8.2.2, 9.2, 11.1.3, 11.3.6, 11.4.1
Commencement of the Work, Definition of......................................................8.1.2
Communications Facilitating Contract Administration............................3.9.1, 4.2.4, 5.2.1
Completion, Conditions Relating to.......................................3.11, 3.15, 4.2.2, 4.2.9,
                                            4.3.2, 9.4.2, 9.8, 9.9.1, 9.10, 11.3.5, 12.2.2, 13.7.1
COMPLETION, PAYMENTS AND.........................................................................9
Completion, Substantial.......................................4.2.9, 4.3.5.2, 8.1.1, 8.1.3, 8.2.3,
                                                                          9.8, 9.9.1, 12.2.2, 13.7
Compliance with Laws....................................1.3, 3.6, 3.7, 3.13, 4.1.1, 10.2.2, 11.1,
                                                11.3, 13.1, 13.5.1, 13.5.2, 13.6, 14.1.1, 14.2.1.3
Concealed or Unknown Conditions..............................................................4.3.6
Conditions of the Contract.....................................................1.1.1, 1.1.7, 6.1.1
Consent, Written.....................................................1.3.1, 3.12.8, 3.14.2, 4.1.2,
                                        4.3.4, 4.5.5, 9.3.2, 9.8.2, 9.9.1, 9.10.2, 9.10.3, 10.1.2,
                                                   10.1.3, 11.3.1, 11.3.1.4, 11.3.11, 13.2, 13.4.2
CONSTRUCTION BY OWNER OR BY SEPARATE CONTRACTORS..........................................1.1.4, 6
Construction Change Directive, Definition of.................................................7.3.1
CONSTRUCTION CHANGE DIRECTIVES.....................................1.1.1, 4.2.8, 7.1, 7.3, 9.3.1.1
Construction Schedules, Contractor's...................................................3.10, 6.1.3
CONTINGENT ASSIGNMENT OF SUBCONTRACTS..........................................................5.4
CONTINUING CONTRACT PERFORMANCE..............................................................4.3.4
Contract, Definition of......................................................................1.1.2
CONTRACT, TERMINATION OR
        SUSPENSION OF THE.......................................................4.3.7, 5.4.1.1, 14
Contract Administration..........................................................3.3.3, 4.9.4, 9.5
Contract Award and Execution, Conditions Relating to........................................3.7.1,
                                                            3.10, 5.2, 9.2, 11.1.3, 11.3.6, 11.4.1
CONTRACT DOCUMENTS, THE................................................................1.1, 1.2, 7
Contract Documents, Copies Furnished and Use of....................................1.3, 2.2.5, 5.3
Contract Documents, Definition of............................................................1.1.1
Contract Performance During Arbitration...............................................4.3.4, 4.5.3
CONTRACT SUM......................................................3.8, 4.3.6, 4.3.7, 4.4.4, 5.2.3,
                                           6.1.3, 7.2, 7.3, 9.1, 9.7, 11.3.1, 12.2.4, 12.3, 14.2.4
CONTACT SUM, Definition of.....................................................................9.1






                                      -4-
   38


                                                    
Contract Time...................................................4.3.6, 4.3.8, 4.4.4, 7.2.1.3, 7.3,
                                                                         8.2.1, 8.3.1, 9.7, 12.1.1
Contract Time, DEFINITION of.................................................................8.1.1
CONTRACTOR.......................................................................................3
Contractor, DEFINITION of...............................................................3.1, 6.1.2
Contractor's Bid.............................................................................1.1.1
CONTRACTOR'S CONSTRUCTION SCHEDULES....................................................3.10, 6.1.3
Contractor's Employees......................................3.3.2, 3.4.2, 3.8.1, 3.9, 3.18, 4.2.3,
                                                        4.2.6, 8.1.2, 10.2, 10.3, 11.1.1, 14.2.1.1
CONTRACTORS LIABILITY INSURANCE...............................................................11.1
Contractor's Relationship with Separate Contractors
        and Owner's Forces.................................2.2.6, 3.12.5, 3.14.2, 4.2.4, 6, 12.2.5
Contractor's Relationship with Subcontractors........................................1.2.4, 3.3.2,
                                    3.18.1, 3.18.2, 5.2, 5.3, 5.4, 9.6.2, 11.3.7, 11.3.8, 14.2.1.2
Contractor's Relationship with the Architect..................................1.1.2, 3.2.1, 3.2.2,
                                3.3.3, 3.5.1, 3.7.3, 3.11, 3.12.8 3.16, 3.18, 4.2.3, 4.2.4, 4.2.6,
                                              4.2.12, 5.2, 6.2.2, 7.3.4, 9.8.2, 11.3.7, 12.1, 13.5
Contractor's Representations.............................1.2.2, 3.5.1, 3.12.7, 6.2.2, 8.2.1, 9.3.3
Contractor's Responsibility for Those Performing the Work...................3.3.2, 3.18, 4.2.3, 10
Contractor's Review of Contract Documents........................................1.2.2, 3.2, 3.7.3
Contractor's Right to Stop the Work............................................................9.7
Contractor's Right to Terminate the Contract..................................................14.1
Contractor's Submittals.....................................3.10, 3.11, 3.12, 4.2.7, 5.2.1, 5.2.3,
                                                          7.3.6, 9.2, 9.3.1, 9.8.2, 9.9.1, 9.10.2,
                                                                    9.10.3, 10.1.2, 11.4.2, 11.4.3
Contractor's Superintendent............................................................3.9, 10.2.6
Contractor's Supervision and Construction Procedures........................................1.2.4,
                                                                 3.3, 3.4, 4.2.3, 8.2.2, 8.2.3, 10
Contractual Liability Insurance...................................................11.1.1.7, 11.2.1
Coordination and Correlation..................................................1.2.2, 1.2.4, 3.3.1,
                                                                        3.10, 3.12.7, 6.1.3, 6.2.1
Copies Furnished of Drawings and Specifications...................................1.3, 2.2.5, 3.11
Correction of Work..........................................................2.3, 2.4, 4.2.1, 9.8.2
                                                                     9.9.1, 12.1.2, 12.2, 13.7.1.3
Cost, Definition of..................................................................7.3.6, 14.3.5
Costs..............................2.4, 3.2.1, 3.7.4, 3.8.2, 3.15.2, 4.3.6, 4.3.7, 4.3.8.1, 5.2.3,
                           6.1.1, 6.2.3, 6.3, 7.3.3.3, 7.3.6, 7.3.7, 9.7, 9.8.2, 9.10.2, 11.3.1.2,
                                  11.3.1.3, 11.3.4, 11.3.9, 12.1, 12.2.1, 12.2.4, 12.2.5, 13.5, 14
CUTTING AND PATCHING...................................................................3.14, 6.2.6
Damage to Construction of Owner or Separate Contractors.....................................3.14.2
                                        6.2.4, 9.5.1.5, 10.2.1.2, 10.2.5, 10.3, 11.1, 11.3, 12.2.5
Damage to the Work......................................3.14.2, 9.9.1, 10.2.1.2, 10.2.5, 10.3,11.3
Damages, Claims for..............................3.18, 4.3.9, 6.1.1, 6.2.5, 8.3.2, 9.5.1.2, 10.1.4
Damages for Delay.......................................................6.1.1, 8.3.3, 9.5.1.6, 9.7






                                      -5-
   39

                                                    
Date of Commencement of the Work, Definition of..............................................8.1.2
Date of Substantial Completion, Definition of................................................8.1.3
Day, Definition of...........................................................................8.1.4
Decisions of the Architect...................................4.2.6, 4.2.7, 4.2.11, 4.2.12, 4.2.13,
                            4.3.2, 4.3.6, 4.4.1, 4.4.4, 4.5, 6.3, 7.3.6, 7.3.8, 8.1.3, 8.3.1, 9.2,
                                          9.4, 9.5.1, 9.8.2, 9.9.1, 10.1.2, 13.5.2, 14.2.2, 14.2.4
DECISIONS TO WITHHOLD CERTIFICATION...............................................9.5, 9.7, 14.1.3
Defective or Nonconforming Work, Acceptance
        Rejection and Correction of........................................2.3, 2.4, 3.5.1, 4.2.1,
                                           4.2.6, 4.3.5, 9.5.2, 9.8.2, 9.9.1, 10.2.5, 12, 13.7.1.3
Defective Work, Definition of................................................................3.5.1
Definitions.................................1.1, 2.1.1, 3.1, 3.5.1, 3.12.1, 3.12.2, 3.12.3, 4.1.1,
                                          4.3.1, 5.1, 6.1.2, 7.2.1, 7.3.1, 7.3.6, 8.1, 9.1, 9.8.1
DELAYS AND EXTENSIONS OF TIME..............................................4.3.1, 4.3.8.1, 4.3.8.2
                                                 6.1.1, 6.2.3, 7.2.1, 7.3.1, 7.3.4, 7.3.5, 7.3.8,
                                                              7.3.9,  8.1.1, 8.3, 10.3.1, 14.1.1.4
Disputes..........................................4.1.4, 4.3, 4.4, 4.5, 6.2.5, 6.3, 7.3.8, 9.3.1.2
Documents and Samples at the Site.............................................................3.11
Drawings, Definition of......................................................................1.1.5
Drawings and Specifications, Use and Ownership of.....................1.1.1, 1.3, 2.2.5, 3.11, 5.3
Duty to Review Contract Documents and Field Conditions.........................................3.2
Effective Date of Insurance..........................................................8.2.2, 11.1.2
EMERGENCIES............................................................................4.3.7, 10.3
Employees, Contractor's..........................................3.3.2, 3.4.2, 3.8.1, 3.9, 3.18.1,
                                         3.18.2, 4.2.3, 4.2.6, 8.1.2, 10.2, 10.3, 11.1.1, 14.2.1.1
Equipment, Labor, Materials and..........................................1.1.3, 1.1.6, 3.4, 3.5.1,
                                              3.8.2, 3.12.3, 3.12.7, 3.12.11, 3.13, 3.15.1, 4.2.7,
                                                      6.2.1, 7.3.6, 9.3.2, 9.3.3, 11.3, 12.2.4, 14
Execution and Progress of the Work.......................................1.1.3, 1.2.3, 3.2, 3.4.1,
                                                  3.5.1, 4.2.2, 4.2.3, 4.3.4, 4.3.8, 6.2.2, 7.1.3,
                                                     7.3.9, 8.2, 8.3, 9.5, 9.9.1, 10.2, 14.2, 14.3
EXECUTION, CORRELATION AND INTENT of the Contract Documents.............................1.2, 3.7.1
Extension of Time...............................................4.3.1, 4.3.8, 7.2.1.3, 8.3, 10.3.1
Failure of Payment by Contractor.................................................9.5.1.3, 14.2.1.2
Failure of Payment by Owner.....................................................4.3.7, 9.7, 14.1.3
Faulty Work (See Defective or Nonconforming Work)
FINAL COMPLETION AND FINAL PAYMENT...........................................4.2.1, 4.2.9, 4.3.2,
                                                 4.3.5, 9.10, 11.1.2, 11.1.3, 11.3.5, 12.3.1, 13.7
Financial Arrangements, Owner's..............................................................2.2.1
Fire and Extended Coverage Insurance..........................................................11.3

GENERAL PROVISIONS...............................................................................1
GOVERNING LAW.................................................................................13.1
Guarantees (See Warranty and Warranties)







                                      -6-
   40
                                                    
Hazardous Materials...................................................................10.1, 10.2.4
Identification of Contract Documents.........................................................1.2.1
Identification of Subcontractors and Suppliers...............................................5.2.1
INDEMNIFICATION.......................................3.17, 3.18, 9.10.2, 10.1.4, 11.3.1.2, 11.3.7
INFORMATION AND SERVICES REQUIRED BY THE OWNER.........................................2.1.2, 2.2,
                                    4.3.4, 6.1.3, 6.1.4, 6.2.6, 9.3.2, 9.6.1, 9.6.4, 9.8.3, 9.9.2,
                                                        9.10.3, 10.1.4, 11.2, 11.3, 13.5.1, 13.5.2
INJURY OR DAMAGE TO PERSON OR PROPERTY.......................................................4.3.9
Inspections............................................................3.3.3, 3.3.4, 3.7.1, 4.2.2,
                                            4.2.6, 4.2.9, 4.3.6, 9.4.2, 9.8.2, 9.9.2, 9.10.1, 13.5
Instructions to Bidders......................................................................1.1.1
Instructions to the Contractor................................3.8.1, 4.2.8, 5.2.1, 7, 12.1, 13.5.2
Insurance...................................4.3.9, 6.1.1, 7.3.6.4, 9.3.2, 9.8.2, 9.9.1, 9.10.2, 11
INSURANCE, BOILER AND MACHINERY.............................................................11.3.2
INSURANCE, CONTRACTOR'S LIABILITY.............................................................11.1
Insurance, Effective Date of.........................................................8.2.2, 11.1.2
INSURANCE, LOSS OF USE......................................................................11.3.3
INSURANCE, OWNER'S LIABILITY..................................................................11.2
INSURANCE, PROPERTY...................................................................10.2.5, 11.3
Insurance, Stored Materials........................................................9.3.2, 11.3.1.4

INSURANCE AND BONDS.............................................................................11
Insurance Companies, Consent to Partial Occupancy...................................9.9.1, 11.3.11
Insurance Companies, Settlement with.......................................................11.3.10
Intent of the Contract Documents..................1.2.3, 3.12.4, 4.2.6, 4.2.7, 4.2.12, 4.2.13, 7.4
INTEREST......................................................................................13.6
INTERPRETATION....................................1.2.5, 1.4, 1.5, 4.1.1, 4.3.1, 5.1, 6.1.2, 8.1.4
Interpretations, Written.....................................................4.2.11, 4.2.12, 4.3.7
Joinder and Consolidation of Claims Required.................................................4.5.6
JUDGMENT ON FINAL AWARD......................................................4.5.1, 4.5.4.1, 4.5.7
LABOR AND MATERIALS, Equipment....................................1.1.3, 1.1.6, 3.4, 3.5.1, 3.8.2,
                                                    3.12.2, 3.12.3, 3.12.7, 3.12.11, 3.13, 3.15.1,
                                                     4.2.7, 6.2.1, 7.3.6, 9.3.2, 9.3.3, 12.2.4, 14
Labor Disputes...............................................................................8.3.1
Laws and Regulations.....................................1.3, 3.6, 3.7, 3.13, 4.1.1, 4.5.5, 4.5.7,
                                       9.9.1, 10.2.2, 11.1, 11.3, 13.1, 13.4, 13.5.1, 13.5.2, 13.6
Liens..................................................2.1.2, 4.3.2, 4.3.5.1, 8.2.2, 9.3.3, 9.10.2
LIMITATION ON CONSOLIDATION OR JOINDER.......................................................4.5.5
Limitations, Statutes of.....................................................4.5.4.2, 12.2.6, 13.7
Limitations of Authority......................................................3.3.1, 4.1.2, 4.2.1,
                                                  4.2.3, 4.2.7, 4.2.10, 5.2.2, 5.2.4, 7.4, 11.3.10







                                      -7-
   41


                                                    
Limitations of Liability...............................2.3, 3.2.1, 3.5.1, 3.7.3, 3.12.8, 3.12.11,
                                   3.17, 3.18, 4.2.6, 4.2.7, 4.2.12, 6.2.2, 9.4.2, 9.6.4, 9.10.4,
                                           10.1.4, 10.2.5, 11.1.2, 11.2.1, 11.3.7, 13.4.2, 13.5.2
Limitations of Time, General..........................................2.2.1, 2.2.4, 3.2.1, 3.7.3,
                                        3.8.2, 3.10, 3.12.5, 3.15.1, 4.2.1, 4.2.7, 4.2.11, 4.3.2,
                             4.3.3,4.3.4, 4.3.6, 4.3.9, 4.5.4.2, 5.2.1, 5.2.3, 6.2.4, 7.3.4, 7.4,
                                 8.2, 9.5, 9.6.2, 9.8, 9.9, 9.10, 11.1.3, 11.3.1, 11.3.2, 11.3.5,
                                                               11.3.6, 12.2.1, 12.2.2, 13.5, 13.7
Limitations of Time, Specific......................................2.1.2, 2.2.1, 2.4, 3.10, 3.11,
                               3.15.1, 4.2.1, 4.2.11, 4.3, 4.4, 4.5, 5.3, 5.4, 7.3.5, 7.3.9, 8.2,
                             9.2, 9.3.1, 9.3.3, 9.4.1, 9.6.1, 9.7, 9.8.2, 9.10.2, 11.1.3, 11.3.6,
                                               11.3.10, 11.3.11, 12.2.2, 12.2.4, 12.2.6, 13.7, 14
LOSS OF USE INSURANCE......................................................................11.3.3
Material Suppliers............................................1.3.1, 3.12.1, 4.2.4, 4.2.6, 5.2.1,
                                                      9.3.1, 9.3.1.2, 9.3.3, 9.4.2, 9.6.5, 9.10.4
Materials, Hazardous.................................................................10.1, 10.2.4
Materials, Labor, Equipment and.................................1.1.3, 1.1.6,  3.4, 3.5.1, 3.8.2,
                                     3.12.2, 3.12.3, 3.12.7, 3.12.11, 3.13, 3.15.1, 4.2.7, 6.2.1,
                                                                  7.3.6, 9.3.2, 9.3.3, 12.2.4, 14
Means, Methods, Techniques, Sequences and Procedures of Construction...3.3.1, 4.2.3, 4.2.7, 9.4.2
MINOR CHANGES IN THE WORK...........................................1.1.1, 4.2.8, 4.3.7, 7.1, 7.4
MISCELLANEOUS PROVISIONS.......................................................................13
Modifications, Definition of................................................................1.1.1
Modifications to the Contract..........................................1.1.1, 1.1.2, 3.7.3, 3.11,
                                                               4.1.2, 4.2.1, 5.2.3, 7, 8.3.1, 9.7
MUTUAL RESPONSIBILITY.........................................................................6.2
NONCONFORMING WORK, ACCEPTANCE OF............................................................12.3
Nonconforming Work, Rejection and Correction of..........2.3.1, 4.3.5, 9.5.2, 9.8.2, 12, 13.7.1.3
Notice.........................................2.3, 2.4, 3.2.1, 3.2.2, 3.7.3, 3.7.4, 3.9, 3.12.8,
                                3.12.9, 3.17, 4.3, 4.4.4, 4.5, 5.2.1, 5.3, 5.4.1.1, 8.2.2, 9.4.1,
                                   9.5.1, 9.6.1, 9.7, 9.10, 10.1.2, 10.2.6, 11.1.3, 11.3, 12.2.2,
                                                                 12.2.4, 13.3, 13.5.1, 13.5.2, 14
NOTICE, WRITTEN...............................................2.3, 2.4, 3.9, 3.12.8, 3.12.9, 4.3,
                                 4.4.4, 4.5, 5.2.1, 5.3, 5.4.1.1, 8.2.2, 9.4.1, 9.5.1, 9.7, 9.10,
                                   10.1.2, 10.2.6, 11.1.3, 11.3, 12.2.2, 12.2.4, 13.3, 13.5.2, 14
Notice of Testing and Inspections..................................................13.5.1, 13.5.2
Notice to Proceed...........................................................................8.2.2
NOTICES, PERMITS, FEES AND......................................2.2.3, 3.7, 3.13, 7.3.6.4, 10.2.2
Observations, Architect's On-Site.................4.2.2, 4.2.5, 4.3.6, 9.4.2, 9.5.1, 9.10.1, 13.5
Observations, Contractor's...........................................................1.2.2, 3.2.2
Occupancy..............................................................9.6.6, 9.8.1, 9.9, 11.3.11
On-Site Inspections by the Architect.............4.2.2, 4.2.9, 4.3.6, 9.4.2, 9.8.2, 9.9.2, 9.10.1
On-Site Observations by the Architect........................................4.2.2, 4.2.5, 4.3.6,
                                                                       9.4.2, 9.5.1, 9.10.1, 13.5






                                      -8-
   42

                                                    
Orders, Written...........................................2.3, 3.9, 4.3.7, 7, 8.2.2, 11.3.9, 12.1,
                                                                              12.2, 13.5.2, 14.3.1
OWNER............................................................................................2
Owner, DEFINITION of...........................................................................2.1
OWNER, INFORMATION AND SERVICES REQUIRED OF THE.............................................2.1.2,
                                    2.2, 4.3.4, 6, 9, 10.1.4, 11.2, 11.3, 13.5.1, 14.1.1.5, 14.1.3
Owner's Authority........................................3.8.1, 4.1.3, 4.2.9, 5.2.1, 5.2.4, 5.4.1,
                                  7.3.1, 8.2.2, 9.3.1, 9.3.2, 11.4.1, 12.2.4, 13.5.2, 14.2, 14.3.1
Owner's Financial Capability.......................................................2.2.1, 14.1.1.5
OWNER'S LIABILITY INSURANCE...................................................................11.2
Owner's Loss of Use Insurance...............................................................11.3.3
Owner's Relationship with Subcontractors....................................................1.1.2,
                                                                               5.2.1, 5.4.1, 9.6.4
Owner's Right to Carry Out the Work..........................................2.4, 12.2.4, 14.2.2.2
OWNER'S RIGHT TO CLEAN UP......................................................................6.3
OWNER'S RIGHT TO PERFORM CONSTRUCTION AND TO AWARD SEPARATE CONTRACTS..........................6.1
OWNER'S RIGHT TO STOP THE WORK..........................................................2.3, 4.3.7
Owner's Right to Suspend the Work.............................................................14.3
Owner's Right to Terminate the Contract.......................................................14.2
OWNERSHIP AND USE OF ARCHITECT'S DRAWINGS, SPECIFICATIONS AND OTHER DOCUMENTS...............1.1.1,
                                                                                   1.3, 2.2.5, 5.3
PARTIAL OCCUPANCY OR USE.......................................................9.6.6, 9.9, 11.3.11
PATCHING, CUTTING AND..................................................................3.14, 6.2.6
PATENTS, ROYALTIES AND........................................................................3.17
Patent, Applications for......................................................4.2.5, 9.2, 9.3, 9.4
                                                      9.5.1, 9.8.3, 9.10.1, 9.10.3, 9.10.4, 14.2.4
PAYMENT, CERTIFICATES FOR...........................................4.2.5, 4.2.9, 9.3.3, 9.4, 9.5,
                                9.6.1, 9.6.6, 9.7.1, 9.8.3, 9.10.1, 9.10.3, 13.7, 14.1.1.3, 14.2.4
PAYMENT, FAILURE OF................................................................4.3.7, 9.5.1.3,
                                                                   9.7, 9.10.2, 14.1.1.3, 14.2.1.2
Payment, Final..........................................4.2.1, 4.2.9, 4.3.2, 4.3.5, 9.10, 11.1.2,
                                                                            11.1.3, 11.3.5, 12.3.1
PAYMENT BOND, PERFORMANCE BOND AND.......................................................7.3.6.4,
                                                                              9.10.3, 11.3.9, 11.4
Payments, Progress.................................................................4.3.4, 9.3, 9.6
                                                                       9.8.3, 9.10.3, 13.6, 14.2.3
PAYMENTS AND COMPLETION......................................................................9, 14
Payments to Subcontractors........................................................5.4.2, 9.5.1.3,
                                                             9.6.2, 9.6.3, 9.6.4, 11.3.8, 14.2.1.2
PCB...........................................................................................10.1
Performance Bond and Payment Bond........................................................7.3.6.4,
                                                                              9.10.3, 11.3.9, 11.4
PERMITS, FEES AND NOTICES........................................2.2.3, 3.7, 3.13, 7.3.6.4, 10.2.2






                                      -9-
   43


                                                    
PERSONS AND PROPERTY, PROTECTION OF.............................................................10
Polychlorinated Biphenyl......................................................................10.1
Product Data, Definition of.................................................................3.12.2
PRODUCT DATA AND SAMPLES, SHOP DRAWINGS..........................................3.11, 3.12, 4.2.7
PROGRESS AND COMPLETION..........................................................4.2.2, 4.3.4, 8.2
PROGRESS PAYMENTS......................................................................4.3.4, 9.3,
                                                                  9.6, 9.8.3, 9.10.3, 13.6, 14.2.3
PROJECT, Definition of the...................................................................1.1.4
PROJECT MANUAL, Definition of the............................................................1.1.7
Project Manuals..............................................................................2.2.5
Project Representatives.....................................................................4.2.10
PROPERTY INSURANCE....................................................................10.2.5, 11.3
PROTECTION OF PERSONS AND PROPERTY..............................................................10
Regulations and Laws.............................1.3, 3.6, 3.7, 3.13, 4.1.1, 4.5.5, 4.5.7, 10.2.2,
                                                  11.1, 11.3, 13.1, 13.4, 13.5.1, 13.5.2, 13.6, 14
Rejection of Work...............................................................3.5.1, 4.2.6, 12.2
Releases of Waivers and Liens...............................................................9.10.2
Representations..............................................................1.2.2, 3.5.1, 3.12.7,
                                                  6.2.2, 8.2.1, 9.3.3, 9.4.2, 9.5.1, 9.8.2, 9.10.1
Representatives......................2.1.1, 3.1.1, 3.9, 4.1.1, 4.2.1, 4.2.10, 5.1.1, 5.1.2, 13.2.1
RESOLUTION OF CLAIMS AND DISPUTES.........................................................4.4, 4.5
Responsibility for Those Performing the Work..........................3.3.2, 4.2.3, 6.1.3, 6.2, 10
Retainage...............................................9.3.1, 9.6.2, 9.8.3, 9.9.1, 9.10.2, 9.10.3
REVIEW OF CONTRACT DOCUMENTS AND FIELD CONDITIONS BY CONTRACTOR..........1.2.2, 3.2, 3.7.3, 3.12.7
Review of Contractor's Submittals by Owner and Architect...............3.10.1, 3.10.2, 3.11, 3.12,
                                                            4.2.7, 4.2.9, 5.2.1, 5.2.3, 9.2, 9.8.2
Review of Shop Drawings, Product Data and Samples by Contractor.............................3.12.5
RIGHTS AND REMEDIES................................................1.1.2, 2.3, 2.4, 3.5.1, 3.15.2,
                               4.2.6, 4.3.6, 4.5, 5.3, 6.1, 6.3, 7.3.1, 8.3.1, 9.5.1, 9.7, 10.2.5,
                                                                    10.3, 12.2.2, 12.2.4, 13.4, 14
ROYALTIES AND PATENTS.........................................................................3.17
RULES AND NOTICES FOR ARBITRATION............................................................4.5.2
SAFETY OF PERSONS AND PROPERTY................................................................10.2
SAFETY PRECAUTIONS AND PROGRAMS.................................................4.2.3, 4.2.7, 10.1
Samples, Definition of......................................................................3.12.3
SAMPLES, SHOP DRAWINGS, PRODUCT DATA AND........................................3.11,  3.12, 4.2.7
SAMPLES AT THE SITE, DOCUMENTS AND............................................................3.11
SCHEDULE OF VALUES......................................................................9.2, 9.3.1
Schedules, Construction.......................................................................3.10
Separate Contracts and Contractors..........1.1.4, 3.14.2, 4.2.4, 4.5.5, 6, 11.3.7, 12.1.2, 12.2.5
Shop Drawings, Definition of................................................................3.12.1
SHOP DRAWINGS, PRODUCT DATA AND SAMPLES..........................................3.11, 3.12, 4.2.7
SITE, USE OF....................................................................3.13, 6.1.1, 6.2.1






                                      -10-
   44

                                                    
Site Inspections............................1.2.2, 3.3.4, 4.2.2, 4.2.9, 4.3.6, 9.8.2, 9.10.1, 13.5
Site Visits, Architect's .............................................4.2.2, 4.2.5, 4.2.9, 4.3.6,
                                                          9.4.2, 9.5.1, 9.8.2, 9.9.2, 9.10.1, 13.5
Special Inspections and Testing................................................4.2.6, 12.2.1, 13.5
SPECIFICATIONS, Definition of the............................................................1.1.6
SPECIFICATIONS, THE..........................................1.1.1, 1.1.6, 1.1.7, 1.2.4, 1.3, 3.11
Statutes of Limitations......................................................4.5.4.2, 12.2.6, 13.7
Stopping the Work.............................................2.3., 4.3.7, 9.7, 10.1.2, 10.3, 14.1
Stored Materials..........................................6.2.1, 9.3.2, 10.2.1.2, 11.3.1.4, 12.2.4
Subcontractor, Definition of.................................................................5.1.1
SUBCONTRACTORS...................................................................................5
Subcontractors, Work by......................................................1.2.4, 3.3.2, 3.12.1,
                                                                                   4.2.3, 5.3, 5.4
SUBCONTRACTUAL RELATIONS.................................................5.3, 5.4, 9.3.1.2, 9.6.2,
                                    9.6.3, 9.6.4, 10.2.1, 11.3.7, 11.3.8, 14.1.1, 14.2.1.2, 14.3.2
Submittals...............................1.3, 3.2.3, 3.10, 3.11, 3.12, 4.2.7, 5.2.1, 5.2.3, 7.3.6,
                                          9.2, 9.3.1, 9.8.2, 9.9.1, 9.10.2, 9.10.3, 10.1.2, 11.1.3
SUBROGATION, WAIVERS OF......................................................6.1.1, 11.3.5, 11.3.7
SUBSTANTIAL COMPLETION...............................................4.2.9, 4.3.5.2, 8.1.1, 8.1.3,
                                                           8.2.3, 9.8, 9.9.1, 12.2.1, 12.2.2, 13.7
Substantial Completion, Definition of........................................................9.8.1
Substitution of Subcontractors........................................................5.2.3, 5.2.4
Substitution of Architect....................................................................4.1.3
Substitution of Materials....................................................................3.5.1
Sub-subcontractor, Definition of.............................................................5.1.2
Subsurface Conditions........................................................................4.3.6
SUCCESSORS AND ASSIGNS........................................................................13.2
SUPERINTENDENT.........................................................................3.9, 10.2.6
SUPERVISION AND CONSTRUCTION PROCEDURES...........................................1.2.4, 3.3, 3.4,
                                  4.2.3, 4.3.4, 6.1.3, 6.2.4, 7.1.3, 7.3.4, 8.2, 8.3.1, 10, 12, 14
Surety...............................................4.4.1, 4.4.4, 5.4.1.2, 9.10.2, 9.10.3, 14.2.2
Surety, Consent of...........................................................9.9.1, 9.10.2, 9.10.3
Surveys..............................................................................2.2.2, 3.18.3
SUSPENSION BY THE OWNER FOR CONVENIENCE.......................................................14.3
Suspension of the Work................................................4.3.7, 5.4.2, 14.1.1.4, 14.3
Suspension or Termination of the Contract.......................................4.3.7, 5.4.1.1, 14
TAXES.................................................................................3.6, 7.3.6.4
TERMINATION BY THE CONTRACTOR.................................................................14.1
TERMINATION BY THE OWNER FOR CAUSE...................................................5.4.1.1, 14.2
Termination of the Architect.................................................................4.1.3
Termination of the Contractor...............................................................14.2.2
TERMINATION OR SUSPENSION OF THE CONTRACT.......................................................14
TESTS AND INSPECTIONS.....................................3.3.3, 4.2.6, 4.2.9, 9.4.2, 12.2.1, 13.5







                                      -11-
   45


                                                    
TIME.............................................................................................8
TIME, DELAYS AND EXTENSIONS OF...................................................4.3.8, 7.2.1, 8.3
Time Limits, Specific.......................................2.1.2, 2.2.1, 2.4, 3.10, 3.11, 3.15.1,
                                   4.2.1, 4.2.11, 4.3, 4.4, 4.5, 5.3, 5.4, 7.3.5, 7.3.9, 8.2, 9.2,
                          9.3.1, 9.3.3, 9.4.1, 9.6.1, 9.7, 9.8.2, 9.10.2, 11.1.3, 11.3.6, 11.3.10,
                                                         11.3.11, 12.2.2, 12.2.4, 12.2.6, 13.7, 14
TIME LIMITS ON CLAIMS.........................................4.3.2, 4.3.3, 4.3.6, 4.3.9, 4.4, 4.5
Title to Work.........................................................................9.3.2, 9.3.3
UNCOVERING AND CORRECTION OF WORK...............................................................12
UNCOVERING WORK...............................................................................12.1
Unforseen Conditions............................................................4.3.6, 8.3.1, 10.1
Unit Prices.........................................................................7.1.4, 7.3.3.2
Use of Documents....................................................1.1.1, 1.3, 2.2.5, 3.12.7, 5.3
USE OF SITE ....................................................................3.13, 6.1.1, 6.2.1
VALUES, SCHEDULE OF.....................................................................9.2, 9.3.1
WAIVER OF CLAIMS: FINAL PAYMENT...............................................4.3.5, 4.5.1, 9.10.3
Waiver of Claims by the Architect...........................................................13.4.2
Waiver of Claims by the Contractor..........................................9.10.4, 11.3.7, 13.4.2
Waiver of Claims by the Owner.................................................4.3.5, 4.5.1, 9.9.3,
                                                            9.10.3, 11.3.3, 11.3.5, 11.3.7, 13.4.2
Waiver of Liens.............................................................................9.10.2
Waivers of Subrogation.......................................................6.1.1, 11.3.5, 11.3.7
WARRANTY and Warranties................................................................3.5, 4.2.9,
                                                    4.3.5.3, 9.3.3, 9.8.2, 9.9.1, 12.2.2, 13.7.1.3
Weather Delays.............................................................................4.3.8.2
WHEN ARBITRATION MAY BE DEMANDED.............................................................4.5.4
Work, Definition of..........................................................................1.1.3
Written Consent...............................................1.3.1, 3.12.8, 3.14.2, 4.1.2, 4.3.4,
                               4.5.5, 9.3.2, 9.8.2, 9.9.1, 9.10.2, 9.10.3, 10.1.2, 10.1.3, 11.3.1,
                                                                   11.3.1.4, 11.3.11, 13.2, 13.4.2
Written Interpretations......................................................4.2.11, 4.2.12, 4.3.7
WRITTEN NOTICE..........................................2.3, 2.4, 3.9, 3.12.8, 3.12.9, 4.3, 4.4.4,
                                 4.5, 5.2.1, 5.3, 5.4.1.1, 8.2.2, 9.4.1, 9.5.1, 9.7, 9.10, 10.1.2,
                                            10.2.6, 11.1.3, 11.3, 12.2.2, 12.2.4, 13.3, 13.5.2, 14
Written Orders................................................................2.3, 3.9, 4.3.7, 7,
                                                         8.2.2, 11.3.9, 12.1, 12.2, 13.5.2, 14.3.1







                                      -12-

EX-10.32B

   1

                                                                  EXHIBIT 10.32B

               GENERAL CONDITIONS OF THE CONTRACT FOR CONSTRUCTION

                                    ARTICLE 1

                               GENERAL PROVISIONS

1.1     BASIC DEFINITIONS

        1.1.1    THE CONTRACT DOCUMENTS

        The Contract Documents consist of the Agreement between Owner and
Contractor (hereinafter the Agreement), Conditions of the Contract (General,
Supplementary and other Conditions), Drawings, Specifications, addenda issued
prior to execution of the Contract, other documents listed in the Agreement and
Modifications issued after execution of the Contract. A Modification is (1) a
written amendment to the Contract signed by both parties, (2) a Change Order,
(3) a Construction Change Directive or (4) a written order for a minor change in
the Work issued by the Architect. Unless specifically enumerated in the
Agreement, the Contract Documents do not include other documents such as bidding
requirements (advertisement or invitation to bid, Instructions to Bidders,
sample forms, the Contractor's bid or portions of addenda relating to bidding
requirements).

        1.1.2    THE CONTRACT

        The Contract Documents form the Contract for Construction. The Contract
represents the entire and integrated agreement between the parties hereto and
supersedes prior negotiations, representations or agreements, either written or
oral. The Contract may be amended or modified only by a Modification. The
Contract Documents shall not be construed to create a contractual relationship
of any kind (1) between the Architect and Contractor, (2) between the Owner and
a Subcontractor or Sub-subcontractor or (3) between any persons or entities
other than the Owner and Contractor. The Architect shall, however, be entitled
to performance and enforcement of obligations under the Contract intended to
facilitate performance of the Architect's duties.

        1.1.3    THE WORK

        The term "Work" means the construction and services required by the
Contract Documents, whether completed or partially completed, and includes all
other labor, materials, equipment and services provided or to be provided by the
Contractor to fulfill the Contractor's obligations. The Work may constitute the
whole or a part of the Project.

        1.1.4    THE PROJECT

        The Project is the total construction of which the Work performed under
the Contract Documents may be the whole or a part and which may include
construction by the Owner or by separate contractors.



   2

        1.1.5    THE DRAWINGS

        The Drawings are the graphic and pictorial portions of the Contract
Documents, wherever located and whenever issued, showing the design, location
and dimensions of the Work, generally including plans, elevations, sections,
details, schedules and diagrams.

        1.1.6    THE SPECIFICATIONS

        The Specifications are that portion of the Contract Documents consisting
of the written requirements for materials, equipment, construction systems,
standards and workmanship for the Work, and performance of related services.

        1.1.7    THE PROJECT MANUAL

        The Project Manual is the volume usually assembled for the Work which
may include the bidding requirements, sample forms, Conditions of the Contract
and Specifications.

1.2     EXECUTION, CORRELATION AND INTENT

        1.2.1 The Contract Documents shall be signed by the Owner and Contractor
as provided in the Agreement. If either the Owner or Contractor or both do not
sign all the Contract Documents, the Architect shall identify such unsigned
Documents upon request.

        1.2.2 Execution of the Contract by the Contractor is a representation
that the Contractor has visited the site, become familiar with local conditions
under which the Work is to be performed and correlated personal observations
with requirements of the Contract Documents.

        1.2.3 The intent of the Contract Documents is to include all items
necessary for the proper execution and completion of the Work by the Contractor.
The Contract Documents are complementary, and what is required by one shall be
as binding as if required by all; performance by the Contractor shall be
required only to the extent consistent with the Contract Documents and
reasonably inferable from them as being necessary to produce the intended
results.

        1.2.4 Organization of the Specifications into divisions, sections and
articles, and arrangement of Drawings shall not control the Contractor in
dividing the Work among Subcontractors or in establishing the extent of Work to
be performed by any trade.

        1.2.5 Unless otherwise stated in the Contract Documents, words which
have well-known technical or construction industry meanings are used in the
Contract Documents in accordance with such recognized meanings.





                                      -2-
   3

1.3     OWNERSHIP AND USE OF ARCHITECT'S DRAWINGS, SPECIFICATIONS AND
        OTHER DOCUMENTS

        1.3.1 The Drawings, Specifications and other documents prepared by the
Architect are instruments of the Architect's service through which the Work to
be executed by the Contractor is described. The Contractor may retain one
contract record set. Neither the Contractor nor any Subcontractor,
Sub-subcontractor or material or equipment supplier shall own or claim a
copyright in the Drawings, Specifications and other documents prepared by the
Architect, and unless otherwise indicated the Architect shall be deemed the
author of them and will retain all common law, statutory and other reserved
rights, in addition to the copyright. All copies of them, except the
Contractor's record set, shall be returned or suitably accounted for to the
Architect, on request, upon completion of the Work. The Drawings, Specifications
and other documents prepared by the Architect, and copies thereof furnished to
the Contractor, are for use solely with respect to this Project. They are not to
be used by the Contractor or any Subcontractor, Sub-subcontractor or material or
equipment supplier on other projects for additions to this Project outside the
scope of the Work without the specific written consent of the Owner and
Architect. The Contractor, Subcontractors, Sub-subcontractors and material or
equipment suppliers are granted a limited license to use and reproduce
applicable portions of the Drawings, Specifications and other documents prepared
by the Architect appropriate to and for use in the execution of their Work under
the Contract Documents. All copies made under this license shall bear the
statutory copyright notice, if any, shown on the Drawings, Specifications and
other documents prepared by the Architect. Submittal or distribution to meet
official regulatory requirements or for other purposes in connection with this
Project is not to be construed as publication in derogation of the Architect's
copyright or other reserved rights.

1.4     CAPITALIZATION

        1.4.1 Terms capitalized in these General Conditions include those which
are (1) specifically defined, (2) the titles of numbered articles and identified
references to Paragraphs, Subparagraphs and Clauses in the document or (3) the
titles of other documents published by the American Institute of Architects.

1.5     INTERPRETATION

        1.5.1 In the interest of brevity the Contract Documents frequently omit
modifying words such as "all" and "any" and articles such as "the" and "an," but
the fact that a modifier or an article is absent from one statement and appears
in another is not intended to affect the interpretation of either statement.





                                      -3-
   4

                                    ARTICLE 2

                                      OWNER

2.1     DEFINITION

        2.1.1 The Owner is the person or entity identified as such in the
Agreement and is referred to throughout the Contract Documents as if singular in
number. The term "Owner" means the Owner or the Owner's authorized
representative.

        2.1.2 The Owner upon reasonable written request shall furnish to the
Contractor in writing information which is necessary and relevant for the
Contractor to evaluate, give notice of or enforce mechanic's lien rights. Such
information shall include a correct statement of the record legal title to the
property on which the Project is located, usually referred to as the site, and
the Owner's interest therein at the time of execution of the Agreement and,
within five days after any change, information of such change in title, recorded
or unrecorded.

2.2     INFORMATION AND SERVICES REQUIRED OF THE OWNER

        2.2.1 The Owner shall, at the request of the Contractor, prior to
execution of the Agreement and promptly from time to time thereafter, furnish to
the Contractor reasonable evidence that financial arrangements have been made to
fulfill the Owner's obligations under the Contract. [Note: Unless such
reasonable evidence were furnished on request prior to the execution of the
Agreement, the prospective contractor would not be required to execute the
Agreement or to commence the Work.]

        2.2.2 The Owner shall furnish surveys describing physical
characteristics, legal limitations and utility locations for the site of the
Project, and a legal description of the site.

        2.2.3 Except for permits and fees which are the responsibility of the
Contractor under the Contract Documents, the Owner shall secure and pay for
necessary approvals, easements, assessments and charges required for
construction, use or occupancy of permanent structures or for permanent changes
in existing facilities.

        2.2.4 Information or services under the Owner's control shall be
furnished by the Owner with reasonable promptness to avoid delay in orderly
progress of the Work.

        2.2.5 Unless otherwise provided in the Contract Documents, the
Contractor will be furnished, free of charge, such copies of Drawings and
Project Manuals as are reasonably necessary for execution of the Work.

        2.2.6 The foregoing are in addition to other duties and responsibilities
of the Owner enumerated herein and especially those in respect to Article 6
(Construction by Owner or by Separate Contractors), Article 9 (Payments and
Completion) and Article II (Insurance and Bonds).





                                      -4-
   5

2.3     OWNER'S RIGHT TO STOP THE WORK

        2.3.1 If the Contractor fails to correct Work which is not in accordance
with the requirements of the Contract Documents as required by Paragraph 12.2 or
persistently fails to carry out Work in accordance with the Contract Documents,
the Owner, by written order signed personally or by an agent specifically so
empowered by the Owner in writing, may order the Contractor to stop the Work, or
any portion thereof, until the cause for such order has been eliminated;
however, the right of the Owner to stop the Work shall not give rise to a duty
on the part of the Owner to exercise this right for the benefit of the
Contractor or any other person or entity, except to the extent required by
Subparagraph 6.1.3.

2.4     OWNER'S RIGHT TO CARRY OUT THE WORK

        2.4.1 If the Contractor defaults or neglects to carry out the Work in
accordance with the Contract Documents and fails within a seven-day period after
receipt of written notice from the Owner to commence and continue correction of
such default or neglect with diligence and promptness, the Owner may after such
seven-day period give the Contractor a second written notice to correct such
deficiencies within a second seven-day period. If the Contractor within such
second seven-day period after receipt of such second notice fails to commence
and continue to correct any deficiencies, the Owner may, without prejudice to
other remedies the Owner may have, correct such deficiencies. In such case an
appropriate Change Order shall be issued deducting from payments then or
thereafter due the Contractor the cost of correcting such deficiencies,
including compensation for the Architect's additional services and expenses made
necessary by such default, neglect or failure. Such action by the Owner and
amounts charged to the Contractor are both subject to prior approval of the
Architect. If payments then or thereafter due the Contractor are not sufficient
to cover such amounts, the Contractor shall pay the difference to the Owner.


                                    ARTICLE 3

                                   CONTRACTOR

3.1     DEFINITION

        3.1.1 The Contractor is the person or entity identified as such in the
Agreement and is referred to throughout the Contract Documents as if singular in
number. The term "Contractor" means the Contractor or the Contractor's
authorized representative.

3.2     REVIEW OF CONTRACT DOCUMENTS AND FIELD CONDITIONS BY CONTRACTOR

        3.2.1 The Contractor shall carefully study and compare the Contract
Documents with each other and with information furnished by the Owner pursuant
to Subparagraph 2.2.2 and shall at once report to the Architect errors,
inconsistencies or omissions discovered. The Contractor shall not





                                      -5-
   6

be liable to the Owner or Architect for damage resulting from errors,
inconsistencies or omissions in the Contract Documents unless the Contractor
recognized such error, inconsistency or omission and knowingly failed to report
it to the Architect. If the Contractor performs any construction activity
knowing it involves a recognized error, inconsistency or omission in the
Contract Documents without such notice to the Architect, the Contractor shall
assume appropriate responsibility for such performance and shall bear an
appropriate amount of the attributable costs for correction.

        3.2.2 The Contractor shall take field measurements and verify field
conditions and shall carefully compare such field measurements and conditions
and other information known to the Contractor with the Contract Documents before
commencing activities. Errors, inconsistencies or omissions discovered shall be
reported to the Architect at once.

        3.2.3 The Contractor shall perform the Work in accordance with the
Contract Documents and submittals approved pursuant to Paragraph 3.12.

3.3     SUPERVISION AND CONSTRUCTION PROCEDURES

        3.3.1 The Contractor shall supervise and direct the Work, using the
Contractor's best skill and attention. The Contractor shall be solely
responsible for and have control over construction means, methods, techniques,
sequences and procedures and for coordinating all portions of the Work under the
Contract, unless Contract Documents give other specific instructions concerning
these matters.

        3.3.2 The Contractor shall be responsible to the Owner for acts and
omissions of the Contractor's employees, Subcontractors and their agents and
employees, and other persons performing portions of the Work under a contract
with the Contractor.

        3.3.3 The Contractor shall not be relieved of obligations to perform the
Work in accordance with the Contract Documents either by activities or duties of
the Architect in the Architect's administration of the Contract, or by tests,
inspections or approvals required or performed by persons other than the
Contractor.

        3.3.4 The Contractor shall be responsible for inspection of portions of
Work already performed under this Contract to determine that such portions are
in proper condition to receive subsequent Work.

3.4     LABOR AND MATERIALS

        3.4.1 Unless otherwise provided in the Contract Documents, the
Contractor shall provide and pay for labor, materials, equipment, tools,
construction equipment and machinery, water, heat, utilities, transportation,
and other facilities and services necessary for proper execution and completion
of the Work, whether temporary or permanent and whether or not incorporated or
to be incorporated in the Work.





                                      -6-
   7

        3.4.2 The Contractor shall enforce strict discipline and good order
among the Contractor's employees and other persons carrying out the Contract.
The Contractor shall not permit employment of unfit persons or persons not
skilled in tasks assigned to them.

3.5     WARRANTY

        3.5.1 The Contractor warrants to the Owner and Architect that materials
and equipment furnished under the Contract will be of good quality and new
unless otherwise required or permitted by the Contract Documents, that the Work
will be free from defects not inherent in the quality required or permitted, and
that the Work will conform with the requirements of the Contract Documents. Work
not conforming to these requirements, including substitutions not properly
approved and authorized, may be considered defective. The Contractor's warranty
excludes remedy for damage or defect caused by abuse, modifications not executed
by the Contractor, improper or insufficient maintenance, improper operation, or
normal wear and tear under normal usage. If required by the Architect, the
Contractor shall furnish satisfactory evidence as to the kind and quality of
materials and equipment.

3.6     TAXES

        3.6.1 The Contractor shall pay sales, consumer, use and similar taxes
for the Work or portions thereof provided by the Contractor which are legally
enacted when bids are received or negotiations concluded, whether or not yet
effective or merely scheduled to go into effect.

3.7     PERMITS, FEES AND NOTICES

        3.7.1 Unless otherwise provided in the Contract Documents, the
Contractor shall secure and pay for the building permit and other permits and
governmental fees, licenses and inspections necessary for proper execution and
completion of the Work which are customarily secured after execution of the
Contract and which are legally required when bids arc received or negotiations
concluded.

        3.7.2 The Contractor shall comply with and give notices required by
laws, ordinances, rules, regulations and lawful orders of public authorities
bearing on performance of the Work.

        3.7.3 It is not the Contractor's responsibility to ascertain that the
Contract Documents are in accordance with applicable laws, statutes, ordinances,
building codes, and rules and regulations. However, if the Contractor observes
that portions of the Contract Documents are at variance therewith, the
Contractor shall promptly notify the Architect and Owner in writing, and
necessary changes shall be accomplished by appropriate Modification.

        3.7.4 If the Contractor performs Work knowing it to be contrary to laws,
statutes, ordinances, building codes, and rules and regulations without such
notice to the Architect and Owner, the Contractor shall assume full
responsibility for such Work and shall bear the attributable costs.





                                      -7-
   8
3.8     ALLOWANCES

        3.8.1 The Contractor shall include in the Contract Sum all allowances
stated in the Contract Documents. Items covered by allowances shall be supplied
for such amounts and by such persons or entities as the Owner may direct, but
the Contractor shall not be required to employ persons or entities against which
the Contractor makes reasonable objection.

        3.8.2 Unless otherwise provided in the Contract Documents:

                 .1 materials and equipment under an allowance shall be selected
                 promptly by the Owner to avoid delay in the Work;

                 .2 allowances shall cover the cost to the Contractor of
                 materials and equipment delivered at the site and all required
                 taxes, less applicable trade discounts;

                 .3 Contractor's costs for unloading and handling at the site,
                 labor, installation costs, overhead, profit and other expenses
                 contemplated for stated allowance amounts shall be included in
                 the Contract Sum and not in the allowances;

                 .4 whenever costs are more than or less than allowances, the
                 Contract Sum shall be adjusted accordingly by Change Order. The
                 amount of the Change Order shall reflect (1) the difference
                 between actual costs and the allowances under Clause 3.8.2.2
                 and (2) changes in Contractor's costs under Clause 3.8.2.3.

3.9     SUPERINTENDENT

        3.9.1 The Contractor shall employ a competent superintendent and
necessary assistants who shall be in attendance at the Project site during
performance of the Work. The superintendent shall represent the Contractor, and
communications given to the superintendent shall be as binding as if given to
the Contractor. Important communications shall be confirmed in writing. Other
communications shall be similarly confirmed on written request in each case.

3.10    CONTRACTOR'S CONSTRUCTION SCHEDULES

        3.10.1 The Contractor, promptly after being awarded the Contract, shall
prepare and submit for the Owner's and Architect's information a Contractor's
construction schedule for the Work. The schedule shall not exceed time limits
current under the Contract Documents, shall be revised at appropriate intervals
as required by the conditions of the Work and Project, shall be related to the
entire Project to the extent required by the Contract Documents, and shall
provide for expeditious and practicable execution of the Work.

        3.10.2 The Contractor shall prepare and keep current, for the
Architect's approval, a schedule of submittals which is coordinated with the
Contractor's construction schedule and allows the Architect reasonable time to
review submittals.

        3.10.3 The Contractor shall conform to the most recent schedules.





                                      -8-
   9

3.11    DOCUMENTS AND SAMPLES AT THE SITE

        3.11.1 The Contractor shall maintain at the site for the Owner one
record copy of the Drawings, Specifications, addenda, Change Orders and other
Modifications, in good order and marked currently to record changes and
selections made during construction, and in addition approved Shop Drawings,
Product Data, Samples and similar required submittals. These shall be available
to the Architect and shall be delivered to the Architect for submittal to the
Owner upon completion of the Work.

3.12    SHOP DRAWINGS, PRODUCT DATA AND SAMPLES

        3.12.1 Shop Drawings are drawings, diagrams, schedules and other data
specially prepared for the Work by the Contractor or a Subcontractor,
Sub-subcontractor, manufacturer, supplier or distributor to illustrate some
portion of the Work.

        3.12.2 Product Data are illustrations, standard schedules, performance
charts, instructions, brochures, diagrams and other information furnished by the
Contractor to illustrate materials or equipment for some portion of the Work.

        3.12.3 Samples are physical examples which illustrate materials,
equipment or workmanship and establish standards by which the Work will be
judged.

        3.12.4 Shop Drawings, Product Data, Samples and similar submittals are
not Contract Documents. The purpose of their submittal is to demonstrate for
those portions of the Work for which submittals are required the way the
Contractor proposes to conform to the information given and the design concept
expressed in the Contract Documents. Review by the Architect is subject to the
limitations of Subparagraph 4.2.7.

        3.12.5 The Contractor shall review, approve and submit to the Architect
Shop Drawings, Product Data, Samples and similar submittals required by the
Contract Documents with reasonable promptness and in such sequence as to cause
no delay in the Work or in the activities of the Owner or of separate
contractors. Submittals made by the Contractor which are not required by the
Contract Documents may be returned without action.

        3.12.6 The Contractor shall perform no portion of the Work requiring
submittal and review of Shop Drawings, Product Data, Samples or similar
submittals until the respective submittal has been approved by the Architect.
Such Work shall be in accordance with approved submittals.

        3.12.7 By approving and submitting Shop Drawings, Product Data, Samples
and similar submittals, the Contractor represents that the Contractor has
determined and verified materials, field measurements and field construction
criteria related thereto, or will do so, and has checked and coordinated the
information contained within such submittals with the requirements of the Work
and of the Contract Documents.





                                      -9-
   10

        3.12.8 The Contractor shall not be relieved of responsibility for
deviations from requirements of the Contract Documents by the Architect's
approval of Shop Drawings, Product Data, Samples or similar submittals unless
the Contractor has specifically informed the Architect in writing of such
deviation at the time of submittal and the Architect has given written approval
to the specific deviation. The Contractor shall not be relieved of
responsibility for errors or omissions in Shop Drawings, Product Data, Samples
or similar submittals by the Architect's approval thereof.

        3.12.9 The Contractor shall direct specific attention, in writing or on
resubmitted Shop Drawings, Product Data, Samples or similar submittals, to
revisions other than those requested by the Architect on previous submittals.

        3.12.10 Informational submittals upon which the Architect is not
expected to take responsive action may be so identified in the Contract
Documents.

        3.12.11 When professional certification of performance criteria of
materials, systems or equipment is required by the Contract Documents, the
Architect shall be entitled to rely upon the accuracy and completeness of such
calculations and certifications.

3.13    USE OF SITE

        3.13.1 The Contractor shall confine operations at the site to areas
permitted by law, ordinances, permits and the Contract Documents and shall not
unreasonably encumber the site with materials or equipment.

3.14    CUTTING AND PATCHING

        3.14.1 The Contractor shall be responsible for cutting, fitting or
patching required to complete the Work or to make its parts fit together
properly.

        3.14.2 The Contractor shall not damage or endanger a portion of the Work
or fully or partially completed construction of the Owner or separate
contractors by cutting, patching or otherwise altering such construction, or by
excavation. The Contractor shall not cut or otherwise alter such construction by
the Owner or a separate contractor except with written consent of the Owner and
of such separate contractor; such consent shall not be unreasonably withheld.
The Contractor shall not unreasonably withhold from the Owner or a separate
contractor the Contractor's consent to cutting or otherwise altering the Work.

3.15    CLEANING UP

        3.15.1 The Contractor shall keep the premises and surrounding area free
from accumulation of waste materials or rubbish caused by operations under the
Contract. At completion of the Work the Contractor shall remove from and about
the Project waste materials, rubbish, the Contractor's tools, construction
equipment, machinery and surplus materials.





                                      -10-
   11

        3.15.2 If the Contractor fails to clean up as provided in the Contract
Documents, the Owner may do so and the cost thereof shall be charged to the
Contractor.

3.16    ACCESS TO WORK

        3.16.1 The Contractor shall provide the Owner and Architect access to
the Work in preparation and progress wherever located.

3.17    ROYALTIES AND PATENTS

        3.17.1 The Contractor shall pay all royalties and license fees. The
Contractor shall defend suits or claims for infringement of patent rights and
shall hold the Owner and Architect harmless from loss on account thereof, but
shall not be responsible for such defense or loss when a particular design,
process or product of a particular manufacturer or manufacturers is required by
the Contract Documents. However, if the Contractor has reason to believe that
the required design, process or product is an infringement of a patent, the
Contractor shall be responsible for such loss unless such information is
promptly furnished to the Architect.

3.18    INDEMNIFICATION

        3.18.1 To the fullest extent permitted by law, the Contractor shall
indemnify and hold harmless the Owner, Architect, Architect's consultants, and
agents and employees of any of them from and against claims, damages, losses and
expenses, including but not limited to attorneys' fees, arising out of or
resulting from performance of the Work, provided that such claim, damage, loss
or expense is attributable to bodily injury, sickness, disease or death, or to
injury to or destruction of tangible property (other than the Work itself)
including loss of use resulting therefrom, but only to the extent caused in
whole or in part by negligent acts or omissions of the Contractor, a
Subcontractor, anyone directly or indirectly employed by them or anyone for
whose acts they may be liable, regardless of whether or not such claim, damage,
loss or expense is caused in part by a party indemnified hereunder. Such
obligation shall not be construed to negate, abridge, or reduce other rights or
obligations of indemnity which would otherwise exist as to a party or person
described in this Paragraph 3.18.

        3.18.2 In claims against any person or entity indemnified under this
Paragraph 3.18 by an employee of the Contractor, a Subcontractor, anyone
directly or indirectly employed by them or anyone for whose acts they may be
liable, the indemnification obligation under this Paragraph 3.18 shall not be
limited by a limitation on amount or type of damages, compensation or benefits
payable by or for the Contractor or a Subcontractor under workers' or workmen's
compensation acts, disability benefit acts or other employee benefit acts.

        3.18.3 The obligations of the Contractor under this Paragraph 3.18 shall
not extend to the liability of the Architect, the Architect's consultants, and
agents and employees of any of them arising out of (1) the preparation or
approval of maps, drawings, opinions, reports, surveys, Change Orders, designs
or specifications, or (2) the giving of or the failure to give directions or
instructions





                                      -11-
   12

by the Architect, the Architect's consultants, and agents and employees of any
of them provided such giving or failure to give is the primary cause of the
injury or damage.


                                    ARTICLE 4

                         ADMINISTRATION OF THE CONTRACT

4.1     ARCHITECT

        4.1.1 The Architect is the person lawfully licensed to practice
architecture or an entity lawfully practicing architecture identified as such in
the Agreement and is referred to throughout the Contract Documents as if
singular in number. The term "Architect" means the Architect or the Architect's
authorized representative.

        4.1.2 Duties, responsibilities and limitations of authority of the
Architect as set forth in the Contract Documents shall not be restricted,
modified or extended without written consent of the Owner, Contractor and
Architect. Consent shall not be unreasonably withheld.

        4.1.3 In case of termination of employment of the Architect, the Owner
shall appoint an architect against whom the Contractor makes no reasonable
objection and whose status under the Contract Documents shall be that of the
former architect.

        4.1.4 Disputes arising under Subparagraphs 4.1.2 and 4.1.3 shall be
subject to arbitration.

4.2     ARCHITECTS ADMINISTRATION OF THE CONTRACT

        4.2.1 The Architect will provide administration of the Contract as
described in the Contract Documents, and will be the Owner's representative (1)
during construction, (2) until final payment is due and (3) with the Owner's
concurrence, from time to time during the correction period described in
Paragraph 12.2. The Architect will advise and consult with the Owner. The
Architect will have authority to act on behalf of the Owner only to the extent
provided in the Contract Documents, unless otherwise modified by written
instrument in accordance with other provisions of the Contract.

        4.2.2 The Architect will visit the site at intervals appropriate to the
stage of construction to become generally familiar with the progress and quality
of the completed Work and to determine in general if the Work is being performed
in a manner indicating that the Work, when completed, will be in accordance with
the Contract Documents. However, the Architect will not be required to make
exhaustive or continuous on-site inspections to check quality or quantity of the
Work. On the basis of on-site observations as an architect, the Architect will
keep the Owner informed of progress of the Work, and will endeavor to guard the
Owner against defects and deficiencies in the Work.





                                      -12-
   13

        4.2.3 The Architect will not have control over or charge of and will not
be responsible for construction means, methods, techniques, sequences or
procedures, or for safety precautions and programs in connection with the Work,
since these are solely the Contractor's responsibility as provided in Paragraph
3.3. The Architect will not be responsible for the Contractor's failure to carry
out the Work in accordance with the Contract Documents. The Architect will not
have control over or charge of and will not be responsible for acts or omissions
of the Contractor, Subcontractors, or their agents or employees, or of any other
persons performing portions of the Work.

        4.2.4 COMMUNICATIONS FACILITATING CONTRACT ADMINISTRATION. Except as
otherwise provided in the Contract Documents or when direct communications have
been specially authorized, the Owner and Contractor shall endeavor to
communicate through the Architect. Communications by and with the Architect's
consultants shall be through the Architect. Communications by and with
Subcontractors and material suppliers shall be through the Contractor.
Communications by and with separate contractors shall be through the Owner.

        4.2.5 Based on the Architect's observations and evaluations of the
Contractor's Applications for Payment, the Architect will review and certify the
amounts due the Contractor and will issue Certificates for Payment in such
amounts.

        4.2.6 The Architect will have authority to reject Work which does not
conform to the Contract Documents. Whenever the Architect considers it necessary
or advisable for implementation of the intent of the Contract Documents, the
Architect will have authority to require additional inspection or testing of the
Work in accordance with Subparagraphs 13.5.2 and 13.5.3, whether or not such
Work is fabricated, installed or completed. However, neither this authority of
the Architect nor a decision made in good faith either to exercise or not to
exercise such authority shall give rise to a duty or responsibility of the
Architect to the Contractor, Subcontractors, material and equipment suppliers,
their agents or employees, or other persons performing portions of the Work.

        4.2.7 The Architect will review and approve or take other appropriate
action upon the Contractor's submittals such as Shop Drawings, Product Data and
Samples, but only for the limited purpose of checking for conformance with
information given and the design concept expressed in the Contract Documents.
The Architect's action will be taken with such reasonable promptness as to cause
no delay in the Work or in the activities of the Owner, Contractor or separate
contractors, while allowing sufficient time in the Architect's professional
judgment to permit adequate review. Review of such submittals is not conducted
for the purpose of determining the accuracy and completeness of other details
such as dimensions and quantities, or for substantiating instructions for
installation or performance of equipment or systems, all of which remain the
responsibility of the Contractor as required by the Contract Documents. The
Architect's review of the Contractor's submittals shall not relieve the
Contractor of the obligations under Paragraphs 3.3, 3.5 and 3.12. The
Architect's review shall not constitute approval of safety precautions or,
unless otherwise specifically stated by the Architect, of any construction
means, methods, techniques, sequences or procedures. The Architect's approval of
a specific item shall not indicate approval of an assembly of which the item is
a component.





                                      -13-
   14

        4.2.8 The Architect will prepare Change Orders and Construction Change
Directives, and may authorize minor changes in the Work as provided in Paragraph
7.4.

        4.2.9 The Architect will conduct inspections to determine the date or
dates of Substantial Completion and the date of final completion, will receive
and forward to the Owner for the Owner's review and records written warranties
and related documents required by the Contract and assembled by the Contractor,
and will issue a final Certificate for Payment upon compliance with the
requirements of the Contract Documents.

        4.2.10 If the Owner and Architect agree, the Architect will provide one
or more project representatives to assist in carrying out the Architect's
responsibilities at the site. The duties, responsibilities and limitations of
authority of such project representatives shall be as set forth in an exhibit to
be incorporated in the Contract Documents.

        4.2.11 The Architect will interpret and decide matters concerning
performance under and requirements of the Contract Documents on written request
of either the Owner or Contractor. The Architect's response to such requests
will be made with reasonable promptness and within any time limits agreed upon.
If no agreement is made concerning the time within which interpretations
required of the Architect shall be furnished in compliance with this Paragraph
4.2, then delay shall not be recognized on account of failure by the Architect
to furnish such interpretations until 15 days after written request is made for
them.

        4.2.12 Interpretations and decisions of the Architect will be consistent
with the intent of and reasonably inferable from the Contract Documents and will
be in writing or in the form of drawings. When making such interpretations and
decisions, the Architect will endeavor to secure faithful performance by both
Owner and Contractor, will not show partiality to either and will not be liable
for results of interpretations or decisions so rendered in good faith.

        4.2.13 The Architect's decisions on matters relating to aesthetic effect
will be final if consistent with the intent expressed in the Contract Documents.

4.3     CLAIMS AND DISPUTES

        4.3.1 DEFINITION. A Claim is a demand or assertion by one of the parties
seeking, as a matter of right, adjustment or interpretation of Contract terms,
payment of money, extension of time or other relief with respect to the terms of
the Contract. The term "Claim" also includes other disputes and matters in
question between the Owner and Contractor arising out of or relating to the
Contract. Claims must be made by written notice. The responsibility to
substantiate Claims shall rest with the party making the Claim.

        4.3.2 DECISION OF ARCHITECT. Claims, including those alleging an error
or omission by the Architect, shall be referred initially to the Architect for
action as provided in Paragraph 4.4. A decision by the Architect, as provided in
Subparagraph 4.4.4, shall be required as a condition precedent to arbitration or
litigation of a Claim between the Contractor and Owner as to all such





                                      -14-
   15

matters arising prior to the date final payment is due, regardless of (1)
whether such matters relate to execution and progress of the Work or (2) the
extent to which the Work has been completed. The decision by the Architect in
response to a Claim shall not be a condition precedent to arbitration or
litigation in the event (1) the position of Architect is vacant, (2) the
Architect has not received evidence or has failed to render a decision within
agreed time limits, (3) the Architect has failed to take action required under
Subparagraph 4.4.4 within 30 days after the Claim is made, (4) 45 days have
passed after the Claim has been referred to the Architect or (5) the Claim
relates to a mechanic's lien.

        4.3.3 TIME LIMITS ON CLAIMS. Claims by either party must be made within
21 days after occurrence of the event giving rise to such Claim or within 21
days after the claimant first recognizes the condition giving rise to the Claim,
whichever is later. Claims must be made by written notice. An additional Claim
made after the initial Claim has been implemented by Change Order will not be
considered unless submitted in a timely manner.

        4.3.4 CONTINUING CONTRACT PERFORMANCE. Pending final resolution of a
Claim including arbitration, unless otherwise agreed in writing the Contractor
shall proceed diligently with performance of the Contract and the Owner shall
continue to make payments in accordance with the Contract Documents.

        4.3.5 WAIVER OF CLAIMS: FINAL PAYMENT. The making of final payment shall
constitute a waiver of Claims by the Owner except those arising from:

                 .1 liens, Claims, security interests or encumbrances arising
                 out of the Contract and unsettled;

                 .2 failure of the Work to comply with the requirements of the
                 Contract Documents; or

                 .3 terms of special warranties required by the Contract
                 Documents.

        4.3.6 CLAIMS FOR CONCEALED OR UNKNOWN CONDITIONS. If conditions are
encountered at the site which are (1) subsurface or otherwise concealed physical
conditions which differ materially from those indicated in the Contract
Documents or (2) unknown physical conditions of an unusual nature, which differ
materially from those ordinarily found to exist and generally recognized as
inherent in construction activities of the character provided for in the
Contract Documents, then notice by the observing party shall be given to the
other party promptly before conditions are disturbed and in no event later than
21 days after first observance of the conditions. The Architect will promptly
investigate such conditions and, if they differ materially and cause an increase
or decrease in the Contractor's cost of, or time required for, performance of
any part of the Work, will recommend an equitable adjustment in the Contract Sum
or Contract Time, or both. If the Architect determines that the conditions at
the site are not materially different from those indicated in the Contract
Documents and that no change in the terms of the Contract is justified, the
Architect shall so notify the Owner and Contractor in writing, stating the
reasons. Claims by either party in opposition to such determination must be made
within 21 days after the Architect has given notice of the decision. If the
Owner and Contractor cannot agree on an adjustment in the Contract Sum or





                                      -15-
   16

Contract Time, the adjustment shall be referred to the Architect for initial
determination, subject to further proceedings pursuant to Paragraph 4.4.

        4.3.7 CLAIMS FOR ADDITIONAL COST. If the Contractor wishes to make Claim
for an increase in the Contract Sum, written notice as provided herein shall be
given before proceeding to execute the Work. Prior notice is not required for
Claims relating to an emergency endangering life or property arising under
Paragraph 10.3. If the Contractor believes additional cost is involved for
reasons including but not limited to (1) a written interpretation from the
Architect, (2) an order by the Owner to stop the Work where the Contractor was
not at fault, (3) a written order for a minor change in the Work issued by the
Architect, (4) failure of payment by the Owner, (5) termination of the Contract
by the Owner, (6) Owner's suspension or (7) other reasonable grounds, Claim
shall be filed in accordance with the procedure established herein.

        4.3.8    CLAIMS FOR ADDITIONAL TIME

                 4.3.8.1 If the Contractor wishes to make Claim for an increase
in the Contract Time, written notice as provided herein shall be given. The
Contractor's Claim shall include an estimate of cost and of probable effect of
delay on progress of the Work. In the case of a continuing delay only one Claim
is necessary.

                 4.3.8.2 If adverse weather conditions are the basis for a Claim
for additional time, such Claim shall be documented by data substantiating that
weather conditions were abnormal for the period of time and could not have been
reasonably anticipated, and that weather conditions had an adverse effect on the
scheduled construction.

        4.3.9 INJURY OR DAMAGE TO PERSON OR PROPERTY. If either party to the
Contract suffers injury or damage to person or property because of an act or
omission of the other party, of any of the other party's employees or agents, or
of others for whose acts such party is legally liable, written notice of such
injury or damage, whether or not insured, shall be given to the other party
within a reasonable time not exceeding 21 days after first observance. The
notice shall provide sufficient detail to enable the other party to investigate
the matter. If a Claim for additional cost or time related to this Claim is to
be asserted, it shall be filed as provided in Subparagraphs 4.3.7 or 4.3.8.

4.4     RESOLUTION OF CLAIM AND DISPUTES

        4.4.1 The Architect will review Claims and take one or more of the
following preliminary actions within ten days of receipt of a Claim: (1) request
additional supporting data from the claimant, (2) submit a schedule to the
parties indicating when the Architect expects to take action, (3) reject the
Claim in whole or in part, stating reasons for rejection, (4) recommend approval
of the Claim by the other party or (5) suggest a compromise. The Architect may
also, but is not obligated to, notify the surety, if any, of the nature and
amount of the Claim.

        4.4.2 If a Claim has been resolved, the Architect will prepare or obtain
appropriate documentation.





                                      -16-
   17

        4.4.3 If a Claim has not been resolved, the party making the Claim
shall, within ten days after the Architect's preliminary response, take one or
more of the following actions: (1) submit additional supporting data requested
by the Architect, (2) modify the initial Claim or (3) notify the Architect that
the initial Claim stands.

        4.4.4 If a Claim has not been resolved after consideration of the
foregoing and of further evidence presented by the parties or requested by the
Architect, the Architect will notify the parties in writing that the Architect's
decision will be made within seven days, which decision shall be final and
binding on the parties but subject to arbitration. Upon expiration of such time
period, the Architect will render to the parties the Architect's written
decision relative to the Claim, including any change in the Contract Sum or
Contract Time or both. If there is a surety and there appears to be a
possibility of a Contractor's default, the Architect may, but is not obligated
to, notify the surety and request the surety's assistance in resolving the
controversy.

4.5     ARBITRATION

        4.5.1 CONTROVERSIES AND CLAIMS SUBJECT TO ARBITRATION. Any controversy
or Claim arising out of or related to the Contract, or the breach thereof, shall
be settled by arbitration in accordance with the Construction Industry
Arbitration Rules of the American Arbitration Association, and judgment upon the
award rendered by the arbitrator or arbitrators may be entered in any court
having jurisdiction thereof, except controversies or Claims relating to
aesthetic effect and except those waived as provided for in Subparagraph 4.3.5.
Such controversies or Claims upon which the Architect has given notice and
rendered a decision as provided in Subparagraph 4.4.4 shall be subject to
arbitration upon written demand of either party. Arbitration may be commenced
when 45 days have passed after a Claim has been referred to the Architect as
provided in Paragraph 4.3 and no decision has been rendered.

        4.5.2 RULES AND NOTICES FOR ARBITRATION. Claims between the Owner and
Contractor not resolved under Paragraph 4.4 shall, if subject to arbitration
under Subparagraph 4.5.1, be decided by arbitration in accordance with the
Construction Industry Arbitration Rules of the American Arbitration Association
currently in effect, unless the parties mutually agree otherwise. Notice of
demand for arbitration shall be filed in writing with the other party to the
Agreement between the Owner and Contractor and with the American Arbitration
Association, and a copy shall be filed with the Architect.

        4.5.3 CONTRACT PERFORMANCE DURING ARBITRATION. During arbitration
proceedings, the Owner and Contractor shall comply with Subparagraph 4.3.4.

        4.5.4 WHEN ARBITRATION MAY BE DEMANDED. Demand for arbitration of any
Claim may not be made until the earlier of (1) the date on which the Architect
has rendered a final written decision on the Claim, (2) the tenth day after the
parties have presented evidence to the Architect or have been given reasonable
opportunity to do so, if the Architect has not rendered a final written decision
by that date, or (3) any of the five events described in Subparagraph 4.3.2.





                                      -17-
   18

                 4.5.4.1 When a written decision of the Architect states that
(1) the decision is final but subject to arbitration and (2) a demand for
arbitration of a Claim covered by such decision must be made within 30 days
after the date on which the party making the demand receives the final written
decision, then failure to demand arbitration within said 30 days' period shall
result in the Architect's decision becoming final and binding upon the owner and
Contractor. If the Architect renders a decision after arbitration proceedings
have been initiated, such decision may be entered as evidence, but shall not
supersede arbitration proceedings unless the decision is acceptable to all
parties concerned.

                 4.5.4.2 A demand for arbitration shall be made within the time
limits specified in Subparagraphs 4.5.1 and 4.5.4 and Clause 4.5.4.1 as
applicable, and in other cases within a reasonable time after the Claim has
arisen, and in no event shall it be made after the date when institution of
legal or equitable proceedings based on such Claim would be barred by the
applicable statute of limitations as determined pursuant to Paragraph 13.7.

        4.5.5 LIMITATION ON CONSOLIDATION OR JOINDER. No arbitration arising out
of or relating to the Contract Documents shall include, by consolidation or
joinder or in any other manner, the Architect, the Architect's employees or
consultants, except by written consent containing specific reference to the
Agreement and signed by the Architect, Owner, Contractor and any other person or
entity sought to be joined. No arbitration shall include, by consolidation or
joinder or in any other manner, parties other than the Owner, Contractor, a
separate contractor as described in Article 6 and other persons substantially
involved in a common question of fact or law whose presence is required if
complete relief is to be accorded in arbitration. No person or entity other than
the Owner, Contractor or a separate contractor as described in Article 6 shall
be included as an original third party or additional third party to an
arbitration whose interest or responsibility is insubstantial. Consent to
arbitration involving an additional person or entity shall not constitute
consent to arbitration of a dispute not described therein or with a person or
entity not named or described therein. The foregoing agreement to arbitrate and
other agreements to arbitrate with an additional person or entity duly consented
to by parties to the Agreement shall be specifically enforceable under
applicable law in any court having jurisdiction thereof.

        4.5.6 CLAIMS AND TIMELY ASSERTION OF CLAIMS. A party who files a notice
of demand for arbitration must assert in the demand all Claims then known to
that party on which arbitration is permitted to be demanded. When a party fails
to include a Claim through oversight, inadvertence or excusable neglect, or when
a Claim has matured or been acquired subsequently, the arbitrator or arbitrators
may permit amendment.

        4.5.7 JUDGMENT ON FINAL AWARD. The award rendered by the arbitrator or
arbitrators shall be final, and judgment may be entered upon it in accordance
with applicable law in any court having jurisdiction thereof.





                                      -18-
   19

                                    ARTICLE 5

                                 SUBCONTRACTORS

5.1     DEFINITIONS

        5.1.1 A Subcontractor is a person or entity who has a direct contract
with the Contractor to perform a portion of the Work at the site. The term
"Subcontractor" is referred to throughout the Contract Documents as if singular
in number and means a Subcontractor or an authorized representative of the
Subcontractor. The term "Subcontractor" does not include a separate contractor
or subcontractors of a separate contractor.

        5.1.2 A Sub-subcontractor is a person or entity who has a direct or
indirect contract with a Subcontractor to perform a portion of the Work at the
site. The term "Sub-subcontractor" is referred to throughout the Contract
Documents as if singular in number and means a Sub-subcontractor or an
authorized representative of the Sub-subcontractor.

5.2     AWARD OF SUBCONTRACTS AND OTHER CONTRACTS FOR PORTIONS OF THE WORK

        5.2.1 Unless otherwise stated in the Contract Documents or the bidding
requirements, the Contractor, as soon as practicable after award of the Contract
shall furnish in writing to the Owner through the Architect the names of persons
or entities (including those who are to furnish materials or equipment
fabricated to a special design) proposed for each principal portion of the Work.
The Architect will promptly reply to the Contractor in writing stating whether
or not the Owner or the Architect, after due investigation, has reasonable
objection to any such proposed person or entity. Failure of the Owner or
Architect to reply promptly shall constitute notice of no reasonable objection.

        5.2.2 The Contractor shall not contract with a proposed person or entity
to whom the Owner or Architect has made reasonable and timely objection. The
Contractor shall not be required to contract with anyone to whom the Contractor
has made reasonable objection.

        5.2.3 If the Owner or Architect has reasonable objection to a person or
entity proposed by the Contractor, the Contractor shall propose another to whom
the Owner or Architect has no reasonable objection. The Contract Sum shall be
increased or decreased by the difference in cost occasioned by such change and
an appropriate Change Order shall be issued. However, no increase in the
Contract Sum shall be allowed for such change unless the Contractor has acted
promptly and responsively in submitting names as required.

        5.2.4 The Contractor shall not change a Subcontractor, person or entity
previously selected if the Owner or Architect makes reasonable objection to such
change.





                                      -19-
   20


5.3     SUBCONTRACTUAL RELATIONS

        5.3.1 By appropriate agreement, written where legally required for
validity, the Contractor shall require each Subcontractor, to the extent of the
Work to be performed by the Subcontractor, to be bound to the Contractor by
terms of the Contract Documents, and to assume toward the Contractor all the
obligations and responsibilities which the Contractor, by these Documents,
assumes toward the Owner and Architect. Each subcontract agreement shall
preserve and protect the rights of the Owner and Architect under the Contract
Documents with respect to the Work to be performed by the Subcontractor so that
subcontracting thereof will not prejudice such rights, and shall allow to the
Subcontractor, unless specifically provided otherwise in the subcontract
agreement, the benefit of all rights, remedies and redress against the
Contractor that the Contractor, by the Contract Documents, has against the
Owner. Where appropriate, the Contractor shall require each Subcontractor to
enter into similar agreements with Sub-subcontractors. The Contractor shall make
available to each proposed Subcontractor, prior to the execution of the
subcontract agreement, copies of the Contract Documents to which the
Subcontractor will be bound, and, upon written request of the Subcontractor,
identify to the Subcontractor terms and conditions of the proposed subcontract
agreement which may be at variance with the Contract Documents. Subcontractors
shall similarly make copies of applicable portions of such documents available
to their respective proposed Sub-subcontractors.

5.4     CONTINGENT ASSIGNMENT OF SUBCONTRACTS

        5.4.1 Each subcontract agreement for a portion of the Work is assigned
by the Contractor to the Owner provided that:

                 .1 assignment is effective only after termination of the
                 Contract by the Owner for cause pursuant to Paragraph 14.2 and
                 only for those subcontract agreements which the Owner accepts
                 by notifying the Subcontractor in writing; and

                 .2 assignment is subject to the prior rights of the surety, if
                 any, obligated under bond relating to the Contract.

        5.4.2 If the Work has been suspended for more than 30 days, the
Subcontractor's compensation shall be equitably adjusted.


                                    ARTICLE 6

                              CONSTRUCTION BY OWNER
                           OR BY SEPARATE CONTRACTORS

6.1     OWNER'S RIGHT TO PERFORM CONSTRUCTION AND TO AWARD SEPARATE CONTRACTS





                                      -20-
   21

        6.1.1 The Owner reserves the right to perform construction or operations
related to the Project with the Owner's own forces, and to award separate
contracts in connection with other portions of the Project or other construction
or operations on the site under Conditions of the Contract identical or
substantially similar to these including those portions related to insurance and
waiver of subrogation. If the Contractor claims that delay or additional cost is
involved because of such action by the Owner, the Contractor shall make such
Claim as provided elsewhere in the Contract Documents.

        6.1.2 When separate contracts are awarded for different portions of the
Project or other construction or operations on the site, the term "Contractor"
in the Contract Documents in each case shall mean the Contractor who executes
each separate Owner-Contractor Agreement.

        6.1.3 The Owner shall provide for coordination of the activities of the
Owner's own forces and of each separate contractor with the Work of the
Contractor, who shall cooperate with them. The Contractor shall participate with
other separate contractors and the Owner in reviewing their construction
schedules when directed to do so. The Contractor shall make any revisions to the
construction schedule and Contract Sum deemed necessary after a joint review and
mutual agreement. The construction schedules shall then constitute the schedules
to be used by the Contractor, separate contractors and the Owner until
subsequently revised.

        6.1.4 Unless otherwise provided in the Contract Documents, when the
Owner performs construction or operations related to the Project with the
Owner's own forces, the Owner shall be deemed to be subject to the same
obligations and to have the same rights which apply to the Contractor under the
Conditions of the Contract, including, without excluding others, those stated in
Article 3, this Article 6 and Articles 10, 11 and 12.

6.2     MUTUAL RESPONSIBILITY

        6.2.1 The Contractor shall afford the Owner and separate contractors
reasonable opportunity for introduction and storage of their materials and
equipment and performance of their activities and shall connect and coordinate
the Contractor's construction and operations with theirs as required by the
Contract Documents.

        6.2.2 If part of the Contractor's Work depends for proper execution or
results upon construction or operations by the Owner or a separate contractor,
the Contractor shall, prior to proceeding with that portion of the Work,
promptly report to the Architect apparent discrepancies or defects in such other
construction that would render it unsuitable for such proper execution and
results. Failure of the Contractor so to report shall constitute an
acknowledgment that the Owner's or separate contractors' completed or partially
completed construction is fit and proper to receive the Contractor's Work,
except as to defects not then reasonably discoverable.

        6.2.3 Costs caused by delays or by improperly timed activities or
defective construction shall be borne by the party responsible therefor.





                                      -21-
   22

        6.2.4 The Contractor shall promptly remedy damage wrongfully caused by
the Contractor to completed or partially completed construction or to property
of the Owner or separate contractors as provided in Subparagraph 10.2.5.

        6.2.5 Claims and other disputes and matters in question between the
Contractor and a separate contractor shall be subject to the provisions of
Paragraph 4.3 provided the separate contractor has reciprocal obligations.

        6.2.6 The Owner and each separate contractor shall have the same
responsibilities for cutting and patching as are described for the Contractor in
Paragraph 3.14.

6.3     OWNER'S RIGHT TO CLEAN UP

        6.3.1 If a dispute arises among the Contractor, separate contractors and
the Owner as to the responsibility under their respective contracts for
maintaining the premises and surrounding area free from waste materials and
rubbish as described in Paragraph 3.15, the Owner may clean up and allocate the
cost among those responsible as the Architect determines to be just.


                                    ARTICLE 7

                               CHANGES IN THE WORK

7.1     CHANGES

        7.1.1 Changes in the Work may be accomplished after execution of the
Contract, and without invalidating the Contract, by Change Order, Construction
Change Directive or order for a minor change in the Work, subject to the
limitations stated in this Article 7 and elsewhere in the Contract Documents.

        7.1.2 A Change Order shall be based upon agreement among the Owner,
Contractor and Architect; a Construction Change Directive requires agreement by
the Owner and Architect and may or may not be agreed to by the Contractor, an
order for a minor change in the Work may be issued by the Architect alone.

        7.1.3 Changes in the Work shall be performed under applicable provisions
of the Contract Documents, and the Contractor shall proceed promptly, unless
otherwise provided in the Change Order, Construction Change Directive or order
for a minor change in the Work.

        7.1.4 If unit prices are stated in the Contract Documents or
subsequently agreed upon, and if quantities originally contemplated are so
changed in a proposed Change Order or Construction Change Directive that
application of such unit prices to quantities of Work proposed will cause
substantial inequity to the Owner or Contractor, the applicable unit prices
shall be equitably adjusted.





                                      -22-
   23

7.2     CHANGE ORDERS

        7.2.1 A Change Order is a written instrument prepared by the Architect
and signed by the Owner, Contractor and Architect, stating their agreement upon
all of the following:

                 .1   a change in the Work;

                 .2 the amount of the adjustment in the Contract Sum, if any;
                 and

                 .3 the extent of the adjustment in the Contract Time, if any.

        7.2.2 Methods used in determining adjustments to the Contract Sum may
include those listed in Subparagraph 7.3.3.

7.3     CONSTRUCTION CHANGE DIRECTIVES

        7.3.1 A Construction Change Directive is a written order prepared by the
Architect and signed by the Owner and Architect, directing a change in the Work
and stating a proposed basis for adjustment, if any, in the Contract Sum or
Contract Time, or both. The Owner may by Construction Change Directive, without
invalidating the Contract, order changes in the Work within the general scope of
the Contract consisting of additions, deletions or other revisions, the Contract
Sum and Contract Time being adjusted accordingly.

        7.3.2 A Construction Change Directive shall be used in the absence of
total agreement on the terms of a Change Order.

        7.3.3 If the Construction Change Directive provides for an adjustment to
the Contract Sum, the adjustment shall be based on one of the following methods:

                 .1 mutual acceptance of a lump sum properly itemized and
                 supported by sufficient substantiating data to permit
                 evaluation;

                 .2 unit prices stated in the Contract Documents or subsequently
                 agreed upon;

                 .3 cost to be determined in a manner agreed upon by the parties
                 and a mutually acceptable fixed or percentage fee; or

                 .4 as provided in Subparagraph 7.3.6.

        7.3.4 Upon receipt of a Construction Change Directive, the Contractor
shall promptly proceed with the change in the Work involved and advise the
Architect of the Contractor's agreement or disagreement with the method, if any,
provided in the Construction Change Directive for determining the proposed
adjustment in the Contract Sum or Contract Time.

        7.3.5 A Construction Change Directive signed by the Contractor indicates
the agreement of the Contractor therewith, including adjustment in Contract Sum
and Contract Time or the method for determining them. Such agreement shall be
effective immediately and shall be recorded as a Change Order.





                                      -23-
   24

        7.3.6 If the Contractor does not respond promptly or disagrees with the
method for adjustment in the Contract Sum, the method and the adjustment shall
be determined by the Architect on the basis of reasonable expenditures and
savings of those performing the Work attributable to the change, including, in
case of an increase in the Contract Sum, a reasonable allowance for overhead and
profit. In such case, and also under Clause 7.3.3.3, the Contractor shall keep
and present, in such form as the Architect may prescribe, an itemized accounting
together with appropriate supporting data. Unless otherwise provided in the
Contract Documents, costs for the purposes of this Subparagraph 7.3.6 shall be
limited to the following:

                 .1 costs of labor, including social security, old age and
                 unemployment insurance, fringe benefits required by agreement
                 or custom, and workers' or workmen's compensation insurance;

                 .2 costs of materials, supplies and equipment, including cost
                 of transportation, whether incorporated or consumed;

                 .3 rental costs of machinery and equipment, exclusive of hand
                 tools, whether rented from the Contractor or others;

                 .4 costs of premiums for all bonds and insurance, permit fees,
                 and sales, use or similar taxes related to the Work; and

                 .5 additional costs of supervision and field office personnel
                 directly attributable to the change.

        7.3.7 Pending final determination of cost to the Owner, amounts not in
dispute may be included in Applications for Payment. The amount of credit to be
allowed by the Contractor to the Owner for a deletion or change which results in
a net decrease in the Contract Sum shall be actual net cost as confirmed by the
Architect. When both additions and credits covering related Work or
substitutions are involved in a change, the allowance for overhead and profit
shall be figured on the basis of net increase, if any, with respect to that
change.

        7.3.8 If the Owner and Contractor do not agree with the adjustment in
Contract Time or the method for determining it, the adjustment or the method
shall be referred to the Architect for determination.

        7.3.9 When the Owner and Contractor agree with the determination made by
the Architect concerning the adjustments in the Contract Sum and Contract Time,
or otherwise reach agreement upon the adjustments, such agreement shall be
effective immediately and shall be recorded by preparation and execution of an
appropriate Change Order.

7.4     MINOR CHANGES IN THE WORK

        7.4.1 The Architect will have authority to order minor changes in the
Work not involving adjustment in the Contract Sum or extension of the Contract
Time and not inconsistent with the intent of the Contract Documents. Such
changes shall be effected by written order and shall be binding on the Owner and
Contractor. The Contractor shall carry out such written orders promptly.





                                      -24-
   25

                                    ARTICLE 8

                                      TIME

8.1     DEFINITIONS

        8.1.1 Unless otherwise provided, Contract Time is the period of time,
including authorized adjustments allotted in the Contract Documents for
Substantial Completion of the Work.

        8.1.2 The date of commencement of the Work is the date established in
the Agreement. The date shall not be postponed by the failure to act of the
Contractor or of persons or entities for whom the Contractor is responsible.

        8.1.3 The date of Substantial Completion is the date certified by the
Architect in accordance with Paragraph 9.8.

        8.1.4 The term "day" as used in the Contract Documents shall mean
calendar day unless otherwise specifically defined.

8.2     PROGRESS AND COMPLETION

        8.2.1 Time limits stated in the Contract Documents are of the essence of
the Contract. By executing the Agreement the Contractor confirms that the
Contract Time is a reasonable period for performing the Work.

        8.2.2 The Contractor shall not knowingly, except by agreement or
instruction of the Owner in writing, prematurely commence operations on the site
or elsewhere prior to the effective date of insurance required by Article 11 to
be furnished by the Contractor. The date of commencement of the Work shall not
be changed by the effective date of such insurance. Unless the date of
commencement is established by a notice to proceed given by the Owner, the
Contractor shall notify the Owner in writing not less than five days or other
agreed period before commencing the Work to permit the timely filing of
mortgages, mechanic's liens and other security interests.

        8.2.3 The Contractor shall proceed expeditiously with adequate forces
and shall achieve Substantial Completion within the Contract Time.

8.3     DELAYS AND EXTENSIONS OF TIME

        8.3.1 If the Contractor is delayed at any time in progress of the Work
by an act or neglect of the Owner or Architect, or of an employee of either, or
of a separate contractor employed by the Owner, or by changes ordered in the
Work, or by labor disputes, fire, unusual delay in deliveries, unavoidable
casualties or other causes beyond the Contractor's control, or by delay
authorized by the Owner pending arbitration, or by other causes which the
Architect determines may justify delay, then





                                      -25-
   26

the Contract Time shall be extended by Change Order for such reasonable time as
the Architect may determine.

        8.3.2 Claims relating to time shall be made in accordance with
applicable provisions of Paragraph 4.3.

        8.3.3 This Paragraph 8.3 does not preclude recovery of damages for delay
by either party under other provisions of the Contract Documents.


                                    ARTICLE 9

                             PAYMENTS AND COMPLETION

9.1     CONTRACT SUM

        9.1.1 The Contract Sum is stated in the Agreement and, including
authorized adjustments, is the total amount payable by the Owner to the
Contractor for performance of the Work under the Contract Documents.

9.2     SCHEDULE OF VALUES

        9.2.1 Before the first Application for Payment, the Contractor shall
submit to the Architect a schedule of values allocated to various portions of
the Work, prepared in such form and supported by such data to substantiate its
accuracy as the Architect may require. This schedule, unless objected to by the
Architect, shall be used as a basis for reviewing the Contractor's Applications
for Payment.

9.3     APPLICATIONS FOR PAYMENT

        9.3.1 At least ten days before the date established for each progress
payment, the Contractor shall submit to the Architect an itemized Application
for Payment for operations completed in accordance with the schedule of values.
Such application shall be notarized, if required, and supported by such data
substantiating the Contractor's right to payment as the Owner or Architect may
require, such as copies of requisitions from Subcontractors and material
suppliers, and reflecting retainage if provided for elsewhere in the Contract
Documents.

                 9.3.1.1 Such applications may include requests for payment on
account of changes in the Work which have been properly authorized by
Construction Change Directives but not yet included in Change Orders.

                 9.3.1.2 Such applications may not include requests for payment
of amounts the Contractor does not intend to pay to a Subcontractor or material
supplier because of a dispute or other reason.





                                      -26-
   27

        9.3.2 Unless otherwise provided in the Contract Documents, payments
shall be made on account of materials and equipment delivered and suitably
stored at the site for subsequent incorporation in the Work. If approved in
advance by the Owner, payment may similarly be made for materials and equipment
suitably stored off the site at a location agreed upon in writing. Payment for
materials and equipment stored on or off the site shall be conditioned upon
compliance by the Contractor with procedures satisfactory to the Owner to
establish the Owner's title to such materials and equipment or otherwise protect
the Owner's interest, and shall include applicable insurance, storage and
transportation to the site for such materials and equipment stored off the site.

        9.3.3 The Contractor warrants that title to all Work covered by an
Application for Payment will pass to the Owner no later than the time of
payment. The Contractor further warrants that upon submittal of an Application
for Payment all Work for which Certificates for Payment have been previously
issued and payments received from the Owner shall, to the best of the
Contractor's knowledge, information and belief, be free and clear of liens,
claims, security interests or encumbrances in favor of the Contractor,
Subcontractors, material suppliers, or other persons or entities making a claim
by reason of having provided labor, materials and equipment relating to the
Work.

9.4     CERTIFICATES FOR PAYMENT

        9.4.1 The Architect will, within seven days after receipt of the
Contractor's Application for Payment either issue to the Owner a Certificate for
Payment, with a copy to the Contractor, for such amount as the Architect
determines is properly due, or notify the Contractor and Owner in writing of the
Architect's reasons for withholding certification in whole or in part as
provided in Subparagraph 9.5.1.

        9.4.2 The issuance of a Certificate for Payment will constitute a
representation by the Architect to the Owner, based on the Architect's
observations at the site and the data comprising the Application for Payment,
that the Work has progressed to the point indicated and that, to the best of the
Architect's knowledge, information and belief, quality of the Work is in
accordance with the Contract Documents. The foregoing representations are
subject to an evaluation of the Work for conformance with the Contract Documents
upon Substantial Completion, to results of subsequent tests and inspections, to
minor deviations from the Contract Documents correctable prior to completion and
to specific qualifications expressed by the Architect. The issuance of a
Certificate for Payment will further constitute a representation that the
Contractor is entitled to payment in the amount certified. However, the issuance
of a Certificate for Payment will not be a representation that the Architect has
(1) made exhaustive or continuous on-site inspections to check the quality or
quantity of the Work, (2) reviewed construction means, methods, techniques,
sequences or procedures, (3) reviewed copies of requisitions received from
Subcontractors and material suppliers and other data requested by the Owner to
substantiate the Contractor's right to payment or (4) made examination to
ascertain how or for what purpose the Contractor has used money previously paid
on account of the Contract Sum.





                                      -27-
   28

9.5     DECISIONS TO WITHHOLD CERTIFICATION

        9.5.1 The Architect may decide not to certify payment and may withhold a
Certificate for Payment in whole or in part, to the extent reasonably necessary
to protect the Owner, if in the Architect's opinion the representations to the
Owner required by Subparagraph 9.4.2 cannot be made. If the Architect is unable
to certify payment in the amount of the Application, the Architect will notify
the Contractor and Owner as provided in Subparagraph 9.4.1. If the Contractor
and Architect cannot agree on a revised amount, the Architect will promptly
issue a Certificate for Payment for the amount for which the Architect is able
to make such representations to the Owner. The Architect may also decide not to
certify payment or, because of subsequently discovered evidence or subsequent
observations, may nullify the whole or a part of a Certificate for Payment
previously issued, to such extent as may be necessary in the Architect's opinion
to protect the Owner from loss because of:

                 .1   defective Work not remedied;

                 .2 third party claims filed or reasonable evidence indicating
                 probable filing of such claims;

                 .3 failure of the Contractor to make payments properly to
                 Subcontractors or for labor, materials or equipment;

                 .4 reasonable evidence that the Work cannot be completed for
                 the unpaid balance of the Contract Sum;

                 .5 damage to the Owner or another contractor;

                 .6 reasonable evidence that the Work will not be completed
                 within the Contract Time, and that the unpaid balance would not
                 be adequate to cover actual or liquidated damages for the
                 anticipated delay; or

                 .7 persistent failure to carry out the Work in accordance with
                 the Contract Documents.

        9.5.2 When the above reasons for withholding certification are removed,
certification will be made for amounts previously withheld.

9.6     PROGRESS PAYMENTS

        9.6.1 After the Architect has issued a Certificate for Payment, the
Owner shall make payment in the manner and within the time provided in the
Contract Documents, and shall so notify the Architect.

        9.6.2 The Contractor shall promptly pay each Subcontractor, upon receipt
of payment from the Owner, out of the amount paid to the Contractor on account
of such Subcontractor's portion of the Work, the amount to which said
Subcontractor is entitled, reflecting percentages actually retained from
payments to the Contractor on account of such Subcontractor's portion of the
Work. The Contractor shall, by appropriate agreement with each Subcontractor,
require each Subcontractor to make payments to Sub-subcontractors in similar
manner.





                                      -28-
   29

        9.6.3 The Architect will, on request, furnish to a Subcontractor, if
practicable, information regarding percentages of completion or amounts applied
for by the Contractor and action taken thereon by the Architect and Owner on
account of portions of the Work done by such Subcontractor.

        9.6.4 Neither the Owner nor Architect shall have an obligation to pay or
to see to the payment of money to a Subcontractor except as may otherwise be
required by law.

        9.6.5 Payment to material suppliers shall be treated in a manner similar
to that provided in Subparagraphs 9.6.2, 9.6.3 and 9.6.4.

        9.6.6 A Certificate for Payment, a progress payment, or partial or
entire use or occupancy of the Project by the Owner shall not constitute
acceptance of Work not in accordance with the Contract Documents.

9.7     FAILURE OF PAYMENT

        9.7.1 If the Architect does not issue a Certificate for Payment, through
no fault of the Contractor, within seven days after receipt of the Contractor's
Application for Payment, or if the owner does not pay the Contractor within
seven days after the date established in the Contract Documents the amount
certified by the Architect or awarded by arbitration, then the Contractor may,
upon seven additional days' written notice to the Owner and Architect, stop the
Work until payment of the amount owing has been received. The Contract Time
shall be extended appropriately and the Contract Sum shall be increased by the
amount of the Contractor's reasonable costs of shut-down, delay and start-up,
which shall be accomplished as provided in Article 7.

9.8     SUBSTANTIAL COMPLETION

        9.8.1 Substantial Completion is the stage in the progress of the Work
when the Work or designated portion thereof is sufficiently complete in
accordance with the Contract Documents so the Owner can occupy or utilize the
Work for its intended use.

        9.8.2 When the Contractor considers that the Work, or a portion thereof
which the Owner agrees to accept separately, is substantially complete, the
Contractor shall prepare and submit to the Architect a comprehensive list of
items to be completed or corrected. The Contractor shall proceed promptly to
complete and correct items on the list. Failure to include an item on such list
does not alter the responsibility of the Contractor to complete all Work in
accordance with the Contract Documents. Upon receipt of the Contractor's list,
the Architect will make an inspection to determine whether the Work or
designated portion thereof is substantially complete. If the Architect's
inspection discloses any item, whether or not included on the Contractor's list,
which is not in accordance with the requirements of the Contract Documents, the
Contractor shall, before issuance of the Certificate of Substantial Completion,
complete or correct such item upon notification by the Architect. The Contractor
shall then submit a request for another inspection by the Architect to determine
Substantial Completion. When the Work or designated portion thereof is
substantially





                                      -29-
   30

complete, the Architect will prepare a Certificate of Substantial Completion
which shall establish the date of Substantial Completion, shall establish
responsibilities of the Owner and Contractor for security, maintenance, heat,
utilities, damage to the Work and insurance, and shall fix the time within which
the Contractor shall finish all items on the list accompanying the Certificate.
Warranties required by the Contract Documents shall commence on the date of
Substantial Completion of the Work or designated portion thereof unless
otherwise provided in the Certificate of Substantial Completion. The Certificate
of Substantial Completion shall be submitted to the Owner and Contractor for
their written acceptance of responsibilities assigned to them in such
Certificate.

        9.8.3 Upon Substantial Completion of the Work or designated portion
thereof and upon application by the Contractor and certification by the
Architect, the Owner shall make payment, reflecting adjustment in retainage, if
any, for such Work or portion thereof as provided in the Contract Documents.

9.9     PARTIAL OCCUPANCY OR USE

        9.9.1 The Owner may occupy or use any completed or partially completed
portion of the Work at any stage when such portion is designated by separate
agreement with the Contractor, provided such occupancy or use is consented to by
the insurer as required under Subparagraph 11.3.11 and authorized by public
authorities having jurisdiction over the Work. Such partial occupancy or use may
commence whether or not the portion is substantially complete, provided the
Owner and Contractor have accepted in writing the responsibilities assigned to
each of them for payments, retainage if any, security, maintenance, heat,
utilities, damage to the Work and insurance, and have agreed in writing
concerning the period for correction of the Work and commencement of warranties
required by the Contract Documents. When the Contractor considers a portion
substantially complete, the Contractor shall prepare and submit a list to the
Architect as provided under Subparagraph 9.8.2. Consent of the Contractor to
partial occupancy or use shall not be unreasonably withheld. The stage of the
progress of the Work shall be determined by written agreement between the Owner
and Contractor or, if no agreement is reached, by decision of the Architect.

        9.9.2 Immediately prior to such partial occupancy or use, the Owner,
Contractor and Architect shall jointly inspect the area to be occupied or
portion of the Work to be used in order to determine and record the condition of
the Work.

        9.9.3 Unless otherwise agreed upon, partial occupancy or use of a
portion or portions of the Work shall not constitute acceptance of Work not
complying with the requirements of the Contract Documents.

9.10    FINAL COMPLETION AND FINAL PAYMENT

        9.10.1 Upon receipt of written notice that the Work is ready for final
inspection and acceptance and upon receipt of a final Application for Payment,
the Architect will promptly make such inspection and, when the Architect finds
the Work acceptable under the Contract Documents





                                      -30-
   31

and the Contract fully performed, the Architect will promptly issue a final
Certificate for Payment stating that to the best of the Architect's knowledge,
information and belief, and on the basis of the Architect's observations and
inspections, the Work has been completed in accordance with terms and conditions
of the Contract Documents and that the entire balance found to be due the
Contractor and noted in said final Certificate is due and payable. The
Architect's final Certificate for Payment will constitute a further
representation that conditions listed in Subparagraph 9.10.2 as precedent to the
Contractor's being entitled to final payment have been fulfilled.

        9.10.2 Neither final payment nor any remaining retained percentage shall
become due until the Contractor submits to the Architect (1) an affidavit that
payrolls, bills for materials and equipment, and other indebtedness connected
with the Work for which the Owner or the Owner's property might be responsible
or encumbered (less amounts withheld by Owner) have been paid or otherwise
satisfied, (2) a certificate evidencing that insurance required by the Contract
Documents to remain in force after final payment is currently in effect and will
not be cancelled or allowed to expire until at least 30 days' prior written
notice has been given to the Owner, (3) a written statement that the Contractor
knows of no substantial reason that the insurance will not be renewable to cover
the period required by the Contract Documents, (4) consent of surety, if any, to
final payment and (5), if required by Owner, other data establishing payment or
satisfaction of obligations, such as receipts, releases and waivers of liens,
claims, security interests or encumbrances arising out of the Contract, to the
extent and in such form as may be designated by the Owner. If a Subcontractor
refuses to furnish a release or waiver required by the Owner, the Contractor may
furnish a bond satisfactory to the Owner to indemnify the Owner against such
lien. If such lien remains unsatisfied after payments are made, the Contractor
shall refund to the Owner all money that the Owner may be compelled to pay in
discharging such lien, including all costs and reasonable attorneys' fees.

        9.10.3 If, after Substantial Completion of the Work, final completion
thereof is materially delayed through no fault of the Contractor or by issuance
of Change Orders affecting final completion, and the Architect so confirms, the
Owner shall, upon application by the Contractor and certification by the
Architect, and without terminating the Contract, make payment of the balance due
for that portion of the Work fully completed and accepted. If the remaining
balance for Work not fully completed or corrected is less than retainage
stipulated in the Contract Documents, and if bonds have been furnished, the
written consent of surety to payment of the balance due for that portion of the
Work fully completed and accepted shall be submitted by the Contractor to the
Architect prior to certification of such payment. Such payment shall be made
under terms and conditions governing final payment, except that it shall not
constitute a waiver of claims. The making of final payment shall constitute a
waiver of claims by the Owner as provided in Subparagraph 4.3.5.

        9.10.4 Acceptance of final payment by the Contractor, a Subcontractor or
material supplier shall constitute a waiver of claims by that payee except those
previously made in writing and identified by that payee as unsettled at the time
of final Application for Payment. Such waivers shall be in addition to the
waiver described in Subparagraph 4.3.5.





                                      -31-
   32

                                   ARTICLE 10

                       PROTECTION OF PERSONS AND PROPERTY

10.1    SAFETY PRECAUTIONS AND PROGRAMS

        10.1.1 The Contractor shall be responsible for initiating, maintaining
and supervising all safety precautions and programs in connection with the
performance of the Contract.

        10.1.2 In the event the Contractor encounters on the site material
reasonably believed to be asbestos or polychlorinated biphenyl (PCB) which has
not been rendered harmless, the Contractor shall immediately stop Work in the
area affected and report the condition to the Owner and Architect in writing.
The Work in the affected area shall not thereafter be resumed except by written
agreement of the Owner and Contractor if in fact the material is asbestos or
polychlorinated biphenyl (PCB) and has not been rendered harmless. The Work in
the affected area shall be resumed in the absence of asbestos or polychlorinated
biphenyl (PCB), or when it has been rendered harmless, by written agreement of
the Owner and Contractor, or in accordance with final determination by the
Architect on which arbitration has not been demanded, or by arbitration under
Article 4.

        10.1.3 The Contractor shall not be required pursuant to Article 7 to
perform without consent any Work relating to asbestos or polychlorinated
biphenyl (PCB).

        10.1.4 To the fullest extent permitted by law, the Owner shall indemnify
and hold harmless the Contractor, Architect, Architect's consultants and agents
and employees of any of them from and against claims, damages, losses and
expenses, including but not limited to attorneys' fees, arising out of or
resulting from performance of the Work in the affected area if in fact the
material is asbestos or polychlorinated biphenyl (PCB) and has not been rendered
harmless, provided that such claim, damage, loss or expense is attributable to
bodily injury, sickness, disease or death, or to injury to or destruction of
tangible property (other than the Work itself) including loss of use resulting
therefrom, but only to the extent caused in whole or in part by negligent acts
or omissions of the Owner, anyone directly or indirectly employed by the Owner
or anyone for whose acts the Owner may be liable, regardless of whether or not
such claim, damage, loss or expense is caused in part by a party indemnified
hereunder. Such obligation shall not be construed to negate, abridge, or reduce
other rights or obligations of indemnity which would otherwise exist as to a
party or person described in this Subparagraph 10.1.4.

10.2    SAFETY OF PERSONS AND PROPERTY

        10.2.1 The Contractor shall take reasonable precautions for safety of,
and shall provide reasonable protection to prevent damage, injury or loss to:

                 .1 employees on the Work and other persons who may be affected
                 thereby;





                                      -32-
   33

                 .2 the Work and materials and equipment to be incorporated
                 therein, whether in storage on or off the site, under care,
                 custody or control of the Contractor or the Contractor's
                 Subcontractors or Sub-subcontractors; and

                 .3 other property at the site or adjacent thereto, such as
                 trees, shrubs, lawns, walks, pavements, roadways, structures
                 and utilities not designated for removal, relocation or
                 replacement in the course of construction.

        10.2.2 The Contractor shall give notices and comply with applicable
laws, ordinances, rules, regulations and lawful orders of public authorities
bearing on safety of persons or property or their protection from damage, injury
or loss.

        10.2.3 The Contractor shall erect and maintain, as required by existing
conditions and performance of the Contract, reasonable safeguards for safety and
protection, including posting danger signs and other warnings against hazards,
promulgating safety regulations and notifying owners and users of adjacent sites
and utilities.

        10.2.4 When use or storage of explosives or other hazardous materials or
equipment or unusual methods are necessary for execution of the Work, the
Contractor shall exercise utmost care and carry on such activities under
supervision of properly qualified personnel.

        10.2.5 The Contractor shall promptly remedy damage and loss (other than
damage or loss insured under property insurance required by the Contract
Documents) to property referred to in Clauses 10.2.1.2 and 10.2.1.3 caused in
whole or in part by the Contractor, a Subcontractor, a Sub-subcontractor, or
anyone directly or indirectly employed by any of them, or by anyone for whose
acts they may be liable and for which the Contractor is responsible under
Clauses 10.2.1.2 and 10.2.1.3, except damage or loss attributable to acts or
omissions of the Owner or Architect or anyone directly or indirectly employed by
either of them, or by anyone for whose acts either of them may be liable, and
not attributable to the fault or negligence of the Contractor. The foregoing
obligations of the Contractor are in addition to the Contractor's obligations
under Paragraph 3.18.

        10.2.6 The Contractor shall designate a responsible member of the
Contractor's organization at the site whose duty shall be the prevention of
accidents. This person shall be the Contractor's superintendent unless otherwise
designated by the Contractor in writing to the Owner and Architect.

        10.2.7 The Contractor shall not load or permit any part of the
construction or site to be loaded so as to endanger its safety.

10.3    EMERGENCIES

        10.3.1 In an emergency affecting safety of persons or property, the
Contractor shall act, at the Contractor's discretion, to prevent threatened
damage, injury or loss. Additional compensation or extension of time claimed by
the Contractor on account of an emergency shall be determined as provided in
Paragraph 4.3 and Article 7.





                                      -33-
   34

                                   ARTICLE 11

                               INSURANCE AND BONDS

11.1    CONTRACTOR'S LIABILITY INSURANCE

        11.1.1 The Contractor shall purchase from and maintain in a company or
companies lawfully authorized to do business in the jurisdiction in which the
Project is located such insurance as will protect the Contractor from claims set
forth below which may arise out of or result from the Contractor's operations
under the Contract and for which the Contractor may be legally liable, whether
such operations be by the Contractor or by a Subcontractor or by anyone directly
or indirectly employed by any of them, or by anyone for whose acts any of them
may be liable:

                 .1 claims under workers' or workmen's compensation, disability
                 benefit and other similar employee benefit acts which are
                 applicable to the Work to be performed;

                 .2 claims for damages because of bodily injury, occupational
                 sickness or disease, or death of the Contractor's employees;

                 .3 claims for damages because of bodily injury, sickness or
                 disease, or death of any person other than the Contractor's
                 employees;

                 .4 claims for damages insured by usual personal injury
                 liability coverage which are sustained (1) by a person as a
                 result of an offense directly or indirectly related to
                 employment of such person by the Contractor, or (2) by another
                 person;

                 .5 claims for damages, other than to the Work itself, because
                 of injury to or destruction of tangible property, including
                 loss of use resulting therefrom;

                 .6 claims for damages because of bodily injury, death of a
                 person or property damage arising out of ownership, maintenance
                 or use of a motor vehicle; and

                 .7 claims involving contractual liability insurance applicable
                 to the Contractor's obligations under Paragraph 3.18.

        11.1.2 The insurance required by Subparagraph 11.1.1 shall be written
for not less than limits of liability specified in the Contract Documents or
required by law, whichever coverage is greater. Coverages, whether written on an
occurrence or claims-made basis, shall be maintained without interruption from
date of commencement of the Work until date of final payment and termination of
any coverage required to be maintained after final payment.

        11.1.3 Certificates of Insurance acceptable to the Owner shall be filed
with the Owner prior to commencement of the Work. These Certificates and the
insurance policies required by this Paragraph 11.1 shall contain a provision
that coverages afforded under the policies will not be cancelled or allowed to
expire until at least 30 days' prior written notice has been given to the Owner.
If any of the foregoing insurance coverages are required to remain in force
after final payment and are reasonably available, an additional certificate
evidencing continuation of such coverage shall be submitted with the final
Application for Payment as required by Subparagraph 9.10.2. Information





                                      -34-
   35

concerning reduction of coverage shall be furnished by the Contractor with
reasonable promptness in accordance with the Contractor's information and
belief.

11.2    OWNER'S LIABILITY INSURANCE

        11.2.1 The Owner shall be responsible for purchasing and maintaining the
Owner's usual liability insurance. Optionally, the Owner may purchase and
maintain other insurance for self-protection against claims which may arise from
operations under the Contract. The Contractor shall not be responsible for
purchasing and maintaining this optional Owner's liability insurance unless
specifically required by the Contract Documents.

11.3    PROPERTY INSURANCE

        11.3.1 Unless otherwise provided, the Owner shall purchase and maintain,
in a company or companies lawfully authorized to do business in the jurisdiction
in which the Project is located, property insurance in the amount of the initial
Contract Sum as well as subsequent modifications thereto for the entire Work at
the site on a replacement cost basis without voluntary deductibles. Such
property insurance shall be maintained, unless otherwise provided in the
Contract Documents or otherwise agreed in writing by all persons and entities
who are beneficiaries of such insurance, until final payment has been made as
provided in Paragraph 9.10 or until no person or entity other than the Owner has
an insurable interest in the property required by this Paragraph 11.3 to be
covered, whichever is earlier. The insurance shall include interests of the
Owner, the Contractor, Subcontractors and Sub-subcontractors in the Work.

                 11.3.1.1 Property insurance shall be on an all-risk policy form
and shall insure against the perils of fire and extended coverage and physical
loss or damage including, without duplication of coverage, theft, vandalism,
malicious mischief, collapse, false work, temporary buildings and debris removal
including demolition occasioned by enforcement of any applicable legal
requirements, and shall cover reasonable compensation for Architect's services
and expenses required as a result of such insured loss. Coverage for other
perils shall not be required unless otherwise provided in the Contract
Documents.

                 11.3.1.2 If the Owner does not intend to purchase such property
insurance required by the Contract and with all of the coverages in the amount
described above, the Owner shall so inform the Contractor in writing prior to
commencement of the Work. The Contractor may then effect insurance which will
protect the interests of the Contractor, Subcontractors and Sub-subcontractors
in the Work, and by appropriate Change Order the cost thereof shall be charged
to the Owner. If the Contractor is damaged by the failure or neglect of the
Owner to purchase or maintain insurance as described above, without so notifying
the Contractor, then the Owner shall bear all reasonable costs properly
attributable thereto.

                 11.3.1.3 If the property insurance requires minimum deductibles
and such deductibles are identified in the Contract Documents, the Contractor
shall pay costs not covered because of such deductibles. If the Owner or insurer
increases the required minimum deductibles





                                      -35-
   36

above the amounts so identified or if the Owner elects to purchase this
insurance with voluntary deductible amounts, the Owner shall be responsible for
payment of the additional costs not covered because of such increased or
voluntary deductibles. If deductibles are not identified in the Contract
Documents, the Owner shall pay costs not covered because of deductibles.

                 11.3.1.4 Unless otherwise provided in the Contract Documents,
this property insurance shall cover portions of the Work stored off the site
after written approval of the Owner at the value established in the approval,
and also portions of the Work in transit.

        11.3.2 BOILER AND MACHINERY INSURANCE. The Owner shall purchase and
maintain boiler and machinery insurance required by the Contract Documents or by
law, which shall specifically cover such insured objects during installation and
until final acceptance by the Owner; this insurance shall include interests of
the Owner, Contractor, Subcontractors and Sub-subcontractors in the Work, and
the Owner and Contractor shall be named insureds.

        11.3.3 LOSS OF USE INSURANCE. The Owner, at the Owner's option, may
purchase and maintain such insurance as will insure the Owner against loss of
use of the Owner's property due to fire or other hazards, however caused. The
Owner waives all rights of action against the Contractor for loss of use of the
Owner's property, including consequential losses due to fire or other hazards
however caused.

        11.3.4 If the Contractor requests in writing that insurance for risks
other than those described herein or for other special hazards be included in
the property insurance policy, the Owner shall, if possible, include such
insurance, and the cost thereof shall be charged to the Contractor by
appropriate Change Order.

        11.3.5 If during the Project construction period the Owner insures
properties, real or personal or both, adjoining or adjacent to the site by
property insurance under policies separate from those insuring the Project, or
if after final payment property insurance is to be provided on the completed
Project through a policy or policies other than those insuring the Project
during the construction period, the Owner shall waive all rights in accordance
with the terms of Subparagraph 11.3.7 for damages caused by fire or other perils
covered by this separate property insurance. All separate policies shall provide
this waiver of subrogation by endorsement or otherwise.

        11.3.6 Before an exposure to loss may occur, the owner shall file with
the Contractor a copy of each policy that includes insurance coverages required
by this Paragraph 11.3. Each policy shall contain all generally applicable
conditions, definitions, exclusions and endorsements related to this Project.
Each policy shall contain a provision that the policy will not be cancelled or
allowed to expire until at least 30 days' prior written notice has been given to
the Contractor.

        11.3.7 WAIVERS OF SUBROGATION. The Owner and Contractor waive all rights
against (1) each other and any of their subcontractors, sub-subcontractors,
agents and employees, each of the other, and (2) the Architect, Architect's
consultants, separate contractors described in Article 6, if





                                      -36-
   37

any, and any of their subcontractors, sub-subcontractors, agents and employees,
for damages caused by fire or other perils to the extent covered by property
insurance obtained pursuant to this Paragraph 11.3 or other property insurance
applicable to the Work, except such rights as they have to proceeds of such
insurance held by the Owner as fiduciary. The Owner or Contractor, as
appropriate, shall require of the Architect, Architect's consultants, separate
contractors described in Article 6, if any, and the subcontractors,
sub-subcontractors, agents and employees of any of them, by appropriate
agreements, written where legally required for validity, similar waivers each in
favor of other parties enumerated herein. The policies shall provide such
waivers of subrogation by endorsement or otherwise. A waiver of subrogation
shall be effective as to a person or entity even though that person or entity
would otherwise have a duty of indemnification, contractual or otherwise, did
not pay the insurance premium directly or indirectly, and whether or not the
person or entity had an insurable interest in the property damaged.

        11.3.8 A loss insured under Owner's property insurance shall be adjusted
by the Owner as fiduciary and made payable to the Owner as fiduciary for the
insureds, as their interests may appear, subject to requirements of any
applicable mortgagee clause and of Subparagraph 11.3.10. The Contractor shall
pay Subcontractors their just shares of insurance proceeds received by the
Contractor, and by appropriate agreements, written where legally required for
validity, shall require Subcontractors to make payments to their
Sub-subcontractors in similar manner.

        11.3.9 If required in writing by a party in interest, the Owner as
fiduciary shall, upon occurrence of an insured loss, give bond for proper
performance of the Owner's duties. The cost of required bonds shall be charged
against proceeds received as fiduciary. The Owner shall deposit in a separate
account proceeds so received, which the Owner shall distribute in accordance
with such agreement as the parties in interest may reach, or in accordance with
an arbitration award in which case the procedure shall be as provided in
Paragraph 4.5. If after such loss no other special agreement is made,
replacement of damaged property shall be covered by appropriate Change Order.

        11.3.10 The Owner as fiduciary shall have power to adjust and settle a
loss with insurers unless one of the parties in interest shall object in writing
within five days after occurrence of loss to the Owner's exercise of this power;
if such objection be made, arbitrators shall be chosen as provided in Paragraph
4.5. The Owner as fiduciary shall, in that case, make settlement with insurers
in accordance with directions of such arbitrators. If distribution of insurance
proceeds by arbitration is required, the arbitrators will direct such
distribution.

        11.3.11 Partial occupancy or use in accordance with Paragraph 9.9 shall
not commence until the insurance company or companies providing property
insurance have consented to such partial occupancy or use by endorsement or
otherwise. The Owner and the Contractor shall take reasonable steps to obtain
consent of the insurance company or companies and shall, without mutual written
consent, take no action with respect to partial occupancy or use that would
cause cancellation, lapse or reduction of insurance.





                                      -37-
   38

11.4    PERFORMANCE BOND AND PAYMENT BOND

        11.4.1 The Owner shall have the right to require the Contractor to
furnish bonds covering faithful performance of the Contract and payment of
obligations arising thereunder as stipulated in bidding requirements or
specifically required in the Contract Documents on the date of execution of the
Contract.

        11.4.2 Upon the request of any person or entity appearing to be a
potential beneficiary of bonds covering payment of obligations arising under the
Contract, the Contractor shall promptly furnish a copy of the bonds or shall
permit a copy to be made.


                                   ARTICLE 12

                        UNCOVERING AND CORRECTION OF WORK

12.1    UNCOVERING OF WORK

        12.1.1 If a portion of the Work is covered contrary to the Architect's
request or to requirements specifically expressed in the Contract Documents, it
must, if required in writing by the Architect, be uncovered for the Architect's
observation and be replaced at the Contractor's expense without change in the
Contract Time.

        12.1.2 If a portion of the Work has been covered which the Architect has
not specifically requested to observe prior to its being covered, the Architect
may request to see such Work and it shall be uncovered by the Contractor. If
such Work is in accordance with the Contract Documents, costs of uncovering and
replacement shall, by appropriate Change Order, be charged to the Owner. If such
Work is not in accordance with the Contract Documents, the Contractor shall pay
such costs unless the condition was caused by the Owner or a separate contractor
in which event the Owner shall be responsible for payment of such costs.

12.2    CORRECTION OF WORK

        12.2.1 The Contractor shall promptly correct Work rejected by the
Architect or failing to conform to the requirements of the Contract Documents,
whether observed before or after Substantial Completion and whether or not
fabricated, installed or completed. The Contractor shall bear costs of
correcting such rejected Work, including additional testing and inspections and
compensation for the Architect's services and expenses made necessary thereby.

        12.2.2 If, within one year after the date of Substantial Completion of
the Work or designated portion thereof, or after the date for commencement of
warranties established under Subparagraph 9.9.1, or by terms of an applicable
special warranty required by the Contract Documents, any of the Work is found to
be not in accordance with the requirements of the Contract Documents, the
Contractor shall correct it promptly after receipt of written notice from the
Owner to





                                      -38-
   39

do so unless the Owner has previously given the Contractor a written acceptance
of such condition. This period of one year shall be extended with respect to
portions of Work first performed after Substantial Completion by the period of
time between Substantial Completion and the actual performance of the Work. This
obligation under this Subparagraph 12.2.2 shall survive acceptance of the Work
under the Contract and termination of the Contract. The Owner shall give such
notice promptly after discovery of the condition.

        12.2.3 The Contractor shall remove from the site portions of the Work
which are not in accordance with the requirements of the Contract Documents and
are neither corrected by the Contractor nor accepted by the Owner.

        12.2.4 If the Contractor fails to correct nonconforming Work within a
reasonable time, the Owner may correct it in accordance with Paragraph 2.4. If
the Contractor does not proceed with correction of such nonconforming Work
within a reasonable time fixed by written notice from the Architect, the Owner
may remove it and store the salvable materials or equipment at the Contractor's
expense. If the Contractor does not pay costs of such removal and storage within
ten days after written notice, the Owner may upon ten additional days' written
notice sell such materials and equipment at auction or at private sale and shall
account for the proceeds thereof, after deducting costs and damages that should
have been borne by the Contractor, including compensation for the Architect's
services and expenses made necessary thereby. If such proceeds of sale do not
cover costs which the Contractor should have borne, the Contract Sum shall be
reduced by the deficiency. If payments then or thereafter due the Contractor are
not sufficient to cover such amount, the Contractor shall pay the difference to
the Owner.

        12.2.5 The Contractor shall bear the cost of correcting destroyed or
damaged construction, whether completed or partially completed, of the Owner or
separate contractors caused by the Contractor's correction or removal of Work
which is not in accordance with the requirements of the Contract Documents.

        12.2.6 Nothing contained in this Paragraph 12.2 shall be construed to
establish a period of limitation with respect to other obligations which the
Contractor might have under the Contract Documents. Establishment of the time
period of one year as described in Subparagraph 12.2.2 relates only to the
specific obligation of the Contractor to correct the Work, and has no
relationship to the time within which the obligation to comply with the Contract
Documents may be sought to be enforced, nor to the time within which proceedings
may be commenced to establish the Contractor's liability with respect to the
Contractor's obligations other than specifically to correct the Work.

12.3    ACCEPTANCE OF NONCONFORMING WORK

        12.3.1 If the Owner prefers to accept Work which is not in accordance
with the requirements of the Contract Documents, the Owner may do so instead of
requiring its removal and correction, in which case the Contract Sum will be
reduced as appropriate and equitable. Such adjustment shall be effected whether
or not final payment has been made.





                                      -39-
   40

                                   ARTICLE 13

                            MISCELLANEOUS PROVISIONS

13.1    GOVERNING LAW

        13.1.1 The Contract shall be governed by the law of the place where the
Project is located.

13.2    SUCCESSORS AND ASSIGNS

        13.2.1 The Owner and Contractor respectively bind themselves, their
partners, successors, assigns and legal representatives to the other party
hereto and to partners, successors, assigns and legal representatives of such
other party in respect to covenants, agreements and obligations contained in the
Contract Documents. Neither party to the Contract shall assign the Contract as a
whole without written consent of the other. If either party attempts to make
such an assignment without such consent, that party shall nevertheless remain
legally responsible for all obligations under the Contract.

13.3    WRITTEN NOTICE

        13.3.1 Written notice shall be deemed to have been duly served if
delivered in person to the individual or a member of the firm or entity or to an
officer of the corporation for which it was intended, or if delivered at or sent
by registered or certified mail to the last business address known to the party
giving notice.

13.4    RIGHTS AND REMEDIES

        13.4.1 Duties and obligations imposed by the Contract Documents and
rights and remedies available thereunder shall be in addition to and not a
limitation of duties, obligations, rights and otherwise imposed or available by
law.

        13.4.2 No action or failure to act by the Owner, Architect or Contractor
shall constitute a waiver of a right or duty afforded them under the Contract,
nor shall such action or failure to act constitute approval of or acquiescence
in a breach thereunder, except as may be specifically agreed in writing.

13.5    TESTS AND INSPECTIONS

        13.5.1 Tests, inspections and approvals of portions of the Work required
by the Contract Documents or by laws, ordinances, rules, regulations or orders
of public authorities having jurisdiction shall be made at an appropriate time.
Unless otherwise provided, the Contractor shall make arrangements for such
tests, inspections and approvals with an independent testing laboratory or
entity acceptable to the Owner, or with the appropriate public authority, and
shall bear all related costs of tests, inspections and approvals. The Contractor
shall give the Architect timely notice of





                                      -40-
   41

when and where tests and inspections are to be made so the Architect may observe
such procedures. The Owner shall bear costs of tests, inspections or approvals
which do not become requirements until after bids are received or negotiations
concluded.

        13.5.2 If the Architect, Owner or public authorities having jurisdiction
determine that portions of the Work require additional testing, inspection or
approval not included under Subparagraph 13.5.1, the Architect will, upon
written authorization from the Owner, instruct the Contractor to make
arrangements for such additional testing, inspection or approval by an entity
acceptable to the Owner, and the Contractor shall give timely notice to the
Architect of when and where tests and inspections are to be made so the
Architect may observe such procedures. The owner shall bear such costs except as
provided in Subparagraph 13.5.3.

        13.5.3 If such procedures for testing, inspection or approval under
Subparagraphs 13.5.1 and 13.5.2 reveal failure of the portions of the Work to
comply with requirements established by the Contract Documents, the Contractor
shall bear all costs made necessary by such failure including those of repeated
procedures and compensation for the Architect's services and expenses.

        13.5.4 Required certificates of testing, inspection or approval shall,
unless otherwise required by the Contract Documents, be secured by the
Contractor and promptly delivered to the Architect.

        13.5.5 If the Architect is to observe tests, inspections or approvals
required by the Contract Documents, the Architect will do so promptly and, where
practicable, at the normal place of testing.

        13.5.6 Tests or inspections conducted pursuant to the Contract Documents
shall be made promptly to avoid unreasonable delay in the Work.

13.6    INTEREST

        13.6.1 Payments due and unpaid under the Contract Documents shall bear
interest from the date payment is due at such rate as the parties may agree upon
in writing or, in the absence thereof, at the legal rate prevailing from time to
time at the place where the Project is located.

13.7    COMMENCEMENT OF STATUTORY LIMITATION PERIOD

        13.7.1   As between the Owner and Contractor:

                 .1 BEFORE SUBSTANTIAL COMPLETION. As to acts or failures to act
                 occurring prior to the relevant date of Substantial Completion,
                 any applicable statute of limitations shall commence to run and
                 any alleged cause of action shall be deemed to have accrued in
                 any and all events not later than such date of Substantial
                 Completion.

                 .2 BETWEEN SUBSTANTIAL COMPLETION AND FINAL CERTIFICATE FOR
                 PAYMENT. As to acts or failures to act occurring subsequent to
                 the relevant date of Substantial Completion and prior to
                 issuance of the final Certificate for Payment, any applicable





                                      -41-
   42

                 statute of limitations shall commence to run and any alleged
                 cause of action shall be deemed to have accrued in any and all
                 events not later than the date of issuance of the final
                 Certificate for Payment; and

                 .3 AFTER FINAL CERTIFICATE FOR PAYMENT. As to acts or failures
                 to act occurring after the relevant date of issuance of the
                 final Certificate for Payment, any applicable statute of
                 limitations shall commence to run and any alleged cause of
                 action shall be deemed to have accrued in any and all events
                 not later than the date of any act or failure to act by the
                 Contractor pursuant to any warranty provided under Paragraph
                 3.5, the date of any correction of the Work or failure to
                 correct the Work by the Contractor under Paragraph 12.2, or the
                 date of actual commission of any other act or failure to
                 perform any duty or obligation by the Contractor or Owner,
                 whichever occurs last.


                                   ARTICLE 14

                    TERMINATION OR SUSPENSION OF THE CONTRACT

14.1    TERMINATION BY THE CONTRACTOR

        14.1.1 The Contractor may terminate the Contract if the Work is stopped
for a period of 30 days through no act or fault of the Contractor or a
Subcontractor, Sub-subcontractor or their agents or employees or any other
persons performing portions of the Work under contract with the Contractor, for
any of the following reasons:

                 .1 issuance of an order of a court or other public authority
                 having jurisdiction;

                 .2 an act of government, such as a declaration of national
                 emergency, making material unavailable;

                 .3 because the Architect has not issued a Certificate for
                 Payment and has not notified the Contractor of the reason for
                 withholding certification as provided in Subparagraph 9.4.1, or
                 because the Owner has not made payment on a Certificate for
                 Payment within the time stated in the Contract Documents;

                 .4 if repeated suspensions, delays or interruptions by the
                 Owner as described in Paragraph 14.3 constitute in the
                 aggregate more than 100 percent of the total number of days
                 scheduled for completion, or 120 days in any 365-day period,
                 whichever is less; or

                 .5 the Owner has faded to furnish to the Contractor promptly,
                 upon the Contractor's request, reasonable evidence as required
                 by Subparagraph 2.2.1.

        14.1.2 If one of the above reasons exists, the Contractor may, upon
seven additional days' written notice to the Owner and Architect, terminate the
Contract and recover from the Owner payment for Work executed and for proven
loss with respect to materials, equipment, tools, and construction equipment and
machinery, including reasonable overhead, profit and damages.





                                      -42-
   43

        14.1.3 If the Work is stopped for a period of 60 days through no act or
fault of the Contractor or a Subcontractor or their agents or employees or any
other persons performing portions of the Work under contract with the Contractor
because the Owner has persistently failed to fulfill the Owner's obligations
under the Contract Documents with respect to matters important to the progress
of the Work, the Contractor may, upon seven additional days' written notice to
the Owner and the Architect, terminate the Contract and recover from the Owner
as provided in Subparagraph 14.1.2.

14.2    TERMINATION BY THE OWNER FOR CAUSE

        14.2.1 The Owner may terminate the Contract if the Contractor:

                 .1 persistently or repeatedly refuses or fails to supply enough
                 properly skilled workers or proper materials;

                 .2 fails to make payment to Subcontractors for materials or
                 labor in accordance with the respective agreements between the
                 Contractor and the Subcontractors;

                 .3 persistently disregards laws, ordinances, or rules,
                 regulations or orders of a public authority having
                 jurisdiction; or

                 .4 otherwise is guilty of substantial breach of a provision of
                 the Contract Documents.

        14.2.2 When any of the above reasons exist, the Owner, upon
certification by the Architect that sufficient cause exists to justify such
action, may without prejudice to any other rights or remedies of the Owner and
after giving the Contractor and the Contractor's surety, if any, seven days'
written notice, terminate employment of the Contractor and may, subject to any
prior rights of the surety:

                 .1 take possession of the site and of all materials, equipment,
                 tools, and construction equipment and machinery thereon owned
                 by the Contractor;

                 .2 accept assignment of subcontracts pursuant to Paragraph 5.4;
                 and

                 .3 finish the Work by whatever reasonable method the Owner may
                 deem expedient.

        14.2.3 When the Owner terminates the Contract for one of the reasons
stated in Subparagraph 14.2.1, the Contractor shall not be entitled to receive
further payment until the Work is finished.

        14.2.4 If the unpaid balance of the Contract Sum exceeds costs of
finishing the Work, including compensation for the Architect's services and
expenses made necessary thereby, such excess shall be paid to the Contractor. If
such costs exceed the unpaid balance, the Contractor shall pay the difference to
the Owner. The amount to be paid to the Contractor or Owner, as the case may be,
shall be certified by the Architect, upon application, and this obligation for
payment shall survive termination of the Contract.





                                      -43-
   44

14.3    SUSPENSION BY THE OWNER FOR CONVENIENCE

        14.3.1 The Owner may, without cause, order the Contractor in writing to
suspend, delay or interrupt the Work in whole or in part for such period of time
as the Owner may determine.

        14.3.2 An adjustment shall be made for increases in the cost of
performance of the Contract, including profit on the increased cost of
performance, caused by suspension, delay or interruption. No adjustment shall be
made to the extent:

                 .1 that performance is, was or would have been so suspended,
                 delayed or interrupted by another cause for which the
                 Contractor is responsible; or

                 .2 that an equitable adjustment is made or denied under another
                 provision of this Contract.

        14.3.3 Adjustments made in the cost of performance may have a mutually
agreed fixed or percentage fee.























                                      -44-

EX-10.32C

   1

                                                                  EXHIBIT 10.32C

                                   ADDENDUM TO

                              GENERAL CONDITIONS OF

                          THE CONTRACT FOR CONSTRUCTION

                        (AIA Document A201-1987 Edition)


    THIS ADDENDUM TO GENERAL CONDITIONS OF THE CONTRACT FOR CONSTRUCTION is
entered into between Vivus, Inc.("Owner") and ADP Marshall, Inc. ("Contractor")
as an amendment and supplement to those certain General Conditions of the
Contract for Construction (AIA Document A201 - 1987 Edition) (hereinafter
"General Conditions"), which has been incorporated by reference into that
certain Standard Form of Agreement Between Owner and Contractor - Cost of the
Work Plus a Fee (AIA Document A111 - 1987 Edition) executed by Owner and
Contractor concurrently herewith (the "Agreement"). References in this Addendum
to sections of the General Conditions shall appear in this Addendum as "GC
Section ___". Paragraphs in this Addendum are numbered to correspond to the
Articles in the General Conditions to which such paragraphs in this Addendum
generally relate. In the event of any conflict between this Addendum and any
other Contract Document, this Addendum shall prevail; provided, however, that
any typed or handwritten additions to the printed form Agreement shall prevail
over conflicting provisions contained in this Addendum. This Addendum shall be
deemed a part of the Agreement.


1.A DEFINITIONS. Unless otherwise provided in this Addendum, the capitalized
terms used in this Addendum shall have the meanings given to those terms in the
Contract Documents. In addition, the following terms shall have the following
meanings: (i) "Materials" shall mean materials, equipment, apparatus, articles,
or processes; (ii) "Laws" shall mean all laws, statutes, ordinances, rules,
regulations, building codes and orders; (iii) "Suppliers" shall mean all
materialmen or other persons providing Materials to Contractor or any
Subcontractor; (iv) "Claims" shall mean liabilities, judgments, claims, damages,
losses and expenses, of every type and nature, including but not limited to
attorneys' fees, experts' fees and court costs; and (v) "Lien" shall mean any
mechanics' or other lien, stop notice, charge, imposition, garnishment or
attachment.

1.B CONTRACTOR AND ARCHITECT AS INDEPENDENT CONTRACTORS. GC Section 1.1.2. is
modified as follows: Contractor and Architect are independent contractors of
Owner. Neither Contractor nor Architect is the employee, agent, joint venturer,
or partner of Owner. The Contract Documents shall not be deemed to create any
relationship, express or implied, between Owner and any Subcontractor or
Supplier of Contractor. Contractor shall have the sole responsibility for
performance under any Subcontract or employment agreement entered into by
Contractor with respect to the Work.

1.C DISCREPANCIES. The following is hereby added to GC Section 1.2.3: Conflicts
or discrepancies among the Contract Documents shall be resolved in the following
order of priority:

 .1  The Agreement;

 .2  The General Conditions; and

 .3  Drawings and specifications.

Amendments and revisions of later date take precedence over those of earlier
date. Drawings govern specifications for quantity and location and
specifications govern drawings for quality and performance. In the event of
ambiguity in quantity or quality, the greater quantity and the better quality
shall govern.

1.D DRAWINGS. GC Section 1.3.1 is modified as follows: Ownership of all
drawings, specifications and copies thereof furnished by Architect is determined
by the Architect's Agreement. They shall not be used on any other project
without the prior written consent of Owner.

2.A DEFINITION OF OWNER. GC Section 2.1.1 is modified as follows: Owner and
Contractor acknowledge and agree that Owner does not hold fee title to the
Project sites and instead holds leasehold interests thereunder. Notwithstanding
the foregoing, Contractor agrees that the provisions herein for the benefit of
Owner and Owner's leasehold interests in the properties shall, at Owner's
election, also apply to the owners of the fee interests in the properties.

2.B MODIFICATION OF OWNER'S OBLIGATIONS. GC Section 2.2.1 is deleted. No action
taken by Owner pursuant to the Contract Documents requires the




   2

approval of Architect. However, Owner will not have control over or charge of,
and will not be responsible for, construction means, methods, techniques,
sequences or procedures, or for safety precautions and programs in connection
with the Work, since these are solely Contractor's responsibility as provided in
the Contract Documents. Owner will not be responsible for Contractor's failure
to carry out the Work in accordance with the Contract Documents. Owner will not
have control over or charge of, and will not be responsible for, negligent acts
or omissions of Contractor, Subcontractors, or their agents or employees, or of
any other persons performing portions of the Work.

2.C OWNER'S RIGHT TO STOP THE WORK. GC Section 2.3.1 is deleted and replaced
with the following, which rights shall be in addition to, and not in restriction
of, other rights and remedies given to Owner:

2.C.1 Suspension Due to Unforeseen Conditions. Notwithstanding any provision in
the Contract Documents to the contrary, if suspension of the Work is warranted
by reason of unforeseen conditions which may adversely affect the quality of the
Work, if the Work were continued, Owner (but not Architect) by written notice to
Contractor may do either or both of the following, to the extent necessary to
address such unforeseen conditions: (i) entirely suspend the Work; or (ii) cause
the Work, or portions thereof, to be partially suspended or delayed, while other
portions of the Work continue on the same or different schedule redetermined by
Owner and Contractor. In such event, the Contract Time shall be extended by the
amount of delay caused by the exercise by Owner of such remedies. In addition,
if Contractor has taken all reasonable steps to mitigate the effects of such
suspension, then Contractor shall be entitled to reimbursement of its
reasonable, direct, out-of-pocket, additional general conditions costs resulting
from such suspension. If Contractor reasonably believes that a suspension of the
Work is warranted by reason of unforeseen circumstances which may adversely
affect the quality of the Work, if the Work were continued, Contractor shall
immediately notify Owner and Architect of such belief, but Contractor shall have
no right to suspend the Work, except with the written consent of Owner or except
in the case of an emergency (in which event Contractor shall resume work upon
cessation of the emergency).

2.C.2 Upon Contractor's Default. Notwithstanding any provision in the Contract
Documents to the contrary, if Contractor fails to correct defective Work as
required by GC Section 12.2, fails to complete the Work on time as required by
the Agreement, or is in material default of its obligations hereunder, Owner may
order Contractor to stop the Work, or any portion thereof, until the cause for
such order has been eliminated pursuant to GC Section 14.B.2, hereof.

3.A REVIEW BY CONTRACTOR. GC Section 3.2.1 (second sentence only) is deleted and
the remainder of GC Section 3.2 is modified as follows: Contractor acknowledges
that it is responsible for inspecting all site conditions, Contract Documents,
and other matters which may affect the prosecution, completion, and Cost of the
Work (herein, the "Conditions of the Work"). Contractor represents to Owner
that: (i) Contractor has inspected and tested to the extent necessary for its
purposes, the Conditions of the Work; (ii) Contractor's knowledge of the
Conditions of the Work as of the execution of the Agreement is sufficient to
enable Contractor to determine the Cost of the Work; and (iii) to the best of
Contractor's knowledge, the Work described in the Contract Documents can be
performed in strict compliance with all Laws.

3.B LABOR AND MATERIALS. GC Section 3.4 is supplemented as follows: Neither
Contractor nor any Subcontractor or Supplier shall incorporate into the Work any
Materials (i) to which its title is imperfect, (ii) against which there is any
claim by a manufacturer or other entity, or (iii) which is encumbered by any
security interest. Contractor shall be responsible for all Materials specified
by the Contract Documents which are delivered to the Project sites. Any
Materials delivered to the Project sites, which are not to be used in or
incorporated into the Work under the Contract Documents, shall be forthwith
removed from the Project sites and Contractor shall be solely responsible for
all cost incurred with respect to such Materials.

3.C [INTENTIONALLY OMITTED.]

3.D PERMITS, FEES AND NOTICES. GC Section 3.7.1 is supplemented as follows:
Contractor shall furnish to Owner copies of all permits obtained during the
course of the Work.

3.E COMPLIANCE WITH LAW. GC Sections 3.7.3 and 3.7.4 are modified and
supplemented as follows: Contractor shall comply with all Laws applicable to the
performance of the Work and the employment of labor. Although Contractor is not
responsible for the preparation of Drawings and Specifications, Contractor shall
nevertheless (i) review the Contract Documents to determine whether they are in
accordance with applicable Law, (ii) notify Owner and Architect of any deviation
in the Drawings and Specifications from the requirements of applicable Law of
which Contractor is or reasonably should be aware, and (iii) perform no Work
which Contractor knows or reasonably should know to be contrary to





                                      -2-
   3

applicable Law. Owner acknowledges that city or county building officials may
refuse to approve components of the Work even if Contractor has complied with
applicable Law.

3.F SUPERINTENDENT. GC Section 3.9 is modified as follows: All of Contractor's
supervisory personnel at the Project sites shall be satisfactory to Owner, and
Contractor shall replace such personnel only with Owner's consent, which shall
not be unreasonably withheld.

3.G PROGRESS SCHEDULE AND ON-SITE MEETINGS. Contractor shall adhere to the
Project schedule approved by Owner and shall immediately notify Owner and
Architect of any material deviation by any party from said schedule. If, in the
judgment of Architect or Owner, any phase of the Work is or may become behind
schedule, Contractor shall take such steps as Owner deems necessary to improve
the progress of the Work and insure Substantial Completion of the Work within
the Contract Time. Upon request by Architect or Owner, Contractor shall submit
for their approvals a revised progress schedule showing the manner in which any
lost time will be regained. Contractor shall hold weekly progress meetings at
the Project sites, or at such other time, frequency, and location as are
reasonably acceptable to Owner. Progress of the Work shall be reported in detail
with reference to construction schedules prepared by and approved by Owner and
Architect. Upon request by Owner, Contractor shall cause each interested
Subcontractor to attend the meeting for the purposes of reporting upon the
progress of the Subcontractor's Work and receiving information; provided,
however, that nothing that may transpire at such meeting shall modify or release
any Subcontractor from its obligations to the Contractor under a Subcontract.

3.H USE OF SITE. GC Section 3.13 is supplemented as follows: In performing the
Work, Contractor shall not cause or allow rain water, dust, nauseous vapors,
excessive noise, or other intrusions to go beyond the boundaries of the Project
sites in any manner that would constitute a nuisance or a violation of Law.

3.I CLEANING UP. GC Section 3.15 is supplemented. Upon completion of the Work,
Contractor shall remove from the Project sites and sell to a third party or
transfer to itself at the fair market value all machinery, equipment,
scaffolding, forms, hand tools and other items which were purchased exclusively
for use in the Work and charged to Owner and paid as a cost of the Project,
which Owner does not elect to retain. Proceeds from such sales, or the fair
market value of the item in the case of a transfer to Contractor, shall be
deducted from the Contract Sum payable to Contractor.

3.J  LABOR RELATIONS.

    3.J.1 Labor Agreements. Employment of labor by Contractor shall be effected
under conditions which are satisfactory to Owner. Should there be picketing on
the Project sites and if Owner establishes a reserved gate for Contractor's
purposes, Contractor shall continue the proper performance of the Work, without
interruption or delay, using such gate.

    3.J.2 Equal Opportunity. Contractor and the Subcontractors shall not
discriminate against any employee or applicant for employment because of
handicap, age, religion, color, sex, or national origin. Contractor shall take
affirmative action to insure that applicants are employed, and that employees
are treated during employment, without regard to their handicap, age, race,
religion, color, sex, or national origin. Such action shall include, but not be
limited to the following: employment, upgrading, demotion, transfer,
recruitment, advertising, layoff or termination, rates of pay or other forms of
compensation, and selection for training, including apprenticeship. Contractor
shall post in conspicuous places, available to employees and applicants for
employment, notices setting forth its policies of non-discrimination. Contractor
and each Subcontractor shall, in all solicitations or advertisements for
employees placed by them or on their behalf, state that all qualified applicants
will receive consideration for employment without regard to handicap, age, race,
religion, color, sex or national origin. Contractor will not discriminate in the
selection of Subcontractors or Suppliers because of age, sex, race, creed,
color, national origin, age, or handicap. Contractor will, in the selection of
Suppliers and in the award of Subcontracts, use its best efforts to identify
qualified minority business enterprises, and to assure that such enterprises
shall have the maximum practicable opportunity for selection by Contractor.
Contractor shall inform Owner in writing as to any such enterprises that have
been so identified.

3.K MECHANICS' LIENS. GC Section 3.18.1 is supplemented. Contractor shall pay
when due all sums payable to persons or firms who furnish labor, or Materials
for the Work or who are otherwise entitled to file a mechanic's Lien upon
Owner's property. Except to the extent attributable to Owner's wrongful
withholding of monies payable to Contractor under the Contract Documents, within
five (5) business days following Owner's written demand, Contractor shall take
such action as may be required to discharge any Lien against Owner or Owner's
real property in connection with the Work and Contractor shall indemnify and
hold harmless Owner and the real property from and against any and all Claims
arising out of the





                                      -3-
   4

filing or service, or attempted filing or service, of any Lien or out of
Contractor's failure to remove or satisfy any Lien in accordance with this
Contract. Except to the extent caused solely by Owner's wrongful withholding of
the amounts due and payable to Contractor, Contractor shall not (i) file or
record, or suffer the filing or recording of, any Lien upon Owner's real
property, (ii) shall not impose, or suffer the imposition of, any stop notice on
funds held by Owner, and (iii) shall not garnish or attach, or suffer the
garnishment or attachment of, any funds held by Owner.

3.L  [INTENTIONALLY OMITTED.]

3.M SIGNAGE. Except as approved by Owner, neither Contractor nor any of its
agents, contractors or employees shall post any signs at the Project sites. All
signs shall comply with all applicable Laws.

4.A ARCHITECT'S RESPONSIBILITIES. Notwithstanding anything to the contrary in
the Contract Documents, (including without limitation GC Sections 4.1, 4.2, 4.4,
1.1.2, and 8.3.1) Architect may be replaced by Owner at any time, and from time
to time, by written notice to Contractor, and Owner shall (i) have the right to
exercise any right or power given to Architect by the Contract Documents, which
Owner may do either in conjunction with Architect or by itself without
consultation with or involvement of Architect, and (ii) receive or obtain any
notices, plans, or other documents Architect is entitled to receive or obtain
pursuant to the Contract Documents, and (iii) communicate directly with
Contractor. Except as Owner may hereafter notify Contractor in writing,
Architect shall have no right to act on behalf of Owner, to provide any approval
for Owner, or to otherwise bind Owner to any action or promise. Architect's
approval, decision, or determination as to any matter is advisory only and shall
not be binding upon Owner. If Architect requests additional inspection, testing,
labor, materials or other Work, Owner shall not be bound to pay the cost
thereof, unless Owner has agreed in writing to do so. Nothing in the Contract
shall limit Architect's duties under the Architect's Agreement.

4.B CONSTRUCTION OBSERVATION. In GC Section 4.2.2, the word "Work" means only
the product of construction and does not include Contractor's equipment,
services, construction means, methods, techniques, sequences, procedures, or
safety precautions or programs. However, if Architect notices any activity of
Contractor which is inconsistent with the Contract Documents, Architect shall
notify Contractor of same.

4.C  CLAIMS.

        4.C.1 Time Limits on Claims. GC Section 4.3.1, Section 4.3.3 and the
phrase "which decision shall be final and binding on the parties but subject to
arbitration" in GC Section 4.4.4 are deleted. Claims by Contractor must be made
within twenty-one (21) days after occurrence of the event giving rise to such
Claim or within twenty-one (21) days after Contractor first recognizes the
condition giving rise to the Claim, whichever is later. Claims must be made by
written notice. Failure to deliver any such notice or request within the
required period shall constitute an irrevocable waiver of any such Claim. If a
Claim has been implemented by Change Order, no further consideration will be
given to such Claim.

        4.C.2 Claims for Additional Time. GC Section 4.3.8.2 is modified as
follows: Notwithstanding anything to the contrary contained in the Contract
Documents, and except for delays due to any damage to the Work caused by
hurricanes or blizzards, Contractor shall not be entitled to additional time
resulting from any delays caused by adverse weather conditions.

        4.C.3 Resolution of Claims. GC Sections 4.3 and 4.4 are modified and
supplemented as set forth herein. In the event of any dispute between Owner and
Contractor, which relates to the Contract Documents or the Work, Contractor
shall not interrupt the progress of the Work during the pendency of any such
dispute, unless ordered to do so by Owner in writing. If either party becomes
involved in litigation in connection with the Contract Documents or the Work,
the court or tribunal in such litigation, or in a separate suit, may award
reasonable costs and expenses of litigation, including court costs, experts'
fees and attorneys' fees, to be paid by the losing party to the prevailing
party. In the event either party becomes the subject of any bankruptcy or
insolvency proceeding, the other parties shall be entitled to reimbursement of
all costs and expenses, including attorneys' fees and court costs, incurred by
said other party to obtain adequate protection of its rights under the Contract
Documents or to obtain other requested relief in such bankruptcy or insolvency
proceeding.

4.D ARBITRATION. GC Section 4.5 is deleted. If a dispute arises out of or
relating to this Agreement or the breach thereof, and if such dispute cannot be
settled through direct discussions, the parties shall submit the dispute to
nonbinding mediation under the Construction Industry Mediation Rules of the
American Arbitration Association before having recourse to a judicial forum. The
mediation may be initiated by the written request of either party and shall be
commenced within fifteen (15) days of receipt of such notice.





                                      -4-
   5

5 SUBCONTRACTORS. GC Section 5.2.3 is deleted. The fourth sentence of GC Section
5.3.1 shall end with the words "...will be bound," and the remainder of said
sentence is deleted. GC Sections 5.1, 5.2, and 5.3 are supplemented. Owner,
acting reasonably and in good faith after consultation with Contractor, may
require Contractor to terminate a Subcontractor and replace the Subcontractor
with another Subcontractor acceptable to Owner. If at such time Contractor is
not in default hereunder, the Contract Sum shall be increased or decreased by
the difference in cost occasioned by such change and the Contract Time shall be
equitably adjusted. Work performed for Contractor by a Subcontractor shall be
performed only pursuant to a written subcontract between Contractor and
Subcontractor in a form reasonably acceptable to Owner. Each subcontract shall
provide that (i) Subcontractor waives all rights it may have against Owner for
damages caused by fire or other perils which would be covered by the property
insurance described in the Contract Documents or which is otherwise covered by
insurance; (ii) Subcontractor will furnish such additional lien waivers and
other documents as Owner and Contractor may reasonably request; and (iii)
require the Subcontractor to perform strictly in accordance with the Contract
Documents (including specifically, but without limiting the generality of the
foregoing the labor and employment relations provision thereof). In addition,
all Suppliers and Subcontractors shall warrant the Work and Materials supplied
and/or installed by them in the same manner and for the same period as is
required of Contractor under this Contract or in such broader manner and for
such longer period as may be required by the Specifications. Contractor and all
Subcontractors shall coordinate their Work with all adjacent work and all other
trades so as to facilitate the general progress of all work. Each Subcontractor
shall afford all other contractors every reasonable opportunity to install other
work and materials. All Subcontractors shall be required to place all debris in
a central location.

7.A INITIAL AUTHORIZATION OF WORK. GC Section 7.1 is modified to delete all
references to or any "major or minor change in the Work, other than a Change
Order or a Construction Change Directive."

7.B  [INTENTIONALLY OMITTED.]

7.C. CHANGE ORDER FOR NEW WORK. The following is hereby added as GC Section
7.2.4: From time to time during the term of this Contract, Owner may elect in
its discretion to submit to Contractor Drawings and Specifications for portions
of the Work. Upon receipt of such Drawings and Specifications, Contractor shall
immediately obtain bids for such Work. Based on bids approved by Owner,
Contractor shall deliver to Owner a proposed Change Order for the Work described
in the Drawings and Specifications so delivered to Contractor. If after
requesting bids, Owner and Contractor are unable to agree upon the terms of a
Change Order for the Work, Owner may rescind its request for Work and may obtain
performance of the Work by others. Contractor shall be authorized to undertake
only those portions of the Work authorized in writing by Owner in a written
Change Order complying with this section or otherwise as authorized by this
Contract. Each Change Order initially authorizing Work shall (i) describe the
Work to be performed and reference the Drawings, Specifications and any other
additional Contract Documents applicable to such Work, (ii) set forth the
adjustment to the Contract Sum proposed by Contractor and approved by Owner for
such Work, and (iii) specify any modification of the Substantial Completion Date
as a consequence of the Change Order.

7.D SUBSEQUENT MODIFICATIONS. The following is hereby added as GC Section 7.2.5:

        "7.2.5 Subsequent Modifications. Furthermore, notwithstanding anything
to the contrary in GC Section 7.2, the Contract Sum may be adjusted and the
Contract Time may be extended or shortened only upon written approval of a
Change Order by Owner and Contractor. Notwithstanding anything to the contrary
in GC Section 7.1.2, Architect may, but is not required to, execute Change
Orders but in all events, Change Orders shall be ineffective unless executed by
Owner. Each Change Order for adjustments in previously authorized Work shall
include (i) a cost breakdown for the maximum increase or decrease in the
Contract Sum as a consequence of a Change, (ii) a description of all plans and
specifications for the Change, and (iii) the adjustment, if any, in the Contract
Time as a consequence of the Change."

7.E RIGHT TO PAYMENT. The following is hereby added as GC Section 7.2.6:

        "7.2.6 Right to Payment. Contractor shall not be entitled to include in
any Application for Payment, or to receive payment for, Work, unless the Work is
authorized by a valid Change Order executed by Owner. No course of conduct or
dealings between the parties, nor express or implied acceptance of alterations
or additions to the Work, and no claim that Owner has been unjustly enriched by
any alteration or addition to the Work, whether or not there is in fact any such
unjust enrichment, shall be the basis for a change in the Contract Time, an
increase in the Contract Sum, or a right to any other payment by Owner to
Contractor. Contractor shall complete all Work specified in Change Orders
executed by Owner and Contractor in





                                      -5-
   6

accordance with the Contract Documents on or before the scheduled Substantial
Completion Date specified in the Change Orders."

        7.F MINOR CHANGES. GC Section 7.4.1 is deleted.

        7.G PRICING FOR CHANGE ORDERS. The change in the Contract Sum for the
Work authorized by each Change Order, shall be equal to: the sum of the total
actual net increase or decrease in the Cost of the Work based upon
Subcontractor's bids and bid revisions approved by Contractor and Owner for the
Change in the Work, if such bids are available, or in all other cases based upon
Owner's and Contractor's estimate of the actual labor and Materials added or
saved by the Change Order.

8.A DEFINITION OF SUBSTANTIAL COMPLETION. GC Sections 8.1.3 and 9.8 are amended
modified and supplemented as follows: "Substantial Completion" of any portion of
the Work is the date when (i) such Work is substantially complete as set forth
in a written certification executed by Architect and approved by Owner, which
approval shall not be unreasonably withheld, or upon Owner's taking beneficial
occupancy of the Work, and (ii) Contractor has delivered to Owner all occupancy
permits and approvals from the appropriate governmental authorities necessary
for the occupancy of such Work for Owner's intended use, and (iii) there remains
no incomplete or defective item of such Work that would adversely affect Owner's
intended use of such Work.

8.B  [INTENTIONALLY OMITTED.]

8.C CLAIM OF DELAY. GC Section 8.3.1 is deleted. If through no fault or
collusion by Contractor or any Subcontractor, Contractor is delayed at any time
in the progress of the Work by any act or neglect of Owner or Architect, or by
any employee of either, or by any separate contractor employed by Owner, or by
fire, flood, war, embargo, earthquake or injunction (not the fault of
Contractor), or any other casualty not the fault of Contractor or any
Subcontractor, then (i) the Contract Time shall be extended by Change Order for
such reasonable time as the Contractor's work has been actually delayed, as
approved by Owner and Contractor (based on the advice of Architect), which
approval shall not be unreasonably withheld and (ii) Contractor shall be
entitled to reimbursement of its and its Subcontractor's reasonable, direct,
out-of-pocket, additional general conditions costs resulting from such delay,
provided, however, that in no event will Contractor be entitled to recover any
damages, additional profit or fee, or any other costs other than the foregoing
additional general conditions costs. Notwithstanding the foregoing, no delay or
force majeure event shall be deemed to have occurred, unless Contractor delivers
a written claim of justifiable delay to Owner and Architect within twenty-one
(21) days following the commencement of the delay. Immediately upon commencement
of a delay, Contractor shall take all steps reasonably available to lessen the
adverse impact of such delay upon Owner and to prevent and mitigate the effects
thereof.

9.A PAYMENTS TO CONTRACTOR. GC Section 9 is amended and supplemented as follows:
Copies of all Applications for Payment shall be submitted to Owner and Architect
no later than the twenty-fifth (25th) day of any calendar month for any period
preceding such date. Notwithstanding anything to the contrary in the
Construction Documents, the parties acknowledge that Architect will not review
or issue Certificates for Payment, and that Owner shall be entitled to review
all Applications for Payment without consulting with Architect. Owner shall be
entitled to withhold amounts included in an Application for Payment if Owner
does not approve such amount as set forth in this Section 9. Contractor shall
submit to Owner the Application for Payment and all notices and documents
required in the Contract Documents to be provided to Architect in connection
with its review of the Application for Payment or the issuance of a Certificate
for Payment. If requested by Owner, each Application for Payment (after the
first) shall be accompanied by an accounting of the disbursement of funds
previously received by Contractor from Owner, certified to be true and correct
by Contractor. Upon the reasonable request of Owner, such accounting also shall
itemize all disbursements to Subcontractors and Suppliers and Contractor shall
deliver to Owner copies of all vendors' invoices, payroll and other data
substantiating actual expenditures by Contractor for the Work, and upon
reasonable request, shall allow Owner to inspect the books and records of
Contractor relating to such expenditures. In each Application for Payment,
Contractor shall certify that: (i) the requested payment represents a just
determination of the actual amount payable to Contractor under the Contract
Documents; (ii) the information set forth in the Application for Payment is
correct; (iii) the Contract, to the best of Contractor's knowledge, is in full
force and effect and free from default by any party (or if Owner is in default,
the nature of the default); (iv) any contingency reserve under the Contract has
or has not been utilized, and if utilized, the amount that remains; (v) all
Subcontractors and Suppliers have been paid all sums that are due and payable to
them in full (excluding payments due which are included in the Application for
Payment in question); (vi) Contractor shall promptly pay all sums due and
payable to Subcontractors, unions, laborers, and





                                      -6-
   7

Suppliers out of funds to be received pursuant to the Application for Payment;
(vii) no Lien currently affects the Work nor is there any basis for the filing
of a Lien with respect to Work, other than Liens caused solely by Owner's
wrongful withholding of amounts due Contractor under the Contract or Liens for
the Work included in the Application for Payment; (viii) all amounts due and
payable with respect to the Work either have been paid to date or are included
in the Application for Payment; and (ix) partial waivers of mechanic's liens
totaling the amounts previously paid by Owner to Contractor have been obtained
from all Subcontractors and Suppliers in such form as to constitute an effective
waiver, under applicable Law, of all Lien rights with respect to the Work.

9.B LIEN RELEASES. GC Section 9.3 is supplemented as follows: Each Application
for Payment shall be accompanied by partial releases of mechanic's Liens in the
form required or authorized by applicable New Jersey law for Work costing not
less than the amount of the Contract Sum (less retention) previously paid by
Owner to Contractor and conditional releases of Liens in the form required or
authorized by applicable New Jersey law for the payments requested in the
Application for Payment. Notwithstanding the foregoing, in no event shall Owner
have any obligation to see to the proper disposition or application of monies
paid by Owner to Contractor.

9.C MAXIMUM AMOUNT OF EACH APPLICATION FOR PAYMENT. The following is added as GC
Section 9.3.1.3: Each Application for Payment (other than the final Application
for Payment) shall be in the sum not to exceed one hundred (100%) of the Cost of
the Work performed during the preceding month. Contractor shall be entitled to
receive the first Four Hundred Fifty Thousand Dollars ($450,000) of the
Contractor Fee and any Contractor Fee in excess of such amount shall be withheld
by Owner as retention and any unused portion shall be released within thirty
(30) days after the date upon which Contractor has achieved Substantial
Completion of the entire Work.

9.D PAYMENT FOR MATERIAL. GC Section 9.3.2 is deleted and replaced with the
following: Payments will be made on account of Materials only when such
Materials have either been (i) incorporated in the Work, or (ii) suitably stored
in a bonded warehouse acceptable to Owner and warehouse receipts therefore have
been delivered to Owner.

9.E OWNER'S OBLIGATION TO PAY CONTRACTOR. GC Section 9.4 is deleted and GC
Sections 9.5.1 and 9.5.2 are modified and supplemented as follows: All
Materials, finishes and processes shall be subject to rejection for just cause
by Owner. Acceptance or rejection of a Material, finish or process shall be
expressed only in writing. Any provision of the Contract Documents to the
contrary notwithstanding, Owner also shall have no obligation to pay Contractor
amounts otherwise payable under this Contract if (i) any of the following
circumstances has occurred, (ii) the occurrence of such circumstances is not
solely caused by Owner's wrongful withholding of amounts payable to Contractor
under this Contract, and (iii) such circumstances have not been remedied or
eliminated to Owner's reasonable satisfaction:

        A. Contractor has failed to make any payment due to Contractor's
        Subcontractors and Suppliers for the material and labor used in the
        Work; or

        B. A claim of Lien has been recorded against Owner's real property, a
        stop notice has been served on Owner, or funds of Owner have been
        garnished or attached in connection with the Work unless Contractor has
        supplied Owner with an acceptable bond; or

        C. Reasonable evidence indicates a probability (i) that a claim of Lien
        will be recorded, a stop notice will be served, or funds of Owner will
        be garnished or attached, or (ii) that Contractor has otherwise failed
        to make payments to Subcontractors and Suppliers, unless Contractor has
        supplied Owner with an acceptable bond; or

        D. Owner, in its reasonable good faith judgment, determines that the
        unpaid amount of the Contract Sum plus the cost of any necessary but
        pending Change Orders (after payment of the amount requested in the
        Application for Payment) will not be sufficient to complete the Work in
        accordance with the Drawings and Specifications, in which case
        Contractor shall perform so much of the Work at its sole cost as is
        necessary to insure that the unpaid amount of the Contract Sum plus the
        cost of any necessary but pending Change Orders will be sufficient to
        complete the Work before Owner shall be obligated to make any further
        payments to Contractor; or

        F. Contractor has failed to perform an obligation on its part to be
        performed under the Contract Documents or under any other contract
        between Contractor and Owner; or

        G. Neither Contractor nor its insurance carrier has reimbursed Owner for
        damage caused to Owner or any other contractor as a consequence of a
        default by





                                      -7-
   8

        Contractor or the acts or omissions of Contractor, or its agents,
        employees, Subcontractors or Suppliers; or

        H. Owner, in its reasonable good faith judgment, determines that the
        Work will not be completed within the Contract Time (as extended by
        excusable delays) through no fault of Owner or Architect; or

        I. Contractor persistently and unreasonably fails to carry out the Work
        in accordance with the Contract Documents.

Until all of the foregoing circumstances are remedied to Owner's satisfaction,
Owner may withhold the amount necessary in Owner's reasonable opinion to protect
Owner from the loss that may be occasioned thereby and, if applicable, may
demand reimbursement of amounts previously paid by Owner to Contractor as
necessary to avoid loss to Owner. When all of the foregoing circumstances are
satisfactorily remedied, payments previously withheld by Owner shall be paid to
Contractor.

9.F METHOD OF PAYMENTS. GC Section 9.6.1 is deleted. Owner shall have the right
to pay Contractor by joint check made payable to Contractor and any
Subcontractor or Supplier to whom all or a portion of such funds may be due;
provided, however, that (i) Contractor shall have no obligation to make payments
by joint check, and (ii) its election to do so in any case shall not constitute
an obligation by Owner to any Subcontractor or Supplier to do so in the future
nor create any contractual relationship whatsoever between Owner and any
Subcontractor or Supplier.

9.G REVIEW OF APPLICATION FOR PAYMENT. GC Section 9.7.1 is deleted and replaced
by the following: Owner may review each Application for Payment and may make
such exceptions, by written notice to Contractor, as Owner reasonably deems
necessary or appropriate under the circumstances then existing. Owner may
withhold a payment to Contractor to the extent that it relates to the correction
of an exception reasonably taken by Owner. If Contractor disputes any exception
to the Application for Payment taken by Owner, Contractor shall nevertheless
continue to diligently prosecute the Work and shall notify Owner of its dispute
in writing. If Contractor fails to deliver a written statement disputing an
exception to an Application for Payment taken by Owner within fourteen (14) days
following notice to Contractor of the exception, Contractor shall be
conclusively presumed to have accepted Owner's exception to the Application for
Payment. Owner shall not be deemed in breach of this Contract by reason of
withholding any payment pursuant to any provision of the Contract Documents,
provided (i) Owner has acted in good faith, (ii) Architect has approved Owner's
action, and/or (iii) the Work in question has been rejected by any governmental
authority.

9.H  [INTENTIONALLY OMITTED.]

9.I  FINAL COMPLETION.  GC Section 9.10 is supplemented as follows:

        9.I.1 Punch List. Immediately prior to the Substantial Completion of the
Work, Contractor shall notify Architect and Owner that the Project is ready for
final inspection. Within three (3) working days following Contractor's notice
that it believes that the Work is substantially complete, Architect and Owner
shall conduct an inspection of the Work and forward to Contractor a
"punch-list", indicating items of the Work requiring completion and items of
unsatisfactory Work. The omission of an item from the "punch-list" shall not
relieve Contractor of its obligation to meet the requirements of this Contract.
All items on the "punch-list" (except for minor, corrective items which do not
in any way interfere with Owner's use and occupancy of the Work) shall be
completed and/or corrected by Contractor to the satisfaction of Architect and
Owner prior to submission of the final Application for Payment.

        9.I.2 Final Payment. Owner shall have no obligation to pay the unpaid
balance of the Contract Sum until (i) the Work and all "punch-list" items have
been completed in accordance with this Contract; (ii) Owner has accepted the
Work and all "punch-list" items; (iii) Contractor has delivered to Owner a
waiver of Lien rights, complying with applicable New Jersey law, conditioned
only upon receipt of the funds requested in the final Application for Payment,
and executed by Contractor and by each person or entity entitled to record a
claim of Lien against Owner's real property (or, if any Subcontractor or
Supplier refuses to furnish such waiver, then a Lien bond in form, substance,
and amount satisfactory to Owner, protecting Owner from claims of Liens by such
persons); (iv) Contractor has delivered to Owner an affidavit in a form
satisfactory to Owner stating that the final payment is being requested and that
the Lien releases and/or bonds delivered to Owner include and cover all
materials, labor, and services for which a Lien could be filed against Owner's
real property; and (v) Contractor has delivered to Owner two (2) complete sets
of "as-built" drawings including separate "as-built" drawings for all
electrical, plumbing and mechanical systems included within the Work which
drawings shall be executed by Contractor and all responsible Subcontractors, all
guaranties, warranties, shop manuals, operating binders and maintenance binders
applicable to the Work and/or





                                      -8-
   9

required by the Specifications. The final payment shall be subject to all
retention provisions of the Contract Documents. Provided all of the foregoing
conditions have been satisfied, except for the completion of minor, corrective
"punch-list" items which do not in any way interfere with Owner's use and
occupancy of the Work, as distinguished from incomplete items, Owner may
withhold from the final payment an amount equal to twice the cost of correction
of all such items until the last of the items has been corrected. If Contractor
fails to make such corrections within thirty (30) days after the final payment,
then Owner may make the corrections and deduct the costs from the amount
withheld therefor.

10.A HAZARDOUS MATERIALS. GC Section 10.1.4 is deleted and GC Sections 10.1.2
and 10.1.3 are supplemented. Wherever used in GC Sections 10.1.2 and 10.1.3, the
words, "asbestos or polychlorinated biphenyl (PCB)" are replaced with "hazardous
materials not disclosed by the Contract Documents and not placed at the Project
sites by Contractor or Subcontractor or any person under the control of either
of them." Contractor and each Subcontractor (i) shall not cause or permit any
hazardous material to be brought upon the Project sites or used in the Work
without the prior written consent of Owner, and (ii) shall comply with all Laws
regarding the use, storage, transportation, exposure of employees to, and
disposal of hazardous materials. Owner shall use reasonable efforts to notify
Contractor in writing of any and all hazardous materials brought upon the
Project Site, at any time prior to the Substantial Completion of the entire
Work, by Owner or its employees or agents. As used in this paragraph, the term
"hazardous material" shall mean any hazardous or toxic substance, material or
radioactive material which is or becomes regulated by any local, federal,
governmental authority.

10.B PROTECTION OF PERSONS AND PROPERTY. GC Section 10.2 is supplemented and
modified as follows: Contractor assumes all risk of loss of, or damage to, its
materials or equipment and the materials and equipment of its Subcontractors,
Suppliers, and employees due to theft or vandalism or malicious mischief and
shall furnish any watchman's services reasonably required to protect the Work.
Until incorporated into the Work, all materials ordered by Contractor or any of
its Subcontractors which are delivered to the Project sites shall be the
responsibility of Contractor and its Subcontractors, who shall provide for the
care, protection, and security for such materials, and shall bear the risk of
loss with respect to such materials, until they are incorporated into the Work.

11.A CONTRACTOR'S INSURANCE. GC Section 11.1 and Section 11.2 are deleted and
replaced by the following: 11.1 Contractor's Liability Insurance.

Contractor shall at his expense, procure and maintain insurance on all of his
operations, in insurance companies with a Best's Insurance Rating of A- or
better or otherwise acceptable to Owner, as follows:

(a)     Workers' Compensation and Employers Liability Insurance. Workers'
        Compensation insurance shall be provided as required by any applicable
        law or regulation. Employers Liability insurance shall be provided in
        amounts not less than $1,000,000 each accident for bodily injury by
        accident, $1,000,000 policy limit for bodily injury by disease and
        $1,000,000 each employee for bodily injury by disease.

        If there is an exposure of injury to Contractor's employees under the
        U.S. Longshoremen's and Harbor Workers' Compensation Act, the Jones Act
        or under laws, regulations or statutes applicable to maritime employees,
        coverage shall be included for such injuries or claims.

(b)     General Liability Insurance. Contractor shall carry Commercial General
        Liability insurance covering all operations by or on behalf of
        Contractor providing insurance for bodily injury liability and property
        damage liability for the limits of liability indicated below for:

        (1) premises and operations;

        (2) products and completed operations;

        (3) contractual liability insuring the obligations assumed by Contractor
            in this Agreement;

        (4) broad form property damage (including completed operations);

        (5) explosion, collapse and underground hazards; and

        (6) personal injury liability (with deletion of the exclusion for
            liability assumed under contract).

        The limits of liability shall not be less than:

            $5,000,000 each occurrence (combined single limit for bodily injury
               and property damage)

            $5,000,000 for personal injury liability

            $5,000,000 aggregate for products-completed operations

            $5,000,000 general aggregate





                                      -9-
   10

        The "general aggregate" limit shall apply separately to Contractor's
        work under the Contract. Contractor shall not obtain a claims made
        policy without the express prior written consent of Owner.

        Owner, its officers, directors and employees shall be named as
        additional insureds. The policy shall be endorsed to stipulate that the
        insurance afforded the additional insureds shall apply as primary
        insurance and that any other insurance maintained by Owner shall be
        excess only and shall not be called upon to contribute with this
        insurance.

        Coverage for Owner, its officers, directors and employees as additional
        insureds shall be provided by a policy provision or by an endorsement
        providing coverage at least as broad as Additional Insured (Form B)
        endorsement form CG 2010 as published by the Insurance Services Office
        (ISO).

        Contractor shall continue to maintain liability insurance for the
        products-completed operations hazard for three years following
        completion of and acceptance of the Work by Owner. Contractor shall
        furnish Certificates of Insurance annually to Owner at the beginning of
        each of these subsequent three years as evidence of this required
        insurance.

(c)     Automobile Liability Insurance. (Bodily Injury and Property Damage
        Liability) including coverage for all owned, hired and non-owned
        automobiles. The limits of liability shall not be less than $1,000,000
        combined single limit for each accident.

(d)     Umbrella Liability and/or Excess Liability Insurance. Contractor shall
        carry Umbrella Liability and/or Excess Liability Insurance for not less
        than the following limits in excess of the limits provided by
        Contractor's Commercial General Liability and Auto Liability policies:

        $5,000,000   each occurrence (combined single limit for bodily injury
                     and property damage)

        $5,000,000   aggregate for products-completed operations

        $5,000,000 general aggregate

        The "general aggregate" limit shall apply separately to Contractor's
        work under this Contract.

        Owner, its officers, directors, and employees shall be additional
        insureds under Contractor's Umbrella Liability or Excess Liability
        policy and the policy shall provide that the insurance afforded such
        additional insureds shall apply as primary insurance and that any other
        insurance maintained by Owner will be excess only and will not
        contribute with this insurance.

(e)     The limits of liability required by this paragraph 11.1 may be satisfied
        by a combination of limits provided by the primary Commercial General
        Liability and Auto Liability policies plus limits provided by Umbrella
        or Excess Liability policies.

(f)     Certificates of Insurance shall be furnished by Contractor to Owner
        before any Work is commenced hereunder by Contractor. The Certificate of
        Insurance shall provide that there will be no cancellation or
        non-renewal of coverage without thirty (30) days prior written notice to
        Owner.

        The Certificate or Insurance furnished as evidence of Commercial General
        Liability insurance carried by Contractor shall include a copy of the
        policy provision or the additional insured endorsement adding Owner as
        additional insured and providing that such insurance applies as primary
        insurance and will not call upon other insurance maintained by Owner for
        contribution.

(g)     If Contractor does not comply with the insurance requirements of this
        paragraph 11.1, Owner may, at his option, provide insurance coverage to
        protect Owner and Contractor and charge Contractor for the cost of that
        insurance. The required insurance shall be subject to the approval of
        Owner, but any acceptance of insurance certificates by Owner shall not
        limit or relieve Contractor of the duties and responsibilities assumed
        by it under this Contract.

(h)     Subcontractors Insurance. Contractor shall require that each of its
        subcontractors obtain and maintain at all times during the period
        Subcontractor is performing Work for Contractor the insurance described
        in Subsections (a) - (d) above.

11.B  [INTENTIONALLY OMITTED.]

11.C.1 OWNER'S INSURANCE. GC Sections 11.3.2, 11.3.3, 11.3.4, 11.3.6, 11.3.9
(first two sentences only), and 11.3.10 (the words "unless one of..." and
following to end of paragraph only) are deleted. The words "as fiduciary" are
deleted wherever they appear in GC Section 11.3 and the remainder of GC Section
11.3 is supplemented as follows: Owner's insurance (i) shall be placed promptly
in the names of the Owner and at the Owner's option, any other person(s)





                                      -10-
   11

whom the Owner deems to have an insurable interest in the Owner's real property
and/or the Work, or any part thereof, and (ii) shall be payable as the
respective interests of said named insureds may appear. The policy shall be
retained and held by the Owner and shall not insure against loss, damage, or
destruction of any tools, supplies, equipment or temporary structures located
in, on or about the Owner's real property, which are the property of Contractor,
or any Subcontractor, Supplier, or person directly or indirectly employed by or
under contract with Contractor or its Subcontractors and Suppliers. A copy of
any policy (or certificate thereof) required of Owner by the Contract Documents
shall be delivered to Contractor upon demand.

11.C.2  [INTENTIONALLY OMITTED.]

11.D  [INTENTIONALLY OMITTED.]

12.A UNCOVERING WORK. GC Section 12.1 is modified as follows: Contractor shall
give Architect and Owner at least twenty-four (24) hours advance notice if
uninspected Work will be covered by other Work. Contractor shall pay for the
cost of uncovering any Work for Architect's inspection if Contractor failed to
give such notice, regardless of whether or not the inspected Work conforms to
the Contract Documents.

12.B CORRECTION OF WORK. GC Section 12.2.4 is supplemented as follows: all Work
not conforming to the Contractor Documents, including without limitation
substitutions not properly approved and authorized shall be considered
defective. Contractor shall repair damage to Owner's property caused by any Work
furnished by the Contractor, which does not conform to the Specifications or the
Contract Documents.

13.A GOVERNING LAW; INTERPRETATION. GC Section 13.1.1 is supplemented as
follows. The invalidity of any provision of the Contract Documents (other than
the amount of the Contract Sum) shall not impair or affect in any manner
whatsoever the validity or enforceability of any other provision of the Contract
Documents.

13.B SUCCESSORS AND ASSIGNS. GC Section 13.2.1 (second and third sentences only)
are deleted. Without Contractor's consent, Owner and any permitted assignee or
successor to Owner hereunder shall have the right to assign the Contract
Documents, or any interest therein, to (i) any lender to Owner, (ii) the owner
of the fee interest in the Project or (iii) any corporation, partnership or
other person which is under common control with Owner or which is controlled by
Owner. At its discretion, but only with Contractor's consent (which consent
shall not be unreasonably withheld or delayed), Owner and any permitted assignee
or successor to Owner, shall have the right to assign the Contract Documents, or
any interest therein, to any other successor owner of the Project sites.
Contractor shall execute an acknowledgment of any assignment by Owner in a form
reasonably requested by Owner. Owner is relying upon the professional standing
and ability of Contractor in the performance of the Work. Consequently,
Contractor shall have no right to assign the Contract Documents, sublet them as
a whole, or assign any monies due or to become due to Contractor under the
Contract Documents, without the prior written consent of Owner, which consent
may be withheld in Owner's sole discretion. The parties acknowledge that
Contractor was known as Marshall Contractors, Inc. prior to its acquisition by
Fluor Daniel, Inc. and is now a wholly owned subsidiary of Fluor Daniel, Inc.
All of the rights and obligations of Marshall Contractors, Inc. under the
Contract Documents and in connection with the Work have been assumed by
Contractor and Contractor shall perform and be responsible for all of the Work,
including, without limitation, the portion of the Work previously performed by
Marshall Contractors, Inc. Contractor represents and warrants to Owner that the
financial standing and net worth of Contractor are substantially similar to that
of Marshall Contractors, Inc.

13.C LIMITATION ON CONSEQUENTIAL DAMAGES. Notwithstanding anything in the
Contract Documents to the contrary, Contractor will not be responsible or held
liable to Owner or its affiliates for indirect, incidental, or consequential
damages of any nature (collectively, "Consequential Damages"), except for any
liquidated damages payable by Contractor to Owner pursuant to Article 14 hereof,
which arise out of or relate in any way to the Agreement and the Contract
Documents (including any breach thereof) and/or the Work performed by
Contractor, which (i) are not covered by the insurance that Contractor is
required to carry under the Contract Documents, including, without limitation,
Section 11.A hereof, and any other Project-specific insurance actually carried
by Contractor, and (ii) exceed Five Hundred Thousand Dollars ($500,000) in the
aggregate, it being understood that the liability limitations set forth herein
shall not apply to any liquidated damages payable by Contractor to Owner
pursuant to Article 14 hereof.

14. LIQUIDATED DAMAGES. CONTRACTOR RECOGNIZES THAT OWNER IS RELYING UPON
CONTRACTOR TO COMPLETE THE ENTIRE WORK (EXCEPT FOR THE LABORATORY FURNITURE
INSTALLATION) BY THE SCHEDULED SUBSTANTIAL COMPLETION





                                      -11-
   12

DATE AS SET FORTH IN THE AGREEMENT. CONTRACTOR ACKNOWLEDGES THAT IN THE EVENT
SUCH WORK IS NOT SUBSTANTIALLY COMPLETED BY THE SCHEDULED SUBSTANTIAL COMPLETION
DATE, OWNER SHOULD BE ENTITLED TO COMPENSATION FOR THE DETRIMENT RESULTING FROM
CONTRACTOR'S FAILURE TO SUBSTANTIALLY COMPLETE THE WORK BY SUCH TIME AND THAT
THE CALCULATION OF SUCH DAMAGE WOULD BE EXTREMELY DIFFICULT AND IMPRACTICABLE.
THEREFORE, THE PARTIES AGREE TO LIQUIDATE DAMAGES. IF THE ENTIRE WORK (EXCEPT
FOR THE LABORATORY FURNITURE INSTALLATION) IS NOT SUBSTANTIALLY COMPLETED BY THE
SCHEDULED SUBSTANTIAL COMPLETION DATE, THEN OWNER SHALL BE ENTITLED TO
LIQUIDATED DAMAGES, UNTIL SUCH TIME AS SUCH WORK IS SUBSTANTIALLY COMPLETED, IN
THE FOLLOWING TIERED AMOUNTS: (I) TWO THOUSAND DOLLARS ($2,000) PER DAY FOR EACH
OF THE FIRST SEVEN (7) CALENDAR DAYS THAT THE SUBSTANTIAL COMPLETION OF SUCH
WORK IS DELAYED BEYOND THE SCHEDULED SUBSTANTIAL COMPLETION DATE, (II) FIVE
THOUSAND DOLLARS ($5,000) PER DAY FOR EACH OF THE NEXT SEVEN CALENDAR DAYS
(I.E., THE EIGHTH (8TH) THROUGH FOURTEENTH (14TH) CALENDAR DAYS FOLLOWING THE
SCHEDULED SUBSTANTIAL COMPLETION DATE) THAT SUCH WORK IS DELAYED BEYOND THE
SCHEDULED SUBSTANTIAL COMPLETION DATE, AND (III) TEN THOUSAND DOLLARS ($10,000)
PER DAY FOR EACH CALENDAR DAY THEREAFTER (I.E., THE FIFTEENTH (15TH) CALENDAR
DAY AND EACH CALENDAR DAY THEREAFTER FOLLOWING THE SUBSTANTIAL COMPLETION DATE)
THAT SUCH WORK IS DELAYED BEYOND THE SCHEDULED SUBSTANTIAL COMPLETION DATE. ALL
OF THE FOREGOING LIQUIDATED DAMAGES ARE CUMULATIVE. FOR EXAMPLE, IF THE
SCHEDULED SUBSTANTIAL COMPLETION DATE IS DECEMBER 19, 1997, AND ALL OF THE WORK
(EXCEPT FOR THE LABORATORY FURNITURE INSTALLATION) IS NOT SUBSTANTIALLY
COMPLETED UNTIL JANUARY 9, 1998, THEN OWNER WOULD BE ENTITLED TO LIQUIDATED
DAMAGES FROM THE CONTRACTOR IN THE AMOUNT OF $119,000 ($14,000 + $35,000 +
$70,000). BOTH PARTIES ACKNOWLEDGE AND AGREE THAT SUCH AMOUNTS ARE PRESENTLY
REASONABLE SUMS CONSIDERING ALL OF THE CIRCUMSTANCES EXISTING AS OF THE
EXECUTION OF THIS ADDENDUM, INCLUDING THE RELATIONSHIP OF THE AMOUNT TO THE
RANGE OF HARM TO OWNER THAT REASONABLY COULD BE ANTICIPATED AND THE ANTICIPATION
THAT PROOF OF ACTUAL DAMAGES WOULD BE COSTLY OR INCONVENIENT. BY EXECUTING THIS
PROVISION AS INDICATED BELOW, EACH PARTY SPECIFICALLY CONFIRMS THE ACCURACY OF
THE STATEMENTS MADE ABOVE AND THE FACT THAT EACH PARTY FULLY UNDERSTOOD THE
CONSEQUENCES OF THIS LIQUIDATED DAMAGES PROVISION AT THE TIME THIS ADDENDUM WAS
MADE.

CONTRACTOR'S INITIALS        SJB
                       ---------------
OWNER'S INITIALS        DCY
                 ----------------





                            [Signature Page Follows]



   13

        IN WITNESS WHEREOF, the parties hereto have executed this Addendum
intending to be bound thereby.



CONTRACTOR                              OWNER

ADP MARSHALL, INC.                      VIVUS, INC.


By: /s/ S. JAMES BUSAM                  By:  /s/ DAVID C. YNTEMA
   -------------------------------         ----------------------------------

Printed                                 Printed
Name:   S. James Busam                  Name:  David C. Yntema
     -----------------------------           --------------------------------

Title:  Senior Vice President           Title: Chief Financial Officer
      ----------------------------            -------------------------------

Date:   December 18, 1997               Date:  December 19, 1997
        --------------------------           --------------------------------

EX-10.33

   1
                                                                   EXHIBIT 10.33

                                  INNOVEX INC.


                                       AND


                                   VIVUS, INC.




                                   SALES FORCE

                               SERVICES AGREEMENT


   2
        This Sales Force Services Agreement ("Agreement"), effective as of
February 1, 1998, is by and between Vivus, Inc., with offices at 605 East
Fairchild Drive, Mountain View, CA 94043 ("Vivus") and, Innovex Inc., whose
principal office is at 10 Waterview Boulevard, Parsippany, NJ 07054 ("Innovex").

        WHEREAS, Vivus, a corporation organized and existing under the laws of
Delaware is engaged, in research, development, manufacture and marketing of
pharmaceutical products;

        WHEREAS, Innovex, a corporation organized and existing under the laws of
Delaware, is a Contract Pharmaceutical Organization (C.P.O.), providing
integrated pharmaceutical services; and

        WHEREAS, Vivus desires to acquire and Innovex desires to provide sales
force services on the terms and conditions contained in this Agreement;

        NOW THEREFORE, in consideration of the following covenants, promises and
obligations, Vivus and Innovex agree:


1.0     DEFINITIONS

        When used in this Agreement, the following terms and phrases shall have
        the meanings identified below:

        1.1     "Affiliate" shall mean any corporation or business entity
                controlled by, controlling, or under common control with (e.g.,
                controlled by a party which controls a party to this Agreement)
                a party to this Agreement. For this purpose, "control" shall
                mean direct or indirect beneficial ownership of at least fifty
                percent (50%) of the voting stock or income interest in such
                corporation or other business entity, or such other relationship
                as, in fact, constitutes actual control.

        1.2     "Product" shall mean MUSE (alprostadil) or any other product
                whose sales promotion is assigned to Innovex by mutual agreement
                with Vivus.

        1.3     "Project Operations Manual" shall mean a document produced by
                Innovex and reasonably acceptable to Vivus, containing the
                objectives and targets for the Services, and reporting and
                administrative standards.

2.0     SERVICES

        2.1     Vivus retains Innovex as an independent contractor for the sole
                purpose of providing the sales force services on the terms and
                conditions of this Agreement, including the responsibilities and
                obligations set forth in Schedules I and III (the "Services").
                Vivus and Innovex are not partners, not co-employers and not
                agents for one another, and


   3
               neither company has the power to exercise control over the
               activities of the other company's employees. Innovex Personnel
               (as defined in Section 4.1) shall not have the authority to make
               any commitments whatsoever on behalf of Vivus except for the
               Services directly permitted by this Agreement.

        2.2     Vivus reserves the right to solicit orders from and sell
                directly to any customer and all distributors or other
                intermediaries.

3.0     COMPENSATION AND EXPENSES

        3.1     As compensation for the Services performed, Vivus shall pay
                Innovex in the manner and amounts specified in Schedule V. If
                the scope of the Services, or the time necessary to perform the
                Services changes, the compensation to be paid by Vivus will be
                adjusted as mutually agreed upon in writing by Vivus and
                Innovex.

        3.2     All invoices are strictly net of any taxes imposed on services,
                and payment in full of all invoices must be made within thirty
                (30) days of the date of the invoice.

               -      If the method of payment is by direct transfer to the
                      Innovex bank account, the wire transfer instructions are
                      as follows:

                      Innovex Inc.
                      Accounting Number:    [*]
                      ABA Number:   [*]
                      Branch Banking & Trust Co., Raleigh, NC

               -      Innovex Federal Employment ID Number is [*]

               -      Payments by check should be mailed to the Innovex Lockbox

                      Innovex, Inc.
                      P.O. Box 890062
                      Charlotte, NC 28289-0062


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


                                       -2-


   4
               -      Payments by check may be remitted via Federal Express to 
                      Innovex's Lockbox as follows:

                      Innovex Inc.
                      Branch Banking & Trust Co.
                      1251 Arrowpine Drive
                      Charlotte, NC 28273
                      Attn: Wholesale Lockbox Dept. (Box 890062)


        3.3     Vivus and Innovex agree that if payment is not made within
                thirty (30) days of the date of the invoice, Interest shall
                accrue on a daily basis at [*]. If there is a rational basis for
                Vivus to dispute the amount of an invoice, or any portion
                thereof, no interest shall accrue on the amount in dispute until
                thirty days after the dispute is resolved. If the period of
                non-conforming payment [*], Innovex may, at its sole discretion
                and without prejudice to any other rights or remedies, [*]
                notice of intent to suspend the Services which specifically
                references this Section 3.3, and if the non-conforming payment
                continues [*].

4.0  PERSONNEL

        4.1     For the purposes of this Agreement, any individual who is
                authorized to perform any part of the Services on behalf of
                Innovex is considered Innovex Personnel ("Innovex Personnel").

        4.2     In the event that any Innovex Personnel providing any of the
                Services referred to in this Agreement should be employed by
                Vivus or an Affiliate then a fee may be payable to Innovex as
                provided in Schedule V.

5.0  CONFIDENTIAL INFORMATION

        5.1     Innovex and Vivus agree that any information relating to the
                technology, research, products, legal affairs, marketing plans,
                business affairs, contracts or finances of the other or
                Affiliates or of any suppliers, agents, distributors, licensees
                or customers of the other which is (a) marked as confidential,
                (b) otherwise represented by the disclosing party as
                confidential either before or within a reasonable time after its
                disclosure, or (c) otherwise represents proprietary or
                confidential information shall be Confidential Information
                ("Confidential Information"). Innovex and Vivus agree; (i) to
                hold Confidential Information in strict confidence and disclose
                it only on a need-to-know basis to Affiliates, subcontractors
                and employees who are under a written obligation to maintain the
                confidentiality of the information; (ii) to make or copy
                materials containing Confidential Information only as reasonably
                required in connection with this Agreement; and (iii) to deliver
                to the disclosing party or destroy any materials, or copies

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


                                       -3-


   5
        of materials, containing Confidential Information when they are no
        longer needed in connection with the Agreement.


     5.2 The obligations of the parties in Section 5.1 shall not extend to any
Confidential Information:

        -       which can be shown by written documentation to have been known
                by the recipient prior to its receipt from the other;

        -       which is public or lawfully becomes generally available to the
                public through no fault of the party;

        -       which is lawfully acquired from a third party without being made
                subject to an obligation of confidence by the third party;

        -       which by mutual written agreement is released from the
                confidentiality provisions of this Agreement; or

        -       which is required to be disclosed under any statutory,
                regulatory or judicial requirement, and in that event,
                confidentiality will be preserved and protected to the extent
                possible; additionally, notice will be provided to the other
                party prior to any such disclosure.

                The obligations of Innovex and Vivus under Section 5.2 of this
                Agreement shall survive the termination or expiration of this
                Agreement for a period of five (5) years.

     5.3 It is expressly agreed that neither party transfers to the other party
by operation of this Agreement any patent right, copyright or other proprietary
right either party owns as of the commencement date of this Agreement. Vivus and
Innovex agree that [*].

6.0  INDEMNIFICATION

     6.1 Vivus shall indemnify, defend and hold harmless Innovex, its Affiliates
and its and their respective directors, officers, employees and agents (each, an
"Innovex Indemnitees") against all losses, claims, actions, damages,
liabilities, costs and expenses (including reasonable attorneys' fees and court
costs) (collectively, "Losses") [*]. Notwithstanding the foregoing, Vivus shall
not be required to indemnify Innovex for any Losses to the extent they arise
from the negligence or willful misconduct of Innovex.

     6.2 Innovex shall indemnify, defend and hold harmless, Vivus, its 
Affiliates and its and their respective directors, officers, employees and
agents against Losses [*]. Notwithstanding the

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


                                       -4-


   6
                foregoing, Innovex shall not be required to indemnify Vivus for
                any losses to the extent they arise from the negligence or
                willful misconduct of Vivus.

        6.3     The party seeking indemnification hereunder (the "Indemnified
                Party") shall: (a) give the party obligated to indemnify (the
                "Indemnifying Party") prompt notice of any such claim or lawsuit
                (including a copy thereof) served upon Indemnified Party; and
                (b) cooperate fully with Indemnifying Party and its legal
                representatives in the investigation of any matter the subject
                of indemnification; and (c) shall not unreasonably withhold its
                approval of the settlement of any claim, liability or action by
                Indemnifying Party covered by this Indemnification provision;
                provided however, that Indemnified Party's failure to comply
                with its obligations under this provision shall not constitute a
                breach of this Agreement nor relieve Indemnifying Party of its
                indemnification obligations hereunder, except to the extent, if
                any, that Indemnifying Party's defense of the affected claim,
                action or proceeding was actually and materially impaired
                thereby.

        6.4     Neither Vivus nor Innovex, nor their respective Affiliates,
                directors, officers, employees or agents shall be liable to the
                other for any special, incidental, indirect or consequential
                damages, including, but not limited to the loss of opportunity,
                use, revenue or profit, in connection with this Agreement or the
                Services performed hereunder, even if such damages shall have
                been foreseeable; provided, however, this provision in no way
                relieves or affects the indemnification obligations of either
                Vivus or Innovex with respect to claims brought by third
                parties.

        6.5     Innovex shall not be liable to Vivus for claims or losses [*].

        6.6     The obligations of Innovex and Vivus under Section 6 shall
                survive the termination of the Agreement.

7.0  INSURANCE

     Innovex and Vivus shall [*]. Neither party shall do or omit to do any act,
     matter or thing which could prejudice or render voidable any such
     insurance. Innovex and Vivus shall, upon request by the other, provide a
     certification evidencing the insurance or any renewal. Each party shall
     notify the other party of any cancellation of or material change in any
     such insurance arrangements, if possible, prior to cancellation or material
     change, but in any event, as soon as possible.

8.0  IMPROPER ACTIVITIES

     If either party shall in its reasonable judgment determine that any of the
     personnel, employees or subcontractors performing obligations pursuant to
     this Agreement are being used for purposes or are involved in any activity
     including but not limited to conduct which is unethical, illegal, immoral

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


                                       -5-


   7
     or which may harm the other party's standing or reputation, then that party
     shall give notice to the other specifying the purpose or activity of the
     complaint and requiring that the other cease such activity. The offending
     party shall use its best efforts to cease such activity immediately after
     having received notice and in every instance such cessation shall take
     place within seven days after having received notice. Cessation of the
     activity and/or termination of the offending personnel, employee or
     subcontractor will generally be a reasonable response to such a complaint.

9.0  TERM & TERMINATION

        9.1     The initial term of this Agreement will begin on the date first
                above written and continue until [*]. Vivus will have the option
                to extend the term of the Agreement for up to [*] upon the terms
                set forth herein by giving Innovex written notice of Vivus's
                exercise of the option to extend, no later than [*].

        9.2     Either party may terminate this Agreement by written notice at
                any time if the other party defaults in the performance of its
                material obligations under this Agreement. In the event of such
                default, the party declaring the default shall provide the
                defaulting party with written notice setting forth the nature of
                the default, and the defaulting party shall have [*] to cure the
                default. If the defaulting party fails to cure the default
                within the foregoing time periods, the other party may terminate
                this Agreement by written notice to the defaulting party, which
                notice shall be effective upon receipt.

        9.3     Vivus may terminate this Agreement [*].

        9.4     Either party may terminate this Agreement by written notice to
                the other party, effective upon receipt with no right to cure
                the default, if the other party files a petition for bankruptcy,
                reorganization or arrangement under any state statute, or makes
                an assignment for the benefit of creditors or takes advantage of
                any insolvency statute or similar statute, or if a receiver or
                trustee is appointed for the property and assets of the party
                and the receivership proceedings are not dismissed within sixty
                (60) days of such appointment.

        9.5     Termination of the Agreement for whatever reason shall not
                affect the accrued rights of either Innovex or Vivus arising
                under or out of this Agreement and all provisions which
                expressly or by implication survive this Agreement shall remain
                in full force and effect.

10.0 FORCE MAJEURE

     Innovex and Vivus shall be excused for the period of any delay in the
     performance of any obligations under this Agreement when prevented from
     performing such obligations by cause or causes beyond their reasonable
     control, including, without limitation, strike, lockout or other labor

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


                                       -6-


   8
     disturbance (other than a strike, lockout or other labor disturbance
     involving Innovex Personnel), flood, riot, insurrection, civil commotion,
     fire, accident, act of war (whether war is declared or not), embargo, delay
     of carrier, inability to obtain material, failure of power or natural
     source of supply, act, injunction, or restraint of government, act of God
     or any other casualty. The party affected thereby shall give the other
     party prompt written notice specifying the extent to which its performance
     will likely be affected. The party affected shall exert reasonable efforts
     to eliminate, cure or overcome any such cause and resume performance as
     soon as practicable.

11.0 RETURN OF MATERIALS

     Innovex shall within sixty (60) days of termination or expiration of this
     Agreement, at the request of Vivus, destroy or return all materials
     belonging to Vivus, including the materials discussed in Section 5.3, other
     than those which Innovex has a legal obligation to keep.

12.0 NOTICES

     All notices under this Agreement shall be in writing and shall be deemed
     duly given when received, if personally delivered or sent by facsimile
     transmission, or one business day after the date mailed by overnight
     courier, and addressed to the parties at the following addresses:

         If to Vivus send to:

         Vivus, Inc.
         605 East Fairchild
         Mountain View, CA 94043
         Attention:Julian Gangolli, Vice President, Marketing
         Phone:   (650) 934-5200
         Fax:     (650) 934-5211

         with a copy in the case of disputes or legal matters to:

         Robert Brownell
         Wilson Sonsini Goodrich & Rosati
         650 Page Mill Road
         Palo Alto, CA 94304
         Phone:   (650) 493-9300
         Fax:     (650) 493-6811


                                       -7-


   9
         If to Innovex send to:

         Innovex, Inc.
         10 Waterview Boulevard
         Parsippany, NJ 07054
         Attention: David Stack, President
         Phone:   (973) 257-4570
         Fax:     (973) 257-4581

         with a copy in the case of disputes or legal matters to:

         L. Stephen Garlow
         General Counsel
         Innovex Inc.
         11250 Corporate Avenue
         Lenexa, KS 66219
         Phone:   (913) 752-8620
         Fax:     (913) 752-8699

         or to such other destination as either party may hereafter notify the
         other party in accordance with this section.

13.0 ASSIGNMENT

     Neither party may assign this Agreement without the prior written consent
     of the other party, except that either party may assign this Agreement
     without consent to a successor in interest to substantially all of the
     business of that party to which the subject matter of this Agreement
     relates.

14.0 WARRANTIES & REPRESENTATIONS

        14.1    Each party warrants and represents to the other that it has the
                full right and authority to enter into this Agreement and that
                it is not aware of any impediment that would inhibit its ability
                to perform its obligations under this Agreement.

        14.2    Innovex and Vivus agree to undertake all of their respective
                obligations under this Agreement in conformance with generally
                accepted business standards, and in material conformance with
                all applicable local, state and federal laws and regulations, as
                amended, including employment laws, tax laws, and the Federal
                Equal Employment Opportunity Act, the Fair Labor Standards Act,
                the Food Drug and Cosmetics Act and the Prescription Drug
                Marketing Act.


                                       -8-


   10
        14.3    Vivus warrants and represents that it has no knowledge of the
                existence of any U.S. patent owned or controlled by anyone other
                than Vivus or an Affiliate which covers the Product and would
                prevent Vivus from making, using, or selling the Product or
                would prevent Vivus or Innovex from promoting or detailing the
                Product.

        14.4    Vivus acknowledges that Innovex will require documents, data,
                records, resources, direction and cooperation by Vivus in order
                to properly perform the Services. Innovex is not responsible for
                errors, delays, or other consequences to the extent such errors,
                delays, or other consequences arise solely from the failure of
                Vivus to provide such documents, data, records, resources,
                direction or cooperation.

        14.5    Innovex acknowledges its responsibility to and will (i) maintain
                all necessary personnel and payroll records for Innovex
                Personnel; (ii) compute wages and withhold applicable Federal,
                State, and local taxes and Federal FICA payments for Innovex
                Personnel; (iii) remit employee withholdings to the proper
                governmental authorities and make employer contributions for
                Federal FICA and Federal and State unemployment insurance
                payments for Innovex Personnel; (iv) pay net wages and fringe
                benefits, if any, directly to Innovex Personnel; and (v) provide
                for liability and Workers' Compensation insurance coverage for
                Innovex Personnel.

15.0 ADVERSE DRUG EXPERIENCE OR PRODUCT COMPLAINTS

     If Innovex Personnel become aware of any adverse drug experience reports or
     product complaints involving the use of any Vivus product, whether or not
     related to the Product under this Agreement, they shall immediately inform
     Vivus in accordance with Vivus procedures. When Vivus communicates
     information concerning adverse drug experience reports to its own sales
     force, such information shall be communicated to Innovex and Innovex
     Personnel, in a manner consistent with the Vivus SOPs.

16.0 ARBITRATION

     Resolution of disputes concerning any aspect of the Services or the
     Agreement, excluding termination, shall be accomplished by good faith
     negotiations between Vivus and Innovex, within thirty (30) days of notice.
     If necessary, thereafter, resolution of such disputes shall be
     accomplished, at written request of either party to the other party, by
     binding arbitration, which shall not interfere with the timely rendering of
     the Services. Arbitration will be pursuant to the Rules of Conciliation and
     Arbitration of the American Arbitration Association, using a three-person
     panel of arbitrators, one (1) to be designated by Vivus, one (1) by
     Innovex, and a third to be agreed upon by the other two (2) arbitrators. If
     the two party-appointed arbitrators are unable to agree on a third
     arbitrator within thirty (30) days after the second arbitrator is
     appointed, the third arbitrator shall be selected by the American
     Arbitration Association.




                                       -9-


   11
[*]


18.0 TERMINATION OF PREVIOUS CONTRACT

     Innovex and Vivus hereby mutually agree and acknowledge that the Sales
     Force Services Agreement between the parties, dated October 31, 1997, shall
     be deemed terminated as of January 31, 1998.

19.0 GENERAL PROVISIONS

        19.1    This Agreement shall be governed by and construed in accordance
                with the laws of the State of Delaware, without giving effect to
                the principles of conflict of laws.

        19.2    Neither party's waiver of the other's breach of any term,
                covenant or condition contained in this Agreement shall be
                deemed to be a waiver of any subsequent breach of the same or
                any other term, covenant or condition in this Agreement.

        19.3    If any part or parts of this Agreement are held to be invalid,
                the remaining parts of the Agreement will continue to be valid
                and enforceable.

        19.4    The headings of this Agreement are used only as a matter of
                convenience, and in no way define, limit, construe or describe
                the scope or intent of any section of this Agreement.

        19.5    The entire contents of Attachment A and all the Schedules
                attached hereto shall be incorporated herein by this reference,
                as if fully set forth in this Agreement.

        19.6    Except for the Sales Force Services Agreement between the
                parties dated October 31, 1997, this Agreement, and the
                materials incorporated herein by reference, constitute the
                entire agreement of the parties and supersedes all prior
                contracts, agreements and understandings relating to the same
                subject matter between the parties. The parties intend this
                Agreement to be a complete statement of the terms of their
                agreement, and no change or modification of any of the
                provisions of this Agreement shall be effective unless it is in
                writing and signed by a duly authorized representative of the
                party against which it is to be enforced.

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



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


                                      -10-


   12
     IN WITNESS WHEREOF, Innovex and Vivus have executed this Agreement,
effective as of the date first above written.



INNOVEX INC.

By: /s/ DAVE STACK                     Date: 3/16/98
   -------------------------------  
     Dave Stack
     President, General Manager



VIVUS, INC.


By: /s/ JULIAN S. GANGOLLI             Date: 3/13/98
   -------------------------------  
     Julian S. Gangolli
     Vice President, Marketing and Sales


                                      -11-


   13
                                   SCHEDULE I

                     INNOVEX RESPONSIBILITIES & OBLIGATIONS

                               VIVUS SALES PROJECT


1. Innovex will provide Innovex Personnel according to the following schedule
which is subject to any adjustments mutually agreed upon between the parties:

     -   [*] Territory Representatives, as follows:
         -   [*] employed on [*].
         -   [*].
     -   [*] District Managers [*].
     -   [*] Associate Project Manager, [*].
     -   [*] Project Manager, [*].

     The parties may agree in writing to increase or decrease the number of
Territory Representatives and District Managers on the same terms and conditions
herein.

2.   [*]

3. Innovex will be responsible for the following:

     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]

4.   [*]

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


                                      -12-


   14
                                   SCHEDULE II

                      VIVUS RESPONSIBILITIES & OBLIGATIONS

                               VIVUS SALES PROJECT


1. Vivus will be responsible [*]

2. Vivus will provide [*]. Vivus will be responsible [*].

3. Vivus shall use all reasonable endeavors to ensure that [*].

4.   [*]

     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]

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


                                      -13-


   15
                                  SCHEDULE III

                               MUTUAL OBLIGATIONS

                               VIVUS SALES PROJECT


1.   Vivus retains Innovex as an independent contractor for the sole purpose of
     providing the sales force services on the terms and conditions of this
     Agreement, including the responsibilities and obligations set forth in
     Schedules I and III (the "Services"). Vivus and Innovex are not partners,
     not co-employers, and not agents of one another, and neither company has
     the power to exercise control over the activities of the other company's
     employees.

2.   [*]

     a.  [*]

     b.  [*]

     c.  [*]

     d.  [*]

     e.  [*]

3.   Innovex and Vivus [*]

4.   Innovex and Vivus will agree [*]

5.   As a general rule, [*]

6.   Computer Hardware and Software.

     a.  [*]

     b.  [*]

     c.  [*]

7.   Transfer of Innovex Personnel.

     a.  [*]

     b.  [*]

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


                                      -14-


   16
     c.  [*]


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


                                      -15-


   17
                                   SCHEDULE IV

                                ROLE DEFINITIONS

                               VIVUS SALES PROJECT


1.   Territory Representative

     RESPONSIBILITIES AND DUTIES:

     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]

     SKILLS:

     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]

2.   District Manager

     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]

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


                                      -16-


   18
     -   [*]
     -   [*]
     -   [*]
     -   [*]

3.   Project Manager

     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]

4.   Associate Project Manager

     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]
     -   [*]


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


                                      -17-


   19
                                   SCHEDULE V

                                      FEES

                               VIVUS SALES PROJECT


1.   Fees. Vivus shall pay to Innovex the following Fees in connection with the
Services from [*].

     a.  [*]

         -   [*]
         -   [*]
         -   [*]

         [*]

         [*]

     b.  [*]

     c.  [*]

         [*]

     d.  [*]

2.   [*]

3.   [*]

4.   [*]

5.   [*]

6.   [*]


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


                                      -18-


   20
                                  ATTACHMENT A
                     INNOVEX SALES FORCE EXPENSE ALLOCATION
                                FEBRUARY 1, 1998
                                 PROJECT # 8165




                                                                      INNOVEX        BILLABLE        VIVUS
                             CATEGORY                                  DIRECT      (PASSTHROUGH)     DIRECT
                             --------                                  ------      -------------     ------
                                                                                            
Auto Costs: monthly allowance, mileage, parking and tolls               [*]             [*]           [*]
Back office, infrastructure                                             [*]             [*]           [*]
Call Reporting and Sample Accountability System                         [*]             [*]           [*]
Drug Screens                                                            [*]             [*]           [*]
Equipment for Innovex Personnel: Computer (hardware/software);
detail bags, business cards                                             [*]             [*]           [*]
Field Supplies: postage, stationery, phone charges                      [*]             [*]           [*]
Forms, reports specially requested by Vivus                             [*]             [*]           [*]
Insurance: employment, workers comp., E&O, CGL                          [*]             [*]           [*]
Medical and other benefits                                              [*]             [*]           [*]
Meetings:
1) initial training
2) Vivus national, regional & district; product launches                [*]             [*]           [*]
Payroll Taxes                                                           [*]             [*]           [*]
Promotional literature and aids, including distribution                 [*]             [*]           [*]
Promotional marketing expenses (the cost of which has been
preapproved by Vivus in writing)                                        [*]             [*]           [*]
Recruiting (database screening, ad placement): re-recruiting            [*]             [*]           [*]
Salaries and Variable Incentive Compensation                            [*]             [*]           [*]
Sales data, territory alignment, mapping and optimization               [*]             [*]           [*]
Samples, including distribution to Reps                                 [*]             [*]           [*]
Severance                                                               [*]             [*]           [*]
Travel Expenses (air, hotel & meals)                                    [*]             [*]           [*]

     * Interviewee, final interview expenses
     * Training
     * Project Manager, APM, DM, NSD, Reps




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


                                      -19-

EX-13.1

   1

                              FINANCIAL STATEMENTS


                                                  
SELECTED FINANCIAL DATA                                1

MANAGEMENT'S DISCUSSION AND ANALYSIS                   2

CONSOLIDATED BALANCE SHEETS                            6

CONSOLIDATED STATEMENTS OF OPERATIONS                  7

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        8

CONSOLIDATED STATEMENTS OF CASH FLOWS                  9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS            10

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS              17



   2
                            SELECTED FINANCIAL DATA
                IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYEE DATA


        Selected Quarterly Financial Data (unaudited) 



                                                                                Quarter Ended
                                                         -------------------------------------------------------------
1997                                                      March 31         June 30        September 30      December 31 
                                                         ----------       ----------       ----------       ----------
                                                                                                       
Net income                                               $    9,554       $    9,958       $   11,259       $    5,846
Net income per diluted common and equivalent share       $     0.27       $     0.28       $     0.31       $     0.17
Common stock prices
  High                                                   $    39.06       $    25.88       $    38.13       $    40.56
  Low                                                    $    18.75       $    15.31       $    22.81       $     9.94

1996

Net income (loss)                                        $   (6,235)      $   (3,745)      $    2,662       $   (9,209)
Net income (loss) per diluted common and
  equivalent share                                       $    (0.23)      $    (0.14)      $     0.07       $    (0.28)
Common stock prices
  High                                                   $    15.63       $    16.38       $    20.38       $    19.00
  Low                                                    $    11.88       $    13.00       $    14.44       $    14.50



The Company's common stock is traded over-the-counter on The Nasdaq Stock Market
under the symbol "VVUS." As of December 31, 1997, there were approximately 608
shareholders of record. The Company has not paid any dividends since its
inception and does not intend to pay any dividends in the foreseeable future.

Selected Financial Data




                                                                     Year Ended December 31,
                                           -----------------------------------------------------------------------------
                                             1997              1996            1995             1994              1993
                                           ---------        ---------        ---------        ---------        ---------
                                                                                                      
Product revenue                            $ 129,337        $      --        $      --        $      --        $      --
Milestone revenue                              9,000           20,000               --               --               --
  Total                                    $ 138,337        $  20,000        $      --        $      --        $      --
Income (loss) before taxes                 $  39,801        $ (16,527)       $ (22,811)       $ (14,864)       $  (7,775)
Net income (loss)                          $  36,617        $ (16,527)       $ (22,811)       $ (14,864)       $  (7,775)
Net income (loss) per diluted share        $    1.03        $   (0.55)       $   (0.85)       $   (0.63)       $   (0.40)
Shares used in per share computation          35,559           29,833           26,914           23,488           19,656
Financial position at year end:
  Total assets                             $ 150,669        $  96,532        $  44,049        $  43,021        $  24,732
  Accumulated deficit                      $ (29,537)       $ (66,154)       $ (49,627)       $ (26,816)       $ (11,952)
  Stockholders' equity                     $ 123,930        $  89,780        $  41,181        $  40,307        $  23,435
Additional information:
  Working capital                          $  54,888        $  60,388        $  19,878        $  21,656        $  16,010
  Capital expenditures                     $  32,268        $   3,682        $   3,148        $     787        $   1,007
  Common shares outstanding                   33,168           32,454           26,952           23,448            4,656
  Number of employees                            215               95               38               28               15



See notes to consolidated financial statements.




                                       1
   3
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview
VIVUS, Inc. (the Company) was incorporated in 1991 to develop products for the
treatment of erectile dysfunction. In November 1996, the Company obtained
regulatory marketing clearance by the U.S. Food and Drug Administration (FDA) to
manufacture and market its first product, MUSE((R)) (alprostadil), in the United
States. The Company commenced product shipments to wholesalers in December 1996
and commercially introduced MUSE (alprostadil) in the United States through its
direct sales force beginning in January 1997. Furthermore, the Company received
FDA clearance in December 1996 for ACTIS((R)), an adjustable elastomeric venous
flow control device designed for those patients who suffer from venoocclusive
dysfunction (commonly referred to as venous leak syndrome). The Company
commenced commercial sales of ACTIS in the United States in July 1997.
   The Company has entered into international marketing agreements with Astra AB
("Astra") and Janssen Pharmaceutica International ("Janssen") under which Astra
and Janssen will purchase MUSE (alprostadil) for resale in various international
markets. In November 1997, the Company obtained regulatory marketing clearance
by the Medicines Control Agency (MCA) to market MUSE (alprostadil) in the United
Kingdom. The Company began selling MUSE (alprostadil) to Astra in the fourth
quarter of 1997. Astra began selling MUSE (alprostadil) in the United Kingdom in
February 1998. In addition, applications for regulatory approval to market MUSE
(alprostadil) have been submitted in several other countries. These applications
will be subject to rigorous approval processes, and there can be no assurance
such approvals will be granted in a timely manner, if at all.
   The Company is subject to a number of risks including its ability to scale-up
its manufacturing capabilities and secure an adequate supply of raw materials,
its ability to successfully market, distribute and sell its products, its
reliance on a single therapeutic approach for the treatment of erectile
dysfunction, and intense competition. There can be no assurance that the Company
will be able to achieve profitability on a sustained basis. Accordingly, there
can be no assurance of the Company's future success.
   The Company has limited experience in manufacturing and selling MUSE
(alprostadil) in commercial quantities. Since the commercial launch of MUSE
(alprostadil) in January 1997, the Company has experienced product shortages due
to higher than expected demand and difficulties encountered in scaling up
production of MUSE (alprostadil). The Company leased 90,000 square feet of space
in New Jersey in which it has constructed additional manufacturing and testing
facilities. The Company has filed for regulatory approvals of the facility with
both the FDA and MCA. In March 1998, the MCA authorized the Company to begin
commercial production and shipment of MUSE (alprostadil) from its new facility.
In addition, the Company has negotiated a long-term lease for a site in Ireland
for construction of a European manufacturing operation. Until the Company
receives the required approvals for its new New Jersey facility, domestic and
certain international markets will need to be supplied from its current facility
within the Paco Pharmaceutical Services, Inc. ("Paco") facility. There can be no
assurance such approvals will be granted in a timely manner, if at all. If
international sales increase as anticipated, product available for the domestic
market may be reduced and gross margins will be adversely impacted. If the
Company encounters further difficulties with its current manufacturing facility
or delays in regulatory approvals of its new manufacturing facility, capacity
constraints could continue for an extended period of time, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
   Because of the production capacity constraints, the Company did not initiate
significant MUSE advertising programs in 1997 and experienced declining demand
for MUSE (alprostadil) in late 1997. In anticipation of receiving regulatory
approvals of its new manufacturing facility and because of available inventories
at the wholesale level, the Company launched its first domestic
direct-to-consumer advertising campaign in January 1998. This campaign includes
major television, newspaper and magazine placements. In February 1998, the FDA
notified the Company that it objected to, among other things, the prominence and
balance of side effect


                                       2
   4
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

information relative to efficacy information in certain written materials and
the Company's television advertisements. The Company has ceased running its
television advertisements and requested a meeting with the FDA to discuss
necessary changes to the Company's television advertisements. There can be no
assurance that the Company's domestic sales and marketing efforts will be
successful at increasing the demand for MUSE (alprostadil). In addition, there
can be no assurance that the Company's capacity constraints will not prevent the
Company from supplying any increased demand.

Results of Operations
YEARS ENDED DECEMBER 31, 1997 AND 1996
Product revenue of $129,337,000 and cost of goods sold of $38,288,000 were
recorded in 1997 compared with none in 1996. Product revenue and related cost of
sales in 1997 were primarily the result of the commercial launch of MUSE
(alprostadil) in the United States. Product gross margin for 1997 was 70% which
includes the effect of reduced cost of sales related to expensed materials of
$4.7 million. International sales commenced in the fourth quarter of 1997.
Because of revenue sharing arrangements with the Company's international
partners, international sales result in lower gross margin as compared to
domestic sales. International revenue in 1998 is expected to compose a greater
proportion of total revenue which will have the effect of lowering gross
margins. This impact may be offset by production efficiencies at the new
manufacturing facility.
   Milestone revenue of $9,000,000 was recorded in 1997 compared with
$20,000,000 in 1996, a decrease of 55%. 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 clearance from the
MCA to market MUSE (alprostadil) in the United Kingdom ($2 million) in November
1997. In 1996, milestone revenue was recorded as the result of signing the
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 were $12,123,000 compared with
$28,279,000 in 1996, a decrease of 57%. 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
(alprostadil) 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 were $47,931,000
compared with $11,733,000 in 1996, an increase of 309%. 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 (alprostadil). The Company
currently employs approximately 75 sales representatives who call upon
urologists and other specialists. Effective February 1998, the Company entered
into a Sales Force Services Agreement with Innovex Inc. ("Innovex"). Pursuant to
this agreement, Innovex will provide approximately 200 additional contract sales
representatives, the substantial majority of whom will be calling upon primary
care physicians. Due to this sales force expansion, as well as the Company's
direct-to-consumer advertising campaign and addition of personnel to support the
Company's operations, selling, general and administrative expenses are expected
to increase significantly in 1998.
   During the fourth quarter of 1997, the Company recorded the 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 $4,856,000 compared with $3,485,000 in 1996, an
increase of 39%. 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 $3,184,000 compared with none for
1996. The increase is the result of having pre-tax income primarily due to


                                       3
   5
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 which have been fully utilized in 1997. Therefore, the
Company expects that its effective tax rate will increase in future periods.

YEARS ENDED DECEMBER 31, 1996 AND 1995 In May 1996, the Company completed a
marketing agreement with Astra AB (Astra) where Astra will purchase the
Company's products for resale in Europe, South America, Central America,
Australia and New Zealand. In consideration for execution of the marketing
agreement, Astra paid the Company $10 million in June 1996. In September 1996,
the Company received a $10 million milestone payment from Astra upon filing an
application for marketing authorization for MUSE (alprostadil) in the United
Kingdom. The Company recorded these receipts as revenue in the consolidated
statement of operations during 1996. The Company began generating revenues from
product sales in January 1997. No product revenues were recorded in 1996 or
1995.

   Research and development expenses in 1996 were $28,279,000 compared with
$21,313,000 in 1995, an increase of 33%. This increase resulted primarily from a
$5.8 million charge related to the issuance of 400,000 shares of common stock in
May 1996 to ALZA Corporation to maintain exclusive rights to certain patents and
patent applications beyond 1998. In addition, higher pre-launch manufacturing
costs were partially offset by lower clinical and regulatory expenses.

   General and administrative expenses in 1996 were $11,733,000 compared with
$4,389,000 in 1995, an increase of 167%. This increase resulted primarily from
higher product marketing and market research expenses, hiring and training the
U.S. sales force, and additional personnel and increased facilities costs to
support the growth of the Company's operations.

   Interest income in 1996 was $3,485,000 compared with $2,891,000 in 1995, an
increase of 21%. The increase resulted from higher average invested cash
balances associated with the $57,468,000 in net proceeds received from the stock
offering in June 1996.

   Liquidity and Capital Resources In 1997, the Company achieved a positive cash
flow from operations for the first year since inception. In prior years, the
Company had financed operations primarily from the sale of common stock. The
Company has raised $152,334,000 to date through the sale of stock. Cash and
available-for-sale securities totaled $91,696,000 at the end of 1997 compared
with $84,325,000 at the end of 1996. The Company maintains its current excess
cash balances in a variety of interest-bearing financial securities such as U.S.
government securities, high-grade corporate debt and certificates of deposit.
Principal preservation, liquidity and safety are the primary investment
objectives.

   Cash provided by operations in 1997 was $42,594,000 compared with cash used
of $10,379,000 in 1996. The increase for 1997 is primarily due to net income of
$36,617,000.

   Accounts receivable at December 31, 1997 were $11,791,000 compared with none
at the end of 1996. This increase is entirely the result of product sales in
1997.

   Inventories were $9,084,000 at December 31,1997 as compared to $4,540,000 at
December 31, 1996. The increase resulted primarily from increased purchases of
raw materials and a lower inventory reserve at the end of 1997.

   Current liabilities were $26,739,000 at December 31, 1997 compared with
$6,752,000 at December 31, 1996, an increase of $19,987,000. This increase was
primarily due to increased sales and marketing expenses, the settlement of a
lawsuit and other increases associated with the growth in operations of the
Company.

   Capital expenditures in 1997 were $32,268,000 compared with $3,682,000 in
1996, an increase of $28,586,000. Capital expenditures were higher in 1997
primarily due to construction of the Company's new manufacturing facility in
Lakewood, New Jersey, the purchase of additional manufacturing equipment for use


                                       4
   6
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

at the Company's dedicated manufacturing operation within the Paco facility,
also in Lakewood, New Jersey, and the completion of the Company's new corporate
headquarters and research and development laboratory facility located in
Mountain View, California. Capital expenditures over the next two years are
likely to increase as they are expected to include additional expenditures
associated with the manufacturing facilities in New Jersey and a new
manufacturing facility in Europe.

   The Company repurchased 336,700 shares of its common stock at a cost of
$7,716,000 in 1997 compared with none in 1996. The Company repurchased an
additional 1,663,300 shares of its common stock in January and February 1998 at
a cost of $23,584,000.

   The Company expects to incur substantial additional costs, including expenses
related to its manufacturing facilities in New Jersey and a new manufacturing
facility in Europe, expenses related to marketing and sales of MUSE
(alprostadil), including expenses associated with expanding its sales force by
approximately 200 sales representatives and a direct-to-consumer marketing
campaign, new product preclinical and clinical costs, ongoing research and
development activities and general corporate purposes. The Company anticipates
that its existing capital resources will be sufficient to support the Company's
operations through the commercial introduction of MUSE (alprostadil)
internationally, but may not be sufficient for the introduction of any
additional future products. Accordingly, the Company anticipates that it may be
required to issue additional equity or debt securities and may use other
financing sources including, but not limited to, corporate alliances and lease
financing to fund the future development and possible commercial launch of its
future products. The sale of additional equity securities would result in
additional dilution to the Company's stockholders. The Company's working capital
and additional funding requirements will depend upon numerous factors,
including: (i) the level of resources that the Company devotes to sales and
marketing capabilities; (ii) the level of resources that the Company devotes to
expanding manufacturing capacity; (iii) the activities of competitors; (iv) the
progress of the Company's research and development programs; (v) the timing and
results of preclinical testing and clinical trials; (vi) technological advances;
and (vii) continued profitability.

Management's discussion and analysis of financial condition and results of
operations contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results could differ materially from
those projected in the forward-looking statements as a result of the factors set
forth above. The discussion of those factors is incorporated herein by this
reference as if said discussion was fully set forth at this point.


                                       5
   7
                          CONSOLIDATED BALANCE SHEETS
                                  IN THOUSANDS




                                                                                            December 31,
                                                                                    --------------------------
                                                                                      1997             1996
                                                                                    ---------        ---------
                                                                                                                     
Assets
Current assets:
  Cash                                                                              $   6,161        $     555
  Available-for-sale securities                                                        52,955           60,710
  Accounts receivable (net of allowance for doubtful accounts of $137 at
   December 31, 1997)                                                                  11,791               --
  Inventories                                                                          9,084            4,540
  Prepaid expenses and other assets                                                     1,636            1,335
     Total current assets                                                              81,627           67,140
Property and equipment                                                                36,462            6,332
Available-for-sale securities, non-current                                             32,580           23,060
     Total                                                                          $ 150,669        $  96,532

Liabilities and Stockholders' Equity 
Current liabilities:
  Accounts payable                                                                  $   6,574        $   3,324
  Accrued and other liabilities                                                        20,165            3,428
     Total current liabilities                                                         26,739            6,752
                                                                                    ---------        ---------
Commitments (Notes 8 and 9)

Stockholders' equity:
  Common stock; $.001 par value; shares authorized -- 200,000 at December 31,
   1997 and 1996; shares outstanding -- December 31, 1997, 33,168
   December 31, 1996, 32,454                                                               33               32
  Paid in capital                                                                     153,336          156,173
  Unrealized gain on securities                                                            98               77
  Deferred compensation                                                                    --             (348)
  Accumulated deficit                                                                 (29,537)         (66,154)
     Total stockholders' equity                                                       123,930           89,780
     Total                                                                          $ 150,669        $  96,532
                                                                                    ---------        ---------



See notes to consolidated financial statements.


                                       6
   8
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                       IN THOUSANDS, EXCEPT PER SHARE DATA




                                                   Year Ended December 31,
                                            --------------------------------------- 
                                              1997           1996            1995
                                            --------       --------        -------- 
                                                                       
Revenue:
  Product                                   $129,337       $     --        $     --
  Milestone                                    9,000         20,000              --
   Total revenue                             138,337         20,000              --
Cost of goods sold                            38,288             --              --
Gross margin                                 100,049         20,000              --
Operating expenses:
  Research and development                    12,123         28,279          21,313
  Selling, general and administrative         47,931         11,733           4,389
  Settlement of lawsuit                        5,050             --              --
   Total operating expenses                   65,104         40,012          25,702
Income (loss) from operations                 34,945        (20,012)        (25,702)
Interest and other income                      4,856          3,485           2,891
   Income (loss) before taxes                 39,801        (16,527)        (22,811)
Provision for income taxes                     3,184             --              --
   Net income (loss)                        $ 36,617       $(16,527)       $(22,811)
                                            --------       --------        --------
Net income (loss) per share:
   Basic                                    $   1.11       $  (0.55)       $  (0.85)
   Diluted                                  $   1.03       $  (0.55)       $  (0.85)
Shares used in per share computation:
   Basic                                      32,996         29,833          26,914
   Diluted                                    35,559         29,833          26,914



See notes to consolidated financial statements.


                                       7
   9
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       IN THOUSANDS, EXCEPT PER SHARE DATA




                                                       Common Stock and
                                                        Paid In Capital            Unrealized
                                                      --------------------         Gain (Loss)      Deferred         Accumulated
                                                      Shares        Amount        on Securities   Compensation         Deficit
                                                      ------        ------             -----        -------            --------
                                                                                                            
BALANCES, December 31, 1994                           23,448      $ 68,698             $(339)       $(1,236)           $(26,816)
Sale of common stock at $7.25 per
  share for cash (net of issuance costs
  of $1,732)                                           3,340        22,483
Sale of common stock through employee
  stock purchase plan                                     31           172
Exercise of common stock options for cash                133           132
Unrealized gain on securities                                                             453
Amortization of deferred compensation                                                                   445
Net loss                                                                                                                (22,811)
                                                      ------      --------             -----        -------            -------- 
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)
                                                      ======      ========             =====        =======            ======== 



See notes to consolidated financial statements.


                                       8
   10
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  IN THOUSANDS




                                                                            Year Ended December 31,
                                                                  ------------------------------------------- 
                                                                     1997             1996             1995
                                                                  ---------        ---------        --------- 
                                                                                                  
Cash flows from operating activities:
  Net income (loss)                                               $  36,617        $ (16,527)       $ (22,811)
  Adjustments to reconcile net income (loss) to net cash
   provided by (used for) operating activities:
     Depreciation and amortization                                    2,138            1,238              708
     Stock compensation costs                                           488              443              445
     Issuance of common stock for patent rights                          --            5,821               --
  Changes in assets and liabilities:
   Accounts receivable                                              (11,791)              --               --
   Inventories                                                       (4,544)          (4,540)              --
   Prepaid expenses and other assets                                   (301)            (698)             (63)
   Accounts payable                                                   3,250            2,971             (298)
   Accrued and other liabilities                                     16,737              913              452
                                                                  ---------        ---------        --------- 
       Net cash provided by (used for) operating activities          42,594          (10,379)         (21,567)
                                                                  ---------        ---------        --------- 
Cash flows from investing activities:
  Property and equipment purchases                                  (32,268)          (3,682)          (3,148)
  Investment purchases                                             (323,609)        (177,074)        (146,338)
  Proceeds from sale and maturity of securities                     321,865          131,818          147,202
                                                                  ---------        ---------        --------- 
       Net cash used for investing activities                       (34,012)         (48,938)          (2,284)
                                                                  ---------        ---------        --------- 
Cash flows from financing activities:
  Sale of common stock                                                   --           57,468           22,483
  Exercise of common stock options                                    4,254            1,205              132
  Sale of common stock through employee stock purchase plan             486              226              172
  Repurchase of common stock                                         (7,716)              --               --
                                                                  ---------        ---------        --------- 
       Net cash provided by (used for) financing activities          (2,976)          58,899           22,787
                                                                  ---------        ---------        --------- 
Net increase (decrease) in cash                                       5,606             (418)          (1,064)
Cash:
  Beginning of year                                                     555              973            2,037
                                                                  ---------        ---------        --------- 
  End of year                                                     $   6,161        $     555        $     973
                                                                  =========        =========        ========= 

Non-cash investing and financing activities:
  Unrealized gain (loss) on securities                            $      21        $     (37)       $     453

Supplemental cash flow disclosure:
  Income taxes paid                                               $   1,653        $      --        $      --



See notes to consolidated financial statements.


                                       9
   11
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 Company obtained clearance from the U.S. Food and Drug Administration
("FDA") to manufacture and market MUSE (alprostadil) in the United States in
November 1996 and clearance to market MUSE (alprostadil) in the United Kingdom
from the Medicines Control Agency ("MCA") in November 1997. The Company is
currently seeking marketing clearance in other countries. The Company commenced
product shipments to wholesalers in December 1996 and commercially introduced
MUSE (alprostadil) in the United States through its direct sales force beginning
in January 1997.

   The Company is subject to a number of risks including its ability to scale-up
its manufacturing capabilities and secure an adequate supply of raw materials,
its ability to successfully market, distribute and sell its 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.

Revenue Recognition -- Product revenue is generally recognized upon shipment.
While there were product shipments in December 1996, 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 which were granted to
customers during this initial selling period.

   The Company primarily sells its products through the wholesale channel in the
United States. Product shipments are generally to distribution centers
throughout the U.S. for the larger wholesalers. During 1997, five of these
wholesalers accounted for 24%, 18%, 14%, 13%, and 11% of total product revenue.

   The Company recognized revenue of $9 million and $20 million in the years
ended December 31, 1997 and 1996 respectively as a result of achieving certain
milestones related to its international marketing agreements. The amounts
recognized 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 by reducing cost of
sales by $4.7 million. The remaining balance of $5.4 million at December 31,
1997 will benefit future periods by reducing cost of sales.

Available-for-Sale Securities -- The Company accounts for available-for-sale
securities in accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Available-for-sale securities represent debt securities that are stated at fair
value. The difference between amortized cost (cost adjusted for amortization of
premiums and accretion of discounts which are recognized as adjustments to
interest income) and fair value, representing unrealized holding gains or
losses, are recorded as a separate component of stockholders' equity until
realized. The Company's policy is to record debt securities as
available-for-sale because the sale of such securities may be required prior to
maturity. Any gains and losses on the sale of debt securities are determined on
a specific identification basis.


                                       10
   12
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

Property -- Property and equipment are 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.

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 (alprostadil) 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 in 1997. Milestone payments are included in
research and development expense in 1997 and prior years.

Research and Development -- Research and development costs are expensed as
incurred.

Net Income (Loss) Per Share -- The Company has adopted Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share" which replaced
Accounting Principles Board Opinion No. 15 ("APB 15"). SFAS 128 requires a dual
presentation of basic and diluted earnings per share. Basic earnings per share
is based on 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.
Diluted earnings per share is computed similarly to earnings per share
previously reported pursuant to APB 15 and, for the Company, diluted earnings
per share amounts are the same as amounts previously reported under APB 15. The
computation of basic and diluted earnings per share for the years ended December
31, 1997, 1996 and 1995 is as follows:




(In thousands, 
except per share data)              1997             1996              1995
                                  --------        ----------        ---------- 
                                                                   
Net income (loss)                 $ 36,617        $  (16,527)       $  (22,811)
                                  ========        ==========        ========== 
Net income (loss) per
  share-- Basic                   $   1.11        $    (0.55)       $    (0.85)
Common equivalent shares:
  Options                            (0.07)               --                --
  Warrants                           (0.01)               --                --
                                  --------        ----------        ---------- 
Net income (loss) per
  share-- Diluted                 $   1.03        $    (0.55)       $    (0.85)
                                  ========        ==========        ========== 
Shares used in the
  computation of net income
  (loss) per share-- Basic          32,996            29,833            26,914
Common equivalent shares:
  Options                            2,215                --                --
  Warrants                             348                --                --
                                  --------        ----------        ---------- 
Diluted shares                      35,559            29,833            26,914
                                  ========        ==========        ========== 



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.

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.

Recently Issued Accounting Pronouncements -- In June 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes
standards for the reporting and


                                       11
   13
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

display of comprehensive income and its components in general purpose financial
statements. In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes annual and
interim reporting standards for business segments of a company and related
disclosures. Both SFAS No. 130 and SFAS No. 131 are effective for fiscal years
beginning after December 15, 1997. The Company believes that the adoption of
these new pronouncements will not have a material effect on the financial
statements.

Reclassifications -- Reclassifications have been made to the prior years'
Consolidated Financial Statements to conform to the fiscal 1997 presentation.

Note 2. Available-for-Sale Securities The fair value and the amortized cost of
available-for-sale securities at December 31, 1997 and 1996 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, 1997:




                                              Fair       Unrealized    Unrealized
                              Amortized       Market       Holding      Holding
(In thousands)                  Cost          Value         Gains        Losses
                               -------       -------       -------       ------- 
                                                                
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)
                               =======       =======       =======       ======= 


As of December 31, 1996:




                                              Fair       Unrealized    Unrealized
                              Amortized       Market       Holding      Holding
(In thousands)                  Cost          Value         Gains        Losses
                               -------       -------       -------       ------- 
                                                                
U.S. government
  securities                   $55,441       $55,488       $    84       $   (37)
Corporate debt                  28,252        28,282            32            (2)
                               -------       -------       -------       ------- 
   Total                       $83,693       $83,770       $   116       $   (39)
                               =======       =======       =======       ======= 



The contractual maturities of these securities as of December 31, 1997 are as
follows:




                                                                       Fair
                                                   Amortized          Market
(In thousands)                                       Cost             Value
                                                    -------          -------
                                                                   
Less than 1 year                                    $52,961          $52,955
From 1 to 2 years                                    32,476           32,580
                                                    -------          -------
   Total                                            $85,437          $85,535
                                                    =======          =======


Note 3. Inventories
Inventories are recorded net of reserves of $5.4 million and $10.1 million as of
December 31, 1997 and 1996, respectively, and consist of:




(In thousands)                                        1997            1996
                                                     ------          ------
                                                                  
Raw materials                                        $8,603          $1,893
Work in process                                         190             344
Finished goods                                          291           2,303
                                                     ------          ------
   Total                                             $9,084          $4,540
                                                     ======          ======



Note 4. Property
Property and equipment as of December 31 consists of:




(In thousands)                                       1997             1996
                                                   --------         --------
                                                                   
Machinery and equipment                            $ 10,247         $  4,763
Computers and software                                2,884            1,859
Furniture and fixtures                                  781              535
Construction in progress                             27,067            1,554
                                                   --------         --------
                                                     40,979            8,711
Accumulated depreciation and
  amortization                                       (4,517)          (2,379)
                                                   --------         --------
Property and equipment, net                        $ 36,462         $  6,332
                                                   ========         ========



Note 5. Accrued and Other Liabilities
Accrued and other liabilities as of December 31 consist of:




(In thousands)                                     1997              1996
                                                -------           -------
                                                                
Settlement of lawsuit                           $ 5,050           $    --
Sales and marketing expenses                      4,913               711
Manufacturing expenses                            2,619             1,086
Employee compensation and benefits                2,308               392
Research and clinical expenses                    1,579               347
Income taxes                                      1,531                --
Other                                             2,164               892
                                                -------           -------
                                                $20,165           $ 3,428
                                                =======           =======



                                       12
   14
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

Note 6. Stockholders' Equity 
Common Stock -- 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. Such shares of preferred stock may be issued by
the Company in the future, without stockholder approval, upon such terms as the
Company's Board of Directors may determine.

Stock Warrants -- In connection with the issuance of convertible preferred stock
in 1993, the Company issued warrants 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, 1997 expire in 1999.

Note 7. Stock Option and Purchase Plans 
Stock Option Plans -- Under the 1991 Incentive Stock Plan (the Plan), the
Company may grant incentive or non-statutory 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) 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 key employees and consultants at not less than 85% of
the fair market value of the stock at the date of grant, as determined by the
Board of Directors. Sales of stock under SPRs are made pursuant to restricted
stock purchase agreements containing provisions established 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, 1997, no SPRs have been granted under the Plan.
   Under the 1994 Director Stock 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 NSOs issued at the fair market value of the
Company's common stock at the date of grant. Under the Director Option Plan,
non-employee 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. 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.
   Details of option activity under these plans are as follows:




                                                                Weighted
                                                                Average
                                              Number            Exercise
                                            of Shares            Price
                                            ---------            ------
                                                             
Outstanding, December 31, 1994              2,184,768            $ 2.90
Granted                                     1,254,050              8.12
Exercised                                    (132,770)             1.00
Canceled                                      (41,416)             6.72
                                            ---------
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
                                            =========



                                       13
   15
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995




                        Options Outstanding                                              Options Exercisable
- -----------------------------------------------------------------------------         ---------------------------
                        Number                                                          Number
                     Outstanding    Weighted-Average              Weighted-           Exercisable   Weighted-
Range of             December 31,     Remaining                   Average             December 31,   Average
Exercise Prices          1997      Contractual Life            Exercise Price            1997      Exercise Price
- ---------------       ---------    ----------------            --------------         -----------  --------------
                                                                                    
$  0.09-$ 6.56          938,900      6.21 years                    $ 3.33               817,005      $  2.96
$  6.63-$11.88          996,850      7.23 years                      8.28               596,271         7.91
$ 13.50-$16.75        1,118,058      7.04 years                     15.98               380,638        15.77
$ 16.88-$21.63        1,126,887      9.06 years                     20.56                66,196        18.61
$ 21.94-$37.38          340,500      8.65 years                     26.29                10,000        28.81
                      ---------                                                       ---------
$  0.09-$37.38        4,521,195      7.53 years                    $13.57             1,870,110      $  7.83
                      =========                                                       =========



At December 31, 1997, 2,100,323 options remain authorized and unissued under
these plans.
   The Company accounts for these plans as prescribed by the Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation expense is recognized only if options are granted to
someone who is not an employee or director of the Company or if options are
granted at a discounted exercise price. Except for compensation discussed in the
following paragraph, no compensation cost has been recognized because the
exercise price equals the market value of stock on the date of grant.
   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 using the Black-Scholes option pricing model are estimated to
be approximately $1.1 million over the option's vesting period of which $140,000
was recorded as expense for the year ended December 31, 1997.
   The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants: risk-free rates ranging from 5-7% and corresponding to government
securities with original maturities similar to the vesting periods; expected
dividend yield of 0%; expected lives of .64 years beyond vest dates; and
expected volatility of 55% in all years. The weighted average of fair values of
options granted during 1997, 1996 and 1995 respectively, were $9.32, $6.76 and
$3.42.

   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)               1997             1996              1995
                                  ----------       ----------        ---------- 
                                                                    
Pro forma net income (loss)       $   31,958       $  (20,039)       $  (23,941)
Pro forma net income
  (loss) per share:
   Basic                          $     0.97       $    (0.67)       $    (0.89)
   Diluted                        $     0.90       $    (0.67)       $    (0.89)



Because the FASB 123 method of accounting has not been applied to options
granted prior to January 1, 1995, 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 plan. As of December 31,


                                       14
   16
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

1997, 94,896 shares have been issued to employees. During 1997, the weighted
average fair market value of shares issued under the employee stock purchase
plan was $23.45 per share.

Note 8. 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, the Company
recorded royalty expense as cost of goods sold based on product sales.

Note 9. Lease Commitments
The Company leases its principal administrative and research and development
laboratory facility under a fifteen year non-cancelable operating lease expiring
in 2012. Under the terms of this lease, the Company has posted a $1.75 million
letter of credit to secure ongoing performance under the lease. The Company also
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.

   Future minimum lease payments under operating leases are as follows:



(In thousands)
                                                  
1998                                             $ 1,749
1999                                               1,778
2000                                               1,811
2001                                               1,846
2002                                               1,282
Thereafter                                        14,467
                                                 -------
                                                 $22,933
                                                 =======



Rent expense under operating leases totaled $1,302,000, $560,000, and $342,000
for the years ended December 31, 1997, 1996, and 1995, respectively.

Note 10. Income Taxes
The provision for income taxes consisted of the following components as of
December 31, 1997:




(In thousands)                                       1997
                                                    ------
                                                    
Current
  Federal                                           $2,170
  State                                              1,332
                                                    ------
   Total current                                     3,502
Deferred (prepaid)
  Federal                                             (318)
  State                                                 --
   Total deferred (prepaid), net                      (318)
                                                    ------
   Total provision for income taxes                 $3,184
                                                    ======





                                       15
   17
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rates as follows:




                                                         1997
                                                         ----
                                                      
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%
                                                         ====



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
carry-forwards. Significant components of the Company's deferred tax assets as
of December 31, are as follows:




(In thousands)                             1997            1996
                                         --------        --------
                                                        
Deferred tax assets:
  Net operating loss carryforwards       $     --        $  7,870
  Research and development credit
   carryforwards                               --           2,715
  Capitalized research and
   development expenses                     1,947           3,695
  Inventory reserve                         3,022           4,237
  Accruals and other                          648             709
  Deferred gain                              (859)         (1,760)
  Depreciation                              1,260             487
                                         --------        --------
                                            6,018          17,953
Valuation allowance                        (6,018)        (17,953)
                                         --------        --------
   Total                                 $     --        $     --
                                         ========        ========



Note 11. Legal Matters
In December 1997, the Company reached a settlement agreement with a former
consultant of the Company whereby the former consultant dismissed 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 class action lawsuits filed in California state court alleging
violations of state securities laws. On March 20, 1998, the Company learned that
a federal class action had been filed against the Company and certain current
and former officers and directors. The lawsuits involve events which allegedly
took place between May 15, 1997 and December 9, 1997. The Company believes that
the allegations are without merit and intends to vigorously defend these cases.
The Company does not believe that resolution of these claims will have an
adverse material impact on the operations or financial position 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.


                                       16
   18
                    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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.


/s/  ARTHUR ANDERSEN LLP

San Jose, California
March 20, 1998


                                       17

EX-21.2

   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

EX-23.1

   1
 
                                                                    EXHIBIT 23.1
 
                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
     As independent public accountants, we hereby consent to the incorporation
of our report dated March 20, 1998 on the consolidated financials statements of
the company for the year ended December 31, 1997, by reference in this Form
10-K, into the Company's previously filed Registration Statement on Form S-8
(File No. 33-80362).
 
                                          /s/ ARTHUR ANDERSEN LLP
                                          Arthur Andersen LLP
San Jose, California
March 31, 1998

EX-27.1

 

<ARTICLE> 5
<MULTIPLIER> 1,000
       
                             
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          DEC-31-1997
<PERIOD-START>                             JAN-01-1997
<PERIOD-END>                               DEC-31-1997
<CASH>                                           6,161
<SECURITIES>                                    52,955
<RECEIVABLES>                                   11,928
<ALLOWANCES>                                       137
<INVENTORY>                                      9,084
<CURRENT-ASSETS>                                81,627
<PP&E>                                          40,979
<DEPRECIATION>                                 (4,517)
<TOTAL-ASSETS>                                 150,669
<CURRENT-LIABILITIES>                           26,739
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                            33
<OTHER-SE>                                     123,897
<TOTAL-LIABILITY-AND-EQUITY>                   150,669
<SALES>                                        129,337
<TOTAL-REVENUES>                               138,337
<CGS>                                           38,288
<TOTAL-COSTS>                                   38,288
<OTHER-EXPENSES>                                65,104
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                 39,801
<INCOME-TAX>                                     3,184
<INCOME-CONTINUING>                             36,617
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                    36,617
<EPS-PRIMARY>                                     1.11
<EPS-DILUTED>                                     1.03

<F1>For Purposes of this Exhibit, Primary Means Basic