<PAGE>
 
    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 1997
                                                       REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                ---------------
 
                                   FORM SB-2
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
 
                                ---------------
 
                                 DEPOMED, INC.
          (NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
 
        CALIFORNIA                      8731                  94-3229046
     (STATE OR OTHER             (PRIMARY STANDARD         (I.R.S. EMPLOYER
     JURISDICTION OF         INDUSTRIAL CLASSIFICATION    IDENTIFICATION NO.)
     INCORPORATION OR               CODE NUMBER)
      ORGANIZATION)
 
                                ---------------
 
                              1170 B CHESS DRIVE,
                         FOSTER CITY, CALIFORNIA 94404
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
                                ---------------
 
                                 JOHN W. FARA
                     PRESIDENT AND CHIEF EXECUTIVE OFFICER
                              1170 B CHESS DRIVE
                         FOSTER CITY, CALIFORNIA 94404
                                (415) 513-0990
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)
 
                                ---------------
 
                                  Copies to:
           JULIAN N. STERN                         LAWRENCE B. FISHER
         STEPHEN C. FERRUOLO               ORRICK, HERRINGTON & SUTCLIFFE LLP
   HELLER EHRMAN WHITE & MCAULIFFE                  666 FIFTH AVENUE
        525 UNIVERSITY AVENUE                   NEW YORK, NEW YORK 10103
     PALO ALTO, CALIFORNIA 94301               TELEPHONE: (212) 506-5000
      TELEPHONE: (415) 324-7000                FACSIMILE: (212) 506-5151
      FACSIMILE: (415) 324-0638
 
                                ---------------
 
  APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness of this Registration Statement.
  If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
  If this Form is filed to register additional securities for an offering
pursuant to Rule 426(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration number of the earlier
effective registration statement for the same offering: [_]
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
 
                                ---------------
 
                        CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                               PROPOSED       PROPOSED
                                               MAXIMUM        MAXIMUM       AMOUNT OF
  TITLE OF EACH CLASS OF      AMOUNT TO BE      PRICE         OFFERING     REGISTRATION
SECURITIES TO BE REGISTERED    REGISTERED   PER SHARE (1)    PRICE (1)         FEE
- ---------------------------------------------------------------------------------------
<S>                          <C>            <C>            <C>            <C>
 Common Stock, no par value
  (2).....................     2,875,000        $7.00       $20,125,000       $6,098
- ---------------------------------------------------------------------------------------
 Common Stock Purchase
  Warrants ("Warrants")
  (3).....................     1,437,500         0.10         143,750           44
- ---------------------------------------------------------------------------------------
 Common Stock issuable upon
  exercise of Warrants
  (4).....................     1,437,500         9.80        14,087,500       4,269
- ---------------------------------------------------------------------------------------
 Representative's Warrants
  (5).....................      250,000         0.0001           25            --
- ---------------------------------------------------------------------------------------
 Common Stock issuable upon
  exercise of
  Representative's Warrants
  (5).....................      250,000          8.40        2,100,000         636
- ---------------------------------------------------------------------------------------
 Warrants issuable upon
  exercise of
  Representative's Warrants
  (5).....................      125,000          0.12          15,000           5
- ---------------------------------------------------------------------------------------
 Common Stock underlying
  Warrants issuable upon
  exercise of
  Representative's Warrants
  (5).....................      125,000          8.40        1,050,000         318
- ---------------------------------------------------------------------------------------
   Totals.................        --             --         $37,521,275      $11,370
</TABLE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457 of the Securities Act of 1933, as
    amended (the "Securities Act").
(2) Includes 375,000 shares of Common Stock that the Underwriters have the
    option to purchase to cover over-allotments in connection with the
    Registrant's sale of the securities, if any.
(3) Includes 187,500 Warrants that the Underwriters have the option to
    purchase to cover over-allotments in connection with the Registrant's sale
    of the securities, if any.
(4) Includes 187,500 shares of Common Stock issuable upon exercise of Warrants
    that the Underwriters have the option to purchase to cover over-allotments
    in connection with the Registrant's sale of the securities, if any.
(5) In connection with the Registrant's sale of the securities, the Registrant
    is granting to the Representative of the several Underwriters (the
    "Representative") warrants to purchase 250,000 shares of Common Stock and
    125,000 Warrants (the "Representative's Warrants").
 
                                ---------------
 
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<PAGE>
 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE    +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF  +
+ANY SUCH STATE.                                                               +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                  SUBJECT TO COMPLETION, DATED APRIL 18, 1997
 
PROSPECTUS
 
                                 DEPOMED, INC.
 
                      2,500,000 SHARES OF COMMON STOCK AND
              1,250,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
 
                                  -----------
 
  DepoMed, Inc., a California corporation (the "Company"), hereby offers (the
"Offering") 2,500,000 shares (the "Shares") of common stock, no par value (the
"Common Stock"), and 1,250,000 redeemable common stock purchase warrants (the
"Warrants"). The Shares and Warrants are sometimes hereinafter collectively
referred to as the "Securities." The Shares and Warrants may only be purchased
together on the basis of two shares of Common Stock and one Warrant and will
trade separately immediately upon issuance. Each Warrant entitles the
registered holder thereof to purchase one share of Common Stock at an exercise
price of $    per share [140% of the initial public offering price per share of
Common Stock], at any time during the period commencing on    , 1998 [twelve
months from the date of the Prospectus] until    , 2002 [5 years after the date
of this Prospectus]. Commencing    , 1998 [18 months from the date of the
Prospectus], the Warrants are subject to redemption by the Company, in whole
but not in part, at $0.10 per Warrant, on 30 days' prior written notice
provided that the average closing sale price of the Common Stock as reported on
the American Stock Exchange ("AMEX") equals or exceeds $    per share [150% of
the initial public offering price per share of Common Stock] for any 20 trading
days within a period of 30 consecutive trading days ending on the fifth trading
day prior to the date of the notice of redemption. See "Description of
Securities--Warrants."
 
  Prior to this Offering, there has been no public market for the Common Stock
or the Warrants and there can be no assurance that such a market will develop
after the completion of this Offering, or, if developed, that it will be
sustained. It is currently anticipated that the initial public offering prices
will be $6.00-$7.00 per Share and $0.10 per Warrant, respectively. For
information regarding the factors considered in determining the initial public
offering prices of the Shares and Warrants and the terms of the Warrants, see
"Risk Factors" and "Underwriting." Application has been made to include the
Shares and Warrants on the AMEX under the symbols "DMI" and "DMI.WS,"
respectively.
 
                                  -----------
 
 THE  SECURITIES OFFERED HEREBY  INVOLVE A HIGH DEGREE  OF RISK AND  IMMEDIATE
   SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
                      COMMENCING ON PAGE 7 AND "DILUTION."
 
                                  -----------
 
THESE SECURITIES HAVE  NOT BEEN APPROVED  OR DISAPPROVED BY  THE SECURITIES AND
EXCHANGE COMMISSION  OR ANY STATE SECURITIES COMMISSION NOR  HAS THE SECURITIES
 AND EXCHANGE COMMISSION  OR ANY  STATE SECURITIES COMMISSION  PASSED UPON  THE
 ACCURACY OR ADEQUACY  OF THIS PROSPECTUS. ANY  REPRESENTATION TO THE CONTRARY
 IS A CRIMINAL OFFENSE.
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                             PRICE TO   UNDERWRITING PROCEEDS TO
                                              PUBLIC    DISCOUNT(1)  COMPANY(2)
- --------------------------------------------------------------------------------
<S>                                         <C>         <C>          <C>
Per Share.................................    $            $            $
- --------------------------------------------------------------------------------
Per Warrant...............................    $            $            $
- --------------------------------------------------------------------------------
Total(3)..................................  $            $           $
</TABLE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Does not include additional compensation payable to National Securities
    Corporation, the representative (the "Representative") of the several
    Underwriters, in the form of a non-accountable expense allowance. In
    addition, see "Underwriting" for information concerning indemnification and
    contribution arrangements with the Underwriters and other compensation
    payable to the Representative.
(2) Before deducting expenses payable by the Company estimated at $   ,
    excluding the non-accountable expense allowance payable to the
    Representative.
(3) The Company has granted to the Representative an option, exercisable within
    45 days after the date of this Prospectus, to purchase up to 375,000
    additional shares of Common Stock and/or up to 187,500 additional Warrants,
    all upon the same terms and conditions as set forth above, solely to cover
    over-allotments, if any (the "Over-Allotment Option"). If such Over-
    Allotment Option is exercised in full, the total Price to Public,
    Underwriting Discount, Proceeds to Company will be $   , $    and $   ,
    respectively. See "Underwriting."
 
                                  -----------
 
  The Securities are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
approval of certain legal matters by their counsel and subject to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this Offering and to reject any order in whole or in part. It is expected that
delivery of the Securities will be made against payment at the offices of
National Securities Corporation, Seattle, Washington, on or about    , 1997.
 
                        NATIONAL SECURITIES CORPORATION
 
                  THE DATE OF THIS PROSPECTUS IS      , 1997.

<PAGE>
 
 
 
 
 
 
  CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND
WARRANTS, INCLUDING PURCHASES OF THE COMMON STOCK AND/OR WARRANTS TO STABILIZE
THEIR RESPECTIVE MARKET PRICES, PURCHASES OF THE COMMON STOCK AND/OR WARRANTS
TO COVER SOME OR ALL OF A SHORT POSITION MAINTAINED BY THE UNDERWRITERS IN THE
COMMON STOCK AND/OR WARRANTS, RESPECTIVELY, AND THE IMPOSITION OF PENALTY
BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
 
                                       2

<PAGE>
 
                               PROSPECTUS SUMMARY
 
  This Prospectus contains forward-looking statements that involve risk and
uncertainties. The Company's actual results could differ materially from those
anticipated in such forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following summary is qualified in its entirety by the more
detailed information and the Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. Except as otherwise noted, all information in
this Prospectus (i) assumes no exercise of the Over-Allotment Option, (ii)
gives effect to a one-for-three reverse stock split of the Common Stock on
     , 1997, (iii) assumes the Warrants and the Representative's Warrants are
not exercised, (iv) assumes no exercise of 76,923 warrants to purchase Common
Stock (the "Bridge Warrants") issued in connection with the Company's Bridge
Financing (the "Bridge Financing") completed in April 1997, and (v) reflects
the conversion of all outstanding shares of Series A Preferred Stock and Series
B Preferred Stock (collectively, the "Preferred Stock") into 908,623 shares of
Common Stock effective automatically upon the closing of the Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Description of Securities," "Underwriting" and Notes to Financial
Statements.
 
                                  THE COMPANY
 
  DepoMed, Inc. (the "Company") is a development stage company engaged in the
development of new and proprietary oral drug delivery technologies. Utilizing
these technologies, the Company has developed two types of oral drug delivery
systems, the Gastric Retention System (the "GR System") and the Reduced
Irritation System (the "RI System" and collectively with the GR System, the
"DepoMed Systems"). The GR System is designed to be retained in the stomach for
an extended period of time while it delivers the incorporated drug or drugs,
and the RI System is designed to reduce the gastrointestinal ("GI") irritation
that is a side effect of many drugs. In addition, the DepoMed Systems are
designed to provide continuous, controlled delivery of an incorporated drug.
 
  The Company intends to develop products utilizing the DepoMed Systems in
collaboration with pharmaceutical and biotechnology companies, from which the
Company expects to receive license fees, research and development funding,
milestone payments and royalties. The Company also intends to develop
independently certain over-the-counter ("OTC") and generic oral drug products
utilizing the DepoMed Systems.
 
  The Company currently has a joint research and development agreement with
Bristol-Myers Squibb Company ("BMS") to develop a product incorporating a BMS
proprietary compound into the GR System. In addition, the Company has entered
into a feasibility study with GalaGen Inc. ("GalaGen") to use the GR System to
enhance local effectiveness and/or provide continuous, controlled delivery of
GalaGen's proprietary immunoglobulin products. The Company is also
independently developing a reduced irritation aspirin product and an enhanced
absorption calcium supplement product and has identified certain other product
candidates expected to benefit from the DepoMed Systems. In April 1997, the
Company and Oakmont Pharmaceuticals, Inc. ("Oakmont") signed a letter of intent
to enter into an agreement pursuant to which Oakmont will manufacture the
Company's reduced irritation aspirin and enhanced absorption calcium supplement
products and have rights to distribute and sell these products in territories
to be determined. The letter of intent also provides for the Company and
Oakmont each to offer rights to future products to the other party.
 
  The DepoMed Systems include proprietary formulations of drug-containing
polymeric units that allow multihour delivery of an incorporated drug
continuously into the stomach either for prolonged, local treatment in the
stomach or for enhanced absorption in the GI tract. The Company believes that
the GR System has the ability to enhance the bioavailability (blood levels) of
drugs that are preferentially absorbed in the stomach, allow for more effective
treatment of local stomach disorders, and provide continuous and extended
delivery of drugs to the upper part of the small intestine, the site where many
drugs are absorbed most efficiently. The RI System is designed to reduce the
irritation to the GI tract caused by many commonly used drugs, including
aspirin. The Company believes the RI System has the potential to make such
drugs less irritating and therefore more widely used.
 
                                       3

<PAGE>
 
 
  In addition to the benefits described above, the Company believes that the
DepoMed Systems may offer additional advantages including multihour release
patterns for drugs of almost any solubility and the ability to use drug
combinations previously not feasible due to the pharmacokinetic differences of
drugs. The Company believes that by reducing the frequency of drug
administration, use of the DepoMed Systems may lead to reduced costs and
improved patient compliance. Also, by providing new formulations of existing
products using the DepoMed Systems, the Company believes that it will be able
to provide its collaborative partners with the ability to extend their patent
franchises on such products.
 
  The Company intends to have the DepoMed Systems used with as many
pharmaceutical products as possible with an emphasis on pharmaceutical products
which command a large market share or are in large market segments and where
the Company believes the DepoMed Systems will provide an advantage over other
drug delivery systems. The Company's primary strategy for the development and
commercialization of the DepoMed Systems involves establishing collaborative
relationships with pharmaceutical and biotechnology companies to develop
improved therapeutic products. The Company also intends to develop improved
generic and/or OTC products that utilize the DepoMed Systems either
independently or jointly by entering into collaborative partnerships with
pharmaceutical, biotechnology or other health care companies.
 
  The Company was incorporated in the State of California in August 1995.
Pursuant to a settlement agreement between M6 Pharmaceuticals, Inc. ("M6") on
the one hand, and Dr. John W. Shell and DepoMed Systems, Inc. ("DSI") on the
other hand, the Company obtained substantially all the assets, and assumed
certain liabilities, attributable to the business conducted by DSI prior to its
merger into M6. The Company's executive offices are located at 1170 B Chess
Drive, Foster City, California 94404 and its telephone number is (415) 513-
0990.
 
                                       4

<PAGE>
 
                                  THE OFFERING
 
Securities offered...................  2,500,000 shares of Common Stock and
                                       1,250,000 Warrants.
 
Terms of Warrants....................  Each Warrant entitles the holder thereof
                                       to purchase, at any time commencing    ,
                                       1998 [one year after the date of this
                                       Prospectus], until    , 2002 [five years
                                       after the date of this Prospectus], one
                                       share of Common Stock at a price of $
                                       per share [140% of the initial public
                                       offering price per share of Common
                                       Stock]. Commencing    , 1998 [18 months
                                       after the date of this Prospectus], the
                                       Warrants are subject to redemption by
                                       the Company, in whole but not in part,
                                       at $.10 per Warrant provided that the
                                       average closing sale price of the Common
                                       Stock as reported on the AMEX equals or
                                       exceeds $    per share [150% of the
                                       initial public offering price of the
                                       Common Stock] for any 20 trading days
                                       within a period of 30 consecutive
                                       trading days ending on the fifth trading
                                       day prior to the date of the notice of
                                       redemption. See "Description of
                                       Securities."
 
Common Stock outstanding prior to      4,263,447 shares of Common Stock.
 the Offering(1).....................
 
Securities to be outstanding after     6,763,447 shares of Common Stock and
 the Offering(1).....................  1,250,000 Warrants.
 
Use of proceeds......................  For research and development, laboratory
                                       and facilities capital expenditures,
                                       repayment of certain indebtedness and
                                       working capital and general corporate
                                       purposes. See "Use of Proceeds."
 
Proposed AMEX symbols:(2)
 
  Common Stock.......................  DMI
 
  Warrants...........................  DMI.WS
 
Risk Factors.........................  An investment in the Securities offered
                                       hereby involves a high degree of risk
                                       and immediate and substantial dilution,
                                       and should be made only by investors who
                                       can afford the loss of their entire
                                       investment. See "Risk Factors" and
                                       "Dilution."
- --------
(1) Excludes 196,667 shares of Common Stock issuable upon exercise of
    outstanding stock options as of March 31, 1997 at a weighted average
    exercise price of $1.64 per share under the Company's 1995 Stock Option
    Plan (the "Stock Plan"). Also excludes 128,333 shares available for grant
    under the Stock Plan. See "Management--1995 Stock Option Plan."
(2) Application has been made for listing of the Common Stock and Warrants on
    the AMEX. There can be no assurance that the Common Stock and Warrants will
    be accepted for listing on the AMEX.
 
                                       5

<PAGE>
 
                         SUMMARY FINANCIAL INFORMATION
 

<TABLE>
<CAPTION>
                                  PERIOD FROM                    PERIOD FROM
                                   INCEPTION                      INCEPTION
                               (AUGUST 7, 1995)   YEAR ENDED   (AUGUST 7, 1995)
                                      TO         DECEMBER 31,        TO
                               DECEMBER 31, 1995     1996     DECEMBER 31, 1996
                               ----------------- ------------ -----------------
<S>                            <C>               <C>          <C>
STATEMENT OF OPERATIONS DATA:
Product development
 revenues....................      $     --       $  317,971     $   317,971
Operating expenses:
  Research and development
   expenses..................        138,816         390,496         529,312
  General and administrative
   expenses..................        155,157         393,676         548,833
  Purchase of in-process
   research and development..        298,154             --          298,154
                                   ---------      ----------     -----------
Total operating expenses.....        592,127         784,172       1,376,299
Loss from operations.........       (592,127)       (466,201)     (1,058,328)
Interest expense, net........          8,541           6,572          15,113
                                   ---------      ----------     -----------
Net loss.....................      $(600,668)     $ (472,773)    $(1,073,441)
                                   =========      ==========     ===========
Pro forma net loss per share
 (1).........................                     $    (0.11)
                                                  ==========
Shares used in computing pro
 forma net loss per share
 (1).........................                      4,285,653
                                                  ==========
<CAPTION>
                                                       DECEMBER 31, 1996
                                                 ------------------------------
                                                                  PRO FORMA
                                                    ACTUAL     AS ADJUSTED(2)
                                                 ------------ -----------------
<S>                            <C>               <C>          <C>
BALANCE SHEET DATA:
Working capital (deficit)......................   $ (516,688)    $13,467,574
Total assets...................................      333,127      14,317,389
Notes payable to shareholders..................      294,238             --
Deficit accumulated during the development
 stage.........................................   (1,073,441)     (1,073,441)
Total shareholders' equity (net capital defi-
 ciency).......................................     (381,432)     13,897,068
</TABLE>

- --------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
    determination of the number of shares used in computing pro forma net loss
    per share.
(2) Adjusted to give effect to (i) the sale of 278,500 shares of Series B
    Preferred Stock in the first quarter of 1997, (ii) the Bridge Financing,
    and (iii) the receipt of the estimated net proceeds of the Offering upon an
    assumed initial public offering price of $6.50 per Share and $.10 per
    Warrant and the initial application of the net proceeds therefrom. See "Use
    of Proceeds."
 
                                       6

<PAGE>
 
                                 RISK FACTORS
 
  This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. An investment in the
Securities offered hereby involves a high degree of risk and should be made
only by investors who can afford the loss of their entire investment.
Prospective investors should carefully review and consider the risk factors
described below and other information in this Prospectus before purchasing the
Securities.
 
EARLY STAGE OF DEVELOPMENT; WORKING CAPITAL DEFICIT; LIMITED REVENUES; LIMITED
OPERATING HISTORY
 
  The Company is at an early stage of development and is subject to all
business risks associated with a new enterprise, including constraints on the
Company's financial and personnel resources, lack of established credit
facilities and collaborative partnering relationships, and uncertainties
regarding product development and future revenues. At December 31, 1996, the
Company had an accumulated deficit of $1,073,441 and a working capital deficit
of $516,688. The Company anticipates that it will continue to incur
substantial additional operating losses for at least the next several years
and expects cumulative losses to increase as the Company's research and
development efforts expand. The Company has had only minimal revenues to date
from collaborative research and development arrangements and feasibility
studies, and no revenues from product sales. There can be no assurance as to
when or whether it will be able to develop significant sources of revenue or
that its operations will become profitable, even if it is able to
commercialize any products.The Company has only a limited history of
operations, consisting primarily of development of its products and
sponsorship of research. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Notes to Financial
Statements.
 
GOING CONCERN DISCLOSURE IN INDEPENDENT AUDITORS' REPORT
 
  The report of the Company's independent auditors with respect to the
Company's financial statements included in this Prospectus includes a "going
concern" qualification, indicating that the Company's losses and deficits in
working capital and shareholders' equity raise substantial doubt about the
Company's ability to continue as a going concern. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Notes to
Financial Statements.
 
NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT
 
 
  The Company's research and development programs are at an early stage of
development. Substantial additional research and development will be necessary
in order for the Company to develop the DepoMed Systems, and there can be no
assurance that the DepoMed Systems will be developed or that products
utilizing the DepoMed Systems will be commercialized by the Company or third
parties in a timely manner or at all. In addition to further research and
development related to the DepoMed Systems, products utilizing the DepoMed
Systems will require clinical testing, regulatory approval and substantial
additional investment prior to commercialization. There can be no assurance
that products utilizing the DepoMed Systems will be successfully developed,
prove to be safe and efficacious in clinical trials, meet applicable
regulatory standards, be capable of being produced in commercial quantities at
acceptable costs, be eligible for third-party reimbursement from governmental
or private insurers, be successfully marketed or achieve market acceptance.
Further, the DepoMed Systems may prove to have undesirable or unintended side
effects that may prevent or limit their commercial use. The Company or its
collaborative partners may find that products that appeared promising in
preclinical studies do not demonstrate efficacy in larger-scale, Phase I,
Phase II and Phase III clinical trials and/or that such products will not
receive regulatory approvals. Accordingly, any product development program
undertaken by the Company may be curtailed, redirected or eliminated at any
time which could have a material adverse effect on the Company. See
"Business--The DepoMed Systems."
 
NEED FOR SUBSTANTIAL ADDITIONAL FUNDS
 
  The Company anticipates that the net proceeds from this Offering will enable
it to meet its capital and operational requirements for at least the 12 months
following the date of this Prospectus. However, this
 
                                       7

<PAGE>
 
expectation is based on the Company's current operating plan which can change
as a result of many factors, and the Company could require additional funding
sooner than anticipated. The Company's cash needs may also vary materially
from those now planned because of results of research and development,
relationships with possible collaborative partners, changes in the focus and
direction of the Company's research and development programs, competitive and
technological advances, results of clinical testing, requirements of the
United States Food and Drug Administration ("FDA") and comparable foreign
regulatory processes and other factors. The Company will require substantial
funds of its own or from third parties to conduct research and development,
preclinical and clinical testing, and to manufacture (or have manufactured)
and market (or have marketed) the products utilizing the DepoMed Systems. The
net proceeds of this Offering are not expected to be sufficient to fund the
Company's operations through commercialization of products yielding sufficient
revenues to support the Company's operations. The Company has no credit
facility or other committed sources of capital. To the extent capital
resources are insufficient to meet future capital requirements, the Company
will have to raise additional funds to continue the development of the DepoMed
Systems. There can be no assurance that such funds will be available on
favorable terms, or at all. To the extent that additional capital is raised
through the sale of equity or convertible debt securities, the issuance of
such securities could result in dilution to the Company's shareholders. If
adequate funds are not available, the Company may be required to curtail
operations significantly or to obtain funds through entering into
collaboration agreements on unattractive terms. The Company's inability to
raise capital would have a material adverse effect on the Company. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
 
DEPENDENCE ON AND NEED FOR COLLABORATIVE PARTNERS
 
  The Company's strategy for the research, development, clinical testing,
manufacturing and commercialization of products utilizing the DepoMed Systems
requires entering into collaborative arrangements with pharmaceutical and
biotechnology companies. The Company has received substantially all of its
revenues since inception from BMS and GalaGen and intends to enter into
collaborative arrangements with other companies to apply the DepoMed Systems,
fund development, commercialize potential products utilizing the DepoMed
Systems and assist in obtaining regulatory approval. Although the Company has
entered into a joint research agreement with BMS and a feasibility study with
GalaGen, there can be no assurance that either BMS or GalaGen will choose to
continue to fund these projects or enter into arrangements to commercialize
products utilizing the DepoMed Systems or, if they do, that any products
utilizing the DepoMed Systems will be successfully developed or
commercialized. Although the Company has entered into a letter of intent with
Oakmont pursuant to which Oakmont will manufacture the Company's reduced
irritation aspirin and enhanced absorption calcium supplement products and
have rights to distribute and sell these products in certain territories,
there can be no assurance that the Company and Oakmont will enter into a
definitive agreement or, if they do, that the Company will be successful in
developing these products or Oakmont will be successful in manufacturing,
distributing or marketing them. Further, there can be no assurance that any of
the Company's present or future collaborative partners will perform their
obligations as expected or will devote sufficient resources to the
development, clinical testing or marketing of the Company's potential products
developed under the collaborations or that the Company will be able to
negotiate future collaborative arrangements on acceptable terms, if at all, or
that such collaborations will be successful. Any parallel development by a
collaborative partner of alternative technologies, preclusion of the Company
from entering into competitive arrangements, failure to obtain timely
regulatory approvals, premature termination of an agreement, or failure by a
collaborative partner to devote sufficient resources to the development and
commercialization of products utilizing the DepoMed Systems could have a
material adverse effect on the Company. See "Business--Collaborative
Relationships."
 
  The Company's agreements with its collaborative partners are likely to be
complex. There may be provisions within such agreements which give rise to
disputes regarding the rights and obligations of the parties. These and other
possible disagreements could lead to delays in collaborative research,
development or commercialization of potential products, or could require or
result in litigation or arbitration, which would be time-consuming and
expensive, and could have a material adverse effect on the Company.
 
                                       8

<PAGE>
 
FLUCTUATIONS IN OPERATING RESULTS
 
  The Company's quarterly operating results will depend upon variations in
revenues recognized under collaborative agreements, including milestones,
royalties, license fees and other contract revenues, and the timing of new
product introductions by the Company and its collaborative partners. The
Company's quarterly operating results may also fluctuate significantly
depending on other factors, including the introduction of new products by the
Company's competitors, regulatory actions, market acceptance of the DepoMed
Systems, adoption of new technologies, manufacturing costs and capabilities,
changes in government funding, and third-party reimbursement policies. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
COMPETITION; TECHNOLOGICAL CHANGE
 
  Competition in the areas of pharmaceutical products and drug delivery
systems is intense and is expected to become more intense in the future.
Several other companies have developed or are developing novel technologies
for oral drug delivery, and these competing technologies may prove superior,
either generally or in particular market segments, in terms of factors such as
cost, consumer satisfaction or drug delivery profile. The Company's primary
competitors in the business of developing and applying drug delivery systems
include companies, such as ALZA Corporation ("ALZA"), Dura Pharmaceuticals,
Inc. ("Dura") and Elan Corporation plc ("Elan"), which have substantially
greater financial, technological, marketing, personnel and research and
development resources than the Company. In addition, the Company may face
competition from pharmaceutical and biotechnology companies that may develop
or acquire drug delivery systems or technologies. Many of the Company's
potential collaborative partners have devoted and are continuing to devote
significant resources in the development of their own drug delivery systems
and technologies. Potential products utilizing the DepoMed Systems will
compete both with products employing advanced drug delivery systems and with
products in conventional dosage forms. New drugs or future developments in
alternative technologies may provide therapeutic or cost advantages over
products utilizing the DepoMed Systems. There can be no assurance that
developments by others will not render the Company's potential products
utilizing the DepoMed Systems or technologies noncompetitive or obsolete. In
addition, the Company's competitive success will depend heavily on entering
into collaborative relationships on reasonable commercial terms, commercial
development of products utilizing the DepoMed Systems, regulatory approvals,
protection of intellectual property and market acceptance of such products.
See "Business--Competition."
 
NO ASSURANCE OF FDA APPROVAL; GOVERNMENT REGULATION
 
  FDA Approval Process. In the United States, pharmaceutical products,
including any products utilizing the DepoMed Systems, are subject to rigorous
regulation by the FDA. If a company fails to comply with applicable
requirements, it may be subject to administrative or judicially imposed
sanctions such as civil penalties, criminal prosecution of the company or its
officers and employees, injunctions, product seizure or detention, product
recalls, total or partial suspension of production and FDA refusal to approve
pending premarket approval applications, or supplements to approved
applications.
 
  Prior to commencement of clinical studies involving human beings,
preclinical testing of new pharmaceutical products is generally conducted on
animals in the laboratory to evaluate the potential efficacy and the safety of
the product. The results of these studies are submitted to the FDA as a part
of an Investigational New Drug ("IND") application, which must become
effective before clinical testing in humans can begin. Typically, clinical
evaluation involves a time consuming and costly three-phase process. In Phase
I, clinical trials are conducted with a small number of subjects to determine
the early safety profile, the pattern of drug distribution and metabolism. In
Phase II, clinical trials are conducted with groups of patients afflicted with
a specific disease in order to determine preliminary efficacy, optimal dosages
and expanded evidence of safety. In Phase III, large-scale, multi-center,
comparative trials are conducted with groups of patients afflicted with a
target disease in order to provide enough data to demonstrate the efficacy and
safety required by the FDA. The FDA closely monitors the progress of each of
the three phases of clinical testing and may, at its discretion, reevaluate,
 
                                       9

<PAGE>
 
alter, suspend or terminate the testing based upon the data which have been
accumulated to that point and its assessment of the risk/benefit ratio to the
patient.
 
  The results of the preclinical and clinical testing on a nonbiologic drug
and certain diagnostic drugs are submitted to the FDA in the form of a New
Drug Application ("NDA") for approval prior to commencement of commercial
sales. In responding to an NDA, the FDA may grant marketing approval, request
additional information or deny the application if the FDA determines that the
application does not satisfy its regulatory approval criteria. There can be no
assurance that approvals will be granted on a timely basis, if at all. Failure
to receive approval for any products utilizing the DepoMed Systems could have
a material adverse effect on the Company.
 
  Certain OTC products are subject to final monographs issued by the FDA. Such
products are subject to various FDA regulations such as those outlining
current good manufacturing practices ("cGMP") requirements, general and
specific OTC labeling requirements (including warning statements), the
restriction against advertising for conditions other than those stated in
approved product labeling, and the requirement that in addition to active
ingredients OTC drugs contain only suitable inactive ingredients. Facilities
which manufacture OTC products are subject to FDA inspection and failure to
comply with applicable regulatory requirements may lead to administrative or
judicially imposed penalties, as well as delays.
 
  Other Regulations. Even if required FDA approval has been obtained with
respect to a product, foreign regulatory approval of a product must also be
obtained prior to marketing the product internationally. Foreign approval
varies from country to country and the time required for approval may delay or
prevent marketing. In certain instances the Company or its collaborative
partners may seek approval to market and sell certain of its products outside
of the United States before submitting an application for United States
approval to the FDA. The regulatory procedures for approval of new
pharmaceutical products vary significantly among foreign countries. The
clinical testing requirements and the time required to obtain foreign
regulatory approvals may differ from that required for FDA approval. Although
there is now a centralized European Union ("EU") approval mechanism in place,
each EU country may nonetheless impose its own procedures and requirements,
many of which are time consuming and expensive, and some EU countries require
price approval as part of the regulatory process. Thus, there can be
substantial delays in obtaining required approvals from both the FDA and
foreign regulatory authorities after the relevant applications are filed, and
approval in any single country may not be a meaningful indication that the
product will thereafter be approved in another country.
 
  The Company is also subject to regulation under various federal and state
laws regarding, among other things, occupational safety, environmental
protection, hazardous substance control and product advertising and promotion.
In connection with its research and development activities and its
manufacturing, the Company is subject to federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling and disposal of certain materials
and wastes. The Company believes that it has complied with these laws and
regulations in all material respects and it has not been required to take any
action to correct any material noncompliance. See "Business--Government
Regulation."
 
NO MANUFACTURING, MARKETING OR SALES CAPABILITIES
 
  The Company does not have internal manufacturing, marketing or sales
resources. In view of its early stage of development and limited resources,
the Company does not anticipate spending a material portion of the net
proceeds of this Offering to acquire resources and develop capabilities in
these areas. Although the Company intends to acquire pilot manufacturing
equipment with a portion of the net proceeds from this Offering, the Company
does not intend to acquire or establish its own dedicated manufacturing
facilities for the foreseeable future. See "Use of Proceeds." Rather, the
Company's manufacturing strategy will be to utilize the facilities of its
collaborative partners or to develop manufacturing relationships with
established contract manufacturers to make products utilizing the DepoMed
Systems. In addition, the Company does not intend to establish an internal
sales and marketing capability, but will seek to rely on its collaborative
partners or distributor arrangements to market and sell the products utilizing
the DepoMed Systems. In April 1997, the Company and Oakmont signed
 
                                      10

<PAGE>
 
a letter of intent to enter into an agreement pursuant to which Oakmont will
manufacture the Company's reduced irritation aspirin and enhanced absorption
calcium supplement products and to have rights to distribute and sell these
products in territories to be determined. There can be no assurance that the
Company will be able to enter into manufacturing, marketing or sales
agreements on reasonable commercial terms, or at all, with Oakmont or any
other third party. Failure to do so could have a material adverse effect on
the Company.
 
  Manufacturers of products utilizing the DepoMed Systems will be subject to
applicable cGMP requirements prescribed by the FDA or other rules and
regulations prescribed by foreign regulatory authorities. There can be no
assurance that the Company will be able to enter into manufacturing agreements
either domestically or abroad with companies whose facilities and procedures
comply with cGMP or applicable foreign standards. Should such agreements be
entered into, the Company will be dependent on such manufacturers for
continued compliance with cGMP and applicable foreign standards. Failure by a
manufacturer of products utilizing the DepoMed Systems to maintain cGMP or
applicable foreign standards could result in significant time delays or the
inability of the Company to commercialize the DepoMed Systems and could have a
material adverse effect on the Company. At the present time, due to ongoing
consolidation in the chemical and pharmaceutical industries, the Company
believes there is a worldwide excess of manufacturing capacity available to
the Company. As a result, the Company believes that it will be able to enter
into agreements with suppliers and manufacturers on reasonable commercial
terms. However, there can be no assurance that there will be manufacturing
capacity available to the Company at the time the Company is ready to
commercialize the DepoMed Systems. There also can be no assurance that any
products utilizing the DepoMed Systems can be manufactured at a cost or in
quantities required to make it commercially viable. The Company's inability to
contract on acceptable terms and with qualified suppliers for the manufacture
of any products utilizing the DepoMed Systems or delays or difficulties in its
relationships with manufacturers, would have a material adverse effect on the
Company.
 
  Contract manufacturers must adhere to cGMP regulations strictly enforced by
the FDA on an ongoing basis through its facilities inspection program.
Contract manufacturing facilities must pass a pre-approval plant inspection
before the FDA will approve an NDA. Certain material manufacturing changes
that occur after approval are also subject to FDA review and clearance or
approval. There can be no assurance that the FDA or other regulatory agencies
will approve the process or the facilities by which any of the products
utilizing the DepoMed Systems may be manufactured. The Company's dependence on
third parties for the manufacture of products utilizing the DepoMed Systems
may adversely affect the Company's ability to develop and deliver products
utilizing the DepoMed Systems on a timely and competitive basis. See
"Business--Collaborative Relationships" and "Business--Manufacturing,
Marketing and Sales."
 
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
 
  The Company's success will depend in part on its ability to obtain and
maintain patent protection for its technologies and to preserve its trade
secrets. It is the policy of the Company to file patent applications in the
United States and foreign jurisdictions. The Company currently holds two
issued United States and two foreign patents and has two United States patent
applications and two foreign applications pending. No assurance can be given
that the Company's patent applications will be approved or that any issued
patents will provide competitive advantages for the DepoMed Systems or the
Company's technologies or will not be challenged or circumvented by
competitors. With respect to already issued patents and any patents which may
issue from the Company's applications, there can be no assurance that claims
allowed will be sufficient to protect the DepoMed Systems or the Company's
technologies. Patent applications in the United States are maintained in
secrecy until a patent issues, and the Company cannot be certain that others
have not filed patent applications for technology covered by the Company's
pending applications or that the Company was the first to file patent
applications for such technology. Competitors may have filed applications for,
or may have received patents and may obtain additional patents and proprietary
rights relating to, compounds or processes that may block the Company's patent
rights or compete without infringing the patent rights of the Company. In
addition, there can be no assurance that any patents issued to the Company
will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide proprietary protection or commercial advantage
to the Company.
 
 
                                      11

<PAGE>
 
  The Company also relies on trade secrets and proprietary know-how which it
seeks to protect, in part, through confidentiality agreements with employees,
consultants, collaborative partners and others. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any such breach or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. Although
potential collaborative partners and the Company's research partners and
consultants are not given access to proprietary trade secrets and know-how of
the Company until they have executed confidentiality agreements, these
agreements may be breached by the other party thereto or may otherwise be of
limited effectiveness or enforceability.
 
  The ability to develop the DepoMed Systems or the Company's technologies and
to commercialize products using the DepoMed Systems or such technologies will
depend on not infringing the patents of others. Although the Company is not
aware of any claim of patent infringement against it, claims concerning
patents and proprietary technologies determined adversely to the Company could
have a material adverse effect on the Company. In addition, litigation may
also be necessary to enforce any patents issued or licensed to the Company or
to determine the scope and validity of third-party proprietary rights. There
can be no assurance that the Company's issued or licensed patents would be
held valid by a court of competent jurisdiction. Whether or not the outcome of
litigation is favorable to the Company, the cost of such litigation and the
diversion of the Company's resources during such litigation could have a
material adverse effect on the Company.
 
  The pharmaceutical industry has experienced extensive litigation regarding
patent and other intellectual property rights. Accordingly, the Company could
incur substantial costs in defending itself in suits that may be brought
against the Company claiming infringement of the patent rights of others or in
asserting the Company's patent rights in a suit against another party. The
Company may also be required to participate in interference proceedings
declared by the United States Patent and Trademark Office for the purpose of
determining the priority of inventions in connection with the patent
applications of the Company or other parties. Adverse determinations in
litigation or interference proceedings could require the Company to seek
licenses (which may not be available on commercially reasonable terms) or
subject the Company to significant liabilities to third parties, and could
therefore have a material adverse effect on the Company. See "Business--
Patents and Proprietary Rights."
 
RELATIONSHIPS OF ADVISORS WITH OTHER ENTITIES
 
  Certain members of the Company's Policy Advisory Board and Development
Advisory Board are employed on a full-time basis by academic or research
institutions. In some cases, members of the Policy Advisory Board and
Development Advisory Board also act as consultants to the other companies. In
addition, except for work performed specifically for and at the direction of
the Company, any inventions or processes discovered by such persons will be
the intellectual property of their institutions or other companies. If the
Company desires access to inventions which are not its property, it will be
necessary for the Company to obtain licenses to such inventions from these
institutions or companies. In addition, invention assignment agreements
executed by such persons in connection with their relationships with the
Company may be subject to the rights of their primary employers or other third
parties with whom they have consulting relationships. See "Business--Advisors
to the Company."
 
HEALTHCARE REFORM; UNCERTAIN AVAILABILITY OF HEALTHCARE REIMBURSEMENT
 
  The healthcare industry is changing rapidly as the public, government,
medical professionals, third-party payors and the pharmaceutical industry
examine ways to contain or reduce the cost of health care. Changes in the
healthcare industry could impact the Company's business, particularly to the
extent that the Company develops the DepoMed Systems for use in prescription
drug applications. In certain foreign markets pricing or profitability of
prescription pharmaceuticals is subject to government control. In the United
States, there have been, and the Company expects that there will continue to
be, a number of federal and state proposals to implement similar government
control or cost containment, particular with respect to Medicare payments. In
addition, emphasis on managed care in the United States has increased and is
expected to continue to increase
 
                                      12

<PAGE>
 
the pressure on pharmaceutical pricing. While the Company cannot predict
whether any such legislative or regulatory proposals will be adopted or the
effect such proposals or managed care efforts may have on its business, the
announcement of such proposals or efforts could have a material adverse effect
on the Company's ability to raise capital, and the adoption of such proposals
or efforts could have a material adverse effect on the Company. Further, to
the extent that such proposals or efforts have a material adverse effect on
pharmaceutical and biotechnology companies or other healthcare providers that
are prospective collaborative partners for the Company, the Company's ability
to establish collaborations may be adversely affected. In addition, in both
domestic and foreign markets, sales of products utilizing the DepoMed Systems
will depend in part on the availability of reimbursement from third-party
payors such as government health administration authorities, private health
insurers and other organizations. Third-party payors are increasingly
challenging the price and cost-effectiveness of prescription pharmaceutical
products. Significant uncertainty exists as to the reimbursement status of
newly approved healthcare products. There can be no assurance that products
utilizing the DepoMed Systems will be considered cost effective or that
adequate third-party reimbursement will be available to the Company's
collaborators to maintain price levels sufficient to realize an appropriate
return on the Company's investment in the DepoMed Systems.
 
DEPENDENCE ON MANAGEMENT AND OTHER KEY EMPLOYEES
 
  The success of the Company is dependent in large part upon the continued
services of John W. Shell and John W. Fara, its Chairman and Chief Scientific
Officer, and President and Chief Executive Officer, respectively, and other
members of the Company's executive management, and on the Company's ability to
attract and retain key management and operating personnel. The Company intends
to apply for key man life insurance on the lives of Drs. Shell and Fara in the
amount of $2,000,000 each. Such persons are in high demand and are often
subject to competing offers. In particular, the Company's success will depend,
in part, on its ability to attract and retain the services of its executive
officers and scientific and technical personnel. The loss of the services of
one or more members of management or key employees or the inability to hire
additional personnel as needed may have a material adverse effect on the
Company. See "Business--Employees" and "Management--Executive Officers and
Directors."
 
SUBSTANTIAL CONTROL BY OFFICERS, DIRECTORS AND THEIR AFFILIATES
 
  Following the Offering, the Company's officers and directors and their
affiliates will beneficially own or control approximately 50.3% of the
outstanding shares of Common Stock. Accordingly, such officers, directors and
their affiliates may be able to influence the outcome of shareholder votes,
including votes concerning election of directors, adoption of amendments to
the Company's Articles of Incorporation and Bylaws and approval of mergers and
other significant corporate transactions. See "Principal Shareholders."
 
RISK OF PRODUCT LIABILITY; UNCERTAINTY OF AVAILABILITY OF PRODUCT LIABILITY
INSURANCE
 
  The Company's business involves exposure to potential product liability
risks that are inherent in the production and manufacture of pharmaceutical
products. Any such claims could have a material adverse effect on the Company.
The Company does not currently have any product liability insurance. Although
the Company has applied to obtain product liability insurance, there can be no
assurance that it will be able to obtain or maintain such insurance on
acceptable terms, that the Company will be able to secure increased coverage
as the commercialization of its potential products utilizing the DepoMed
Systems proceeds or that any insurance will provide adequate protection
against potential liabilities. Claims or losses in excess of the limit of any
liability insurance coverage obtained by the Company could have a material
adverse effect on the Company. See "Business--Product Liability."
 
ABSENCE OF DIVIDENDS
 
  The Company has never declared or paid cash dividends on its Common Stock
and does not intend to pay any cash dividends in the foreseeable future. See
"Dividend Policy."
 
 
                                      13

<PAGE>
 
NO PUBLIC MARKET FOR THE SECURITIES; ARBITRARY DETERMINATION OF PUBLIC
OFFERING PRICES
 
  Prior to the Offering, there has been no public market for the Securities,
and there can be no assurance that an active trading market will develop, or,
if developed, be sustained in any of the Securities after the Offering. The
initial public offering price of the Securities and the exercise price and
terms of the Warrants have been determined arbitrarily by negotiations between
the Company and the Representative and do not necessarily bear any
relationship to the Company's asset value, net worth or other established
criteria of value. Factors considered in such negotiations, in addition to
prevailing market conditions, included the history and prospects for the
industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure and certain
other factors as were deemed relevant. Accordingly, the initial public
offering price of the Securities and the exercise price and terms of the
Warrants may not be indicative of prices that may prevail at any time or from
time to time in the public market for the Securities. See "Underwriting."
 
PRICE VOLATILITY
 
  The securities markets have from time to time experienced significant price
and volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market prices of the common stock of
many publicly traded pharmaceutical or biotechnology companies have in the
past been, and can in the future be expected to be, especially volatile.
Announcements of technological innovations or new products by the Company or
its competitors, developments or disputes concerning patents or proprietary
rights, publicity regarding actual or potential medical results relating to
products under development by the Company or its competitors, regulatory
developments in both the United States and foreign countries, delays in the
Company's testing and development schedules, public concern as to the safety
of biopharmaceutical or biotechnology products and economic and other external
factors, as well as period-to-period fluctuations in the Company's financial
results, may have a significant impact on the market price of the Securities.
 
POTENTIAL ADVERSE EFFECT OF REPRESENTATIVE'S WARRANTS
 
  At the consummation of the Offering, the Company will sell to the
Representative for nominal consideration the Representative's Warrants to
purchase up to 250,000 shares of Common Stock and/or 125,000 Warrants. The
Representative's Warrants will be exercisable for a period of four years
commencing    , 1998 [one year after the effective date of this Offering], at
an exercise price of $   per share [120% of the initial public offering price
per share of Common Stock] and $    per Warrant [120% of the initial public
offering price per Warrant]. The Warrants obtained upon exercise of the
Representative's Warrants will be exercisable for a period of four years
commencing one year after the effective date of this Offering, at an exercise
price of $    per share [140% of the initial public offering price per share
of Common Stock]. For the term of the Representative's Warrants, the holders
thereof will have, at nominal cost, the opportunity to profit from a rise in
the market price of the Securities without assuming the risk of ownership,
with a resulting dilution in the interest of other security holders. As long
as the Representative's Warrants remain unexercised, the Company's ability to
obtain additional capital may be adversely affected. Moreover, the
Representative may be expected to exercise the Representative's Warrants at a
time when the Company would, in all likelihood, be able to obtain any needed
capital through a new offering of its securities on terms more favorable to
the Company than those provided by the Representative's Warrants. See
"Underwriting."
 
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS
 
  Commencing    , 1998 [18 months after the date of this Prospectus], the
Warrants are subject to redemption at $0.10 per Warrant on 30 days' prior
written notice to the Warrant holders if the average closing sales price of
the Common Stock as reported on the AMEX equals or exceeds $   per share [150%
of the initial public offering price per share of Common Stock] for any 20
trading days within a period of 30 consecutive trading days ending on the
fifth trading day prior to the date of the notice of redemption. If the
Warrants are redeemed, holders of the Warrants will lose their rights to
exercise the Warrants after the expiration of the 30 day notice of redemption
period. Upon receipt of a notice of redemption, holders would be required to:
 
                                      14

<PAGE>
 
(i) exercise the Warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so, (ii) sell the Warrants at the current
market price, if any, when they might otherwise wish to hold the Warrants or
(iii) accept the redemption price which is likely to be substantially less
than the market value of the Warrants at the time of redemption. See
"Description of Securities--Warrants."
 
MANAGEMENT'S DISCRETION IN USE OF PROCEEDS
 
  Approximately $2.4 million or approximately 18% of the estimated net
proceeds of the Offering has been allocated to working capital and general
corporate purposes. Accordingly, the Company's Board of Directors will have
discretion with respect to the allocation of such net proceeds. See "Use of
Proceeds."
 
DILUTION; DISPARITY OF CONSIDERATION
 
  Purchasers of shares of Common Stock in this Offering will experience an
immediate and substantial dilution of $4.45 per share based on an assumed
initial public offering price of $6.50 per share of Common Stock. Additional
dilution to future net tangible book value per share may occur upon exercise
of outstanding stock options and warrants and may occur, in addition, if the
Company issues additional equity securities in the future. The current
shareholders of the Company, including officers and directors, acquired their
shares of Common Stock for nominal consideration or for consideration
substantially less than the public offering price of the shares of Common
Stock offered hereby. As a result, new investors will bear substantially all
of the risks inherent in an investment in the Company. See "Dilution" and
"Certain Transactions."
 
POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
 
  Future sales of Common Stock by shareholders and option holders or through
the exercise of the Warrants could have an adverse effect on the market prices
of the Securities. Upon completion of this Offering, the Company will have
6,763,447 shares of Common Stock outstanding, of which the 2,500,000 shares
offered hereby (and the 1,250,000 Warrants) will be transferable without
restriction under the Securities Act. The Company, all officers and directors
of the Company and all holders of outstanding securities exercisable for or
convertible into Common Stock have entered into contractual arrangements (the
"Lock-Up Agreements") and have agreed not to directly or indirectly, issue,
agree or offer to sell, transfer, assign, distribute, grant an option for
purchase of sale of, pledge, hypothecate or otherwise encumber or dispose of
any beneficial interest in such securities for a period of 12 months following
the date of this Prospectus (the "Lock-Up Period") without the prior written
consent of the Representative. As a result, notwithstanding the possible
earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701
under the Securities Act of 1933, as amended (the "Securities Act"), shares
subject to the Lock-Up Agreements will not be saleable until the Lock-Up
Period expires or the terms of the Lock-Up Agreements are waived by the
Representative. Assuming that the Representative does not release the
shareholders from the Lock-Up Agreements, after the Lock-Up Period all of the
shares will be eligible for sale in the public market. Of such shares,
3,355,991 shares of Common Stock will be eligible for sale under Rule 144
(subject to volume limitations imposed by such rule), 815,789 shares of Common
Stock will be eligible for sale under Rule 144(k), and 91,667 shares will be
eligible for sale under Rule 701. In addition, the Company intends to register
on Form S-8 under the Securities Act, as soon as possible after the Effective
Date, shares of Common Stock issuable under options granted under the Stock
Plan. Such registration becomes effective immediately upon its filing with the
Securities and Exchange Commission (the "Commission"). As of March 31, 1997,
options to purchase a total of 196,667 shares of Common Stock were
outstanding, and options to purchase an additional 128,333 shares of Common
Stock were reserved for future issuance under the Stock Plan.
 
  No prediction can be made as to the effect that future sales of Common
Stock, or the availability of shares of Common Stock for future sale, will
have on the market prices of the Common Stock and Warrants prevailing from
time to time. The sale or issuance, or the potential for sale or issuance, of
Common Stock after the Lock-Up Period could have an adverse impact on the
market prices of the Common Stock and/or the Warrants. Sales of substantial
amounts of Common Stock or the perception that such sales could occur could
adversely affect
 
                                      15

<PAGE>
 
prevailing market prices for the Common Stock and/or the Warrants. See
"Underwriting" and "Shares Eligible for Future Sale."
 
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS
 
  The Warrants are not exercisable unless, at the time of exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants and such shares have been registered, qualified
or deemed to be exempt under the securities or "blue sky" laws of the state of
residence of the exercising holder of the Warrants. Although the Company has
undertaken to use its best efforts to have all of the shares of Common Stock
issuable upon exercise of the Warrants registered or qualified on or before
the exercise date and to maintain a current prospectus relating thereto until
the expiration of the Warrants, there is no assurance that it will be able to
do so. The value of the Warrants may be greatly reduced if a current
prospectus covering the Common Stock issuable upon the exercise of the
Warrants is not kept effective or if such Common Stock is not qualified or
exempt from qualification in the states in which the holders of the Warrants
reside. Until completion of this Offering, the Common Stock and the Warrants
may only be purchased together on the basis of two shares of Common Stock and
one Warrant, but the Warrants will be separately tradeable immediately after
this Offering. Although the Securities will not knowingly be sold to
purchasers in jurisdictions in which the Securities are not registered or
otherwise qualified for sale, investors may purchase the Warrants in the
secondary market or move to a jurisdiction in which the shares underlying the
Warrants are not registered or qualified during the period that the Warrants
are exercisable, the Company will be unable to issue shares to those persons
desiring to exercise their Warrants unless and until the shares are qualified
for sale in jurisdictions in which such purchasers reside, or an exemption
from such qualification exists in such jurisdictions, and holders of the
Warrants would have no choice but to attempt to sell the Warrants in a
jurisdiction where such sale is permissible or allow them to expire
unexercised. See "Description of Securities--Warrants."
 
                                      16

<PAGE>
 
                                USE OF PROCEEDS
 
  The net proceeds to the Company from the sale of the Securities offered
hereby (assuming an initial public price of $6.50 per Share and $0.10 per
Warrant), after deduction of underwriting discounts and other estimated
expenses relating to the Offering, are estimated to be approximately
$14,000,000 (or $16,200,000 if the Over-Allotment Option is exercised in
full). The Company intends to use the net proceeds as follows:
 

<TABLE>
<CAPTION>
                                                 NET PROCEEDS PERCENT OF TOTAL
                                                 ------------ ----------------
   <S>                                           <C>          <C>
   Research and development expenses............ $ 7,000,000         50%
   Laboratory and facilities capital
    expenditures................................   3,000,000         21%
   Repayment of certain indebtedness............   1,600,000         11%
   Working capital and general corporate
    purposes....................................   2,400,000         18%
                                                 -----------        ---
     Total...................................... $14,000,000        100%
                                                 ===========        ===
</TABLE>

 
  Research and Development Expenses. The Company intends to continue investing
in the further development of its oral drug delivery technologies and the
DepoMed Systems. The Company also intends to develop generic compounds, such
as a reduced irritation aspirin product and an enhanced absorption calcium
supplement product, internally. The Company intends to conduct or fund
clinical trials on such products and will undertake the associated regulatory
activities.
 
  Laboratory and Facilities Capital Expenditures. The Company intends to spend
a portion of the net proceeds of this Offering to make capital investments in
laboratories and related facilities, including the leasing of laboratory,
testing and pilot manufacturing facilities, leasehold improvements and
purchase of laboratory and pilot scale manufacturing equipment.
 
  Repayment of Certain Indebtedness. Approximately $1,000,000 of the net
proceeds of this Offering will be used to repay indebtedness of the Company
incurred in connection with the Bridge Financing. In connection with the
Bridge Financing, the Company issued promissory notes (the "Bridge Notes") in
the aggregate principal amount of $1,000,000 to fund working capital and
general corporate purposes. Interest accrues on the Bridge Notes at the rate
of 6% per annum and the Bridge Notes will become due and payable on the
consummation of the Offering. Approximately $600,000 of the net proceeds of
this Offering will be used to repay other indebtedness of the Company,
including unpaid salaries and five promissory notes held by officers of the
Company. As of March 31, 1997, $250,667 of principal was outstanding and
$47,456 of interest was outstanding on such promissory notes. Interest accrues
on $150,667 of principal at the rate of 6% per annum and on the remaining
$100,000 at the rate of 6.5% per annum. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Certain Transactions."
 
  The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Offering, based on the current state of its
operations, its current plans and current economic conditions. Proceeds may be
reapportioned among categories listed above. The amount and timing of
expenditures will vary depending upon a number of factors, including progress
of the Company's operations, technical advances, terms of collaborative
arrangements, changes in competitive conditions and determinations with
respect to the commercial potential of products utilizing the DepoMed Systems.
 
  The Company currently anticipates that the net proceeds of this Offering
will enable it to meet its operational and capital requirements for at least
the 12 months following the date of this Prospectus. However, there can be no
assurance the net proceeds of this Offering will satisfy the Company's
requirements for any particular period of time. The Company anticipates that
additional funding may be required after the use of proceeds of the Offering.
No assurance can be given that such additional financing will be available
when needed on terms acceptable to the Company, if at all. See "Risk Factors--
Need for Substantial Additional Funds."
 
  Pending application of the net proceeds of the Offering, the Company intends
to invest such net proceeds in interest-bearing, short-term investment grade
financial instruments.
 
                                      17

<PAGE>
 
                                DIVIDEND POLICY
 
  The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain its earnings for future growth
and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
 
                                CAPITALIZATION
 
  The following table sets forth the capitalization of the Company as of
December 31, 1996 (i) on an actual basis, and (ii) pro forma as adjusted to
give effect to (a) the sale of 278,500 shares of Series B Preferred Stock in
the first quarter of 1997, (b) the Bridge Financing, (c) the estimated net
proceeds from the sale of Common Stock and Warrants offered hereby at an
assumed initial public offering price of $6.50 per Share and $0.10 per Warrant
and the initial application of the estimated net proceeds therefrom (including
the repayment of all the Bridge Notes in the principal amount of $1,000,000),
and (d) the conversion of the Preferred Stock into 908,623 shares of Common
Stock upon consummation of the Offering. This table should be read in
conjunction with the Company's Financial Statements and related Notes thereto
and Selected Financial Data appearing elsewhere in this Prospectus. See "Use
of Proceeds."
 

<TABLE>
<CAPTION>
                                                      DECEMBER 31, 1996
                                              ----------------------------------
                                                ACTUAL     PRO FORMA AS ADJUSTED
                                              -----------  ---------------------
<S>                                           <C>          <C>
Shareholders' equity (net capital
 deficiency):
  Preferred stock, no par value, 10,000,000
   shares authorized, 2,447,368 shares issued
   and outstanding, actual; 5,000,000 shares
   authorized, none issued and outstanding,
   pro forma as adjusted..................... $   682,759       $       --
  Common stock, no par value, 25,000,000
   shares authorized, 3,354,825 shares issued
   and outstanding, actual; 6,763,447 shares
   issued and outstanding, pro forma as
   adjusted(1)...............................     284,250        15,245,509
Deferred compensation........................    (275,000)         (275,000)
Deficit accumulated during the development
 stage.......................................  (1,073,441)       (1,073,441)
                                              -----------       -----------
  Total shareholders' equity (net capital
   deficiency)............................... $  (381,432)      $13,897,068
                                              ===========       ===========
</TABLE>

- --------
(1) Excludes 196,667 shares of Common Stock issuable upon the exercise of
    outstanding stock options as of March 31, 1997 at a weighted average
    exercise price of $1.64 per share under the Stock Plan. Also excludes
    128,333 shares of Common Stock reserved for future grants of options under
    the Stock Plan. See "Management--1995 Stock Option Plan."
 
                                      18

<PAGE>
 
                                   DILUTION
 
  As of December 31, 1996, the pro forma net tangible book value (deficit) of
the Company's Common Stock was $(102,932), or approximately $(0.02) per share
of Common Stock after giving effect to (i) the sale of Series B Preferred
Stock in the first quarter of 1997, (ii) the Bridge Financing, and (iii) the
conversion of the Preferred Stock into Common Stock upon consummation of the
Offering. Pro forma net tangible book value per share represents the total
amount of tangible assets less total liabilities divided by the number of
shares of Common Stock issued and outstanding. After giving effect to the sale
of the Common Stock and Warrants offered hereby at an assumed initial public
offering price of $6.50 per share of Common Stock and $0.10 per Warrant (after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company), the pro forma net tangible book value of the
Company at December 31, 1996 would have been $13,897,068, or approximately
$2.05 per share of Common Stock. This represents an immediate increase in net
tangible book value of $2.07 per share of Common Stock to existing
shareholders of Common Stock and an immediate dilution in net tangible book
value of $4.45 per share of Common Stock to new investors. The following table
illustrates this per share dilution:
 

<TABLE>
   <S>                                                             <C>    <C>
   Assumed initial public offering price per share...............         $6.50
   Pro forma net tangible book value (deficit) per share prior to
    this Offering................................................  (0.02)
   Increase per share attributable to this Offering..............   2.07
                                                                   -----
   Pro forma net tangible book value per share after this
    Offering.....................................................          2.05
                                                                          -----
   Dilution per share to new investors...........................         $4.45
                                                                          =====
</TABLE>

 
  The computations in the table set forth above assume that the Over-Allotment
Option is not exercised. If the Over-Allotment Option is exercised in full,
the pro forma net tangible book value as of December 31, 1996 would have been
$16,095,411 or $2.25 per share of Common Stock, resulting in dilution to new
investors of $4.25 per share of Common Stock.
 
  The following table summarizes, on a pro forma basis to reflect the same
adjustments described above, the number of shares of Common Stock purchased
from the Company, the total consideration paid and the average price per share
paid by (i) existing shareholders of Common Stock at December 31, 1996, and
(ii) new shareholders in the Offering, assuming the sale of the Common Stock
and Warrants offered hereby at an assumed initial public offering price of
$6.50 per Share. The calculations are based upon total consideration given by
new investors and existing shareholders before any deduction of underwriting
discounts and offering expenses payable by the Company.
 

<TABLE>
<CAPTION>
                                                     TOTAL
                            SHARES PURCHASED     CONSIDERATION
                            ----------------- ------------------- AVERAGE PRICE
                             NUMBER   PERCENT   AMOUNT    PERCENT   PER SHARE
                            --------- ------- ----------- ------- -------------
<S>                         <C>       <C>     <C>         <C>     <C>
Existing shareholders(1)... 4,263,447    63%  $ 1,037,750     6%      $0.24
New investors(2)........... 2,500,000    37%   16,250,000    94%      $6.50
                            ---------   ---   -----------   ---
  Total.................... 6,763,447   100%  $17,220,509   100%
                            =========   ===   ===========   ===
</TABLE>

- --------
(1) Excludes 196,667 shares of Common Stock issuable upon exercise of stock
    options as of March 31, 1997 with a weighted average exercise price of
    $1.64 per share outstanding under the Stock Plan. Also excludes 128,333
    shares of Common Stock reserved for future grants of options under the
    Stock Plan. See "Management--1995 Stock Option Plan."
(2) Reflects no proceeds received from the sale of the Warrants.
 
                                      19

<PAGE>
 
                            SELECTED FINANCIAL DATA
 
  The selected statements of operations data for the period from inception
(August 7, 1995) to December 31, 1995, for the year ended December 31, 1996
and for the period from inception (August 7, 1995) to December 31, 1996 and
the balance sheet data at December 31, 1996 are derived from the financial
statements of the Company which have been audited by Ernst & Young LLP,
independent auditors. The selected financial data set forth below is qualified
in its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Financial Statements and related Notes thereto appearing
elsewhere in this Prospectus.
 

<TABLE>
<CAPTION>
                                  PERIOD FROM                    PERIOD FROM
                                   INCEPTION                      INCEPTION
                                (AUGUST 7, 1995)              (AUGUST 7, 1995)
                                       TO         YEAR ENDED         TO
                                  DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                      1995           1996           1996
                                ---------------- ------------ -----------------
<S>                             <C>              <C>          <C>
STATEMENT OF OPERATIONS DATA:
Product development revenues..     $     --       $ 317,971      $   317,971
Operating expenses:
  Research and development
   expenses...................       138,816        390,496          529,312
  General and administrative
   expenses...................       155,157        393,676          548,833
  Purchase of in-process
   research and development...       298,154            --           298,154
                                   ---------      ---------      -----------
Total operating expenses......       592,127        784,172        1,376,299
Loss from operations..........      (592,127)      (466,201)      (1,058,328)
Interest expense, net.........         8,541          6,572           15,113
                                   ---------      ---------      -----------
Net loss......................     $(600,668)     $(472,773)     $(1,073,441)
                                   =========      =========      ===========
Pro forma net loss per
 share(1).....................                    $   (0.11)
                                                  =========
Shares used in computing pro
 forma net loss per share(1)..                    4,285,653
                                                  =========
<CAPTION>
                                                              DECEMBER 31, 1996
                                                              -----------------
<S>                             <C>              <C>          <C>
BALANCE SHEET DATA:
Working capital (deficit)...................................     $  (516,688)
Total assets................................................         333,127
Notes payable to shareholders...............................         294,238
Capital lease obligation, non-current portion...............          34,634
Deficit accumulated during development stage................      (1,073,441)
Total shareholders' equity (net capital deficiency).........        (381,432)
</TABLE>

- --------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
    determination of the number of shares used in computing pro forma net loss
    per share.
 
                                      20

<PAGE>
 

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
 
  The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and related
Notes thereto appearing elsewhere in this Prospectus. Except for the
historical information contained herein, the discussion in this Prospectus
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors," as
well as those discussed elsewhere herein.
 
GENERAL
 
  Since its inception in August 1995, the Company has devoted substantially
all its efforts to research and development conducted on its own behalf and
through collaborations with pharmaceutical partners in connection with the
DepoMed Systems. The Company's primary activities since inception (August 7,
1995) have been, in addition to research and development, establishing its
offices and research facilities, recruiting personnel, filing patent
applications, developing a business strategy and raising capital. To date, the
Company has received only limited revenue, all of which has been from
collaborative research and feasibility arrangements. At its inception in 1995,
the Company acquired $298,154 of in-process research and development
technology. This amount was recognized as operating expense in 1995. There was
no such expense in 1996. The Company has generated a cumulative net loss of
$1,073,441 for the period from its inception through December 31, 1996.
 
  The Company intends to continue investing in the further development of its
drug delivery technologies and the DepoMed Systems. The Company also intends
to develop generic compounds, such as a reduced irritation aspirin product and
an enhanced absorption calcium supplement product, internally. Depending upon
a variety of factors, including collaborative arrangements, available
personnel and financial resources, the Company will conduct or fund clinical
trials on such products and will undertake the associated regulatory
activities. The Company will need to make additional capital investments in
laboratories and related facilities, including the purchase of laboratory and
pilot scale manufacturing equipment. As additional personnel are hired in 1997
and beyond, expenses can be expected to increase from their 1996 levels.
Within the next 12 months, the Company will also require additional space for
laboratory, testing and pilot manufacturing facilities. See "Use of Proceeds."
 
RESULTS OF OPERATIONS
 
  The Company commenced operations in August 1995. Because of the difference
in the length of the reported periods, the comparison of the period from
inception to December 31, 1995 to the year ended December 31, 1996 is not
meaningful and has not been presented.
 
 Year Ended December 31, 1996
 
  Revenues in 1996 were $317,971, primarily the result of the joint research
agreement with BMS.
 
  Research and development expenses in 1996 were $390,496, primarily
consisting of personnel costs and laboratory supply expenses.
 
  General and administrative expenses in 1996 were $393,676, primarily
consisting of personnel costs, facilities expenses and fees paid to outside
financial consultants.
 
                                      21

<PAGE>
 
  The Company records and amortizes over related vesting periods deferred
compensation representing the difference between the exercise price of options
granted and the deemed fair value of its Common Stock at the time of grant.
Options generally vest over four years. Deferred compensation of $275,000 has
been recorded and is being amortized to both research and development expenses
as well as general and administrative expenses over the related vesting
periods of the options granted during the period ended December 31, 1996.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Since inception, the Company has financed operations principally from the
sale of preferred stock. In 1995, the Company issued 2,447,368 shares of
Series A Preferred Stock for net proceeds of $682,759. In the first quarter of
1997, the Company issued 278,500 shares of Series B Preferred Stock for an
aggregate purchase price of $278,500. In 1996, the Company borrowed $50,000
from an officer of the Company, which the Company intends to repay with a
portion of the net proceeds of this Offering. See "Use of Proceeds" and
"Certain Transactions."
 
  In April 1997, the Company completed the Bridge Financing and issued the
Bridge Notes to fund working capital and general corporate purposes. The
Bridge Notes bear interest at the rate of 6% per annum and are due and payable
upon the closing of this Offering. The Company intends to use a portion of the
net proceeds of this Offering to repay the entire principal amount of and the
accrued interest on the Bridge Notes. In connection with the Bridge Financing,
the Company issued Bridge Warrants entitling the investors to purchase the
number of shares of Common Stock which equals 50% of their investment divided
by the initial public offering price per share of the Common Stock. A total of
76,923 shares of Common Stock will be issuable upon exercise of the Bridge
Warrants at an exercise price of $6.50 per share of Common Stock, assuming an
initial public offering price of $6.50 per share. The Bridge Warrants may be
exercised at any time during the four year period beginning 12 months after
the date of this Prospectus. See "Use of Proceeds" and Note 9 of Notes to
Financial Statements.
 
  Cash used in operations in 1996 was $391,316 compared to $194,019 for the
period from inception to December 31, 1995. The period from inception to
December 31, 1995 included a non-recurring charge of $298,154 for the
acquisition of in-process research and development technology. Cash used for
operations is expected to increase in 1997 as a result of increased
expenditures and working capital requirements to support product development
and expanded and continuing research activities.
 
  Cash used in investing activities primarily related to capital expenditures
for property and equipment. Capital expenditures in 1996 were $28,708. Capital
expenditures for the period from inception to December 31, 1995 were $49,645.
In addition, in 1996, $56,393 of equipment was acquired and financed under a
capital lease. For the period from inception to December 31, 1995 $65,563 of
equipment was acquired and financed under a capital lease. Capital
expenditures in both years were primarily for research and development
equipment. Capital expenditures during the 12 months following the date of
this Prospectus may include pilot manufacturing equipment, such as tablet
presses for proof of principle, and product development and quality control
laboratory equipment. In the future the Company may seek lease financing for
certain additional equipment. Upon completion of the Offering, the Bridge
Notes, the promissory notes issued to the officers of the Company and accrued,
unpaid salaries will be paid with a portion of the net proceeds from this
Offering. See "Use of Proceeds"
 
  The Company anticipates that the net proceeds from this Offering, will
enable it to meet its capital and operational requirements for at least the 12
months following the date of this Prospectus. Cash needs of the Company may
vary materially from those now planned because of results of research and
development, relationships with possible collaborative partners, changes in
the focus and direction of the Company's research and development programs,
competitive and technological advances, results of clinical testing,
requirements of the FDA and comparable foreign regulatory processes and other
factors. The Company will require substantial funds of its own or from third
parties to conduct research and development, preclinical and clinical testing,
and to manufacture (or have manufactured) and market (or have marketed) the
products utilizing the DepoMed Systems. The net proceeds of this Offering are
not expected to be sufficient to fund the Company's operations
 
                                      22

<PAGE>
 
through commercialization of products yielding sufficient revenues to support
the Company's operations. The Company has no credit facility or other
committed sources of capital. To the extent capital resources are insufficient
to meet future capital requirements, the Company will have to raise additional
funds to continue the development of its technologies. There can be no
assurance that such funds will be available on favorable terms, or at all. To
the extent that additional capital is raised through the sale of equity or
convertible debt securities, the issuance of such securities could result in
dilution to the Company's shareholders. If adequate funds are not available,
the Company may be required to curtail operations significantly or to obtain
funds through entering into collaboration agreements on unattractive terms.
The Company's inability to raise capital would have a material adverse effect
on the Company.
 
NET OPERATING LOSSES
 
  The Company has not generated any taxable income to date. At December 31,
1996, the net operating losses available to offset future taxable income for
federal income tax purposes were approximately $500,000. Because the Company
has experienced ownership changes, future utilization of carry forwards may be
limited in any fiscal year pursuant to Internal Revenue Code regulations. The
carryforwards expire at various dates beginning in 2010 through 2011 if not
utilized. As a result of the annual limitation, anticipated and future losses,
all or a portion of these carryforwards may expire before becoming available
to reduce the Company's federal income tax liabilities.
 
 
                                      23

<PAGE>
 
 
                                  BUSINESS
 
  The Company is a development stage company engaged in the development of new
and proprietary oral drug delivery technologies. Utilizing these technologies,
the Company has developed two types of oral drug delivery systems, the GR
System and the RI System. The GR System is designed to be retained in the
stomach for an extended period of time while it delivers the incorporated drug
or drugs and the RI System is designed to reduce the GI irritation that is a
side effect of many drugs. In addition, the DepoMed Systems are designed to
provide continuous, controlled delivery of an incorporated drug.
 
  The Company intends to develop products utilizing the DepoMed Systems in
collaboration with pharmaceutical and biotechnology companies, from which the
Company expects to receive license fees, research and development funding,
milestone payments and royalties. The Company also intends to develop
independently certain OTC and generic oral drug products utilizing the DepoMed
Systems.
 
  The Company currently has a joint research and development agreement with
BMS to develop a product incorporating a BMS proprietary compound into the GR
System. In addition, the Company has entered into a feasibility study with
GalaGen to use the GR System to enhance local effectiveness and/or provide
continuous, controlled delivery of GalaGen's proprietary immunoglobulin
products. The Company is also independently developing a reduced irritation
aspirin product and enhanced absorption calcium supplement product and has
identified certain other product candidates expected to benefit from the
DepoMed Systems. In April 1997, the Company and Oakmont signed a letter of
intent to enter into an agreement pursuant to which Oakmont will manufacture
the Company's reduced irritation aspirin and enhanced absorption calcium
supplement products and have rights to distribute and sell these products in
territories to be determined. The letter of intent also provides for the
Company and Oakmont each to offer rights to future products to the other
party.
 
  The DepoMed Systems include proprietary formulations of drug-containing
polymeric units that allow multihour delivery of an incorporated drug
continuously into the stomach either for prolonged, local treatment in the
stomach or for enhanced absorption in the GI tract. The Company believes that
the GR System has the ability to enhance the bioavailability (blood levels) of
drugs that are preferentially absorbed in the stomach, allow for more
effective treatment of local stomach disorders, and provide continuous and
extended delivery of drugs to the upper part of the small intestine, the site
where many drugs are absorbed most efficiently. The RI System is designed to
reduce the irritation to the GI tract caused by many commonly used drugs,
including aspirin. The Company believes the RI System has the potential to
make such drugs less irritating and therefore more widely used.
 
  In addition to the benefits described above, the Company believes that the
DepoMed Systems may offer additional advantages including: multihour release
rate patterns for drugs of almost any solubility and the ability to use drug
combinations previously not feasible due to pharmacokinetic differences
between drugs. The Company believes that by reducing the frequency of drug
administration, use of the DepoMed Systems may lead to reduced costs and
improved patient compliance. Also, by providing new formulations of existing
products using the DepoMed Systems, the Company believes that it will be able
to provide its collaborative partners with the ability to extend their patent
franchises on such products.
 
  The Company intends to have the DepoMed Systems used with as many
pharmaceutical products as possible with an emphasis on pharmaceutical
products which command a large market share or are in large market segments
and where the Company believes the DepoMed Systems will provide an advantage
over other drug delivery systems. The Company's primary strategy for the
development and commercialization of the DepoMed Systems involves establishing
collaborative relationships with pharmaceutical and biotechnology companies to
develop improved therapeutic products. The Company also intends to develop
improved generic and/or OTC products that utilize the DepoMed Systems either
independently or jointly by entering into collaborative partnerships with
pharmaceutical, biotechnology or other health care companies.
 
 
                                      24

<PAGE>
 
THE DRUG DELIVERY INDUSTRY
 
  Drug delivery companies apply proprietary technologies to create new
pharmaceutical products utilizing drugs developed by others. These products
are generally novel, cost-effective dosage forms that provide any of several
benefits including better control of drug concentration in the blood, improved
safety and efficacy, improved patient compliance and ease of use. Drug
delivery technologies can provide pharmaceutical companies with a means of
developing new products as well as extending existing patent franchises.
 
  The increasing need to deliver medication to patients efficiently and with
fewer side effects has accelerated the pace of invention of new drug delivery
systems and the development and maturation of the drug delivery industry.
Today, medication can be delivered to a patient through many different
delivery systems including transdermal, injection, implant and oral methods.
However, these delivery methods continue to have certain limitations.
Transdermal patches are often inconvenient to apply, can be irritating to the
skin and the rate of release can be difficult to control. Injections are
uncomfortable for most patients. In most cases both injections and implants
must be administered in a hospital or physician's office and, accordingly, are
frequently not suitable for home use. Oral administration remains the
preferred method of administering medication. However, conventional oral drug
administration also has limitations. Because capsules and tablets have limited
effectiveness in providing controlled drug delivery, they frequently result in
drug release that is too rapid, causing incomplete absorption of the drug,
irritation to the GI tract and other side effects. In addition, they lack the
ability to provide localized therapy. The need for frequent dosing of many
drugs administered by capsules and tablets also can impede patient compliance
with the prescribed regimen.
 
  In recent years, drug delivery companies have been able to develop
innovative and efficient solutions to some of the limitations of conventional
oral drug administration. For example, the improved oral delivery system
developed by ALZA in the 1980s reduced the side effects and dosing frequency
of the hypertension drug, Procardia(R). The improved product, Procardia XL(R),
has substantially increased the sales of the drug and, because of the new
formulation, the patent franchise on Procardia(R) was extended. The Company
believes that the DepoMed Systems have the potential to offer similar
opportunities of improved therapy and extended patent life to pharmaceutical
and biotechnology companies.
 
THE DEPOMED SYSTEMS
 
  The DepoMed Systems are based on the Company's proprietary oral drug
delivery technologies which are designed to include formulations of drug-
containing polymeric units that allow multihour delivery of an incorporated
drug. Although the Company's formulations are proprietary, the polymers
utilized in the DepoMed Systems are commonly used in the food and drug
industries. The Company has formulated these polymers into cylinders and
spheres that are contained in gelatin capsules for ease of administration. By
using different formulations of the polymers, the Company believes that the
DepoMed Systems are able to provide continuous, controlled delivery of drugs
of varying molecular complexity and solubility.
 
  The DepoMed Systems are designed to address certain limitations of drug
delivery and to provide for orally administered, conveniently dosed, cost-
effective drug therapy that provides continuous, controlled delivery of a drug
over a multihour period. The Company believes that the DepoMed Systems can
provide one or more of the following therapeutic advantages over conventional
methods of drug administration:
 
  .  Enhance Safety and Efficacy through Controlled Delivery. The Company
     believes that the DepoMed Systems may improve the ratio of therapeutic
     effect to toxicity by decreasing the initial peak concentrations of drug
     associated with toxicity, while maintaining levels of a drug at
     therapeutic, subtoxic concentrations for an extended period of time.
     Many drugs demonstrate optimal efficacy when concentrations are
     maintained at therapeutic levels over an extended period of time. When a
     drug is administered intermittently, the therapeutic concentration is
     often exceeded for some period of time, and then the concentration
     rapidly drops below effective levels. Excessively high concentrations
     are a major cause of side effects, and subtherapeutic concentrations are
     ineffective.
 
 
                                      25

<PAGE>
 
  .  Greater Patient and Caregiver Convenience. The Company believes that the
     DepoMed Systems may offer once-daily dosing for certain drugs that are
     currently required to be administered several times daily. Such once-
     daily dosing promotes compliance to dosing regimens. Patient
     noncompliance with dosing regimens has been associated with increased
     costs of medical therapies by prolonging treatment duration, increasing
     the likelihood of secondary or tertiary disease manifestation and
     contributing to over-utilization of medical personnel and facilities. By
     improving patient compliance, providers and third-party payors may
     reduce unnecessary expenditures and improve therapeutic outcomes.
 
  .  Expand Types of Drugs Capable of Oral Delivery. Some drugs, including
     certain proteins and peptides, because of their large molecular size and
     susceptibility to degradation in the GI tract, must currently be
     administered by injection or by continuous infusion, which is typically
     done in a hospital or other clinical setting. The Company believes the
     Depomed Systems may be able to deliver some of these drugs orally.
 
  .  Proprietary Reformulation of Generic Products. The Company believes that
     the DepoMed Systems may offer the potential to produce improved
     formulations of generic products. These proprietary formulations may be
     differentiated from existing generic products by virtue of reduced
     dosing requirements, improved efficacy, decreased toxicity or additional
     indications.
 
THE GASTRIC RETENTION SYSTEM
 
  The GR System consists of a proprietary formulation of drug-containing
polymeric cylinders which remain in the stomach for an extended period of time
to provide continuous, controlled delivery of an incorporated drug. The GR
System's design is based in part on principles of human gastric emptying and
GI transit. Following a meal, liquids and small particles flow continuously
from the stomach into the intestine leaving behind the larger nondigested
particles until the digestive process is complete. As a result, drugs in
liquid form or those consisting of small particles tend to empty rapidly from
the stomach and continue into the intestine, often before the drug has time to
act locally or to be absorbed. The drug-containing polymeric cylinders of the
GR System are formulated into easily swallowed cylinder shapes which are
designed to swell rapidly upon ingestion. The cylinders attain a size after
ingestion sufficient to be retained in the stomach for multiple hours while
delivering the drug content in solution.
 
  The Company has demonstrated multihour gastric retention in humans who have
been given the GR System with food. In addition, the Company is currently
developing an enhanced version of the GR System designed to be retained in the
stomach without the ingestion of food. This process is expected to allow for
treatment regimens unrelated to meal times, as well as for retention that is
more prolonged and with minimum patient to patient variation in retention
time. The Company believes that this feature will make medical treatment less
disruptive to a patient's normal schedule.
 
  The expected advantages of the GR System over conventional oral drug
delivery systems include the following:
 
  More Efficient GI Drug Absorption. The Company believes that the GR System
can be used for improved oral administration of drugs that are currently
inadequately absorbed when delivered as conventional tablets or capsules. Many
drugs are primarily absorbed in the stomach, duodenum or upper small
intestine, through which drugs administered in conventional oral dosage forms
pass quickly. In contrast, the GR System is designed to be retained in the
stomach allowing for constant multihour flow of drugs to certain areas of the
GI tract. Accordingly, for such drugs, the GR System offers a significantly
enhanced opportunity for increased absorption. Unlike some insoluble systems,
at the end of its useful life the polymer contained in the GR System dissolves
and is passed through the GI tract and eliminated. Under its joint research
agreement with BMS, the Company currently is developing a product utilizing
this feature of the GR System. See "--Collaborative Relationships."
 
  Gastric Delivery for Local Therapy and Absorption. The Company believes that
the GR System can be used to deliver drugs which can efficiently eradicate GI-
dwelling microorganisms, such as H. pylori, a cause of
 
                                      26

<PAGE>
 
ulcers, and C. parvum, the causative agent for cryptosporidiosis, a parasitic
intestinal disorder which afflicts late stage AIDS patients. The Company is
currently conducting a feasibility study with GalaGen on the use of the GR
System for the local gastric delivery of immunoglobulin products which may be
effective against these microorganisms. See "--Collaborative Relationships."
 
  The Company is currently developing a calcium supplement product which
utilizes the GR System. Calcium supplements are essential in the treatment of
osteoporosis. It is estimated that 20 million people in the United States
suffer from osteoporosis and that another 17 million people are at risk. New
medications for this debilitating condition are effective but calcium
supplementation is essential. In addition, it is estimated that 30 million
people in the United States are under long-term treatment with
corticosteroids, such as prednisone, which can cause significant bone loss.
Accordingly, calcium supplementation is recommended as concomitant treatment
with these drugs. Current calcium supplement products are mostly in the form
of calcium carbonate, which is soluble only in an acidic medium and which
consequently must be retained in the stomach for an extended period of time
for efficient dissolution and subsequent absorption. However, conventional
calcium carbonate products pass through the stomach too quickly for a
significant amount of the calcium salt to dissolve. The Company believes that
the GR System will provide for the more efficient dissolution and absorption
of an orally administered calcium compound by keeping the product in the
stomach for an extended period of time.
 
  The Company believes that a possible future application of the GR System is
the incorporation of a nonsystemic antacid into the GR System that would be
designed to provide sustained local action. Although currently used antacid
products are nonsystemic, their duration time is short. Accordingly,
individuals who need through-the-night protection from excess stomach acid
must resort to systemic antacids, such as Zantac(R) or Tagamet(R), which have
a longer on-set of action. The Company believes that the GR System may be
designed to provide continuous, controlled local delivery which is expected to
allow for a nonsystemic antacid product with more immediate and sustained
action. It is estimated that several million people in the United States
regularly take antacids.
 
  Rational Drug Combinations. The Company believes that the GR System may
allow for rational combinations of drugs with different biological half-lives.
Physicians frequently prescribe multiple drugs for treatment of a single
medical condition. For example, a physician may prescribe
captopril/hydrochlorothiazide or nifedipine/triampterine for a patient with a
heart condition. Single product combinations have not been considered feasible
because the different biological half-lives of these combination drugs would
result in an overdosage of one drug and/or an underdosage of the other. By
incorporating different drugs into different polymeric cylinders in the same
capsule, the GR System is designed to release each of its incorporated drugs
continuously at a rate and duration (dose) appropriately adjusted for the
specific biological half-lives of the drugs. The Company believes that future
rational drug combination products using the GR System have the potential to
simplify drug administration, increase patient compliance, and reduce medical
costs.
 
  Potential for Oral Delivery of Peptides and Proteins. Based on laboratory
studies conducted by the Company, the GR System is expected to protect drugs
prior to their delivery in the stomach. This feature coupled with gastric
retention could allow for continuous delivery of peptides and proteins (i.e.,
labile drugs) into the upper portion of the small intestine, the most likely
site of possible absorption for many such drugs. It is expected that this
mechanism will allow effective oral delivery of some drugs that currently
require administration by injection. In addition, the Company believes that
the GR System can be formulated to provide for continuous, controlled delivery
of insoluble or particulate matter, including protein or antigen-laden
vesicles, such as liposomes, and microspheres or nanoparticles.
 
THE REDUCED IRRITATION SYSTEM
 
  The RI System is designed to provide for significant reduction in local GI
irritation from the effects of certain drugs. Local tissue damage occurs when
solid crystals of a drug remain at any one site of the GI tract for long
periods of time. The RI System consists of an outer capsule, which is designed
to rapidly disintegrate upon ingestion to deliver multiple small, spherical
pellets. The pellets are composed of an inert matrix of polymeric
 
                                      27

<PAGE>
 
material in which the active ingredient is homogeneously dispersed in its
solid state. The pellets persist for a period of time, but ultimately dissolve
and the polymer is eliminated.
 
  The RI System is designed to reduce irritation through three distinct
mechanisms. First, the small spheres of the RI System are designed to deliver
an incorporated drug in solution state, in contrast to a solid or crystalline
state which may cause ulcers. Second, the dispersion of the spheres within the
stomach contributes further to the dilution of the local drug effects. Third,
controlled delivery contributes to the reduction of GI irritation by
delivering the incorporated drug over a longer period of time. In addition to
the reduced irritation aspirin that the Company is currently developing, the
Company believes that other GI irritating compounds such as potassium chloride
and erythromycin may benefit from the RI System.
 
  The Company is currently developing an aspirin product which utilizes the RI
System and is designed to reduce the GI irritation which is common when
aspirin is administered in conventional tablet or capsule form. Aspirin usage
has been expanding with important new medical indications, including the
prevention and treatment of cardiovascular disease. Aspirin is widely
recognized for its ability to cause damage to the GI tract and local
irritation of the stomach and intestine which often relates to GI discomfort
and a patient's intolerance to this drug. The irritation properties of aspirin
are mostly local, not systemic in origin. Local damage begins and is sustained
by high local drug concentration against the mucosa, particularly when aspirin
is administered in a solid, crystalline state as from a rapidly dissolving
tablet. These crystals in contact with the mucosa provide a stagnant pool of
saturated drug solution against the cell walls, resulting in damage from both
cellular mechanisms and from back diffusion of acid into the mucosal cells and
into the submucosal capillaries, causing tissue necrosis and bleeding. To
minimize local damage, the RI System is designed to deliver its drug in
solution, in a controlled manner from a dispersion of polymeric units.
 
                                      28

<PAGE>
 
  The figure below shows the results from a preliminary study completed for
the Company by SRI International. Using a standard animal model (considered
predictive of local GI irritation in humans), the irritant properties of
aspirin were reduced by approximately 72% when delivered from the RI System,
compared to the same dose of aspirin administered in conventional tablet form.
 
                           [FIGURE 2 APPEARS HERE]
 
 
                                      29

<PAGE>
 
PRODUCTS UNDER DEVELOPMENT
 
  The following table summarizes the Company's principal product development
initiatives:
 

<TABLE>
<CAPTION>
DEPOMED                                       POTENTIAL
SYSTEM        PROGRAM         PARTNER        INDICATIONS    EXPECTED BENEFIT    STATUS
- -------  ----------------  -------------- ----------------  ----------------  -----------
<S>      <C>               <C>            <C>               <C>               <C>
  GR     BMS Proprietary   Bristol-Myers  Confidential(1)   . Less frequent   Phase I
         Compound          Squibb Company                     dosing
  GR     Anti-infective    GalaGen Inc.   C. parvum,        . Prolonged,      Feasibility
         Immunoglobulin                   intestinal          continuous
                                          infection           delivery for
                                                              intestinal
                                                              therapy
  GR     Anti-infective    GalaGen Inc.   H. pylori         . Prolonged,      Feasibility
         Immunoglobulin                   gastric             continuous
                                          infection           delivery to
                                                              gastric mucosa
  GR     Calcium           In-house       Osteoporosis,     . Improved        Pre-
         Supplement                       other calcium       calcium         clinical
                                          deficiencies        absorption
  RI     Aspirin           In-house       Multiple,         . Reduced         Pre-
                                          including           gastric         clinical
                                          cardiovascular      irritation
                                          therapy
                                                            . Prolonged low
                                                              dose delivery
</TABLE>

- --------
(1) The potential indication may not be disclosed pursuant to the terms of the
    agreement between the Company and BMS. See "--Collaborative
    Relationships."
 
BUSINESS STRATEGY
 
  The Company intends to have the DepoMed Systems used with as many
pharmaceutical products as possible with an emphasis on pharmaceutical
products which command a large market share or are in large market segments
and where the Company believes the DepoMed Systems will provide an advantage
over other drug delivery systems.
 
  The Company's primary strategy for the development and commercialization of
the DepoMed Systems involves establishing collaborative relationships with
pharmaceutical and biotechnology companies to develop improved therapeutic
products. The products will be jointly developed, with the collaborative
partner having primary responsibility to clinically test, manufacture, market
and sell the products. The Company has retained and intends to continue to
retain ownership of its technologies developed for its collaborative partners.
The Company believes this practice will provide the Company with the
flexibility of entering into collaborative arrangements with other potential
partners should the initial partner decide not to pursue the commercialization
of a particular product which utilizes the DepoMed Systems. The Company
believes that its partnering strategy will enable it to reduce its cash
requirements while developing a larger potential products portfolio. By
providing new formulations of existing products using the DepoMed Systems, the
Company believes that it will not only be able to offer such partners improved
products but also may provide them with the ability to extend their patent
franchises on such products. The Company believes that the potential for such
renewed franchises will be especially attractive to pharmaceutical companies
whose patents on existing products are close to expiration. In addition, the
Company believes that the DepoMed Systems may offer pharmaceutical and
biotechnology companies formulations for products based on new molecular
entities, such as antigens and peptides, that can be safely and effectively
administered orally. Collaborations with pharmaceutical and biotechnology
companies are expected to provide near-term revenues from sponsored
development activities and future revenues from license fees and royalties
relating to the sale of products.
 
  The Company also intends to develop improved generic and/or OTC products
that utilize the DepoMed Systems either independently or jointly by entering
into collaborative partnerships with pharmaceutical, biotechnology or other
healthcare companies. To reduce costs and time-to market, the Company intends
to select those products that treat indications with clear-cut clinical end-
points and that are reformulations of existing compounds already approved by
the FDA. The Company believes that products utilizing the DepoMed Systems will
provide favorable product differentiation in the highly competitive generic
and OTC drug product markets
 
                                      30

<PAGE>
 
at costs below those of other drug delivery systems, thereby enabling the
Company and its collaborative partners to compete more effectively in
marketing improved generic and OTC products. By funding the initial
development costs of these improved products, the Company believes that it may
be able to enter into collaborative marketing arrangements that provide higher
royalty rates or other more favorable payment terms on product sales. The
Company is also seeking to establish alliances with overseas sales and
marketing partners for the initial sale of the Company's future generic
products. The Company believes that due to the more favorable regulatory
environments in some foreign countries, it may be able to generate revenues
from these markets while awaiting FDA approval in the United States.
 
COLLABORATIVE RELATIONSHIPS
 
  Bristol-Myers Squibb Company. In July 1996, the Company and BMS entered into
a joint research agreement to develop a product incorporating a BMS
proprietary compound into the GR System. Pursuant to the agreement, BMS has an
option to obtain an exclusive, worldwide license to products incorporating the
BMS compound utilizing the GR System. Based on a pharmacokinetic study in
humans that was concluded in February, 1997, a dosage level (drug release rate
and duration) for the product has been selected. Further clinical testing is
now in progress, while process scale-up and manufacturing methodologies are
being finalized. If such license is entered into, the Company will receive a
royalty on net sales of the products as well as certain milestone payments.
The option expires in February 1999. There can be no assurance, however, that
BMS will exercise the option or that, if it does, any resulting product will
be approved by the FDA or, if approved, will be commercialized.
 
  GalaGen Inc. In May 1996, the Company and GalaGen entered into a feasibility
study involving the use of the GR System to deliver oral immunoglobulin
products developed by GalaGen. If the outcome of the feasibility study is
favorable, the Company may enter into a development agreement with GalaGen.
There can be no assurance, however, that such feasibility study will be
concluded successfully, and even if successfully concluded that the Company
will be able to enter into an agreement with GalaGen on reasonable commercial
terms or at all.
 
  Oakmont Pharmaceuticals, Inc. In April 1997, the Company and Oakmont signed
a letter of intent to enter into an agreement pursuant to which Oakmont will
manufacture the Company's reduced irritation aspirin and enhanced absorption
calcium supplement products and have rights to distribute and sell these
products in territories to be determined. The letter of intent also provides
for the Company and Oakmont each to offer rights to future products to the
other party. There can be no assurance that the Company and Oakmont will enter
into a definitive agreement or, if they do, that the Company will be
successful in developing these products or Oakmont will be successful in
manufacturing, distributing or marketing them.
 
COMPETITION
 
  Competition in the areas of pharmaceutical products and drug delivery
systems is intense and is expected to become more intense in the future.
Several other companies have developed or are developing novel technologies
for oral drug delivery, and these competing technologies may prove superior,
either generally or in particular market segments, in terms of factors such as
cost, consumer satisfaction or drug delivery profile. The Company's principal
competitors in the business of developing and applying drug delivery systems
include companies, such as ALZA, Dura and Elan, all of which have
substantially greater financial, technological, marketing, personnel and
research and development resources than the Company. In addition, the Company
may face competition from pharmaceutical and biotechnology companies that may
develop or acquire drug delivery technologies. Many of the Company's potential
collaborative partners have devoted and are continuing to devote significant
resources in the development of their own drug delivery systems and
technologies. Products incorporating the Company's technologies will compete
both with products employing advanced drug delivery systems and with products
in conventional dosage forms. New drugs or future developments in alternate
drug delivery technologies may provide therapeutic or cost advantages over any
potential products which utilize the DepoMed Systems. There can be no
assurance that developments by others will not render any potential products
utilizing the DepoMed
 
                                      31

<PAGE>
 
Systems noncompetitive or obsolete. In addition, the Company's competitive
success will depend heavily on entering into collaborative relationships on
reasonable commercial terms, commercial development of products incorporating
the DepoMed Systems, regulatory approvals, protection of intellectual property
and market acceptance of such products.
 
PATENTS AND PROPRIETARY RIGHTS
 
  The Company's success will depend in part on its ability to obtain and
maintain patent protection for its technologies and to preserve its trade
secrets. It is the policy of the Company to file patent applications in the
United States and foreign jurisdictions. The Company currently holds two
issued United States and two foreign patents and has two United States and two
foreign patent applications pending. No assurance can be given that the
Company's patent applications will be approved or that any issued patents will
provide competitive advantages for the DepoMed Systems or the Company's
technologies or will not be challenged or circumvented by competitors. With
respect to already issued patents and any patents which may issue from the
Company's applications, there can be no assurance that claims allowed will be
sufficient to protect the Company's technologies. Patent applications in the
United States are maintained in secrecy until a patent issues, and the Company
cannot be certain that others have not filed patent applications for
technology covered by the Company's pending applications or that the Company
was the first to file patent applications for such technology. Competitors may
have filed applications for, or may have received patents and may obtain
additional patents and proprietary rights relating to, compounds or processes
that may block the Company's patent rights or compete without infringing the
patent rights of the Company. In addition, there can be no assurance that any
patents issued to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide proprietary
protection or commercial advantage to the Company.
 
  The Company also relies on trade secrets and proprietary know-how which it
seeks to protect, in part, through confidentiality agreements with employees,
consultants, collaborative partners and others. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for any such breach or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. Although
potential collaborative partners and the Company's research partners and
consultants are not given access to proprietary trade secrets and know-how of
the Company until they have executed confidentiality agreements, these
agreements may be breached by the other party thereto or may otherwise be of
limited effectiveness or enforceability.
 
  The ability to develop the Company's technologies and to commercialize
products using such technologies will depend on not infringing the patents of
others. Although the Company is not aware of any claim of patent infringement
against it, claims concerning patents and proprietary technologies determined
adversely to the Company could have a material adverse effect on the Company.
In addition, litigation may also be necessary to enforce any patents issued or
licensed to the Company or to determine the scope and validity of third-party
proprietary rights. There can be no assurance that the Company's issued or
licensed patents would be held valid by a court of competent jurisdiction.
Whether or not the outcome of litigation is favorable to the Company, the cost
of such litigation and the diversion of the Company's resources during such
litigation could have a material adverse effect on the Company.
 
  The pharmaceutical industry has experienced extensive litigation regarding
patent and other intellectual property rights. Accordingly, the Company could
incur substantial costs in defending itself in suits that may be brought
against the Company claiming infringement of the patent rights of others or in
asserting the Company's patent rights in a suit against another party. The
Company may also be required to participate in interference proceedings
declared by the United States Patent and Trademark Office for the purpose of
determining the priority of inventions in connection with the patent
applications of the Company or other parties. Adverse determinations in
litigation or interference proceedings could require the Company to seek
licenses (which may not be available on commercially reasonable terms) or
subject the Company to significant liabilities to third parties, and could
therefore have a material adverse effect on the Company.
 
                                      32

<PAGE>
 
MANUFACTURING, MARKETING AND SALES
 
  The Company intends to develop products utilizing the DepoMed Systems for
its collaborators and, in some cases, retain rights to manufacture commercial
quantities of such products. The manufacture and incorporation of drugs into
hydrophilic, polymer matrix pellets used in the DepoMed Systems is
accomplished by using a variety of standard techniques. These include direct
compression, compression using high speed rotary tablet press or,
alternatively, by an extrusion/spheronization process. The Company does not
have any internal manufacturing, marketing or sales resources. In view of its
early stage of development and limited resources, the Company does not
anticipate spending a material portion of the net proceeds of this Offering to
acquire resources and develop capabilities in these areas. Although the
Company intends to acquire pilot manufacturing equipment with a portion of the
net proceeds of the Offering, the Company does not intend to acquire or
establish its own dedicated manufacturing facilities for the foreseeable
future. See "Use of Proceeds." Rather, the Company's manufacturing strategy
will be to utilize the facilities of its collaborative partners, or to develop
manufacturing relationships with established contract manufacturers to make
products utilizing the DepoMed Systems. In addition, the Company does not
intend to establish an internal sales and marketing capability, but will seek
to rely on its collaborative partners or distributor arrangements to market
and sell the products utilizing the DepoMed Systems. In April 1997, the
Company and Oakmont signed a letter of intent to enter into an agreement
pursuant to which Oakmont will manufacture the Company's reduced irritation
aspirin and enhanced absorption calcium supplement products and have rights to
distribute and sell these products in territories to be determined. There can
be no assurance that the Company will be able to enter into manufacturing,
marketing or sales agreements on reasonable commercial terms, or at all, with
Oakmont or with another third party. Failure to do so could have a material
adverse effect on the Company.
 
  Manufacturers of products utilizing the DepoMed Systems will be subject to
applicable cGMP requirements prescribed by the FDA or other rules and
regulations prescribed by foreign regulatory authorities. There can be no
assurance that the Company will be able to enter into manufacturing agreements
either domestically or abroad with companies whose facilities and procedures
comply with cGMP or applicable foreign standards. Should such agreements be
entered into, the Company will be dependent on such manufacturers for
continued compliance with cGMP and applicable foreign standards. Failure by a
manufacturer of products utilizing the DepoMed Systems to maintain cGMP or
applicable foreign standards could result in significant time delays or the
inability of the Company to commercialize the DepoMed Systems and could have a
material adverse effect on the Company. At the present time, due to ongoing
consolidation in the chemical and pharmaceutical industries, the Company
believes there is a worldwide excess of manufacturing capacity available to
the Company. As a result, the Company believes that it will be able to enter
into agreements with suppliers and manufacturers on reasonable commercial
terms. However, there can be no assurance that there will be manufacturing
capacity available to the Company at the time the Company is ready to
commercialize products utilizing the DepoMed Systems. There also can be no
assurance that any products utilizing the DepoMed Systems can be manufactured
at a cost or in quantities required to make them commercially viable. The
Company's inability to contract on acceptable terms and with qualified
suppliers for the manufacture of any products or delays or difficulties in its
relationships with manufacturers, would have a material adverse effect on the
Company.
 
  Contract manufacturers must adhere to cGMP regulations strictly enforced by
the FDA on an ongoing basis through its facilities inspection program.
Contract manufacturing facilities must pass a pre-approval plan inspection
before the FDA will approve an NDA. Certain material manufacturing changes
that occur after approval are also subject to FDA review and clearance or
approval. There can be no assurance that the FDA or other regulatory agencies
will approve the process or facilities by which any of the products utilizing
the DepoMed Systems may be manufactured. The Company's dependence on third
parties for the manufacture of products utilizing the DepoMed Systems may
adversely affect the Company's ability to develop and deliver such products on
a timely and competitive basis.
 
                                      33

<PAGE>
 
GOVERNMENT REGULATION
 
  The Company is subject to regulation under various federal laws regarding
pharmaceutical products and also various federal and state laws regarding,
among other things, occupational safety, environmental protection, hazardous
substance control and product advertising and promotion. In connection with
its research and development activities, the Company is subject to federal,
state and local laws, rules, regulations and policies governing the use,
generation, manufacture, storage, air emission, effluent discharge, handling
and disposal of certain materials and wastes. The Company believes that it has
complied with these laws and regulations in all material respects and it has
not been required to take any action to correct any material noncompliance.
 
  FDA Approval Process. In the United States, pharmaceutical products,
including any products utilizing the DepoMed Systems, are subject to rigorous
regulation by the FDA. If a company fails to comply with applicable
requirements, it may be subject to administrative or judicially imposed
sanctions such as civil penalties, criminal prosecution of the company or its
officers and employees, injunctions, product seizure or detention, product
recalls, total or partial suspension of production and FDA refusal to approve
pending new drug applications, premarket approval applications, or supplements
to approved applications.
 
  Prior to commencement of clinical studies involving human beings,
preclinical testing of new pharmaceutical products is generally conducted on
animals in the laboratory to evaluate the potential efficacy and the safety of
the product. The results of these studies are submitted to the FDA as a part
of an IND application, which must become effective before clinical testing in
humans can begin. Typically, clinical evaluation involves a time consuming and
costly three-phase process. In Phase I, clinical trials are conducted with a
small number of subjects to determine the early safety profile and the
pharmcokinetic pattern of a drug. In Phase II, clinical trials are conducted
with groups of patients afflicted with a specific disease in order to
determine preliminary efficacy, optimal dosages and expanded evidence of
safety. In Phase III, large-scale, multi-center, comparative trials are
conducted with patients afflicted with a target disease in order to provide
enough data to demonstrate the efficacy and safety required by the FDA. The
FDA closely monitors the progress of each of the three phases of clinical
testing and may, at its discretion, re-evaluate, alter, suspend or terminate
the testing based upon the data which have been accumulated to that point and
its assessment of the risk/benefit ratio to the patient.
 
  The results of the preclinical and clinical testing on a nonbiologic drug
and certain diagnostic drugs are submitted to the FDA in the form of an NDA
for approval prior to commencement of commercial sales. In responding to an
NDA, the FDA may grant marketing approval, request additional information or
deny the application if the FDA determines that the application does not
satisfy its regulatory approval criteria. There can be no assurance that
approvals will be granted on a timely basis, if at all. Failure to receive
approval for any products utilizing the DepoMed Systems could have a material
adverse effect on the Company.
 
  OTC products subject to final monographs issued by the FDA are subject to
various FDA regulations such as those outlining cGMP requirements, general and
specific OTC labeling requirements (including warning statements), the
restriction against advertising for conditions other than those stated in
product labeling, and the requirement that in addition to approved active
ingredients OTC drugs contain only suitable inactive ingredients. OTC products
and manufacturing facilities are subject to FDA inspection, and failure to
comply with applicable regulatory requirements may lead to administrative or
judicially imposed penalties, as well as delays.
 
  Other Regulations. Even if required FDA approval has been obtained with
respect to a product, foreign regulatory approval of a product must also be
obtained prior to marketing the product internationally. Foreign approval
procedures vary from country to country and the time required for approval may
delay or prevent marketing. In certain instances the Company or its
collaborative partners may seek approval to market and sell certain of its
products outside of the U.S. before submitting an application for U.S.
approval to the FDA. The regulatory procedures for approval of new
pharmaceutical products vary significantly among foreign countries. The
clinical testing requirements and the time required to obtain foreign
regulatory approvals may differ from that required for FDA approval. Although
there is now a centralized EU approval mechanism in place, each EU
 
                                      34

<PAGE>
 
country may nonetheless impose its own procedures and requirements, many of
which are time consuming and expensive, and some EU countries require price
approval as part of the regulatory process. Thus, there can be substantial
delays in obtaining required approval from both the FDA and foreign regulatory
authorities after the relevant applications are filed, and approval in any
single country may not be a meaningful indication that the product will
thereafter be approved in another country.
 
PRODUCT LIABILITY
 
  The Company's business involves exposure to potential product liability
risks that are inherent in the production and manufacture of pharmaceutical
products. Any such claims could have a material adverse effect on the Company.
The Company does not currently have any product liability insurance. Although
the Company has applied for product liability insurance, there can be no
assurance that it will be able to obtain or maintain such insurance on
acceptable terms, that the Company will be able to secure increased coverage
as the commercialization of the DepoMed Systems proceeds or that any insurance
will provide adequate protection against potential liabilities.
 
ADVISORS TO THE COMPANY
 
  The Company has two groups of advisors that advise the Company on business
and scientific issues and on future opportunities. As compensation for these
services, the Company has granted the advisors options to purchase shares of
the Company's Common Stock. These options vest over four years.
 
 The Policy Advisory Board
 
  Members of the Policy Advisory Board advise management of the Company on
medical, regulatory and business issues relating to the Company.
 
  Carl C. Peck, M.D. Dr. Peck is Professor of Pharmacology and Medicine and
founding Director of the Center for Drug Development Science at Georgetown
University Medical Center, Washington, D.C. Formerly he served as Assistant
Surgeon General in the U.S. Public Health Service and as Director of the
Center for Drug Evaluation and Research (CDER) at the FDA. Dr. Peck holds an
M.D. degree from the University of Kansas. Dr. Peck advises the Company on
drug development, experimental design and analysis, and regulatory affairs.
 
  John Urquhart, M.D. Dr. Urquhart is Professor of Pharmacoepidemiology at
Maastricht University in Maastricht, The Netherlands. He is also Chief
Scientist of AARDEX, Ltd. in Zurich, Switzerland and Adjunct Professor of
Biopharmaceutical Sciences at the University of California, San Francisco.
Earlier he was Chief Scientist at ALZA, holding various management positions
including President of ALZA Research. Dr. Urquhart holds an M.D. degree from
Harvard University. Dr. Urquhart advises the Company on new product
opportunities and product specifications.
 
  James B. Wiesler. Mr. Wiesler is the retired Vice Chairman of the Bank of
America, where he was in charge of global consumer banking. Mr. Wiesler
currently serves as a director of Science Applications International
Corporation and of the Sidney Kimmel Cancer Center in San Diego. Additionally,
he serves on the Board of Trustees of Sharp Memorial Hospital and Alexian
Brothers Hospital. Mr. Wiesler advises the Company on financial and business
strategy issues.
 
 The Development Advisory Board
 
  Members of the Development Advisory Board provide the Company with expertise
on medical, scientific and product development issues, including government
regulations, clinical trial design and manufacturing issues related to the
DepoMed Systems. In certain cases, the advisors also provide consulting
services to the Company in their area of expertise in addition to their roles
as advisors and will receive compensation for such consulting services.
 
  Harriet Benson, Ph.D. Dr. Benson, who was until recently Vice President for
Regulatory Affairs of ALZA, advises the Company on matters relating to state
and federal compliance issues and other regulatory affairs.
 
                                      35

<PAGE>
 
  Roy Kuramoto, Ph.D. Until his recent retirement, Dr. Kuramoto was Senior
Vice President in charge of world-wide manufacturing operations for Syntex
Corporation. Dr. Kuramoto advises the Company on issues related to pilot
scale-up and manufacturing methodologies.
 
  John Palmer, M.D., Ph.D. Dr. Palmer is Chairman Emeritus and Professor in
the Department of Pharmacology, University of Arizona Medical School. Dr.
Palmer advises the Company on matters related to preclinical study design and
clinical pharmacology.
 
  Virgil Place, M.D. Dr. Place is the founder and Chairman of Vivus, Inc., a
medical device company. Dr. Place advises the Company on issues related to
product design, regulatory procedures, and medical affairs.
 
EMPLOYEES
 
  As of April 1, 1997, the Company had seven full-time employees. None of the
Company's employees is represented by a collective bargaining agreement, nor
has the Company experienced any work stoppage. The Company believes that its
relations with its employees are good.
 
FACILITIES
 
  The Company leases approximately 3,300 square feet in Foster City,
California, under a lease which expires on February 28, 1999. The Company will
need to lease additional space for laboratory, testing and pilot manufacturing
facilities within the next 12 months following the date of this Prospectus.
See "Use of Proceeds."
 
LEGAL PROCEEDINGS
 
  The Company is not a party to any legal proceedings.
 
                                      36

<PAGE>
 
                                  MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
  The executive officers and directors of the Company and their ages as of
March 31, 1997 are as follows:
 

<TABLE>
<CAPTION>
   NAME                  AGE                          POSITION
   ----                  ---                          --------
<S>                      <C> <C>
John W. Shell, Ph.D.....  71 Founder, Chairman of the Board and Chief Scientific Officer
John W. Fara, Ph.D......  54 President, Chief Executive Officer and Director
John N. Shell...........  43 Vice President, Operations and Director
John F. Hamilton........  52 Vice President, Finance and Chief Financial Officer
Judson A. Cooper(1).....  38 Director
Joshua Schein,            36 Director
 Ph.D.(1)...............
</TABLE>

- --------
(1) Member of Audit Committee
 
  John W. Shell, Ph.D., has served as Chairman of the Board of Directors of
the Company since its inception in August 1995, and served as the Company's
President and Chief Executive Officer from May 1995 to December 1996 when he
became the Company's Chief Scientific Officer. Dr. Shell founded DSI in 1991,
and served as its Chairman and Chief Executive Officer until its merger with
M6 in 1994, and served as President of the DepoMed Division of M6 from March
1994 until May 1995. Prior to founding DSI, from 1987 until 1990 he was Vice
President for Research at Johnson & Johnson's IOLAB division. His experience
also includes eight years as a Senior Research Scientist at The Upjohn
Company, six years as Director of Research for Allergan Pharmaceuticals and
fifteen years with ALZA dating from its founding in 1968. Dr. Shell served as
Vice President of ALZA Pharmaceuticals, and later as Vice President for
Business Development for ALZA. Dr. Shell received B.A., B.S. and Ph.D. degrees
from the University of Colorado.
 
  John W. Fara, Ph.D., has served as a director of the Company since November
1995 and as its President and Chief Executive Officer since December 1996.
From February 1990 to June 1996 he was President and Chief Executive Officer
of Anergen, Inc., a biotechnology company. Prior to February 1990 he was
President of Prototek, Inc., a biotechnology company ("Prototek"). Prior to
his tenure at Prototek, he was Director of Biomedical Research and then Vice
President of Business Development during ten years with ALZA. Dr. Fara
received a B.S. from the University of Wisconsin and a Ph.D. from UCLA.
 
  John N. Shell has served as a director of the Company since its inception in
August 1995 and Director of Operations for the Company until December 1996,
when he was named Vice President, Operations. From May 1994 to August 1995,
Mr. Shell served in a similar capacity at the DepoMed Division of M6. Prior to
1994, Mr. Shell served as Materials Manager for Ebara International
Corporation, a multi-national semiconductor equipment manufacturer, and as
Materials Manager for ILC Technology, an electro-optics and electronics
manufacturer. Mr. Shell received his B.A. from the University of California,
Berkeley.
 
  John F. Hamilton has served as the Company's Vice President, Finance and
Chief Financial Officer since January 1997. Prior to joining the Company, Mr.
Hamilton was Vice President and Chief Financial Officer of Glyko, Inc. and
Glyko Biomedical Ltd., a carbohydrate instrument and reagents company from May
1992 to September 1996. Previously he was President and Chief Financial
Officer of Protos Corporation, a drug design subsidiary of Chiron Corporation,
from June 1988 to May 1992 and held various positions with Chiron Corporation,
including Treasurer, from September 1987 to May 1992. Mr. Hamilton received a
B.A. from the University of Pennsylvania and an M.B.A. from the University of
Chicago.
 
                                      37

<PAGE>
 
  Judson A. Cooper has served as a director of the Company since August 1995.
Mr. Cooper has been a private investor since September 1993. Prior to 1993,
Mr. Cooper served for two years as a Vice President of D. Blech and Company, a
merchant bank. Mr. Cooper is a graduate of the Kellogg School of Management.
 
  Joshua Schein, Ph.D., has served as a director of the Company since December
1995. Since 1994 Dr. Schein has served as a Vice President of Investment
Banking at Josephthal Lyon and Ross Incorporated, and from 1991 until 1994 as
a Vice President at D. Blech and Company. Dr. Schein received a Ph.D. in
neurosciences from the Albert Einstein College of Medicine, and an M.B.A. from
Columbia University Graduate School of Business.
 
BOARD OF DIRECTORS COMMITTEES AND OTHER INFORMATION
 
  All directors are elected at the annual meeting of shareholders and hold
office until the election and qualification of their successors at the next
annual meeting of shareholders. Officers of the Company serve at the
discretion of the Board of Directors. Mr. John N. Shell is Dr. Shell's son.
There are no other family relationships.
 
  The Board currently has an Audit Committee. The Audit Committee oversees the
actions taken by the Company's independent auditors and reviews the Company's
internal financial and accounting controls and policies.
 
DIRECTOR COMPENSATION
 
  Directors do not currently receive any cash compensation from the Company
for their services as members of the Board of Directors, although they are
reimbursed for certain expenses in connection with their attendance at
meetings of the Board of Directors. Upon his election to the Board of
Directors in 1995, John W. Fara received an option to purchase 16,666 shares
of Common Stock at an exercise price of $0.09 per share.
 
EXECUTIVE COMPENSATION
 
  The following table sets forth certain compensation paid by the Company in
the fiscal year ended December 31, 1996 to the Company's Chief Executive
Officer and former Chief Executive Officer (now the Company's Chairman and
Chief Scientific Officer) (collectively, the "Named Executive Officers"). No
other executive officer earned in excess of $100,000 during fiscal 1996.
 
                          SUMMARY COMPENSATION TABLE
 

<TABLE>
<CAPTION>
                                                                LONG-TERM
                                                               COMPENSATION
                                                          ----------------------
                                                                  AWARDS
                                                          ----------------------
                                      ANNUAL COMPENSATION      COMMON STOCK
NAME AND PRINCIPAL POSITION                SALARY($)      UNDERLYING OPTIONS (#)
- ---------------------------           ------------------- ----------------------
<S>                                   <C>                 <C>
John W. Fara,
 President and Chief Executive Offi-
 cer(1).............................       $ 21,917(2)            83,333
John W. Shell,
 Chairman and Chief Scientific Offi-
 cer(3).............................        185,000                  --
</TABLE>

- --------
(1) Dr. Fara became President and Chief Executive Officer in December 1996.
    Dr. Fara devoted 40% of his time to the Company until February 1997, when
    he assumed his duties on a full-time basis.
(2) Includes $15,750 that Dr. Fara received in connection with services
    performed as a consultant to the Company prior to his appointment as
    President and Chief Executive Officer.
(3) Dr. Shell served as President and Chief Executive Officer of the Company
    until December 1996.
 
                                      38

<PAGE>
 
  The following table provides information concerning grants of options to
purchase the Company's Common Stock made to each of the Named Executive
Officers during the fiscal year ended December 31, 1996.
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 

<TABLE>
<CAPTION>
                                          INDIVIDUAL GRANTS
                         ---------------------------------------------------
                                                                               POTENTIAL REALIZED
                                           PERCENT                              VALUE AT ASSUMED
                           NUMBER OF       OF TOTAL                          ANNUAL RATES OF STOCK
                           SECURITIES      OPTIONS                           PRICE APPRECIATION FOR
                           UNDERLYING     GRANTED TO    EXERCISE                OPTION TERM (1)
                            OPTIONS       EMPLOYEES      PRICE    EXPIRATION ----------------------
  NAME                   GRANTED (2)(3) IN FY-1996 (4) ($/SH) (5)    DATE        5%         10%
  ----                   -------------- -------------- ---------- ---------- ---------- -----------
<S>                      <C>            <C>            <C>        <C>        <C>        <C>
John W. Fara............     83,333           96%        $0.90     10/25/06  $   47,167 $   119,531
John W. Shell...........        --           --            --           --          --          --
</TABLE>

- --------
(1) Amounts represent hypothetical gains that could be achieved for the
    respective options if exercised at the end of the option term. The assumed
    5% and 10% rates of stock price appreciation are mandated by rules of the
    Securities and Exchange Commission and do not represent the Company's
    estimate or projection of the future Common Stock price.
(2) The options reflected in this table were all granted under the Stock Plan.
    The date of grant is 10 years prior to the expiration date listed. For
    additional material terms of the options, see "Management--1995 Stock
    Option Plan."
(3) The options vest at a rate of 25% per year over four years from the grant
    date.
(4) Based on an aggregate of 86,667 options granted to employees of the
    Company in fiscal 1996.
(5) The exercise price per share of options granted represented the fair value
    of the underlying shares of Common Stock on the dates the options were
    granted as determined by the Board of Directors. The Company's Common
    Stock was not traded publicly at the time of the option grants to the
    Named Executive Officers.
 
  None of the Named Executive Officers exercised options to purchase Common
Stock during the year ended December 31, 1996. The following table sets forth
certain information regarding the value of exercised and unexercised stock
options held by each of the Named Executive Officers as of December 31, 1996.
 
          AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
                            YEAR-END OPTION VALUES
 

<TABLE>
<CAPTION>
                       NUMBER OF SECURITIES              VALUE OF UNEXERCISED
                      UNDERLYING UNEXERCISED             IN-THE-MONEY OPTIONS
                   OPTIONS AT DECEMBER 31, 1996         AT DECEMBER 31, 1996(1)
                   --------------------------------    -------------------------
  NAME              EXERCISABLE      UNEXERCISABLE     EXERCISABLE UNEXERCISABLE
  ----             -------------    ---------------    ----------- -------------
<S>                <C>              <C>                <C>         <C>
John W. Fara......            4,167            95,883    $27,085     $546,792
John W. Shell.....              --                --         --           --
</TABLE>

- --------
(1) The value of the options is based upon the difference between the exercise
    price and the assumed value of $6.50 per share, the midpoint of the range
    of the estimated initial public offering price set forth on the cover of
    this Prospectus.
 
1995 STOCK OPTION PLAN
 
  The Stock Plan was adopted by the Board of Directors and approved by the
shareholders in September 1995 and subsequently amended. As of March 31, 1997,
a total of 416,667 shares of Common Stock have been reserved for issuance
under the Stock Plan. As of March 31, 1997, options to purchase a total of
91,667 shares of Common Stock had been exercised, options to purchase a total
of 196,667 shares at a weighted average exercise price of $1.64 per share were
outstanding, and 128,333 shares remain available for future option grants.
 
 
                                      39

<PAGE>
 
  The purpose of the Stock Plan is to attract, retain and motivate officers,
key employees, consultants and directors of the Company by giving them the
opportunity to acquire stock ownership in the Company. The Stock Plan provides
for the granting to employees of the Company (including officers and employee
directors) of "incentive stock options" within the meaning of Section 422 of
the Code and for the grant of nonstatutory stock options to employees and
consultants of the Company. To the extent an optionee would have the right in
any calendar year to exercise for the first time incentive stock options for
shares having an aggregate fair market value (under all plans of the Company
and determined for each share as of the grant date) in excess of $100,000, any
such excess options shall be automatically converted to a nonstatutory stock
option.
 
  The Stock Plan is administered by the Board of Directors or a committee of
the Board of Directors (the "Administrator"). The Administrator determines the
type and terms of options and purchase rights granted under the Stock Plan,
including the number of shares covered, exercise price, term and condition for
exercise of the option. The exercise price of all stock options granted under
the Stock Plan must be at least 100% of the fair market value of the Common
Stock of the Company on the grant date. The term of an incentive stock option
may not exceed ten years from the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of stock of the Company, the exercise price of any stock option
granted shall be at least 110% of the fair market value of the Common Stock on
the grant date and the term of such option may not exceed five years. Payment
of the exercise price may be in cash, check, or, at the discretion of the
administrator, by promissory notes or shares of stock held by the optionee, or
a combination thereof.
 
  No option may be transferred by the optionee other than by will or the laws
of descent and distribution or pursuant to a qualified domestic relations
order ("QDRO"). During the lifetime of an optionee, only the optionee (or the
optionee's spouse pursuant to a QDRO) may exercise an option. An option shall
be exercisable on or after each vesting date in accordance with the terms set
forth in the option agreement; provided, however, that the right to exercise
an option must vest at the rate of at least 20% per year over five years from
the grant date.
 
  In the event of certain changes in control of the Company or a sale of
substantially all its assets, the Administrator may cancel each outstanding
option upon payment in cash to the optionee of the amount by which any cash
and any other property which the optionee would have received for the shares
of stock covered by the vested portion of the option exceeds the exercise
price of the option. The Board may amend, suspend or terminate the Stock Plan
as long as such action does not adversely affect any outstanding option or
purchase right and provided that shareholder approval shall be required for
any amendment to (i) increase the number of shares subject to the Stock Plan,
(ii) materially change eligibility for the grant of options or purchase
rights, or (iii) materially increase the benefits accruing to participants. If
not terminated earlier, the Stock Plan will terminate in 2005.
 
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
 
  The Company's Articles of Incorporation limit the liability of directors for
monetary damages to the maximum extent permitted by California law. Such
limitation of liability has no effect on the availability of equitable
remedies, such as injunctive relief or recission. The Company is also
empowered under its Articles of Incorporation to enter into indemnification
agreements with its director and officers and to purchase insurance on behalf
of any person whom it is required to indemnify. The Company's Bylaws provide
that the Company will indemnify its directors and officers as a contractual
obligation and may indemnify its employees and agents against certain
liabilities to the fullest extent permitted by California law. The Company has
entered into indemnification agreements with each of its current directors and
officers.
 
                                      40

<PAGE>
 
                             CERTAIN TRANSACTIONS
 
  In March 1994, DepoMed Systems, Inc. ("DSI") a company founded and
principally owned by Dr. John W. Shell was merged into M6 Pharmaceuticals,
Inc. ("M6"). In July 1995 DSI and Dr. Shell instituted an action against M6
relating to the merger and related events. In August 1995, pursuant to a
settlement agreement (the "Settlement Agreement") between DSI and Dr. Shell,
on the one hand, and M6, on the other hand, M6 transferred all of the
intellectual property and other technology assets of DSI to the Company, and
the Company assumed certain liabilities related thereto.
 
  In September 1995, the Company issued 2,066,667 shares of its Common Stock
to Dr. Shell and other shareholders of DSI in cancellation of the M6 stock
received in the merger.
 
  In September 1995, the Company issued 1,196,491 shares of Common Stock to
CSO Ventures LLC ("CSO") in consideration of the prior agreement of CSO to
lend the Company $100,000 to finance the litigation against M6 and to assist
the Company in its initial financing. In September 1995, the Company also
entered into a consulting agreement with CSO, pursuant to which CSO provided
financial advisory services to the Company for an annual fee of $120,000. The
consulting agreement terminated in September 1996. In March 1997, the Company
entered into a consulting agreement with CSO which provides for business
development, operations and financial advisory services to be performed by CSO
for an annual fee of $120,000. The agreement has a term of one year and is
renewed automatically unless terminated by either party with 60 days written
notice. Dr. Schein and Mr. Cooper are members of CSO and also are directors of
the Company.
 
  In November 1995, the Company sold 1,025,000 shares of Series A Preferred
Stock to David P. Ash and 815,000 shares of Series A Preferred to Amore
Perpetuo, Inc., each a principal shareholder of the Company. In February 1997,
the Company sold 25,000 shares of Series B Preferred Stock to John F.
Hamilton, the Company's Chief Financial Officer. See "Principal Shareholders."
 
  Pursuant to the terms of the Settlement Agreement, the Company assumed two
promissory notes issued to Dr. Shell by DSI in December 1992 and December 1993
for the aggregate principal amount of $100,667 (the "DSI Notes"). In November
1996, the Company issued a promissory note to Dr. Shell (the "1996 Note" and
together with the DSI Notes the "Shell Notes") for the principal amount of
$50,000. The Shell Notes bear interest at 6% per annum. The Shell Notes will
become due and payable upon completion of this Offering. As of December 31,
1996, the aggregate principal amount and related interest on the Shell Notes
totaled $171,488. The Company intends to repay the Shell Notes with a portion
of the net proceeds from this Offering. See "Use of Proceeds."
 
  Pursuant to the terms of the Settlement Agreement, the Company assumed
promissory notes (the "Stern Notes") issued to Julian N. Stern, Secretary of
the Company, by DSI. The Stern Notes bear interest at 6.5% per annum. The
Stern Notes will become due and payable upon completion of this Offering. The
Company intends to repay the Stern Notes with a portion of the net proceeds
from this Offering. As of December 31, 1996, the aggregate principal amount of
the Stern Notes and related interest totaled $122,750. See "Use of Proceeds."
 
                                      41

<PAGE>
 
                            PRINCIPAL SHAREHOLDERS
 
  The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1997 and, as adjusted
to reflect the sale of the Securities offered hereby, by (i) each person who
is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers, and (iv) by all current directors and executive officers
as a group.
 

<TABLE>
<CAPTION>
                               SHARES BENEFICIALLY PERCENT BEFORE PERCENT AFTER
   NAME OF BENEFICIAL OWNER       OWNED (1)(2)      OFFERING (2)  OFFERING (2)
   ------------------------    ------------------- -------------- -------------
<S>                            <C>                 <C>            <C>
CSO Ventures LLC (3)..........      1,196,491           28.1%         17.7%
Cygnus Therapeutics Systems
 (4)..........................        400,000            9.4           5.9
David P. Ash (5)..............        341,667            8.0           5.1
Amore Perpetuo, Inc. (6)......        271,666            6.4           4.0
John W. Shell (7).............      1,566,666           36.7          23.2
John N. Shell (8).............        502,083           11.8           7.4
John W. Fara (9)..............          4,167              *             *
Judson A. Cooper (10).........      1,196,491           28.1          17.7
Joshua Schein (10)............      1,196,491           28.1          17.7
All directors and executive
 officers
 as a group (6 persons) (11)..      3,277,741           76.8          50.3
</TABLE>

- --------
   * Less than one percent of the outstanding shares of Common Stock.
 (1) Assumes no exercise of the Over-Allotment Option. Except pursuant to
     applicable community property laws or as indicated in the footnotes to
     this table, to the Company's knowledge, each shareholder identified in
     the table possesses sole voting and investment power with respect to all
     shares of Common Stock shown as beneficially owned by such shareholder.
 (2) Applicable percentage of ownership for each shareholder is based on
     4,263,447 shares of Common Stock outstanding as of March 31, 1997,
     together with applicable options for such shareholders. Beneficial
     ownership is determined in accordance with the rules of the Securities
     and Exchange Commission, and includes voting and investment power with
     respect to the shares. Shares of Common Stock subject to outstanding
     options are deemed outstanding for computing the percentage of ownership
     of the person holding such options, but are not deemed outstanding for
     computing the percentage ownership of any other person.
 (3) CSO Ventures LLC's ("CSO") address is 666 3rd Avenue, 30th Floor, New
     York, New York 10017.
 (4) These shares are being held by Dr. John W. Shell for delivery to Cygnus
     Therapeutics Systems ("Cygnus") if certain conditions are met, including
     the timely tender for cancellation of certificates representing shares of
     M6 held by Cygnus.
 (5) Includes 30,000 shares of Common Stock held by the children of Mr. Ash.
 (6) Amore Perpetuo, Inc.'s address is 4616 West Sahara Avenue #65, Las Vegas,
     Nevada 89012.
 (7) Dr. Shell's address is 1170 B Chess Drive, Foster City, California 94404.
     Includes 400,000 shares of Common Stock held on behalf of Cygnus, of
     which Dr. Shell disclaims beneficial ownership. See footnote 4.
 (8) Includes 2,083 shares of Common Stock issuable upon exercise of
     outstanding options which will vest within 60 days of March 31, 1997. Mr.
     Shell's address is 1170 B Chess Drive, Foster City, California 94404.
 (9) Represents 4,167 shares of Common Stock issuable upon exercise of
     outstanding options which will vest within 60 days of March 31, 1997. Dr.
     Fara's address is 1170 B Chess Drive, Foster City, California 94404.
(10) Represents shares beneficially owned by CSO, of which Mr. Cooper and Dr.
     Schein disclaim beneficial ownership.
(11) Includes 6,250 shares of Common Stock issuable upon exercise of
     outstanding options which will vest within 60 days of March 31, 1997.
     Also includes 1,196,491 shares owned by CSO, of which Mr. Cooper and Dr.
     Schein disclaim beneficial ownership and 8,333 shares of Common Stock
     held by John F. Hamilton, the Company's Chief Financial Officer.
 
                                      42

<PAGE>
 
                           DESCRIPTION OF SECURITIES
 
  The following description of the securities of the Company and certain
provisions of the Company's Articles of Incorporation and Bylaws to be
effective upon completion of the Offering is a summary and is qualified in its
entirety by the provisions of the Articles of Incorporation and Bylaws, which
have been filed as exhibits to the Company's Registration Statement, of which
this prospectus is a part.
 
  Upon the closing of the Offering, the authorized capital stock of the
Company will consist of 25,000,000 shares of Common Stock, no par value and
5,000,000 shares of Preferred Stock, no par value (the "Preferred Stock").
 
COMMON STOCK
 
  Upon completion of this Offering, there will be 6,763,447 shares of Common
Stock issued and outstanding. Holders of Common Stock are entitled to one vote
per share on all matters to be voted upon by the shareholders of the Company.
Subject to the preferences that may be applicable to any future shares of
Preferred Stock outstanding, the holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to the prior liquidation rights of any future shares of
Preferred Stock outstanding. The holders of Common Stock have no preemptive,
redemption, conversion, sinking fund or other subscription rights. The
outstanding shares of Common Stock are, and the shares offered by the Company
in the Offering will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common
Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
 
PREFERRED STOCK
 
  Upon the closing of this Offering, the Board of Directors will have the
authority, without further action by the shareholders, to issue up to
5,000,000 shares of Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, conversion rights, voting rights, terms in redemption, liquidation
preferences, sinking fund terms and the number of shares constituting any
series or the designation of such series without any further vote or action by
the shareholders. The issuance of Preferred Stock could adversely affect the
voting power of holders of Common Stock and the likelihood that such holders
will receive dividend payments and payments upon liquidation and could have
the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plans to issue any shares of Preferred
Stock.
 
BRIDGE WARRANTS
 
  Each Bridge Warrant entitles the registered holder thereof to purchase, at
anytime during the four year period commencing 12 months after the date of
this Prospectus, one share of Common Stock at the initial public offering
price of the Company's Common Stock, subject to adjustment upon the occurrence
of certain events such as combinations or reclassifications of the Common
Stock. The holders of the Bridge Warrants are also entitled to certain
registration rights. See "--Registration Rights."
 
WARRANTS
 
  The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects
by reference to the actual text of the Warrant Agreement between the Company,
and Continental Stock Transfer & Trust Company (the "Warrant Agent"), a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
 
 
                                      43

<PAGE>
 
  Exercise Price and Terms. Each Warrant entitles the registered holder
thereof to purchase, at any time commencing    , 1998 [12 months after the
date of this Prospectus], until    , 2002 [5 years after the date of this
Prospectus], one share of Common Stock at a price of $    per share [140% of
the initial public offering price per share of Common Stock], subject to
adjustment in accordance with the anti-dilution provisions referred to below.
The holder of any Warrant may exercise such Warrant by surrendering the
certificate representing the Warrant to the Warrant Agent, with the
subscription form thereon properly completed and executed, together with
payment of the exercise price. The Warrants may be exercised at any time in
whole or in part at the applicable exercise price until the expiration of the
Warrants. No fractional shares will be issued upon the exercise of the
Warrants. The exercise price of the Warrants bears no relationship to any
objective criteria and should in no event be regarded as an indication of any
future market price of the securities offered hereby.
 
  Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Warrants are subject to adjustment, upon
the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of the Common Stock or for a period of two
years from the date of this Prospectus, the sale by the Company of shares of
its Common Stock or other securities convertible into Common Stock at a price
below the initial public offering price of the Common Stock, excluding shares
of Common Stock issued in connection with incentive or benefit plans of the
Company and strategic alliances. Additionally, an adjustment will be made in
the case of a reclassification or exchange of Common Stock, consolidation or
merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the surviving corporation) or
sale of all or substantially all of the assets of the Company, in order to
enable warrantholders to acquire the kind and number of shares of stock or
other securities or property receivable in such event by a holder of the
number of shares of Common Stock that might have been purchased upon the
exercise of the Warrant.
 
  Redemption Provisions. Commencing      , 1998 [18 months after the date of
this Prospectus], the Warrants are subject to redemption at $.10 per Warrant
on 30 days' prior written notice provided that the average closing sales price
of the Common Stock as reported on the AMEX equals or exceeds $   per share
[150% of the initial public offering price of the Common Stock] (subject to
adjustment for stock dividends, stock splits, combinations or
reclassifications of the Common Stock), for any 20 trading days within a
period of 30 consecutive trading days ending on the fifth trading day prior to
the date of the notice of redemption. In the event the Company exercises the
right to redeem the Warrants, such Warrants will be exercisable until the
close of business on the business day immediately preceding the date for
redemption fixed in such notice. If any Warrant called for redemption is not
exercised by such time, it will cease to be exercisable and the holder will be
entitled only to the redemption price.
 
  Transfer, Exchange and Exercise. The Warrants are in registered form and may
be presented to the Warrant Agent for transfer, exchange or exercise at any
time on or prior to their expiration date five years from the date of this
Prospectus, at which time the Warrants become wholly void and of no value. If
a market for the Warrants develops, the holder may sell the Warrants instead
of exercising them. There can be no assurance, however, that a market for the
Warrants will develop, or if it develops, that it will continue.
 
  Warrantholders Not Shareholders. The Warrants do not confer upon holders any
voting, dividend or other rights as shareholders of the Company.
 
  Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrantholders. The Company may, in its
sole discretion, lower the exercise price of the Warrants for a period of not
less than 30 days on not less than thirty (30) days' prior written notice to
the warrantholders and the Representative. Modification of the number of
securities purchasable upon the exercise of any Warrant, the exercise price
and the expiration date with respect to any Warrant requires the consent of
two-thirds of the warrantholders.
 
  The Warrants are not exercisable unless, at the time of the exercise, the
Company has a current prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants, and such shares have been registered, qualified
or deemed to be exempt under the securities laws of the state of residence of
the exercising
 
                                      44

<PAGE>
 
holder of the Warrants. Although the Company will use its best efforts to have
all of the shares of Common Stock issuable upon exercise of the Warrants
registered or qualified on or before the exercise date and to maintain a
current prospectus relating thereto until the expiration of the Warrants,
there can be no assurance that it will be able to do so.
 
  The Warrants are separately transferable immediately upon issuance. Although
the Securities will not knowingly be sold to purchasers in jurisdictions in
which the Securities are not registered or otherwise qualified for sale,
purchasers may buy Warrants in the aftermarket or may move to jurisdictions in
which the shares underlying the Warrants are not so registered or qualified
during the period that the Warrants are exercisable. In this event, the
Company would be unable to issue shares to those persons desiring to exercise
their Warrants and holders of Warrants would have no choice but to attempt to
sell the Warrants in a jurisdiction where such sale is permissible or allow
them to expire unexercised.
 
REGISTRATION RIGHTS
 
  Certain holders of the Common Stock or their transferees are entitled to
certain rights with respect to the registration of shares under the Securities
Act. Registration rights are held with respect to 92,834 shares of Common
Stock to be issued upon conversion of the Company's Series B Preferred Stock
upon consummation of this Offering under the terms of the agreements between
the Company and holders of Series B Preferred Stock (the "Registrable
Securities"). Subject to certain limitations in such agreements, the holders
of Registrable Securities have "piggyback" rights to request that their shares
be registered for public resale with respect to up to four registrations of
the Company's securities. However, if such piggyback rights are exercised in
connection with an underwritten offering of the Company's Common Stock, the
underwriter of such offering has the right to reduce to 20% of the total the
number of such shares to be included in such public offering or, in the case
of the initial public offering, to exclude such shares entirely. In addition,
at a time when the Company is eligible to register securities on Form S-3,
holders of Registrable Securities not already registered may demand that the
Company file a Form S-3, provided that the aggregate offering price of the
Registrable Securities would be at least $1,000,000. The Company will pay
certain expenses in connection with the exercise of the foregoing rights.
These registration rights expire five years after an initial public offering
of the Company's securities.
 
  Registration rights are also held with respect to 76,923 shares of Common
Stock (assuming an initial public offering price of $6.50) issuable upon
exercise of the Bridge Warrants (the "Bridge Shares") under the terms of the
agreement between the Company and holders of the Bridge Warrants. Subject to
certain limitations in such agreement, the holders of Bridge Shares have the
right to require the Company, on one occasion, to register the Bridge Shares
under the Securities Act. In addition, the holders of the Bridge Shares have
"piggyback" rights to request that their shares be registered for public
resale with respect to one registration of the Company's securities. However,
if such piggyback registration rights are exercised in connection with an
underwritten offering of the Company's Common Stock, the underwriter of such
offering has the right to reduce or eliminate such shares to be included in
such public offering. The Company will pay certain expenses (excluding
underwriting discounts and commissions) relating to such registrations.
 
TRANSFER AGENT AND REGISTRAR
 
  The transfer agent and registrar for the Company's Common Stock and the
Warrant Agent for the Warrants is Continental Stock Transfer & Trust Company,
New York, New York.
 
                                      45

<PAGE>
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
  Upon completion of this Offering, the Company will have 6,763,447 shares of
Common Stock outstanding, of which the 2,500,000 shares offered hereby (and
the 1,250,000 Warrants) will be transferable without restriction under the
Securities Act. The other 4,263,447 outstanding shares of Common Stock are
"restricted securities" (as that term is defined in Rule 144 promulgated under
the Securities Act) which may be publicly sold only if registered under the
Securities Act or if sold in accordance with an applicable exemption from
registration, such as Rule 144. In general, under the revised holding period
requirements of Rule 144, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted securities for at least one year, is entitled to
sell (together with any person with whom such individual is required to
aggregate sales) within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class, or, if the Common Stock is quoted on the Nasdaq Stock Market or
another national securities exchange, the average weekly trading volume during
the four calendar weeks preceding the sale. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements, and the
availability of current public information regarding the Company. A person who
has not been an affiliate of the Company for at least three months, and who
has beneficially owned restricted securities for at least two years, is
entitled to sell such restricted shares under Rule 144(k) without regard to
any of the limitations described above.
 
  Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 generally may be relied upon with
respect to the sale of shares purchased from the Company by its employees,
directors, officers or consultants prior to the date of this Prospectus
pursuant to written compensatory benefit plans such as the Stock Plan and
written contracts such as option agreements. Rule 701 is also available for
sales of shares acquired by persons pursuant to the exercise of options
granted prior to the effective date of this Prospectus, regardless of whether
the option exercise occurs before or after the effective date of this
Prospectus. Securities issued in reliance on Rule 701 are "restricted
securities" within the meaning of Rule 144 and, beginning 90 days after the
date of this Prospectus, may be sold by persons other than affiliates of the
Company subject only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance with its one-year minimum holding
period requirement.
 
  Options granted under the Stock Plan to purchase a total of 196,667 shares
of Common Stock are currently outstanding, and options to purchase an
additional 128,333 shares of Common Stock are reserved for future issuance
under the Stock Plan. Of the options granted under the Stock Plan, 7,083 of
such options were currently exercisable as of March 31, 1997, with the
remaining outstanding options to become exercisable at the rate of 28,750
options in 1997 and 49,167 in each of 1998 and 1999, and 62,500 options in
2000 and thereafter. Shares of Common Stock issued upon the exercise of
outstanding options will be "restricted securities" and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available. Potential exemptions include those available under
Rule 144 and Rule 701.
 
  No prediction can be made as to the effect that future sales of Common
Stock, or the availability of shares of Common Stock for future sale, will
have on the market prices of the Common Stock and Warrants prevailing from
time to time. Pursuant to the Lock-Up Agreements, the Company, all officers
and directors of the Company and all holders of outstanding securities
exercisable for or convertible into Common Stock have agreed not to, directly
or indirectly, issue, agree or offer to sell, transfer, assign, distribute,
grant an option for purchase or sale of, pledge, hypothecate or otherwise
encumber or dispose of any beneficial interest in such securities for a period
of 12 months following the date of this Prospectus without the prior written
consent of the Representative. Assuming that the Representative does not
release the shareholders from the Lock-Up Agreements, after the Lock-Up Period
all of the shares will be eligible for sale in the public market. Of such
shares, 3,355,991 shares of Common Stock will be eligible for sale under Rule
144 (subject to volume limitations imposed by such rule), 815,789 shares of
Common Stock will be eligible for sale under Rule 144(k), and 91,667 shares
will be eligible for sale under Rule 701. The sale or issuance, or the
potential for sale or issuance, of Common Stock after such 12-month period
could have an adverse impact on the market prices of the Common Stock and/or
the Warrants. Sales of substantial amounts of Common Stock or the perception
that such sales could occur could adversely affect prevailing market prices
for the Common Stock and/or the Warrants. See "Underwriting."
 
                                      46

<PAGE>
 
                                 UNDERWRITING
 
  The Underwriters named below (the "Underwriters"), for whom National
Securities Corporation is acting as representative (in such capacity, the
"Representative"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement (the "Underwriting Agreement"), to purchase from
the Company and the Company has agreed to sell to the Underwriters on a firm
commitment basis, the respective number of shares of Common Stock and Warrants
set forth opposite their names:
 

<TABLE>
<CAPTION>
        UNDERWRITERS                       NUMBER OF SHARES NUMBER OF WARRANTS
        ------------                       ---------------- ------------------
      <S>                                  <C>              <C>
      National Securities Corporation.....
                                              ---------         ---------
        Total.............................    2,500,000         1,250,000
                                              =========         =========
</TABLE>

 
  The Underwriters are committed to purchase all the shares of Common Stock
and Warrants offered hereby, if any of such Securities are purchased. The
Underwriting Agreement provides that the obligations of the several
Underwriters are subject to conditions precedent specified therein.
 
  The Company has been advised by the Representative that the Underwriters
propose initially to offer the Securities to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to certain
dealers at such prices less concessions not in excess of $   per share of
Common Stock and $    per Warrant. Such dealers may reallow a concession not
in excess of $   per share of Common Stock and $    per Warrant to certain
other dealers. After the commencement of the Offering, the public offering
price, concession and reallowance may be changed by the Representative.
 
  The Representative has informed the Company that it does not expect sales to
discretionary accounts by the Underwriters to exceed five percent of the
Securities offered hereby.
 
  The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that Underwriters may be required to make. The Company has also
agreed to pay to the Representative a non-accountable expense allowance equal
to 2 1/2% of the gross proceeds derived from the sale of the Securities
underwritten, of which $50,000 has been paid to date.
 
  The Company has granted to the Underwriters the Over-Allotment Option,
exercisable during the 45-day period from the date of this Prospectus, to
purchase from the Company up to an additional 375,000 shares and/or an
additional 187,500 Warrants at the initial public offering prices per share
and per Warrant, respectively, offered hereby, less underwriting discounts.
Such option may be exercised only for the purpose of covering over-allotments,
if any, incurred in the sale of the Securities offered hereby. To the extent
such option is exercised in whole or in part, each Underwriter will have a
firm commitment, subject to certain conditions, to purchase the number of the
additional Securities proportionate to its initial commitment.
 
  In connection with this Offering, the Company has agreed to sell to the
Representative, for $.0001 per warrant, warrants to purchase from the Company
up to 250,000 shares of Common Stock and/or up to 125,000 Warrants (the
"Representative's Warrants"). The Representative's Warrants are initially
exercisable at a price of $    per share [120% of the initial public offering
price per share of Common Stock] and $    per Warrant [120% of the initial
public offering price per Warrant] for a period of four years, commencing one
year after the date of this Prospectus and are restricted from sale, transfer,
assignment or hypothecation for a period of 12 months from the date of this
Prospectus, except to officers of the Representative. The Representative's
Warrants provide for adjustment in the number of securities issuable upon the
exercise thereof as a result of certain subdivisions and combinations of the
Common Stock. The Representative's Warrants grant to the holders thereof
certain rights of registration for the securities issuable upon exercise
thereof.
 
 
                                      47

<PAGE>
 
  The Company's directors, and executive officers, and all holders of shares
of Common Stock, options, warrants or other securities convertible,
exercisable or exchangeable for Common Stock have agreed not to offer, sell,
or otherwise dispose of any shares of Common Stock for a period of 12 months
following the date of this Prospectus without the prior written consent of the
Representative. An appropriate legend shall be placed on the certificates
representing such securities.
 
  Upon the exercise of any Warrants more than one year after the date of this
Prospectus, which exercise was solicited by the Representative, and to the
extent not inconsistent with the guidelines of the National Association of
Securities Dealers, Inc. ("NASD") and the Rules and Regulations of the
Commission, the Company has agreed to pay the Representative a commission
which shall not exceed five percent (5%) of the aggregate exercise price of
such Warrants in connection with bona fide services provided by the
Representative relating to any warrant solicitation undertaken by the
Representative. In addition, the individual must designate the firm entitled
to payment of such warrant solicitation fee. A warrant solicitation fee will
only be paid to the Representative or another NASD member when such NASD
member is specifically designated in writing as the soliciting broker.
However, no compensation will be paid to the Representative in connection with
the exercise of the Warrants if (i) the market price of the Common Stock is
lower than the exercise price, (ii) the Warrants were held in a discretionary
account, or (iii) the exercise of Warrants is not solicited by the
Representative. Unless granted an exemption by the Commission from its Rule
101 under Regulation M promulgated under the Securities Act, the
Representative will be prohibited from engaging in any market making
activities with regard to the Company's securities for the period from five
business days (or such applicable periods as Rule 101 under Regulation M may
provide) prior to any solicitation of the exercise of the Warrants until the
later of the termination of such solicitation activity or the termination (by
waiver or otherwise) of any right the Representative may have to receive a
fee. As a result, the Representative may be unable to continue to provide a
market for the Company's securities during certain periods while the Warrants
are exercisable. If the Representative has engaged in any of the activities
prohibited by Rule 101 under Regulation M during the period described above,
the Representative undertakes to waive unconditionally its rights to receive a
commission on the exercise of such Warrants.
 
  In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market prices of the Securities.
Such transactions may include stabilization transactions effected in
accordance with Rule 104 of Regulation M, pursuant to which such persons may
bid for or purchase the Common Stock and/or Warrants for the purpose of
stabilizing their respective market prices. The Underwriters also may create a
short position for the account of the Underwriters by selling more Securities
in connection with the Offering than they are committed to purchase from the
Company, and in such case may purchase Securities in the open market following
completion of the Offering to cover all or a portion of such short position.
The Underwriters may also cover all or a portion of such short position, up to
375,000 shares of Common Stock and/or 187,500 Warrants, by exercising the
Over-Allotment option referred to above. In addition, the Representative may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter (or dealer participating in the
Offering) for the account of other Underwriters, the selling concession with
respect to the Securities that are distributed in the Offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the prices of the Securities at a level above that which might
otherwise prevail in the open market. None of the transactions described in
this paragraph is required, and, if they are undertaken, they may be
discontinued at any time.
 
  Prior to this Offering, there has been no public market for the Common Stock
or the Warrants. Consequently, the initial public offering prices of the
Common Stock and Warrants, and the exercise price of the Warrants has been
determined by negotiation between the Company and the Representative and does
not necessarily bear any relationship to the Company's asset value, net worth
or other established criteria of value. The factors considered in such
negotiations, in addition to prevailing market conditions, included the
history of
 
                                      48

<PAGE>
 
and prospects for the industry in which the Company competes, an assessment of
the Company's management, the prospects of the Company, its capital structure,
the market for initial public offerings and certain other factors as were
deemed relevant.
 
  The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a
copy of each such agreement which are filed as exhibits to the Registration
Statement of which this Prospectus is a part. For a more complete description
thereof, see "Additional Information."
 
                                 LEGAL MATTERS
 
  The legality of the Securities offered hereby will be passed upon for the
Company by Heller Ehrman White & McAuliffe, Palo Alto, California. Julian N.
Stern, the Secretary of the Company, is the owner of 83,333 shares of Common
Stock and is the sole stockholder and employee of a professional corporation
that is a partner of Heller Ehrman White & McAuliffe. Orrick, Herrington &
Sutcliffe LLP, New York, New York has acted as counsel to the Underwriters in
connection with the Offering.
 
                                    EXPERTS
 
  The financial statements of DepoMed, Inc. at December 31, 1996 and for the
period from inception (August 7, 1995) to December 31, 1995, for the year
ended December 31, 1996 and for the period from inception (August 7, 1995) to
December 31, 1996 and the statement of direct expenses of DepoMed Systems
Division of M6 Pharmaceuticals, Inc. for the period from January 1, 1995 to
August 6, 1995 appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein and in the Registration Statement,
and are included in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing.
 
                            ADDITIONAL INFORMATION
 
  The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form SB-2 under the Securities Act
(the "Registration Statement") with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and such Common Stock,
reference is made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus as to the
contents of any contracts or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement may be inspected by anyone without charge at the
Commission's principal office in Washington, D.C., and copies of all or any
part of the Registration Statement may be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W. Washington, D.C. 20549, upon
payment of certain fees prescribed by the Commission. The Commission maintains
an Internet World Wide Web site that contains reports, proxy and information
reports and other materials that are filed through the Commission's Electronic
Data Gathering, Analysis and Retrieval System. The site can be accessed at
http://www.sec.gov.
 
  The Company intends to furnish its shareholders with annual reports
containing financial statements audited by its independent auditors.
 
                                      49

<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS
 

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
DEPOMED, INC. FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors..........................  F-2
Balance Sheet..............................................................  F-3
Statements of Operations...................................................  F-4
Statement of Shareholders' Equity (Net Capital Deficiency).................  F-5
Statements of Cash Flows...................................................  F-6
Notes to Financial Statements..............................................  F-7
DEPOMED SYSTEMS DIVISION OF M6 PHARMACEUTICALS, INC.
Report of Ernst & Young LLP, Independent Auditors.......................... F-14
Statement of Direct Expenses............................................... F-15
Notes to Statement of Direct Expenses...................................... F-16
</TABLE>

 
                                      F-1

<PAGE>
 

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors DepoMed, Inc.
 
  We have audited the accompanying balance sheet of DepoMed, Inc. (a
development stage company) as of December 31, 1996, and the related statements
of operations, shareholders' equity (net capital deficiency), and cash flows
for the period from inception (August 7, 1995) to December 31, 1995, for the
year ended December 31, 1996, and for the period from inception (August 7,
1995) to December 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations and net capital deficiency raise substantial doubt
about its ability to continue as a going concern. Management's plans as to
these matters are also described in Note 1. The 1996 financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DepoMed, Inc. (a
development stage company) at December 31, 1996, and the results of its
operations and its cash flows for the period from inception (August 7, 1995)
to December 31, 1995, for the year ended December 31, 1996, and for the period
from inception (August 7, 1995) to December 31, 1996 in conformity with
generally accepted accounting principles.
 
Palo Alto, California January 31, 1997, except for Note 9, as to which the
date is April  , 1997
 
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon completion of the
1 for 3 reverse stock split described in Note 9 to the financial statements.
 
                                                          /s/ Ernst & Young LLP
 
Palo Alto, California April 17, 1997
 
                                      F-2

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                                 BALANCE SHEET
 

<TABLE>
<CAPTION>
                                                                     PRO FORMA
                                                                   SHAREHOLDERS'
                                                                      EQUITY
                                                                   (NET CAPITAL
                                                                    DEFICIENCY)
                                                     DECEMBER 31,   AT DECEMBER
                                                         1996        31, 1996

                                                     ------------  -------------
<S>                                                  <C>           <C>
                       ASSETS
Current assets:
  Cash and cash equivalents......................... $    10,802
  Accounts receivable...............................     120,898
  Other current assets..............................      31,537
                                                     -----------
    Total current assets............................     163,237
Property and equipment, net.........................     155,139
Other assets........................................      14,751
                                                     -----------
                                                     $   333,127
                                                     ===========
                  LIABILITIES AND
    SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
  Accounts payable.................................. $    51,746
  Accrued compensation..............................     291,374
  Notes payable to shareholders.....................     294,238

  Capital lease obligation, current portion.........      19,803
  Other current liabilities.........................      22,764
                                                     -----------
    Total current liabilities.......................     679,925
Capital lease obligation, non-current portion.......      34,634
Commitments
Shareholder's equity (net captial deficiency):
  Preferred stock, no par value, 10,000,000 shares
   authorized (5,000,000 pro forma); 2,447,368
   shares
   issued and outstanding (none pro forma);
   aggregate
   liquidation preference of $750,000 at December
   31, 1996.........................................     682,759    $       --
  Common stock, no par value, 25,000,000 shares
   authorized; 3,354,825 shares issued and
   outstanding,
   (4,170,614 shares pro forma).....................     284,250        967,009
  Deferred compensation.............................    (275,000)      (275,000)
  Deficit accumulated during the development stage..  (1,073,441)    (1,073,441)
                                                     -----------    -----------
    Total shareholders' equity (net capital
     deficiency)....................................    (381,432)   $  (381,432)
                                                     -----------    -----------
                                                     $   333,127
                                                     ===========
</TABLE>

 
                            See accompanying notes.
 
                                      F-3

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                            STATEMENTS OF OPERATIONS
 

<TABLE>
<CAPTION>
                                                                   INCEPTION
                                       INCEPTION                   (AUGUST 7,
                                    (AUGUST 7, 1995)  YEAR ENDED    1995) TO
                                    TO DECEMBER 31,  DECEMBER 31, DECEMBER 31,
                                          1995           1996         1996
                                    ---------------- ------------ ------------
<S>                                 <C>              <C>          <C>
Product development revenue........    $     --       $ 317,971   $   317,971
Operating expenses:
  Research and development.........      138,816        390,496       529,312
  General and administrative.......      155,157        393,676       548,833
  Purchase of in-process research
   and development.................      298,154            --        298,154
                                       ---------      ---------   -----------
    Total operating expenses.......      592,127        784,172     1,376,299
Loss from operations...............     (592,127)      (466,201)   (1,058,328)
Interest expense, net..............        8,541          6,572        15,113
                                       ---------      ---------   -----------
Net loss...........................    $(600,668)     $(472,773)  $(1,073,441)
                                       =========      =========   ===========
Pro forma net loss per share.......                   $   (0.11)
                                                      =========
Shares used in computing pro forma
 net loss per share................                   4,285,653
                                                      =========
</TABLE>

 
 
                            See accompanying notes.
 
                                      F-4

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
           STATEMENT OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
 
              FROM INCEPTION (AUGUST 7, 1995) TO DECEMBER 31, 1996
 

<TABLE>
<CAPTION>
                                                                                          DEFICIT         TOTAL
                                                                                        ACCUMULATED   SHAREHOLDERS'
                         CONVERTIBLE PREFERRED STOCK      COMMON STOCK                     DURING        EQUITY
                         ----------------------------- -------------------   DEFERRED   DEVELOPMENT   (NET CAPITAL
                             SHARES         AMOUNT      SHARES    AMOUNT   COMPENSATION    STAGE       DEFICIENCY)
                         --------------  ------------- --------- --------- ------------ ------------  -------------
<S>                      <C>             <C>           <C>       <C>       <C>          <C>           <C>
Balances at inception
 (August 7, 1995).......            --   $         --        --  $     --   $      --   $        --    $      --
Issuance of common
 shares to founders on
 August 7, 1995 in
 exchange for shares
 held by them in M6
 Pharmaceuticals, Inc...            --             --  2,066,667       --          --            --           --
Issuance of common
 shares for cash to
 investors at
 approximately $0.0009
 per share on November
 15, 1995...............            --             --  1,196,491     1,000         --            --         1,000
Issuance of Series A
 convertible preferred
 stock for cash to
 investors at
 approximately $0.31 per
 share on November 15,
 1995, net of issuance
 costs of $67,241.......      2,447,368        682,759       --        --          --            --       682,759
Net loss................            --             --        --        --          --       (600,668)    (600,668)
                         --------------  ------------- --------- ---------  ----------  ------------   ----------
Balances at
 December 31, 1995......      2,447,368        682,759 3,263,158     1,000         --       (600,668)      83,091
Issuance of common
 shares for cash at
 various dates at $0.09
 per share to employees
 and the Company's
 counsel pursuant to
 stock option
 agreements.............            --             --     91,667     8,250         --            --         8,250
Deferred compensation
 related to grants of
 certain stock options..            --             --        --    275,000    (275,000)          --           --
Net loss................            --             --        --        --          --       (472,773)    (472,773)
                         --------------  ------------- --------- ---------  ----------  ------------   ----------
Balances at
 December 31, 1996......      2,447,368  $     682,759 3,354,825 $ 284,250  $ (275,000) $ (1,073,441)  $ (381,432)
                         ==============  ============= ========= =========  ==========  ============   ==========
</TABLE>

 
                                      F-5

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                            STATEMENT OF CASH FLOWS
 

<TABLE>
<CAPTION>
                                     INCEPTION                     INCEPTION
                                  (AUGUST 7, 1995)  YEAR ENDED  (AUGUST 7, 1995)
                                  TO DECEMBER 31,  DECEMBER 31, TO DECEMBER 31,
                                        1995           1996           1996
                                  ---------------- ------------ ----------------
<S>                               <C>              <C>          <C>
Cash flows from operating
 activities:
  Net loss......................     $(600,668)     $(472,773)     (1,073,441)
  Adjustments to reconcile net
   loss to net cash used in in
   operating activities:
    Depreciation and
     amortization...............        12,234         32,878          45,112
    Accrued interest expense on
     shareholder notes..........         2,930         10,688          13,618
    Purchase of in-process
     research and development...       298,154            --          298,154
    Changes in assets and
     liabilities:
      Accounts receivable.......           --        (120,898)       (120,898)
      Other current assets......        (9,144)       (22,393)        (31,537)
      Other assets..............       (10,076)        (4,675)        (14,751)
      Accounts payable..........        12,000         39,746          51,746
      Accrued compensation......        62,283        161,615         223,898
      Other current
       liabilities..............        38,268        (15,504)         22,764
                                     ---------      ---------     -----------
        Net cash used in
         operating activities...      (194,019)      (391,316)       (585,335)
                                     ---------      ---------     -----------
Cash flows from investing
 activities:
  Expenditures for property and
   equipment....................       (49,645)       (28,708)        (78,353)
  Purchases of short-term
   investments..................       (79,582)           --          (79,582)
  Sales of short-term
   investments..................           --          79,582          79,582
                                     ---------      ---------     -----------
  Net cash provided by (used in)
   investing activities.........      (129,227)        50,874         (78,353)
                                     ---------      ---------     -----------
Cash flows from financing
 activities:
  Payments on capital lease
   obligations..................       (22,506)       (45,013)        (67,519)
  Proceeds on issuance of notes
   to shareholders..............           --          50,000          50,000
  Proceeds on issuance of common
   stock........................         1,000          8,250           9,250
  Proceeds on issuance of
   preferred stock..............       682,759            --          682,759
                                     ---------      ---------     -----------
  Net cash provided by financing
   activities...................       661,253         13,237         674,490
                                     ---------      ---------     -----------
  Net increase (decrease) in
   cash and cash equivalents....       338,007       (327,205)         10,802
  Cash and cash equivalents at
   beginning of period..........           --         338,007             --
                                     ---------      ---------     -----------
  Cash and cash equivalents at
   end of period................     $ 338,007      $  10,802     $    10,802
                                     =========      =========     ===========
Supplementary schedule of
 noncash financing and investing
 activities:
  Acquisition of property and
   equipment under capital
   leases.......................     $  65,563      $  56,393     $   121,956
                                     =========      =========     ===========
  Assumption of net liabilities
   of M6 Pharmaceuticals at
   inception (August 7, 1995)...     $ 298,154      $     --      $   298,154
                                     =========      =========     ===========
Supplemental disclosure of cash
 flow information:
  Cash paid during the period
   for interest.................     $   6,493      $   5,695     $    12,188
                                     =========      =========     ===========
</TABLE>

 
                            See accompanying notes.
 
                                      F-6

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                         NOTES TO FINANCIAL STATEMENTS
 
(1) ORGANIZATION AND BASIS OF PRESENTATION
 
 Organization
 
  DepoMed, Inc. (the "Company"), a development stage company, was incorporated
in the State of California on August 7, 1995. The Company is engaged in the
research and development of oral drug delivery systems. The Company's primary
activities since incorporation have been establishing its offices and research
facilities, recruiting personnel, conducting research and development,
performing business and strategic planning and raising capital.
 
 Basis of Presentation
 
  In the course of its development activities, the Company has sustained
continuing operating losses and expects such losses to continue over the next
several years. Management plans to continue to finance the operations with a
combination of stock sales, such as the initial public offering contemplated
by the Company and, in the longer term, revenues from corporate alliances and
technology licenses. The Company's ability to continue as a going concern is
dependent upon the successful execution of financings and, ultimately, upon
achieving profitable operations. If adequate funds are not available, the
Company may be required to delay, reduce the scope of, or eliminate one or
more of its development programs. Since December 31, 1996, the Company has
raised $278,500 from the private placement of Series B preferred stock (see
Note 9).
 
  In March 1994, DepoMed Systems, Inc. ("DSI"), a company founded and
principally owned by Dr. John W. Shell, the founder of the Company, was merged
into M6 Pharmaceuticals, Inc. ("M6"). In August 1995, pursuant to a settlement
agreement (the "1995 Settlement Agreement") among M6, DSI and Dr. Shell, M6
transferred all of the assets related to the research, development, marketing,
production and sale of oral drug delivery systems and technology developed by
or under the direction of Dr. Shell to the Company, and the Company assumed
certain net liabilities totaling $298,154 related thereto. Such amount has
been reflected in the statement of operations as a charge for the purchase of
in-process research and development.
 
 Unaudited Pro Forma Shareholders' Equity (Net Capital Deficiency)
 
  If the offering contemplated by this Prospectus is consummated, all of the
convertible preferred shares outstanding as of the closing date will
automatically be converted into 815,789 shares of common stock based on the
shares of convertible preferred stock outstanding as of December 31, 1996. Pro
forma shareholders' equity at December 31, 1996, as adjusted for the
conversion of preferred stock, is disclosed on the balance sheet.
 
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Cash, Cash Equivalents and Short-Term Investments
 
  The Company considers all highly liquid investments purchased with an
original maturity from the date of purchase of three months or less to be cash
equivalents. As of December 31, 1995, cash equivalents primarily consist of
U.S. treasury bills. All other liquid investments are classified as short-term
investments and consist of treasury bills with maturities in excess of three
months. The Company places its cash, cash equivalents and short-term
investments with high quality, U.S. financial institutions and to date has not
experienced losses on any of its balances.
 
 Depreciation and Amortization
 
  Property and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets, generally three to five
years. Leasehold improvements are amortized over the lesser of the lease term
or the estimated useful lives of the related assets, generally four years.
 
                                      F-7

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
 Stock-Based Compensation
 
  In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under SFAS 123, stock-based compensation expense
is measured using either the intrinsic value method as prescribed by
Accounting Principles Board Opinion No. 25 ("APBO 25") or the fair-value
method described in SFAS 123. Beginning in 1996, the Company implemented SFAS
123 using the intrinsic-value method. Accordingly, adoption of the SFAS 123
had no material effect on the Company's financial position or results of
operations.
 
 Net Loss Per Share
 
  Except as noted below, historical net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
are excluded from the computation as their effect is antidilutive, except that
pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletins, common and common equivalent shares issued during the 12-month
period prior to the initial filing of the proposed offering at prices below
the assumed public offering price have been included in the calculation as if
they were outstanding for all periods presented (using the treasury stock
method for stock options at the estimated public offering price).
 
  Historical net loss per share information is as follows:
 

<TABLE>
<CAPTION>
                                             PERIOD FROM INCEPTION  YEAR ENDED
                                              (AUGUST 7, 1995) TO  DECEMBER 31,
                                               DECEMBER 31, 1995       1996
                                             --------------------- ------------
      <S>                                    <C>                   <C>
      Net loss per share...................        $   (0.10)       $   (0.14)
                                                   =========        =========
      Shares used in computing net loss per
       share...............................        3,044,109        3,469,864
                                                   =========        =========
</TABLE>

 
  Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of convertible preferred shares not included
above that will automatically convert upon completion of the Company's initial
public offering (using the as-if-converted method) from the original date of
issuance.
 
 Revenue Recognition
 
  Product development revenue relates to the reimbursement of costs incurred
for research and development and the achievement of milestones as specified in
the related agreement and are recorded as earned.
 
(3) BRISTOL MYERS SQUIBB RESEARCH AGREEMENT
 
  In July 1996, the Company and Bristol Myers Squibb Company ("BMS") entered
into a joint research agreement to develop a product using a BMS proprietary
compound and the DepoMed Gastric Retentive System. Pursuant to the agreement,
the Company has achieved all the specified milestones and has, therefore,
recorded approximately $198,000 in product development revenues in 1996, the
entire fee specified in the agreement. The amounts receivable under the
agreement totaled $57,778 as of December 31, 1996.
 
                                      F-8

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  Pursuant to the agreement, BMS has an option to obtain an exclusive,
worldwide license to products incorporating the BMS compound utilizing the GR
System. If such license is entered into, the Company will receive a royalty on
net sales of the products as well as certain milestone payments. The option
expires in February 1999.
 
  Also in 1996, the Company performed contract research services for BMS under
an arrangement whereby BMS reimbursed specific research costs relating to the
same product. Revenue recognized in accordance with this arrangement amounted
to $110,000 in 1996 and the amount receivable under the arrangement totaled
$63,120 as of December 31, 1996.
 
(4) PROPERTY AND EQUIPMENT
 
  Property and equipment consist of the following:
 

<TABLE>
<CAPTION>
                                                               DECEMBER 31, 1996
                                                               -----------------
      <S>                                                      <C>
      Furniture and office equipment..........................     $ 15,590
      Laboratory equipment....................................      153,957
      Leasehold improvements..................................       30,704
                                                                   --------
                                                                    200,251
      Less accumulated depreciation and amortization..........      (45,112)
                                                                   --------
                                                                   $155,139
                                                                   ========
</TABLE>

 
  Property and equipment includes assets under capitalized leases of $121,956
at December 31, 1996. Accumulated amortization related to assets under capital
leases totaled $33,412 at December 31, 1996, respectively.
 
(5) LEASES
 
  The Company leases its facilities under a noncancelable operating lease. The
facilities lease expires in 1999 and includes an option to renew the lease for
an additional five years. Future minimum lease payments under the capital
leases and operating leases at December 31, 1996, together with the present
value of the minimum lease payments, are as follows:
 

<TABLE>
<CAPTION>
                                                             OPERATING CAPITAL
                                                              LEASES    LEASES
                                                             --------- --------
      <S>                                                    <C>       <C>
      Year ending December 31,
        1997................................................ $ 38,676  $ 27,272
        1998................................................   39,468    23,316
        1999................................................    6,600    19,820
                                                             --------  --------
      Total minimum payments required....................... $ 84,744    70,408
                                                             ========
      Less amount representing interest.....................            (15,971)
                                                                       --------
      Present value of future lease payments................             54,437
      Less current portion..................................            (19,803)
                                                                       --------
      Noncurrent portion....................................           $ 34,634
                                                                       ========
</TABLE>

 
  Rent expense for the period from inception (August 7, 1995) to December 31,
1995, for the year ended December 31, 1996 and for the period from inception
(August 7, 1995) to December 31, 1996 was approximately $15,840, $36,960 and
$52,800, respectively.
 
                                      F-9

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
(6) RELATED PARTY TRANSACTIONS
 
 Promissory Note to Chairman of the Board
 
  DSI entered into a promissory note with an individual who is the Company's
founder, a shareholder and the Chairman of the Board of Directors, in each of
December 1992 and December 1993 in the aggregate principal amount of $100,667.
These notes are among the liabilities assumed by the Company pursuant to the
1995 Settlement Agreement. In November 1996, the Company entered into a
promissory note with the same individual in the aggregate principal amount of
$50,000. All the notes bear interest at 6% per annum on the outstanding
principal balance. The notes are due upon the Company's receipt of at least $1
million in net proceeds in additional equity financing to the Company. The
aggregate principal balance of all outstanding notes including the related
interest due the Chairman as of December 31, 1996 is $171,488.
 
 Promissory Note to Shareholder
 
  In July 1993, DSI signed two promissory notes with a shareholder who is also
the secretary to the Board of Directors. These notes are among the liabilities
assumed by the Company pursuant to the 1995 Settlement Agreement. The
principal of the notes aggregates $100,000, bears interest at 6.5% per annum,
and is due at the earlier of the Company's receipt of at least $500,000 in net
proceeds from additional equity financing, but not later than December 31,
1997. The entire amount and related interest of $122,750 is outstanding as of
December 31, 1996.
 
(7) SHAREHOLDERS' EQUITY
 
 Convertible Preferred Stock
 
  The Company is authorized to issue 10,000,000 shares of preferred,
designated as Series A convertible preferred stock (2,505,000 shares
designated) and Series B preferred stock (500,000 shares designated).
Preferred shareholders are entitled to receive noncumulative dividends at the
rate of $0.02451616 and $0.08 per annum, for each share of Series A, and
Series B preferred shares outstanding, respectively, when and if declared by
the Board of Directors, payable in preference to common stock dividends. No
dividends have been declared or paid by the Company.
 
  In the event of any liquidation, dissolution, or winding up of the Company,
the holders of the Series A and Series B preferred shares shall be entitled to
receive, prior to and in preference to any distribution of any of the assets
or surplus funds of the Company to the common shareholders, $0.306452 and
$1.00, respectively, for each share of Series A and Series B preferred stock,
respectively, held by them, and all declared but unpaid dividends on the
preferred shares.
 
  The holders of each share of preferred stock shall be entitled to the number
of votes equal to the number of shares of common stock into which such shares
of preferred stock could be converted at the record date for determination of
the shareholders entitled to vote on such matter.
 
  Each share of preferred stock is convertible at any time at the option of
the holder into shares of common stock at the then effective conversion price.
The conversion price per share of Series A and Series B preferred stock shall
be $0.919356 and $3.00, respectively, and is subject to adjustment as
specified in the articles of incorporation. Conversion of preferred shares is
automatic upon the closing of a public offering registered under the
Securities Act of 1933, with aggregate proceeds of not less than $3,500,000.
Such conversion shall be deemed to have been made immediately prior to the
closing of such underwritten public offering of securities.
 
                                     F-10

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 Common Shares
 
  The Company is authorized to issue 25,000,000 shares of common stock.
Holders of common stock are entitled to one vote per share on all matters to
be voted upon by the shareholders of the Company.
 
  Subject to the preferences that may be applicable to any outstanding shares
of preferred stock, the holders of common stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors.
 
 1995 Stock Option Plan
 
  The Company's 1995 Stock Option Plan ( the "Plan") was adopted by the Board
of Directors and approved by the shareholders in September 1995, and has
subsequently been amended. As of December 31, 1996 a total of 416,667 shares
of common stock have been reserved for issuance under the Plan. The Plan
provides for the granting to employees of the Company, including officers and
employee directors, of incentive stock options, and for the granting of
nonstatutory stock options to employees and consultants of the Company.
 
  The exercise price of all stock options granted under the Plan must be at
least 100% of the fair value of the common stock of the Company on the grant
date. The term of an incentive stock option may not exceed ten years from the
date of grant. An option shall be exercisable on or after each vesting date in
accordance with the terms set forth in the option agreement; provided,
however, that the right to exercise an option generally vests at the rate of
at least 25% per year over four years from the grant date.
 
 Stock-Based Compensation
 
  During 1996, the Company adopted SFAS 123. In accordance with the Statement,
the Company applies APBO 25 in accounting for option grants to employees under
the Plan and, accordingly, does not recognize compensation expense for options
granted to employees at fair value, only those options granted at prices below
fair value. The valuation related to stock options granted to non-employees
was immaterial and, therefore, no value was recorded in the financial
statements.
 
  The Company used the minimum value method to determine the fair value of
stock options at the grant date issued in 1995 and 1996 using the following
weighted average assumptions for 1995 and 1996, respectively: risk free
interest rates of 6.6% and 6.4%, respectively, and a weighted average expected
option life of 2 and 4 years, respectively. The weighted average estimated
fair value of employee stock options granted during 1995 and 1996 was $0.0014
and $1.13 per share, respectively.
 
  The effect of applying the minimum value method of SFAS 123 in determining
the fair values of stock options in 1995 and 1996 did not result in pro forma
net loss and loss per share that are materially different from historical
amounts reported. Therefore, such pro forma information is not presented
herein. Future pro forma results of operations may be materially different
from actual amounts reported.
 
                                     F-11

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  A summary of the Company's stock option activity, and related information
for the period from inception (August 7, 1995) to December 31, 1995 and for
the year ended December 31, 1996 follows:
 

<TABLE>
<CAPTION>
                                  PERIOD FROM INCEPTION
                                  (AUGUST 7, 1995) TO          YEAR ENDED
                                   DECEMBER 31, 1995       DECEMBER 31, 1996
                                 ------------------------  --------------------
                                               WEIGHTED               WEIGHTED
                                                AVERAGE                AVERAGE
                                               EXERCISE               EXERCISE
                                  OPTIONS        PRICE     OPTIONS      PRICE
                                 ------------ -----------  ---------  ---------
   <S>                           <C>          <C>          <C>        <C>
   Outstanding at beginning of
    period.....................           --   $      --     120,000   $  0.09
   Granted at fair value.......       120,000        0.09      3,334      0.09
   Granted below fair value....           --          --      83,333      0.90
   Exercised...................           --          --     (91,667)     0.09
   Forfeited...................           --          --         --        --
                                 ------------              ---------
   Outstanding at December 31..       120,000  $     0.09    115,000   $  0.68
                                 ============              =========
</TABLE>

 
  Exercise prices for options outstanding as of December 31, 1996 ranged from
$0.09 to $0.90. The following table summarizes information about options
outstanding at December 31, 1996:
 

<TABLE>
<CAPTION>
                                   OUTSTANDING OPTIONS       EXERCISABLE OPTIONS
                              ------------------------------ ---------------------
                                        WEIGHTED  REMAINING              WEIGHTED
   RANGE OF                             AVERAGE  CONTRACTUAL  NUMBER     AVERAGE
   EXERCISE                   NUMBER OF EXERCISE  LIFE (IN      OF       EXERCISE
    PRICES                     OPTIONS   PRICE     YEARS)     OPTIONS     PRICE
   --------                   --------- -------- ----------- ---------  ----------
     <S>                      <C>       <C>      <C>         <C>        <C>   
     $0.09...................   31,667   $0.09      8.87     7,083      $    0.09
     $0.90...................   83,333    0.90      9.83        --             --
                               -------
                               115,000
                               =======
</TABLE>

 
  In December 1996, the Company granted an option to purchase 83,333 shares of
common stock at $0.90 per share. Deferred compensation of $275,000 was
recorded on this option grant based on the deemed fair value of common stock
on the date of grant of approximately $4.20. In January 1997, the Company
granted options to purchase 81,667 shares of common stock at $3.00 per share
and additional deferred compensation of approximately $98,000 will be recorded
in the quarter ending March 31, 1997 based on the deemed fair value of common
stock on the grant date of $4.20.
 
(8) INCOME TAXES
 
  As of December 31, 1996 the Company had federal net operating loss
carryforwards of approximately $500,000. The primary difference between the
accumulated deficit and the net operating loss carryforwards relates to the
exclusion of deferred compensation which will not be paid prior to March 15,
1997 for tax purposes. The net operating loss carryforwards will expire at
various dates beginning on 2010 through 2011 if not utilized.
 
  Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986. The annual limitations may result in the
expiration of net operating losses before utilization.
 
  Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amount used for income tax purposes.
 
                                     F-12

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Significant components of the Company's deferred tax assets as of December
31 are as follows:
 

<TABLE>
<CAPTION>
                                                       INCEPTION
                                                       (AUGUST 7,
                                                        1995) TO
                                                      DECEMBER 31, DECEMBER 31,
                                                          1995         1996
                                                      ------------ ------------
      <S>                                             <C>          <C>
      Net operating loss carryforward................  $  65,000    $ 380,000
      Deferred compensation..........................     50,000      120,000
                                                       ---------    ---------
      Total deferred tax assets......................    115,000      500,000
      Valuation allowance for deferred tax assets....   (115,000)    (500,000)
                                                       ---------    ---------
        Total........................................  $     --     $     --
                                                       =========    =========
</TABLE>

 
(9) SUBSEQUENT EVENTS
 
  In January 1997, the board of directors authorized management of the Company
to file a registration statement with the SEC permitting the Company to sell
shares of its common stock and warrants to the public. If the initial public
offering is consummated under the terms currently anticipated, all of the
preferred stock outstanding will automatically convert into 815,789 shares of
common stock. Unaudited pro forma shareholders' equity, as adjusted for the
assumed conversion of the preferred shares, is set forth on the balance sheet.
 
  Also in January 1997, the board of directors of the Company authorized a 3-
for-1 reverse stock split, in which three shares of common stock will be
exchanged for one share of common stock. Following shareholder approval, the
stock split was effected on      , 1997. Effective upon closing of the initial
public offering, the Company will become authorized to issue 5,000,000 shares
of preferred stock and 25,000,000 shares of common stock. All share and per
share amounts, as well as the dividend and liquidation preferences from
preferred stock, included in the accompanying financial statements have been
retroactively adjusted to reflect the reverse stock split.
 
  In the first quarter of fiscal 1997, the Company issued 278,500 shares of
Series B preferred stock to accredited investors at a purchase price of $1.00
per share of Series B Preferred Stock. If the initial public offering is
consummated under the terms currently anticipated, all of the preferred stock
outstanding will automatically convert into 92,834 shares of Common Stock.
 
  In April 1997, the Company arranged a financing facility of up to $1,000,000
of one-year notes to accredited investors (the "Bridge Financing"). The terms
of the borrowing include a mandatory payment requirement upon the closing of
an initial public offering prior to the Bridge Financing's maturity. The
Bridge Financing bears interest at the rate of 6% per annum and further
provides for the issuance of warrants upon the closing of an initial public
offering (the "Bridge Warrants"). The Bridge Warrants entitle the investors to
purchase the number of shares of Common Stock which equals 50% of their
investment divided by the initial public offering price of the Common Stock,
exercisable at a price equal to the initial public offering price of the
Common Stock. The Bridge Warrants may be exercised during the 4 year period
beginning one year after the date of the initial public offering.
 
                                     F-13

<PAGE>
 

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors
DepoMed, Inc.
 
  We have audited the accompanying statement of direct expenses of DepoMed
Systems Division of M6 Pharmaceuticals, Inc. for the period from January 1,
1995 to August 6, 1995. 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 audit.
 
  We conducted our audit 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 audit provides a reasonable basis
for our opinion.
 
  In our opinion, the statement referred to above presents fairly, in all
material respects, the direct expenses of DepoMed Systems Division of M6
Pharmaceuticals, Inc. for the period from January 1, 1995 to August 6, 1995,
in conformity with generally accepted accounting principles.
 
                                                          /s/ Ernst & Young LLP
Palo Alto, California
January 31, 1997

 
                                     F-14

<PAGE>
 
              DEPOMED SYSTEMS DIVISION OF M6 PHARMACEUTICALS, INC.
 
                          STATEMENT OF DIRECT EXPENSES
 
             FOR THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 6, 1995
 

<TABLE>
   <S>                                                                <C>
   Operating expenses:
     Research and development........................................ $ 175,096
     General and administrative......................................   164,688
                                                                      ---------
   Total operating expenses..........................................   339,784
                                                                      ---------
   Net loss.......................................................... $(339,784)
                                                                      =========
</TABLE>

 
                                      F-15

<PAGE>
 
                 DEPOMED DIVISION OF M6 PHARMACEUTICALS, INC.
 
                     NOTES TO STATEMENT OF DIRECT EXPENSES
 
(1) BASIS OF PRESENTATION
 
  In March 1994, DepoMed Systems, Inc. ("DSI"), a company founded and
principally owned by Dr. John W. Shell, the inventor of the DSI's proprietary
technology related to drug delivery systems, was merged into M6
Pharmaceuticals, Inc. ("M6"). During the period that DepoMed was controlled by
M6, it was operated as a division, and, therefore, had no separate legal
status. As a result, separate financial statements were not maintained by M6
for the DepoMed division ("Division") during that time.
 
  The accompanying statement of direct expenses were prepared to present the
direct expenses for the Division for period from January 1, 1995 to August 6,
1995. There were no revenues for the Division during the period. The statement
is not intended to be a complete presentation of the results of operations of
the Division during that period.
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
(2) SIGNIFICANT ACCOUNTING POLICY--DIRECT EXPENSES
 
  The accompanying statements include only direct expenses during the period
presented. No allocations of corporate expenses have been presented as
management believes any allocations would be subjective and not fairly present
the results of operations of the Division. This statement of direct expenses
is not necessarily indicative of the expenses that would have been incurred
had DepoMed Systems operated as a stand-alone business.
 
                                     F-16

<PAGE>
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
  NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
 
                                ---------------
 
 
                              TABLE OF CONTENTS
 

<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   3
Risk Factors.............................................................   7
Use of Proceeds..........................................................  17
Dividend Policy..........................................................  18
Capitalization...........................................................  18
Dilution.................................................................  19
Selected Financial Data..................................................  20
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  21
Business.................................................................  24
Management...............................................................  37
Certain Transactions.....................................................  41
Principal Shareholders...................................................  42
Description of Securities................................................  43
Shares Eligible for Future Sale..........................................  46
Underwriting.............................................................  47
Legal Matters............................................................  49
Experts..................................................................  49
Additional Information...................................................  49
Index to Financial Statements............................................ F-1
</TABLE>

 
                                ---------------
 
  UNTIL     , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
 
                                 DEPOMED, INC.
 
                               2,500,000 SHARES
                                OF COMMON STOCK
 
                                      AND
 
                             1,250,000 REDEEMABLE
                                 COMMON STOCK
                               PURCHASE WARRANTS
 
                               -----------------
 
                                  PROSPECTUS
 
                               -----------------
 
 
                              NATIONAL SECURITIES
                                  CORPORATION
 
 
                                        , 1997
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<PAGE>
 

                                    PART II
 
                    INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
  The registrant has the power to indemnify its directors and officers against
liability for certain acts pursuant to Section 317 of the California
Corporations Code. Article IV of the registrant's Third Amended and Restated
Articles of Incorporation provides as follows:
 
  "The liability of the directors of this corporation for monetary damages
  shall be eliminated to the fullest extent permissible under California law.
  This corporation is also authorized, to the fullest extent permissible
  under California law, to indemnify its agents (as defined in Section 317 of
  the California Corporations Code), whether by by-law, agreement or
  otherwise, for breach of duty to this corporation and its shareholders in
  excess of that expressly permitted by Section 371 and to advance defense
  expenses to its agents in connection with such matters as they are
  incurred, subject to the limits on such excess indemnification set forth in
  Section 204 of the California Corporations Code. If, after the effective
  date of this Article, California law is amended in a manner which permits a
  corporation to limit the monetary or other liability of its directors or to
  authorize indemnification of, or advancement of such defense expenses to,
  its directors or other persons, in any such case to a greater extent than
  is permitted on such effective date, the references in this Article to
  "California law" shall to that extent be deemed to refer to California law
  as so amended."
 
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
  The following-table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in
connection with the sale of the Common Stock being registered. All amounts are
estimated except the Commission Registration Fee, the NASD Filing Fee and the
American Stock Exchange Application Fee.
 

<TABLE>
   <S>                                                                 <C>
   SEC Registration Fee............................................... $ 11,370
   NASD Filing Fee....................................................    4,252
   American Stock Exchange Application Fee............................   42,500
   Blue Sky Qualification Fees and Expenses...........................   20,000
   Accounting Fees and Expenses.......................................  140,000
   Legal Fees and Expenses............................................  175,000
   Transfer Agent and Registrar Fees..................................    5,000
   Directors' and Officers' Insurance.................................  115,000
   Printing and Engraving.............................................  120,000
   Miscellaneous......................................................   22,516
                                                                       --------
       Total.......................................................... $655,638
                                                                       ========
</TABLE>

 
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
 
  During the past three years, the registrant has issued the securities set
forth below which were not registered under the Securities Act of 1933, as
amended (the "Securities Act").
 
  In March 1994, DepoMed Systems, Inc. ("DSI") a company founded and
principally owned by Dr. John W. Shell was merged into M6 Pharmaceuticals,
Inc. ("M6"). In August 1995, pursuant to a settlement agreement between DSI
and Dr. Shell, on the one hand, and M6, on the other hand, M6 transferred all
of the intellectual property and other technology assets attributable to DSI
to the Company, and the Company assumed certain liabilities related thereto.
In September 1995, the Company issued 2,066,667 shares of its Common Stock to
Dr. Shell and other prior shareholders of DSI in cancellation of the M6 stock
received in the merger. The shares were issued under section 4(2) of the
Securities Act.
 
 
                                     II-1

<PAGE>
 
  In September 1995, the Company also issued 1,196,491 shares of Common Stock
to CSO Ventures LLC ("CSO") in consideration of the prior agreement of CSO to
lend the Company $100,000 to finance the litigation against M6 and to assist
the Company in its initial financing. The shares were issued under section
4(2) of the Securities Act.
 
  In November 1995, the Company sold 2,447,368 shares of Series A Preferred
Stock to certain accredited investors. The shares were issued under section
4(2) of the Securities Act.
 
  In the first quarter of 1997, the Company sold 278,500 shares of Series B
Preferred Stock to eight accredited investors. The shares were issued under
section 4(2) of the Securities Act. See "Principal Shareholders."
 
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
  (a) Exhibits
 

<TABLE>
 <C>   <S>
  *1.1 Form of Underwriting Agreement
   3.1 Third Amended and Restated Articles of Incorporation
  *3.2 Form of Amended and Restated Articles of Incorporation (to become
        effective upon closing of the Offering)
   3.3 Bylaws
  *3.4 Form of Amended and Restated Bylaws (to become effective upon closing of
        the Offering)
  *4.1 Specimen Common Stock Certificate
  *4.2 Specimen Warrant Certificate
  *4.3 Form of Representative's Warrant Agreement including form of
        Representative's Warrant
  *4.4 Form of Warrant Agreement
  *5.1 Opinion of Heller Ehrman White & McAuliffe
  10.1 1995 Incentive Stock Plan, as amended
 +10.2 Agreement dated July 11, 1996 between the Company and Bristol-Myers
        Squibb Company
 +10.3 Feasibility Agreement dated May 13, 1996 between the Company and GalaGen
        Inc.
  10.4 Agreement dated March 18, 1997 between the Company and CSO Ventures LLC
  10.5 Lease Agreement between the Company and 1170 Chess Drive Limited
        Partnership dated September 2, 1992
  10.6 First Amendment to lease agreement dated January 1, 1996 between the
        Company and SKW II Real Estate Partnership
  11.1 Statement re: computation of net loss per share
  23.1 Consent of Ernst & Young LLP, Independent Auditors
 *23.2 Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5.1)
  24.1 Power of Attorney (included on pages II-4 and II-5)
  27.1 Financial Data Schedule
</TABLE>

- --------
*  To be filed by amendment.
 
+  Confidential treatment requested.
 
 
                                     II-2

<PAGE>
 
ITEM 28. UNDERTAKINGS.
 
  (1) The undersigned Registrant hereby undertakes that it will:
 
    (a) File, during any period in which offers or sales are being made, a
  post-effective amendment to this registration statement to:
 
      (i) Include any prospectus required by Section 10(a)(3) of the
    Securities Act,
 
      (ii) Reflect in the prospectus any facts or events which,
    individually or together, represent a fundamental change in the
    information in the registration statement, and
 
      (iii) Include any additional or changed material information on the
    plan of distribution.
 
    (b) For determining liability under the Securities Act, treat each post-
  effective amendment as a new registration statement of the securities
  offered, and the offering of the securities at that time to be the initial
  bona fide offering.
 
    (c) File a post-effective amendment to remove from registration any of
  the securities that remain unsold at the end of this offering.
 
  (2) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
 
  (3) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of each issue.
 
  (4) The undersigned Registrant hereby undertakes that it will:
 
    (a) For determining any liability under the Securities Act, treat the
  information omitted from the form of prospectus filed as part of this
  Registration Statement in reliance upon Rule 430A and contained in a form
  of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
  497(h) under the Securities Act as part of this registration statement as
  of the time it was declared effective.
 
    (b) For determining any liability under the Securities Act, treat each
  post-effective amendment that contains a form of prospectus as a new
  registration statement for the securities offered in the registration
  statement, and the offering of such securities at that time as the initial
  bona fide offering of those securities.
 
                                     II-3

<PAGE>


                                  SIGNATURES
 
  Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement on Form SB-2 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Foster City, California on April 18,
1997.
 
                                          DEPOMED, INC.
 
                                                 /s/ John W. Fara
                                          By: ___________________________
                                             John W. Fara
                                             President Chief Executive
                                             Officer and Director
 
                               POWER OF ATTORNEY
 
  Each person whose signature appears below constitutes and appoints John W.
Fara, John W. Shell and John F. Hamilton his true and lawful attorneys-in-fact
and agents, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective
amendments) to the Registration Statement, and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act
of 1933, as amended, and all post-effective amendments thereto, and to file
the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his or her substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
 
  Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form SB-2 has been signed by the following persons
in the capacities and on the dates indicated.
 
       /s/ John W. Shell               Chairman of the          April 18, 1997
- -------------------------------         Board of Directors
     John W. Shell, Ph.D.               and Chief
                                        Scientific Officer
 
       /s/ John W. Fara                President, Chief         April 18, 1997
- -------------------------------         Executive Officer
      John W. Fara, Ph.D.               and Director
                                        (Principal
                                        Executive Officer)
 
       /s/ John N. Shell               Vice President,          April 18, 1997
- -------------------------------         Operations and
         John N. Shell                  Director
 
                                     II-4

<PAGE>
 
     /s/ John F. Hamilton               Vice President,         April 18, 1997
- -------------------------------          Finance Chief
       John F. Hamilton                  Financial Officer
                                         (Principal
                                         Financial Officer)
 
     /s/ Judson A. Cooper               Director                April 18, 1997
- -------------------------------
       Judson A. Cooper
 
       /s/ Joshua Schein                Director                April 18, 1997
- -------------------------------
     Joshua Schein, Ph.D.
 
                                      II-5

<PAGE>
 

                               INDEX TO EXHIBITS
 

<TABLE>
<CAPTION>
                                                                  SEQUENTIALLY
 EXHIBIT                                                            NUMBERED
  PAGE                         DESCRIPTION                            PAGE
 -------                       -----------                        ------------
 <C>     <S>                                                      <C>
  *1.1   Form of Underwriting Agreement
   3.1   Third Amended and Restated Articles of Incorporation
  *3.2   Form of Amended and Restated Articles of Incorporation
          (to become effective upon closing of the Offering)
   3.3   Bylaws
  *3.4   Form of Amended and Restated Bylaws (to become
          effective upon closing of the Offering)
  *4.1   Specimen Common Stock Certificate
  *4.2   Specimen Warrant Certificate
  *4.3   Form of Representative's Warrant Agreement including
          form of Representative's Warrant
  *4.4   Form of Warrant Agreement
  *5.1   Opinion of Heller Ehrman White & McAuliffe
  10.1   1995 Incentive Stock Plan, as amended
 +10.2   Agreement dated July 11, 1996 between the Company and
          Bristol-Myers Squibb Company
 +10.3   Feasibility Agreement dated May 13, 1996 between the
          Company and GalaGen Inc.
  10.4   Agreement dated March 18, 1997 between the Company and
          CSO Ventures LLC
  10.5   Lease Agreement between the Company and 1170 Chess
          Drive Limited Partnership dated September 2, 1992
  10.6   First Amendment to lease agreement dated January 1,
          1996 between the Company and SKW II Real Estate
          Partnership
  11.1   Statement re: computation of net loss per share
  23.1   Consent of Ernst & Young LLP, independent auditors
 *23.2   Consent of Heller Ehrman White & McAuliffe (included
          in Exhibit 5.1)
  24.1   Power of Attorney (included on pages II-4 and II-5)
  27.1   Financial Data Schedule
</TABLE>

- --------
*  To be filed by amendment.
 
+  Confidential treatment requested.
 





<PAGE>
 
                                  EXHIBIT 3.1
                                  -----------


                           THIRD AMENDED AND RESTATED

                          ARTICLES OF INCORPORATION OF
                                 DEPOMED, INC.


     Dr. John W. Fara and Julian N. Stern hereby certify that:

     1.  They are the President and Secretary, respectively, of DepoMed, Inc.

(the "Corporation").

     2.  The Articles of Incorporation of the Corporation are hereby amended and

restated to read in full as follows:
                                       I.

     The name of this Corporation is DEPOMED, INC.

                                      II.

     The purpose of this Corporation is to engage in any lawful  act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.

                                     III.

          3.1  Authorized Capital Stock. This Corporation is authorized to issue
               ------------------------
two classes of stock, which shall be known as Common Stock and Preferred Stock.
The total number of shares of Common Stock which this Corporation is authorized
to issue is 35,000,000 shares and the total number of shares of Preferred Stock
which this Corporation is authorized to issue is 10,000,000. This Corporation is
authorized to issue a series of Preferred Stock which shall be designated Series
A Convertible Preferred Stock (the
 "Series A Preferred") and shall consist of
2,505,000 shares of Preferred Stock and a series of Preferred Stock which shall
be designated Series B Convertible Preferred Stock (the "Series B Preferred")
and shall consist of 500,000 shares of Preferred Stock. The remaining shares of
Preferred Stock may be issued from time to time in one or more series. The
rights, privileges, preferences and restrictions applicable to the Preferred
Stock are set forth in Section 3.3.

          3.2  The Board of Directors shall determine the designation of each
additional series of Preferred Stock and the authorized number of shares of each
series.  The Board of Directors is authorized to determine and alter the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of shares of Preferred Stock and to increase or decrease (but
not below the number of shares of

<PAGE>
 
such series then outstanding) the number of shares of any such series subsequent
to the issue of shares of that series.  If the number of shares of any series of
Preferred Stock shall be so decreased, the shares constituting such decrease
shall resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.

     3.3  The rights, privileges, preferences and restrictions of the Preferred
Stock are as follows:

          3.3.1  Dividend Rights.
                 --------------- 

              (a) Dividend Rights of Preferred Stock. The holders of Preferred
                  ----------------------------------
Stock shall be entitled to receive, out of any funds legally available therefor,
when and as declared by the Board of Directors noncumulative dividends on each
outstanding share of Preferred Stock as follows:

                   (i)  Before any amount shall be paid to the holders of Common
Stock, the holders of Series A Preferred and Series B Preferred shall be
entitled to receive an amount equal to $0.02451616 and $0.08, respectively, per
annum for each share of Series A Preferred and Series B Preferred held by them.

                  (ii)  No dividends (other than those payable solely in shares
of Common Stock) shall be payable on any Common Stock during any fiscal year of
this Corporation until dividends in the full respective preferential amount per
share set forth above, and in the full respective preferential amount per share
specified for any series of Preferred Stock authorized in the future, shall have
been paid or declared and set apart for payment to Preferred Stock during that
fiscal year. The right to such dividends on shares of Preferred Stock shall not
be cumulative and no right shall accrue to holders of Preferred Stock by reason
of the fact that dividends on such shares are not declared or paid in any prior
year.

              (b) Dividend Rights of Common Stock.  At any time after the full
                  -------------------------------
preferential dividend per share on Preferred Stock shall have been declared and
paid or set apart for payment in accordance with the provisions of Section
3.3.1(a), dividends may be paid on the outstanding Common Stock out of any funds
legally available therefor.  The holders of Preferred Stock shall not be
entitled to participate in any dividends other than as provided in Section
3.3.1(a).

          3.3.2   Liquidation Preference.  In the event of any liquidation,
                  ----------------------                                   
dissolution, or winding up of the Corporation, either voluntary or involuntary,
distributions to the shareholders of this Corporation shall be made in the
following manner:

              (a) The holders of the Series A Preferred and Series B Preferred
shall be entitled to receive, prior and in preference to any distribution of any
of the assets or surplus

                                      -2-

<PAGE>
 
funds of the Corporation to the holders of the Common Stock by reason of their
ownership of such stock, the amount of $0.306452 and $1.00, respectively, for
each share of Series A Preferred and Series B Preferred then held by them,
adjusted for any combinations, consolidations, or stock distributions or
dividends which respect to such shares and, in addition, an amount equal to all
declared but unpaid dividends on the Series A Preferred and Series B Preferred.

              (b)  If upon the occurrence of such event, if the assets and funds
available to be distributed among the holders of the Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then the assets and funds of the Corporation available for
distribution shall be distributed ratably among the holders of the Series A
Preferred and Series B Preferred in proportion to the preferential amount each
such holder is otherwise entitled to receive.

              (c)  After payment has been made to the holders of the Series A
Preferred and Series B Preferred of the full amounts to which they shall be
entitled as provided in paragraphs (a) and (b) above, and after the payment to
the holders of any series of Preferred Stock authorized in the future of the
full preferential amount specified therefor, the remaining assets of the
Corporation available for distribution to shareholders shall be distributed
among the holders of Common Stock ratably in proportion to the numbers of shares
of Common Stock held by them.

              (d)  For purposes of this Section 3.3.2, a merger or consolidation
of the Corporation with or into any other corporation or corporations, or the
merger of any other corporation or corporations into the Corporation, in which
consolidation or merger the shareholders of the Corporation receive
distributions in cash or securities of another corporation or corporations as a
result of such consolidation or merger, or a sale of all or substantially all of
the assets of the Corporation, shall be treated as a liquidation, dissolution or
winding up of the Corporation.

              (e)  Any securities to be delivered to the holders of the
Preferred Stock pursuant to Section 3.3.2(d) above shall be valued as follows:

                   (i) Securities not subject to investment letter or other
similar restrictions on free marketability:

                       (1) If traded on a securities exchange or on the Nasdaq
National Market, the value shall be deemed to be the average of the closing
prices of the securities on such exchange or system over the 30-day period
ending three (3) days prior to the closing;

                                      -3-

<PAGE>
 
                       (2) If actively traded over-the-counter, the value shall
be deemed to be the average of the closing bid or sale prices (whichever are
applicable) over the 30-day period ending three (3) days prior to the closing;
and

                       (3) If there is no active public market, the value shall
be the fair market value thereof, as mutually determined by the Corporation and
the holders of a majority-in-interest of the Preferred Stock that would have
been entitled to receive such securities or the same type of securities. 

                   (ii) The method of valuation of securities subject to
investment letter or other restrictions on free marketability shall be to make
an appropriate discount from the market value determined as above in
subparagraphs 3.3.2(e)(1), (2) or (3) to reflect the approximate fair market
value thereof, as mutually determined by the Corporation and the holders of a
majority-in-interest of the Preferred Stock that would be entitled to receive
such securities or the same type of securities.

              (f)  As authorized by Section 402.5(c) of the California
Corporations Code, the provisions of Sections 502 and 503 of the California
Corporations Code shall not apply with respect to repurchase by the Corporation
of shares of Common Stock issued to or held by employees or consultants of the
Corporation or its subsidiaries upon termination of their employment or services
pursuant to agreement providing for the right of said repurchase.

          3.3.3 Voting Rights. Except as otherwise required by law or by Section
                -------------
3.3.5, the holder of each share of Common Stock shall be entitled to one vote
for each share held and the holder of each share of Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such share of Preferred Stock could be converted at the record date
for determination of the shareholders entitled to vote on such matter, or, if no
such record date is established, at the date such vote is taken or any written
consent of shareholders is solicited, such votes to be counted together with all
other shares of stock of the Corporation having general voting power and not
separately as a class. Fractional votes by the holders of Preferred Stock shall
not, however, be permitted and any fractional voting rights shall (after
aggregating all shares into which shares of Preferred Stock held by each holder
could be converted) be rounded to the nearest whole number. Holders of Common
Stock and Preferred Stock shall be entitled to notice of any shareholders'
meeting in accordance with the Bylaws of the Corporation.

          3.3.4  Conversion.  The holders of the Preferred Stock have conversion
                 ----------                                                     
rights as follows (the "Conversion Rights"):

                                      -4-

<PAGE>
 
                   (a)  Right to Convert. Each share of Preferred Stock shall be
                        ----------------
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share at the office of the Corporation or any transfer agent
for the Preferred Stock. Each share of Preferred Stock shall be convertible into
the number of shares of Common Stock which results from dividing the "Conversion
Price" per share in effect for such series of Preferred Stock at the time of
conversion into the "Conversion Value" per share of such series of Preferred
Stock. The number of shares of Common Stock into which each series of Preferred
Stock is convertible is hereinafter collectively referred to as the "Conversion
Rate" for such series. The initial Conversion Price per share of Series A and
Series B Preferred shall be $0.306452 and $1.00, respectively. The initial
Conversion Price of each series of Preferred Stock shall be subject to
adjustment as hereinafter provided. The Conversion Value per share of Series A
Preferred and Series B Preferred shall be $0.306452 and $1.00, respectively.

                   (b)  Automatic Conversion. Each share of Preferred Stock
                        --------------------
shall automatically be converted into shares of Common Stock at the then
effective Conversion Rate (i) upon the closing of a firm commitment underwritten
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of Common Stock
for the account of the Corporation to the public at an aggregate offering price
to the public of not less than $3,500,000 (prior to deduction of underwriter
commissions and offering expenses); (ii) immediately upon the receipt by the
Corporation of a written request for conversion duly executed by holders of at
least 60% of the then outstanding shares of such series of Preferred Stock; or
(iii) at such time as 60% of the shares of such series of Preferred Stock ever
outstanding have converted into Common Stock.

                   (c)  Mechanics of Conversion.
                        ----------------------- 

                        (i)  Before any holder of Preferred Stock shall be
entitled to convert the same into Common Stock, the holder shall surrender the
certificate or certificates representing the Preferred Stock to be converted,
duly endorsed for transfer, at the office of the corporation or of any transfer
agent for Preferred Stock, and shall give written notice to the corporation at
such office that the holder elects to convert the same and shall state therein
the name or names in which the holder wishes the certificate or certificates for
shares of Common Stock to be issued. The Corporation shall, as soon as
practicable thereafter, issue and deliver at such office to such holder of
Preferred Stock, a certificate or certificates for the number of shares of
Common Stock to which the holder shall be entitled as aforesaid and a check
payable to the holder in the amount of any cash amounts payable as the result of
a conversion into fractional shares of Common Stock pursuant to Section
3.3.4(c)(iv) hereunder and any declared but unpaid dividends on the converted
Preferred Stock to which the holder may be

                                      -5-

<PAGE>
 
entitled.  In the case of any conversion pursuant to Section 3.3.4(a), such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of surrender of the shares of Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.

                   (ii)  In the case of any conversion pursuant to Section
3.3.4(b)(i), the conversion shall be conditioned upon the closing of the
underwritten public offering, in which event the person(s) entitled to receive
the Common Stock issuable upon such conversion of Preferred Stock shall not be
deemed to have converted such Preferred Stock until immediately prior to such
closing. Written notice of such conversion shall be given by the Corporation to
the holders of Preferred Stock at least ten (10) days prior to the closing of
the sale of such securities. On or after the closing date as specified in such
notice, each holder of Preferred Stock shall surrender the certificate or
certificates representing such Preferred Stock, duly endorsed for transfer, at
the office of the Corporation or any transfer agent for Preferred Stock. The
Corporation shall as soon as practicable thereafter, issue and deliver at such
office to such holder of Preferred Stock, a certificate or certificates for the
number of shares of Common Stock to which he or she shall be entitled as
aforesaid and a check payable to the holder in the amount of any cash amounts
payable as a result of a conversion into a fractional share of Common Stock
pursuant to Section 3.3.4(c)(iv) hereunder and any declared but unpaid dividends
on the converted Preferred Stock. Such conversion shall be deemed to have been
made immediately prior to the closing of such underwritten public offering of
securities, and, notwithstanding that any certificate representing the Preferred
Stock shall not have been surrendered, each holder of such Preferred Stock shall
thereafter be treated for all purposes as the record holder of the number of
shares of Common Stock issuable to such holder upon such conversion.

                  (iii)  In the case of any conversion pursuant to Section
3.3.4(b)(ii) or 3.3.4(b)(iii), such conversion shall be deemed to have been made
as of the date of receipt by the Corporation of a written request for conversion
duly executed by holders of at least 60% of the then outstanding shares of such
series of Preferred Stock, or as of the date as of which 60% of the shares of
such series of Preferred Stock ever outstanding has converted to Common Stock.
Written notice of such conversion shall be given by the Corporation to the
holders of such series of Preferred Stock within twenty (20) days following the
date on which conversion shall be deemed to have occurred. As promptly as
possible after receipt of such notice, each holder of such series of Preferred
Stock shall surrender the certificate or certificates representing such
Preferred Stock, duly endorsed for transfer, at the office of the Corporation or
any transfer agent for Preferred Stock. The corporation shall,

                                      -6-

<PAGE>
 
as soon as practicable thereunder, issue and deliver at such office to such
holder of Preferred Stock, a certificate or certificates for the number of
shares of Common Stock to which the holder shall be entitled as aforesaid and a
check payable to the holder in the amount of any cash amounts payable as a
result of a conversion into a fractional share of Common Stock pursuant to
Section 3.3.4(c)(iv) hereunder and any declared but unpaid dividends on the
converted Preferred Stock.  Such conversion shall be deemed to have been made as
of the date aforesaid and, notwithstanding that any certificate representing
such series of Preferred Stock shall not have been surrendered, each holder of
such series of Preferred Stock shall thereafter be treated for all purposes as
the record holder of the number of shares of Common Stock issued to such holder
upon such conversion.

                   (iv)  No fractional shares of Common Stock shall be issued
upon conversion of Preferred Stock. In lieu of any fractional share to which the
holder would otherwise be entitled, the Corporation shall pay cash equal to such
fraction multiplied by the then effective Conversion Price.

              (d)  Adjustment to Conversion Price for Diluting Issues.
                   -------------------------------------------------- 

                   (i)  Special Definitions. For purposes of this Section
                        -------------------
3.3.4(d), the following definitions apply:

                        (A) "Options" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities other than rights, options or warrants issued or issuable to
directors or employees of or consultants to the Company pursuant to a stock
grant, option plan or other incentive program approved by the Board of Directors
but not exceeding the rights, options or warrants to subscribe for or purchase
in the aggregate not more than 2,500,000 shares of Common Stock, subject to
adjustment for all subdivisions and combinations and for repurchases of shares
previously issued.

                        (B) "Shares" shall mean shares of Preferred.

                        (C) "Original Issue Date" shall mean the date on which
Shares of were first issued.

                        (D) "Convertible Securities" shall mean any evidence of
indebtedness, shares (other than Common Stock and Shares) or other securities
convertible into or exchangeable for Common Stock.

                        (E) "Additional Shares of Common Stock" shall include
all shares of Common Stock issued (or, pursuant to Section 3.3.4(d)(iii), deemed
to be issued) by the Company after the Original Issue Date, other than shares of
Common Stock issued or issuable: (1) upon the conversion of the

                                      -7-

<PAGE>
 
Shares; (2) to Directors or employees of, or consultants to, the Company
pursuant to a stock grant, option plan or other incentive program approved by
the Board of Directors but not exceeding 2,500,000 shares of Common Stock,
subject to adjustment for all subdivisions and combinations and for repurchases
of shares previously issued; (3) as a dividend or distribution on the Shares; or
(4) by way of a dividend or other distribution on shares of Common Stock
excluded from the definition of Additional Shares of Common Stock by the
foregoing clauses (1), (2) and (3), or this clause (4), or on the shares of
Common Stock so excluded.

                   (ii)  No Adjustment of the Conversion Price. No adjustment in
                         -------------------------------------
the Conversion Price for any series of Preferred Stock shall be made in respect
of the issuance of Additional Shares of Common Stock unless the consideration
per share for an Additional Share of Common Stock issued or deemed to be issued
by the Company is less than the Conversion Price of such series of Preferred
Stock in effect, on the date of and immediately prior to such issuance. No
adjustment in the Conversion Price for any series of Preferred Stock will be
made unless such adjustment would require a change of at least one percent of
the Conversion Price then in effect, but any adjustment that would otherwise be
required to be made shall be carried forward and taken into account in any
subsequent adjustment.

                  (iii)  Deemed Issue of Additional Shares of Common Stock.
                         ------------------------------------------------- 

                         (A) Stock Dividends and Subdivisions. In the event that
the Company at any time or from time to time after the Original Issue Date shall
declare or pay any dividend on the Common Stock payable in Common Stock, or
effect a subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (otherwise than by payment of a dividend in
Common Stock), then in any such event, Additional Shares of Common Stock shall
be deemed to have been issued:

                             (1) in the case of any such dividend, immediately
after the close of business on the record date for the determination of holders
of any class of securities entitled to receive such dividend; or

                             (2) in the case of any subdivision, at the close of
business on the date immediately prior to the date upon which such corporate
action becomes effective.

                         (B) Options and Convertible Securities. In the event
                             ----------------------------------
the Company at any time or from time to time after the Original Issue Date shall
issue any Options or Convertible Securities or shall fix a record date for the
determination of holders of any class of securities then issued to receive any
such Options or Convertible Securities, then the

                                      -8-

<PAGE>
 
maximum number of shares (as set forth in the resolution relating thereto
without regard to any provisions contained therein designed to protect against
dilution) of Common Stock issuable upon the exercise of such Option or, in the
case of Convertible Securities and Options therefore, the conversion or exchange
of such Convertible Securities, shall be deemed to be Additional Shares of
Common Stock issued as of the time of such issue or, in case such a record date
shall have been fixed, as of the close of business on such record date, provided
that Additional Shares of Common Stock shall not be deemed to have been issued
unless the consideration per share (determined pursuant to Section 3.3.4(v)
hereof) of such Additional Shares of Common Stock would be less than the
Conversion Price for a series of Preferred Stock in effect on the date of and
immediately prior to such issue, or such record date, as the case may be, and
provided further that in any such case in which Additional Shares of Common
Stock are deemed to be issued:

                       (1) no further adjustment in the Conversion Price of such
series of Preferred Stock shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;

                       (2) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase in the
consideration payable to the Company or decrease in the number of shares of
Common Stock issuable, upon the exercise, conversion or exchange thereof, the
Conversion Price for a series of Preferred Stock computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or decrease
in so far as it affects such Options or the rights of conversion or exchange
under such Convertible Securities (provided, however, that no such adjustment of
the Conversion Price of such series of Preferred Stock shall effect the Common
Stock previously issued upon conversion of Shares); and

                       (3) no readjustment pursuant to clause (2) above shall
have the effect of increasing the Conversion Price for a series of Preferred
Stock to an amount which exceeds the lower of (i) the Conversion Price for such
series of Preferred Stock on the original adjustment date, or (ii) the
Conversion Price for a series of Preferred Stock that would have resulted from
any issuance of Additional Shares of Common Stock between the original
adjustment date and such readjustment date.

              (iv)  Adjustment of Conversion Price upon issuance of Additional
                    ----------------------------------------------------------
Shares of Common Stock. In the event the Company shall issue Additional Shares
- ----------------------
of Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to

                                      -9-

<PAGE>
 
Section 3.3.4(iii)) without consideration or for a consideration per share less
than the Conversion Price of a series of Preferred Stock in effect on the date
of and immediately prior to such issue, then in such event, such Conversion
Price shall be reduced, concurrently with such issue, to a price (calculated to
the nearest U.S. cent) determined by multiplying such Conversion Price by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue, plus the number of shares of Common
Stock that could be purchased for the aggregate consideration to be received for
the Additional Shares of Common Stock at the then existing Conversion Price of
such series of Preferred Stock, and the denominator of which shall be the number
of shares of Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common Stock so issued.  For the purpose of
the preceding sentence, all shares of Common Stock issuable upon conversion of
all of the outstanding Shares and Convertible Securities and exercise of Options
shall be deemed to be outstanding, and immediately after any Additional Shares
of Common Stock are deemed issued pursuant to Section 3.3.4(iii) such Additional
Shares of Common Stock shall be deemed to be outstanding.

                   (v)  Determination of Consideration. For purposes of this
                        ------------------------------
Section 3.3.4, the consideration received by the Company for the issue of any
Additional Shares of Common Stock shall be computed as follows:

                        (A) Cash and Property:  Such consideration shall
                            -----------------                           

                            (1) insofar as it consists of cash, include the
aggregate amount of cash received by the Company exclusive of amounts paid or
payable for accrued interest or accrued dividends;

                            (2) insofar as it consists of property other than
cash, be computed at the fair market value thereof at the time of such issue, as
determined in good faith by the Board of Directors; and

                            (3) in the event Additional Shares of Common Stock
are issued together with other shares or securities or other assets of the
Company for consideration which covers both, be the proportion of such
considerations so received computed as provided in clauses (1) and (2) above, as
determined in good faith by the Board of Directors.

                       (B)  Options and Convertible Securities. The
                            ----------------------------------
consideration per share received by the Company for Additional Shares of Common
Stock deemed to have been issued pursuant to Section 3.3.4(d)(iii)(B), relating
to Options and Convertible Securities, shall be determined by dividing:

                                     -10-

<PAGE>
 
                       (1) if the total amount, if any, received or receivable
by the Company as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the resolutions relating thereto, without regard to any provision
contained therein designed to protect against dilution) payable to the Company
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities, or in the case of Options for Convertible Securities,
the exercise of such Options for Convertible Securities and the conversion or
exchange of such Convertible Securities; by

                       (2) the maximum number of shares of Common Stock (as set
forth in such resolutions relating thereto, without regard to any provision
contained therein designed to protect against dilution) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.

                   (C) Stock Dividends. Any Additional Shares of Common Stock
                       ---------------
deemed to have been issued relating to stock dividends shall be deemed to have
been issued for no consideration.

              (e) Adjustments for Combinations of Common Stock. In the event the
                  --------------------------------------------
outstanding shares of Common Stock shall be combined by reclassification or
otherwise into a lesser number of shares of Common Stock, the Conversion Price
of each series of Preferred Stock in effect immediately prior to such
combination, or consolidation shall, concurrently with the effectiveness of such
combination or consolidation, be proportionately increased.

              (f) Adjustments for Other Distributions. In the event the
                  -----------------------------------
Corporation at any time or from time to time makes, or fixes a record date for
the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this Section 3.3.4, then
and in each such event provision shall be made so that the holders of Preferred
Stock shall receive upon conversion thereof, in addition to the number of shares
of Common Stock receivable thereupon, the amount of securities of the
Corporation which they would have received had their Preferred Stock been
converted into Common Stock on the date of such event and had they thereafter,
during the period from the date of such event to and including the date of
conversion, retained such securities receivable by them as aforesaid during such
period, subject to all other adjustments called for during such period under
this Section 3.3.4 with respect to the rights of the holders of the Preferred
Stock.

              (g) Adjustment for Reclassification, Exchange and Substitution. If
                  ---------------------------------------------------------- 
the Common Stock issuable upon conversion of the Preferred Stock shall be
changed into the same or a different number of shares of any other class or
classes of

                                     -11-

<PAGE>
 
stock, whether by capital reorganization, reclassification or otherwise (other
than a subdivision or combination of shares provided for above), the Conversion
Rate of each series of Preferred Stock then in effect shall, concurrently with
the effectiveness of such reorganization or reclassification, be proportionately
adjusted such that the Preferred Stock shall be convertible into, in lieu of the
number of shares of Common Stock which the holders would otherwise have been
entitled to receive, a number of shares of such other class or classes of stock
equivalent to the number of shares of Common Stock that would have been subject
to receipt by the holders upon conversion of the Preferred Stock immediately
before that change.

                   (h)  No Impairment. This Corporation will not, by amendment
                        -------------
of its Articles of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 3.3.4 and in the taking of all such action as may be necessary
or appropriate in order to protect the conversion rights of the holders of
Preferred Stock against impairment.

                   (i)  Certificate as to Adjustments. Upon the occurrence of
                        -----------------------------
each adjustment or readjustment of the Conversion Price of a series of Preferred
Stock pursuant to this Section 3.3.4, the Corporation at its expense shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and furnish to each holder of such series of Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of such series of
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of such series of Preferred Stock.

                   (j)  Issue Taxes. The Corporation shall pay any and all issue
                        -----------
and other taxes that may be payable in respect of any issuance or delivery of
shares of Common Stock on conversion of shares of Preferred Stock pursuant
hereto; provided, however, that the Corporation shall not be obligated to pay
any transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion .

                   (k)  Reservation of Common Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Preferred Stock, such number of its shares of Common

                                     -12-

<PAGE>
 
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all the then outstanding shares of Preferred Stock, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.

              (l)  Notices of Record Date. In the event that this Corporation
                   ----------------------
shall propose at any time:

                   (i) to declare any dividend or distribution upon its Common
Stock, whether in cash, property, stock or other securities, whether or not a
regular cash dividend and whether or not out of earnings or earned surplus;

                  (ii) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class or
series or other rights;

                 (iii) to effect any reclassification or recapitalization of its
Common Stock outstanding involving a change in the Common Stock; or

                  (iv) to merge or consolidate with or into any other
corporation, or sell, lease or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up; then, in connection with each
such event, this Corporation shall send to the holders of the Preferred Stock:

                       (1) at least 20 days' prior written notice of the date on
which a record shall be taken for such dividend, distribution or subscription
rights (and specifying the date on which the holders of Common Stock shall be
entitled thereto) or for determining rights to vote in respect of the matters
referred to in (iii) and (iv) above; an d

                       (2) in the case of the matters referred to in (iii) and
(iv) above, at least 20 days' prior written notice of the date when the same
shall take place (and specifying the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event or the record date for
the determination of such holders if such record date is earlier).

          Each such written notice shall be delivered personally or given by
first class mail, postage prepaid, addressed to the holders of the Preferred
Stock at the address for each such holder as shown on the books of this
Corporation.

                                     -13-

<PAGE>
 
          3.3.5  Covenants. In addition to any other rights provided by law, so
                 --------- 
long as shares of Preferred Stock are outstanding, this Corporation shall not
without first obtaining the affirmative vote or written consent of the holders
of not less than a majority of the outstanding shares of Preferred Stock, voting
together as one class:

              (a) amend or repeal any provision of, or add any provision to,
this Corporation's Articles of Incorporation if such action would materially and
adversely directly alter or change the preferences, rights, privileges or powers
of, or the restrictions provided for the benefit of, the Preferred Stock, or
increase or decrease the authorized number of shares of Preferred Stock;

              (b) authorize or issue shares of any class or series of stock
having any preferences or priority as to dividends or assets superior to any
such preference or priority of the Preferred Stock;

              (c) reclassify any class or series of Common Stock into shares
having any preference or priority as to dividends or assets superior to or on a
parity with any such preference or priority of any series of Preferred Stock;

              (d) merge with any other corporation if after such merger the
shareholders of the corporation shall own less than fifty percent (50%) of the
voting shares of the surviving corporation in such merger, or sell all or
substantially all of the assets of the Corporation; or

              (e) pay or declare any dividend on, or redeem (other than stock
repurchases pursuant to contractual arrangements with employees, officers,
directors or consultants) any shares of Common Stock.

                                      IV.

          The liability of the directors of this corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law. This corporation is also authorized, to the fullest extent permissible
under California law, to indemnify its agents (as defined in Section 317 of the
California Corporations Code), whether by by-law, agreement or otherwise, for
breach of duty to this corporation and its shareholders in excess of that
expressly permitted by Section 317 and to advance defense expenses to its agents
in connection with such matters as they are incurred, subject to the limits on
such excess indemnification set forth in Section 204 of the California
Corporations Code. If, after the effective date of this Article, California law
is amended in a manner which permits a corporation to limit the monetary or
other liability of its directors or to authorize indemnification of, or
advancement of such defense expenses to, its directors or other persons, in any
such case to a greater extent than is permitted on such effective date, the

                                     -14-

<PAGE>
 
references in this Article to "California law" shall to that extent be deemed to
refer to California law as so amended.

     3.  The foregoing Third Amended and Restated Articles of Incorporation have
been duly approved by the Board of Directors.

     4.  The foregoing Third Amended and Restated Articles of Incorporation have
been duly approved by the required vote of the shareholders of this Corporation
in accordance with Sections 902 and 903 of the California Corporations Code.
The total number of outstanding shares of Common Stock is 10,049,474 shares.
The total number of outstanding shares Series A Preferred is 2,447,368 shares.
There are no other shares outstanding.  The number of shares voting in favor of
the amendment equaled or exceeded the vote required, such required vote being
more than fifty percent (50%) of the outstanding shares of the Common Stock and
Series A Preferred, each voting separately as a class.

     John W. Fara and Julian N. Stern further declare under penalty of perjury
under the laws of the State of California that the matters set forth in these
Third Amended and Restated Articles of Incorporation are true and correct of
their own knowledge.

     Executed at Foster City, California, this 30th day of December, 1996.




                                      /s/ John W. Fara
                                      ------------------------------
                                      JOHN W. FARA, President



                                      /s/ Julian N. Stern
                                      ------------------------------
                                      JULIAN N. STERN, Secretary

                                     -15-

<PAGE>
 
                                     -16-



<PAGE>
 

                                  EXHIBIT 3.3
                                  -----------


                                    BYLAWS

                                      OF

                                 DEPOMED, INC.



                                 SHAREHOLDERS
                                 ------------


     1.  Annual Meeting.  Unless the Board of Directors or the President of the
         --------------                                                        
corporation selects a different time or date, the annual meeting of shareholders
shall be held at 11:00 a.m. on the first Tuesday of the fifth calendar month
following the end of the corporation's fiscal year.  The annual meeting shall be
for the purpose of electing a Board of Directors and transacting such other
business as may properly be brought before the meeting.

     2.  Special Meeting.  Special meetings of shareholders may be called at any
         ---------------                                                        
time by the Board of Directors, the Chairman of the Board, the President or the
holders of shares entitled to cast not less than one-tenth of the votes at the
meeting.

     3.  Place.  Meetings of shareholders shall be held at the principal
         -----                                                          
executive office of the corporation or at any other place, within or without
California, which is designated by the Board of Directors or the President.

     4.  Notice.
         ------ 

         (a) Annual and Special Meetings.  A written notice of each meeting of
             ---------------------------                                      
shareholders shall be given not more than 60 days and, except as provided below,
not less than 10 (or, if sent by third-class mail, 30) days before the meeting
to each shareholder entitled to vote at the meeting.
  The notice shall state the
place, date and hour of the meeting and, if directors are to be elected at the
meeting, the names of the nominees intended to be presented by the Board of
Directors for election.  The notice shall also state (i) in the case of an
annual meeting, those matters which the Board of Directors intends to present
for action by the shareholders, and (ii),in the case of a special meeting, the
general nature of the business to be transacted and that no other business may
be transacted.  Notice shall be delivered personally, by mail or other means
addressed to each such shareholder at the address of the shareholder appearing
on the books of the corporation, the address given by the shareholder to the
corporation for the purpose of notice or as otherwise provided by law.  Upon
written request to the Chairman of the Board, the President, the Secretary or
any Vice President of the corporation by any person (other than the Board of
Directors) entitled to call a special meeting of shareholders, the person
receiving such request shall cause notice to be given

<PAGE>
 
to the shareholders entitled to vote that a meeting will be held at a time
requested by the person calling the meeting not less than 35 nor more than 60
days after receipt of the request.

               (b) Adjourned Meetings. Notice of an adjourned meeting need not
                   ------------------
be given if (i) the meeting is adjourned for 45 days or less, (ii) the time and
place of the adjourned meeting are announced at the meeting at which the
adjournment is taken and (iii) no new record date is fixed for the adjourned
meeting. otherwise, notice of the adjourned meeting shall be given as in the
case of an original meeting.

          5.   Record Date.  The Board of Directors may fix in advance a record
               -----------                                                     
date for the determination of the shareholders entitled to notice of any
meeting, to vote, to receive any dividend or other distribution or allotment of
rights or to exercise any rights.  The record date shall be not more than 60 nor
less than 10 days prior to the date of the meeting nor more than 60 days prior
to such other action.  If no record date is fixed, the record date for
determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the business day next
preceding the day on which notice is given or, if notice is waived, the close of
business on the business day next preceding the day on which the meeting
is.held. The record date for determining shareholders entitled to give consent
to corporate action in writing without a meeting, when no prior action by the
Board of Directors has been taken, shall be the day on which the first written
consent is given.  The record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto, or the 60th day prior to the
date of such other action, whichever is later.  Except as otherwise provided by
law, only shareholders at the close of business on the record date are entitled
to notice and to vote, to receive the dividend, distribution or allotment of
rights or to exercise rights, as the case may be, notwithstanding any transfer
of shares on the books of the corporation occurring after the record date.
Except as otherwise provided by law, the corporation shall be entitled to treat
the holder of record of any shares as the holder in fact of such shares and
shall not be bound to recognize any equitable or other claim to or interest in
such shares on the part of any other person, whether or not the corporation
shall have express or other notice of such claim or interest.  A determination
of shareholders of record entitled to notice of or to vote at a meeting of
shareholders shall apply to any adjournment of the meeting unless the Board of
Directors fixes a new record date.  The Board of Directors shall fix a-new
record date if the adjourned meeting takes place more than 45 days after the
date set for the original meeting.

          6.   Meeting Without Regular Call and Notice.  The transactions of any
               ---------------------------------------                          
meeting of shareholders, however called and noticed and wherever held, are as
valid as though had at a meeting duly held after regular call and notice if a
quorum is

                                      -2-

<PAGE>
 
present in person or by proxy and if, either before or after the meeting, each
of the persons entitled to vote who is not present at the meeting in person or
by proxy signs a written waiver of notice, a consent to the holding of the
meeting or an approval of the minutes of the meeting.  Attendance of a
shareholder at a shareholders' meeting shall constitute a waiver of notice of
such meeting unless, at the beginning of the meeting, the shareholder objects to
the transaction of any business because the meeting was not properly called or
convened or, with respect to the consideration of a matter required to be
included in the notice for the meeting which was not so included, the
shareholder expressly objects to such consideration at the meeting.

          7.   Quorum and Required Vote.  A majority of the shares entitled to
               ------------------------                                       
vote, represented in person or by proxy, constitutes a quorum for the
transaction of business.  No business may be transacted at a meeting in the
absence of a quorum other than the adjournment of the meeting, except that if a
quorum is present at the commencement of the meeting, business may be transacted
until the meeting is adjourned even though the withdrawal of shareholders
results in less than a quorum.  If a quorum is present at a meeting, the
affirmative vote of the holders of shares having a majority of the voting power
of the shares represented and voting at the meeting on any matter shall be the
act of the shareholders unless the vote of a larger number or voting by classes
is required by law or the Articles of Incorporation.  If a quorum is present at
the commencement of a meeting but the withdrawal of shareholders results in less
than a quorum, the affirmative vote of a majority of shares required to
constitute a quorum shall be the act of the shareholders unless the vote of a
larger number is required by law or the Articles of Incorporation.  Any meeting
of shareholders, whether or not a quorum is present, may be adjourned by the
vote of a majority of the shares represented at the meeting.

          8.   Proxies.  A shareholder may be represented at any meeting of
               -------                                                     
shareholders by a written proxy signed by the person entitled to vote or by such
persons duly authorized attorney-in-fact.  A proxy must bear a date within 11
months prior to the meeting, unless the proxy specifies a different length of
time.  A revocable proxy is revoked by a writing delivered to the Secretary of
the corporation stating that the proxy is revoked or by a subsequent proxy
executed and delivered to the Secretary by, or by attendance at the meeting and
voting in person by, the person executing the proxy.

          9.   Voting.  Except as provided below or as otherwise provided by the
               ------                                                           
Articles of Incorporation or by law, a shareholder shall be entitled to one vote
for each share held of record on the record date fixed for the determination of
the shareholders entitled to vote or, if no such date is fixed, the date
determined in accordance with law.  Upon the demand of any shareholder made at a
meeting before the voting begins, the election of directors shall be by ballot.
At any election of directors, shareholders may cumulate votes and give one
candidate

                                      -3-

<PAGE>
 
a number of votes equal to the number of directors to be elected multiplied by
the number of votes to which the shares are entitled or distribute votes
according to the same principle among as many candidates as desired.  No
shareholder shall be entitled to cumulate votes for any one or more candidates
unless such candidate or candidates' names have been placed in nomination prior
to the voting and at least one shareholder has given notice at the meeting prior
to the voting of such shareholder's intention to cumulate votes.

          10.  Election Inspectors.  One or three election inspectors may be
               -------------------                                          
appointed by the Board of Directors in advance of a meeting of shareholders or
at the meeting by the chairman of the meeting.  If not previously chosen, one or
three inspectors shall be appointed by the chairman of the meeting if a
shareholder or proxyholder so requests.  When inspectors are appointed at the
request of a shareholder or proxyholder, the majority of shares represented in
person or by proxy shall determine whether one or three inspectors shall be
chosen.  The election inspectors shall determine all questions concerning the
existence of a quorum and the right to vote, shall tabulate and determine the
results of voting and shall do all other acts necessary or helpful to the
expeditious and impartial conduct of the vote.  If there are three inspectors,
the decision, act or certificate of a majority of the inspectors is effective as
if made by all.

          11.  Action Without Meeting.  Except as provided below or by the
               ----------------------                                     
Articles of Incorporation, any action which may be taken at a meeting of
shareholders may be taken without a meeting and without prior notice if a
consent in writing setting forth the action so taken is signed by the holders of
outstanding shares having not less than the minimum number of votes which would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote on such action were present and voted.  Unless the consents of
all shareholders entitled to vote have been solicited in writing, the
corporation shall give to those shareholders entitled to vote who have not
consented in writing (i) a written notice at least 10 days before consummation
of an action authorized by shareholders without a meeting covered by the
following sections of the California corporations Code: 310 (certain
transactions involving interested directors), 317 (indemnification of corporate
agents), 1201 (reorganizations) and 2007 (certain distributions of assets) and
(ii) a written notice promptly after the taking of any other action approved by
shareholders without a meeting.  Subject to Section 305(b) of the California
Corporations Code, directors may not be elected by written consent except by
unanimous written consent of all shares entitled to vote for the election of
directors.

          12.  Reports.  The annual report to shareholders specified in Section
               -------                                                         
1501 of the California Corporations Code is dispensed with, except as the Board
of Directors may otherwise determine, as long as there are less than 100 holders
of record of the corporation's shares.  Any such annual report sent to

                                      -4-

<PAGE>
 
shareholders shall be sent at least 15 (or, if sent by third-class mail, 35)
days prior to the next annual meeting of shareholders and not later than 120
days after the close of the fiscal year.

          13.  Lost Stock Certificates.  The corporation may cause a new stock
               -----------------------                                        
certificate to be issued in place of any certificate previously issued by the
corporation alleged to have been lost, stolen or destroyed.  The corporation
may, at its discretion and as a condition precedent to such issuance, require
the owner of such certificate to deliver an affidavit stating that such
certificate was lost, stolen or destroyed or to give the corporation a bond or
other security sufficient to indemnify it against any claim that may be made
against it, including any expense or liability, on account of the alleged loss,
theft or destruction or the issuance of a new certificate.


                               BOARD OF DIRECTORS
                               ------------------

          14.  Number.  The authorized number of directors of this corporation
               ------                                                         
shall not be less than three nor more than five.  The exact number of directors
shall be fixed by resolution of the Board of Directors.  The indefinite number
of directors may be changed or a definite number fixed without provision for an
indefinite number by an amendment to the Articles of Incorporation or by
amendment to these bylaws duly adopted by the vote or written consent of holders
of a majority of the outstanding shares entitled to vote.  An amendment reducing
the minimum number of directors to a number less than five cannot be adopted if
the votes cast against its adoption at a meeting of the shareholders, or the
shares not consenting in the case of action by written consent, are equal to
more than 16-2/3% of the outstanding shares entitled to vote.' No amendment may
change the maximum number of authorized directors to a number greater than two
times the minimum number of directors minus one.

          15.  Powers.  Subject to the limitations imposed by law or contained
               ------                                                         
in the Articles of Incorporation, the business and affairs of the corporation
shall be managed and all corporate powers shall be exercised by or under the
ultimate direction of the Board of Directors.

          16.  Election, Term of Office and Vacancies.  At each annual meeting
               --------------------------------------                         
of shareholders, directors shall be elected to hold office until the next annual
meeting.  Each director, including a director elected to fill a vacancy, shall
hold office until the expiration of the term for which the director was elected
and until a successor has been elected.  The Board of Directors may declare
vacant the office of any director who has been declared to be of unsound mind by
court order or convicted of a felony.  Vacancies on the Board of Directors not
caused by removal may be filled by a majority of the directors then in office,
regardless of whether they constitute a quorum, or by a sole remaining director.
The shareholders may elect a director

                                      -5-

<PAGE>
 
at any time to fill any vacancy not filled, or which cannot be filled, by the
Board of Directors.  No reduction in the authorized number of directors shall
have the effect of removing any director prior to the expiration of his term of
office.

          17.  Removal.  Except as provided below, any or all of the directors
               -------                                                        
may be removed without cause if such removal is approved by the affirmative vote
or written consent of a majority of the outstanding shares entitled to vote.
Unless the entire Board of Directors is so removed, no director may be removed
if (i) the votes cast against removal, or not consenting in writing to such
removal in the case of written consent, would be sufficient to elect such
director if voted cumulatively at an election at which the same total number of
votes was cast or, if such action is taken by written consent, all shares
entitled to vote were voted and (ii) the entire number of directors authorized
at the time of the director's most recent election were then being elected.

          18.  Resignation.  Any director may resign by giving notice to the
               -----------                                                  
Chairman of the Board, the President, the Secretary or the Board of Directors.
The resignation of a director shall be effective when given unless the director
specifies a later time.  The resignation shall be effective regardless of
whether it is accepted by the corporation.

          19.  Compensation.  If the Board of Directors so resolves, the
               ------------                                             
directors, including the Chairman of the Board, shall receive compensation and
expenses of attendance for meetings of the Board of Directors and of committees
of the Board.  Nothing herein shall preclude any director from serving the
corporation in another capacity and receiving compensation for such service.

          20.  Committees.  The Board of Directors may, by resolution adopted by
               ----------                                                       
a majority of the authorized number of directors, designate one or more
committees, each consisting of two or more directors, to serve at the pleasure
of the Board.  The Board may designate one or more directors as alternate
members of a committee who may replace any absent member at any meeting of the
committee.  To the extent permitted by the resolution of the Board of Directors,
a committee may exercise all of the authority of the Board except:

               (a) the approval of any action which, under the California
Corporations Code, must be approved by the outstanding shares or approved by the
shareholders;

               (b) the filling of vacancies on the Board or any committee;

               (c) the fixing of compensation of the directors for serving on
the Board or any committee;

               (d) the adoption, amendment or repeal of By-laws;

                                      -6-

<PAGE>
 
               (e) the amendment or repeal of any resolution of the Board which
by its express terms is not so amendable or repealable;

               (f) a distribution to the shareholders of the corporation, except
at a rate, in a periodic amount or within a price range determined by the Board;
and

               (g) the appointment of any other committees of the Board or the
members of such committees.

          21.  Inspection of Records and Properties.  Each director may inspect
               ------------------------------------                            
all books, records, documents and physical properties of the corporation and its
subsidiaries at any reasonable time.  Inspections may be conducted either by the
director or the director's agent or attorney.  The right of inspection includes
the right to copy and make extracts.

          22.  Time and Place of Meetings and Telephone Meetings.  Unless the
               -------------------------------------------------             
Board of Directors determines otherwise, the Board shall hold a regular meeting
during each quarter of the corporation's fiscal year. one such meeting shall
take place immediately following the annual meeting of shareholders.  All
meetings of directors shall be held at the principal executive office of the
corporation or at such other place, within or without California, as shall be
designated in the notice of the meeting or in a resolution of the Board of
Directors.  Directors may participate in a meeting through use of conference
telephone or similar communications equipment, provided that all members so
participating can hear each other.

          23.  Call.  Meetings of the Board of Directors, whether regular or
               ----                                                         
special, may be called by the Chairman of the Board, the President, the
Secretary, any Vice President or any two directors.

          24.  Notice.  Regular meetings of the Board of Directors may be held
               ------                                                         
without notice if the time of such meetings has been fixed by the Board.
Special meetings shall be held upon four days' notice by mail or 48 hours'
notice delivered personally or by telephone or telegraph, and regular meetings
shall be held upon similar notice if notice is required for such meetings.
Neither a notice nor a waiver of notice must specify the purpose of any regular
or special meeting.  Notice of the time and place of holding an adjourned
meeting need not be given to absent directors if the time and place of the
adjourned meeting is announced at the meeting at which the adjournment is taken,
but if a meeting is adjourned for more than 24 hours, notice of the adjourned
meeting shall be given prior to the time of such meeting to the directors who
were not present at the time of the adjournment.

          25.  Meeting Without Regular Call and Notice.  The transactions of any
               ---------------------------------------                          
meeting of the Board of Directors, however called and noticed or wherever held,
are as valid as though had

                                      -7-

<PAGE>
 
at a meeting duly held after regular call and notice if a quorum is present and
if, either before or after the meeting, each of the directors not present signs
a written waiver of notice, a consent to the holding of the meeting or an
approval of the minutes of the meeting.  For such purposes, a director shall not
be considered present at a meeting if, although in attendance at the meeting,
the director protests the lack of notice prior to the meeting or at its
commencement.

          26.  Action Without Meeting.  Any action required or permitted to be
               ----------------------                                         
taken by the Board of Directors may be taken without a meeting, if all of the
members of the Board individually or collectively consent in writing to such
action.

          27.  Quorum and Required Vote.  A majority of the authorized number of
               ------------------------                                         
directors shall constitute a quorum for the transaction of business.  Subject to
the provisions of Section 310 (relating to certain transactions involving
interested directors) and Section 317(e) (relating to indemnification of
corporate agents) of the California Corporations Code, every act or decision
done or made by a majority of the directors present at a meeting duly held at
which a quorum is present is the act of the Board.  A meeting at which a quorum
is initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority
of the required quorum for such meeting.  A majority of the directors present.at
a meeting, whether or not a quorum is present, may adjourn the meeting to
another time and place.

          28.  Committee Meetings.  The principles set forth in Sections 22
               ------------------                                          
through 27 of these By-laws shall apply to committees of the Board of Directors
and to actions taken by such committees.

          29.  Indemnification of Directors and Officers.
               ----------------------------------------- 

               (a) Indemnification.  To the fullest extent permissible under
                   ---------------                                          
California law, the corporation shall indemnify its directors and officers
against all expenses, judgments, fines, settlements and other amounts actually
and reasonably incurred by them in connection with any proceeding, including an
action by or in the right of the corporation, by reason of the fact that such
person is or was a director or officer of the corporation, or is or was serving
at the request of the corporation as a director, officer, trustee, employee or
agent of another corporation, or of a partnership, joint venture, trust or other
enterprise (including service with respect to employee benefit plans).  To the
fullest extent permissible under California law, expenses incurred by a director
or officer seeking indemnification under this By-law in defending any proceeding
shall be advanced by the corporation as they are incurred upon receipt by the
corporation of an undertaking by or on behalf of the director or officer to
repay such amount if it shall ultimately be determined that the director or
officer is not entitled to be indemnified by the corporation for those

                                      -8-

<PAGE>
 
expenses.  If, after the effective date of this By-law, California law is
amended in a manner which permits the corporation to authorize indemnification
of or advancement of expenses to its directors or officers, in any such case to
a greater extent than is permitted on such effective date, the references in
this By-law to "California law" shall to that extent be deemed to refer to
California law as so amended.  The rights granted by this By-law are contractual
in nature and, as .such, may not be altered with respect to any present or
former director or officer without the written consent of that person.

               (b) Procedure. Upon written request to the Board of Directors by
                   ---------
a person seeking indemnification under this By-law, the Board shall promptly
determine in accordance with Section 317(e) of the California Corporations Code
whether the applicable standard of conduct has been met and, if so, the Board
shall authorize indemnification. If the Board cannot authorize indemnification
because the number of directors who are parties to the proceeding with respect
to which indemnification is sought prevents the formation of a quorum of
directors who are not parties to the proceeding, then, upon written request by
the person seeking indemnification, independent legal counsel (by means of a
written opinion obtained at the corporation's expense) or the corporation's
shareholders shall determine whether the applicable standard of conduct has been
met and, if so, shall authorize indemnification.

               (c) Definitions. The term "proceeding" means any threatened,
                   -----------
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative. The term "expenses" includes, without
limitation, attorneys' fees and any expenses of establishing a right to
indemnification.


                                   OFFICERS
                                   --------

          30.  Titles and Authority.  The officers of the corporation shall
               --------------------                                        
include a Chairman of the Board or a President or both, a Secretary and a
Treasurer.  The Board of Directors may also choose one or more Vice Presidents,
Assistant Secretaries, Assistant Treasurers or other officers.  Any number of
offices may be held by the same person.  All officers shall perform their duties
and exercise their powers subject to the direction of the Board of Directors.
Deeds, notes, contracts, and any other instrument or document may be executed on
behalf of this corporation by the single signature of the Chairman of the Board
or the President or by the signatures of any two officers, provided that the
signing officers shall not both be Assistant Vice Presidents, Assistant
Secretaries, Assistant Treasurers or other subordinate officers.
Notwithstanding the foregoing, any officer is authorized to sign (i) a proxy or
consent solicited by the directors or management of any company in which this
corporation owns shares or (ii) any notice given by this corporation to any
other person.

                                      -9-

<PAGE>
 
          31.  Election, Term of Office and Vacancies.  At its regular meeting
               --------------------------------------                         
after each annual meeting of shareholders, the Board of Directors shall choose
the officers of the corporation.  The Board may choose additional officers or
fill vacant offices at any other time.  No officer must be a member of the Board
of Directors except the Chairman of the Board.  The officers shall hold office
until their successors are chosen, except that the Board of Directors may remove
any officer at any time.

          32.  Resignation.  Any officer may resign at any time upon notice to
               -----------                                                    
the corporation without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party.  The resignation of an
officer shall be effective when given unless the officer specifies a later time.
The resignation shall be effective regardless of whether it is accepted by the
corporation.

          33.  Chairman of the Board; President.  If the Board of Directors
               --------------------------------                            
elects a Chairman of the Board, such officer shall preside over all meetings of
the Board of Directors and of shareholders.  If there be no Chairman of the
Board, the President shall perform such duties.  The Board of Directors shall
designate either the Chairman of the Board or the President as the chief
executive officer and may prescribe the duties and powers of the chief executive
officer.  If there be no Chairman of the Board, the President shall be the chief
executive officer.

          34.  Secretary.  Unless otherwise determined by the Board of Directors
               ---------                                                        
or the chief executive officer, the Secretary shall have the following powers
and duties:

               (a) Record of Corporate Proceedings.  The Secretary shall attend
                   -------------------------------                             
meetings of shareholders and the Board of Directors and its committees and shall
record all votes and the minutes of such meetings in a book to be kept at the
principal executive office of the corporation or at such other place as the
Board may determine.  The Secretary shall keep at the corporation's principal
executive office, if in California, or at its principal business office in
California if the principal executive office is not in California, the original
or a copy of these By-laws, as amended.

               (b) Record of Shares. Unless a transfer agent is appointed by the
                   ----------------
Board of Directors to keep a share register, the Secretary shall keep a share
register at the principal executive office of the corporation showing the names
of the shareholders and their addresses, the number and class of shares held by
each, the number and date of certificates issued and the number and date of
cancellation of each certificate surrendered for cancellation.

               (c) Notices.  The Secretary shall give such notices as may be
                   -------                                                  
required by law or these By-laws.

          35.  Treasurer.  Unless the Board of Directors
               ---------                                

                                     -10-

<PAGE>
 
designates another chief financial officer, the Treasurer shall be the chief
financial officer of the corporation.  Unless otherwise determined by the Board
of Directors or the chief executive officer, the Treasurer shall have custody of
the corporate funds and securities, shall keep adequate and correct accounts of
the corporation's properties and business transactions, shall disburse such
funds of the corporation as may be ordered by the Board or the chief executive
officer (taking proper vouchers for such disbursements), and shall render to the
chief executive officer and the Board, at regular meetings of the Board or
whenever the Board may require, an account of all transactions and the financial
condition of the corporation.

          36.  Other officers.  The other officers of the corporation, if any,
               --------------                                                 
shall exercise such powers and perform such duties as the Board of Directors or
the chief executive officer shall prescribe.

          37.  Salaries.  The Board of Directors shall fix the salary of the
               --------                                                     
chief executive officer and may fix the salaries of other employees of the
corporation, including the other officers.  If the Board does not fix the
salaries of the other officers, the chief executive officer shall fix such
salaries.

                                 AMENDMENT OF
                                    BYLAWS
                                    ------

          38.  Bylaws may be adopted, amended or repealed by the affirmative
vote of a majority of the outstanding shares entitled to vote or by the Board of
Directors, except that an amendment changing the authorized number of directors
may only be adopted as provided in Section 14.


                                 CERTIFICATION
                                 -------------

          This is to certify that the foregoing is a true and correct copy of
the bylaws of the corporation named in the title of these bylaws and that such
bylaws were duly adopted by the Board of Directors of such corporation effective
August 8, 1995.



                                      /s/   Julian N. Stern
                                     -----------------------------
                                     Julian N. Stern, Secretary

                                     -11-



<PAGE>
 
                                 EXHIBIT 10.1
                                 ------------


                            1995 STOCK OPTION PLAN

                                      OF

                                 DEPOMED, INC.


 1.   PURPOSES OF THE PLAN
      --------------------

      The purposes of the 1995 Stock Option Plan (the "Plan") of DepoMed, Inc.,
a California corporation (the "Company"), are to:

      (a) Encourage selected employees, directors and consultants to improve
operations and increase profits of the Company;

      (b) Encourage selected employees, directors and consultants to accept or
continue employment or association with the Company or its Affiliates; and

      (c) Increase the interest of selected employees, directors and consultants
in the Company's welfare through participation in the growth in value of the
common stock of the Company (the "Common Stock").

      Options granted under this Plan ("Options") may be "incentive stock
options" ("ISOs") intended to satisfy the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or "nonstatutory
options" ("NSOs").

 2.   ELIGIBLE PERSONS
      ----------------

      Every person who at the date of grant of an Option is a full-time employee
of the Company or of any Affiliate (as defined below) of the Company is eligible
to receive NSOs or ISOs under this Plan.  Every person who at the date of grant
is a consultant to, or non-employee director of, the Company or any Affiliate
(as defined below) of the Company
 is eligible to receive NSOs under this Plan.
The term "Affiliate" as used in the Plan means a parent or subsidiary
corporation as defined in the applicable provisions (currently Sections 424(e)
and (f), respectively) of the Code.  The term "employee" includes an officer or
director who is an employee, of the Company.  The term "consultant" includes
persons employed by, or otherwise affiliated with, a consultant.

 3.   STOCK SUBJECT TO THIS PLAN
      --------------------------

      Subject to the provisions of Section 6.1.1 of the Plan, the total number
of shares of stock which may be issued under

<PAGE>
 
options granted pursuant to this Plan shall not exceed 750,000 shares of Common
Stock.  The shares covered by the portion of any grant under the Plan which
expires unexercised shall become available again for grants under the Plan.

 4.   ADMINISTRATION
      --------------

      (a) This Plan shall be administered by the Board of Directors of the
Company (the "Board") or, either in its entirety or only insofar as required
pursuant to Section 4(b) hereof, by a committee (the "Committee") of at least
two Board members to which administration of the Plan, or of part of the Plan,
is delegated (in either case, the "Administrator").

      (b) From and after such time as the Company registers a class of equity
securities under Section 12 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), it is intended that this Plan shall be administered in
accordance with the disinterested administration requirements of Rule 16b-3
promulgated by the Securities and Exchange Commission ("Rule 16b-3"), or any
successor rule thereto.

      (c) Subject to the other provisions of this Plan, the Administrator shall
have the authority, in its discretion: (i) to grant Options; (ii) to determine
the fair market value of the Common Stock subject to Options; (iii) to determine
the exercise price of Options granted; (iv) to determine the persons to whom,
and the time or times at which, Options shall be granted, and the number of
shares subject to each Option; (v) to interpret this Plan; (vi) to prescribe,
amend, and rescind rules and regulations relating to this Plan; (vii) to
determine the terms and provisions of each Option granted (which need not be
identical), including but not limited to, the time or times at which Options
shall be exercisable; (viii) with the consent of the optionee, to modify or
amend any Option; (ix) to defer (with the consent of the optionee) the exercise
date of any Option; (x) to authorize any person to execute on behalf of the
Company any instrument evidencing the grant of an Option; and (xi) to make all
other determinations deemed necessary or advisable for the administration of
this Plan.  The Administrator may delegate nondiscretionary administrative
duties to such employees of the Company as it deems proper.

      (d) All questions of interpretation, implementation, and application of
this Plan shall be determined by the Administrator.  Such determinations shall
be final and binding on all persons.

      (e) With respect to persons subject to Section 16 of the Exchange Act, if
any, transactions under this Plan are intended to comply with the applicable
conditions of Rule 16b-3, or any successor rule thereto.  To the extent any
provision of this Plan or action by the Administrator fails to so comply, it
shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Administrator.  Notwithstanding the

                                      -2-

<PAGE>
 
above, it shall be the responsibility of such persons, not of the Company or the
Administrator, to comply with the requirements of Section 16 of the Exchange
Act; and neither the Company nor the Administrator shall be liable if this Plan
or any transaction under this Plan fails to comply with the applicable
conditions of Rule 16b-3 or any successor rule thereto, or if any such person
incurs any liability under Section 16 of the Exchange Act.

 5.   GRANTING OF OPTIONS; OPTION AGREEMENT
      -------------------------------------

      (a) No Options shall be granted under this Plan after ten years from the
date of adoption of this Plan by the Board.

      (b) Each Option shall be evidenced by a written stock option agreement, in
form satisfactory to the Company, executed by the Company and the person to whom
such Option is granted; provided, however, that the failure by the Company, the
optionee, or both to execute such an agreement shall not invalidate the granting
of an Option, although the exercise of each option shall be subject to Section
6.1.3.

      (c) The stock option agreement shall specify whether each Option it
evidences is a NSO or an ISO.

      (d) Subject to Section 6.3.3 with respect to ISOs, the Administrator may
approve the grant of Options under this Plan to persons who are expected to
become employees, directors or consultants of the Company, but are not
employees, directors or consultants at the date of approval.

 6.   TERMS AND CONDITIONS OF OPTIONS
      -------------------------------

      Each Option granted under this Plan shall be subject to the terms and
conditions set forth in Section 6.1.  NSOs shall be also subject to the terms
and conditions set forth in Section 6.2, but not those set forth in Section 6.3.
ISOs shall also be subject to the terms and conditions set forth in Section 6.3,
but not those set forth in Section 6.2.

      6.1  Terms and Conditions to Which All Options Are Subject.  All Options
           --------------------------------------------- -------              
granted under this Plan shall be subject to the following terms and conditions:

           6.1.1 Changes in Capital Structure. Subject to Section 6.1.2, if the
                 ----------------------------
stock of the Company is changed by reason of a stock split, reverse stock split,
stock dividend, or recapitalization, combination or reclassification,
appropriate adjustments shall be made by the Board in (a) the number and class
of shares of stock subject to this Plan and each Option outstanding under this
Plan, and (b) the exercise price of each outstanding Option; provided, however,
that the Company shall not be required to issue fractional shares as a result of
any such adjustments. Each such adjustment shall be subject to approval by the
Board in its sole discretion.

                                      -3-

<PAGE>
 
          6.1.2  Corporate Transactions.  In the event of the proposed
                 ----------------------                               
dissolution or liquidation of the Company, the Administrator shall notify each
optionee at least 30 days prior to such proposed action.  To the extent not
previously exercised, all Options will terminate immediately prior to the
consummation of such proposed action.  In the event of a merger or consolidation
of the Company with or into another corporation or entity in which the Company
does not survive, or in the event of a sale of all or substantially all of the
assets of the Company in which the stockholders of the Company receive
securities of the acquiring entity or an affiliate thereof, all Options shall be
assumed or equivalent options shall be substituted by the successor corporation
(or other entity) or a parent or subsidiary of such successor corporation (or
other entity).  If such successor does not agree to assume the Options or to
substitute equivalent options therefor, unless the Administrator shall determine
otherwise, the Options will expire upon such event.

          6.1.3  Time of Option Exercise.  Subject to Section 5 and Section
                 -----------------------                                   
6.3.4, Options granted under this Plan shall be exercisable (a) immediately as
of the effective date of the stock option agreement granting the Option, or (b)
in accordance with a schedule related to the date of the grant of the Option,
the date of first employment, or such other date as may be set by the
Administrator (in any case, the "Vesting Base Date") and specified in the
written stock option agreement relating to such Option; provided, however, that
the right to exercise an Option must vest at the rate of at least 20% per year
over five years from the date the option was granted.  In any case, no Option
shall be exercisable until a written stock option agreement in form satisfactory
to the Company is executed by the Company and the optionee.

          6.1.4  Option Grant Date.  Except in the case of advance approvals
                 -----------------                                          
described in Section 5(d), the date of grant of an Option under this Plan shall
be the date as of which the Administrator approves the grant.

          6.1.5  Nonassignability of Option Rights.  No Option granted under
                 ---------------------------------                          
this Plan shall be assignable or otherwise transferable by the optionee except
by will or by the laws of descent and distribution.  During the life of the
optionee, an Option shall be exercisable only by the optionee.

          6.1.6  Payment.  Except as provided below, payment in full, in cash,
                 -------                                                      
shall be made for all stock purchased at the time written notice of exercise of
an Option is given to the Company, and proceeds of any payment shall constitute
general funds of the Company.  At the time an Option is granted or exercised,
the Administrator, in the exercise of its absolute discretion after considering
any tax or accounting consequences, may authorize any one or more of the
following additional methods of payment:

                                      -4-

<PAGE>
 
               (a) Acceptance of the optionee's full recourse promissory note
for all or part of the Option price, payable on such terms and bearing such
interest rate as determined by the Administrator (but in no event less than the
minimum interest rate specified under the Code at which no additional interest
would be imputed and in no event more than the maximum interest rate allowed
under applicable usury laws), which promissory note may be either secured or
unsecured in such manner as the Administrator shall approve (including, without
limitation, by a security interest in the shares of the Company); and

               (b) Delivery by the optionee of Common Stock already owned by the
optionee for all or part of the Option price, provided the value (determined as
set forth in Section 6.1.11) of such Common Stock is equal on the date of
exercise to the Option price, or such portion thereof as the optionee is
authorized to pay by delivery of such stock; provided, however, that if an
optionee has exercised any portion of any Option granted by the Company by
delivery of Common Stock, the optionee may not, within six months following such
exercise, exercise any Option granted under this Plan by delivery of Common
Stock without the consent of the Administrator.

          6.1.7  Termination of Employment. If for any reason other than death
                 -------------------------                                    
or disability, an optionee ceases to be employed by the Company or any of its
Affiliates (such event being called a "Termination"), Options held at the date
of Termination (to the extent then exercisable) may be exercised in whole or in
part at any time within one (1) month of the date of such Termination, or such
other period of not less than thirty (30) days after the date of such
Termination as is specified in the Option Agreement (but in no event after the
Expiration Date); provided, that if such exercise of the Option would result in
                  --------                                                     
liability for the optionee under Section 16(b) of the Exchange Act, then such
one-month period automatically shall be extended until the tenth (10th) day
following the last date upon which optionee has any liability under Section
16(b) (but in no event after the Expiration Date).  If an optionee dies or
becomes disabled (within the meaning of Section 22(e)(3) of the Code) while
employed by the Company or an Affiliate or within the period that the Option
remains exercisable after Termination, Options then held (to the extent then
exercisable) may be exercised, in whole or in part, by the optionee, by the
optionee's personal representative or by the person to whom the Option is
transferred by devise or the laws of descent and distribution, at any time
within twelve (12) months after the death or twelve (12) months after the
disability of the optionee, or such other period of not less than six (6) months
from the date of Termination as is specified in the Option Agreement (but in no
event after the Expiration Date).  For purposes of this Section 6.1.7,
"employment" includes service as a director or as a consultant.  For purposes of
this Section 6.1.7, an optionee's employment shall not be deemed to terminate by
reason of sick leave, military leave or other leave of absence approved by the

                                      -5-

<PAGE>
 
Administrator, if the period of any such leave does not exceed 90 days or, if
longer, if the optionee's right to reemployment by the Company or any Affiliate
is guaranteed either contractually or by statute.

          6.1.8  Repurchase of Stock.  At the option of the Administrator, the
                 -------------------                                          
stock to be delivered pursuant to the exercise of any Option granted to an
employee, director or consultant under this Plan may be subject to a right of
repurchase in favor of the Company with respect to any employee, or director or
consultant whose employment, or director or consulting relationship with the
Company is terminated.  Such right of repurchase either:

                 (a) shall be at the Option exercise price and (i) shall lapse
at the rate of at least 20% per year over five years from the date the Option is
granted (without regard to the date it becomes exercisable), and must be
exercised for cash or cancellation of purchase money indebtedness within the
later of (x) 30 days after the acquisition of stock upon exercise of such Option
or (y) 90 days after such termination, and (ii) if the right is assignable by
the Company, the assignee must pay the Company upon assignment of the right
(unless the assignee is a 100% owned subsidiary of the Company or is an
Affiliate) cash equal to the difference between the Option exercise price and
the value (determined as set forth in Section 6.1.11) of the stock to be
purchased if the Option exercise price is less than such value; or

                 (b) shall be at the higher of the Option exercise price or the
value (determined as set forth in Section 6.1.11 or as otherwise provided in the
grant of Option) of the stock being purchased on the date of termination, and
must be exercised for cash or cancellation of purchase money indebtedness within
the later of (x) 30 days after the acquisition of stock upon exercise of such
Option or (y) 90 days after such termination, and such right shall terminate
when the Company's securities become publicly traded.

      Determination of the number of shares subject to any such right of
repurchase shall be made as of the date the employee's employment as an
employee, consultant or director of the Company terminates, not as of the date
that any Option granted to such employee, director or consultant is thereafter
exercised.

          6.1.9  Withholding and Employment Taxes.  At the time of exercise of
                 --------------------------------                             
an Option or at such other time as the amount of such obligations becomes
determinable (the "Tax Date"), the optionee shall remit to the Company in cash
all applicable federal and state withholding and employment taxes.  If
authorized by the Administrator in its sole discretion after considering any tax
or accounting consequences, an optionee may elect to (i) deliver a promissory
note on such terms as the Administrator deems appropriate, (ii) tender to the
Company

                                      -6-

<PAGE>
 
previously owned shares of Stock or other securities of the Company, or (iii)
have shares of Common Stock which are acquired upon exercise of the Option
withheld by the Company to pay some or all of the amount of tax that is required
by law to be withheld by the Company as a result of the exercise of such Option,
subject to the following limitations:

                 (a) Any election pursuant to clause (iii) above by an optionee
subject to Section 16 of the Exchange Act shall either (x) be made at least six
months before the Tax Date and shall be irrevocable; or (y) shall be made in (or
made earlier to take effect in) any ten-day period beginning on the third
business day following the date of release for publication of the Company's
quarterly or annual summary statements of earnings and shall be subject to
approval by the Administrator, which approval may be given at any time after
such election has been made. In addition, in the case of (y), the Option shall
be held at least six months prior to the Tax Date.

                 (b) Any election pursuant to clause (ii) above, where the
optionee is tendering Common Stock issued pursuant to the exercise of an Option,
shall require that such shares be held at least six months prior to the Tax
Date.

      Any of the foregoing limitations may be waived (or additional limitations
may be imposed) by the Administrator, in its sole discretion, if the
Administrator determines that such foregoing limitations are not required (or
that such additional limitations are required) in order that the transaction
shall be exempt from Section 16(b) of the Exchange Act pursuant to Rule 16b-3,
or any successor rule thereto.  In addition, any of the foregoing limitations
may be waived by the Administrator, in its sole discretion, if the Administrator
determines that Rule 16b-3, or any successor rule thereto, is not applicable to
the exercise of the Option by the optionee or for any other reason.

      Any securities tendered or withheld in accordance with this Section 6.1.9
shall be valued by the Company as of the Tax Date.

          6.1.10 Other Provisions.  Each Option granted under this Plan may
                 ----------------                                          
contain such other terms, provisions, and conditions not inconsistent with this
Plan as may be determined by the Administrator, and each ISO granted under this
Plan shall include such provisions and conditions as are necessary to qualify
the Option as an "incentive stock option" within the meaning of Section 422 of
the Code.  If Options provide for a right of first refusal in favor of the
Company with respect to stock acquired by employees, directors or consultants,
such Options shall provide that the right of first refusal shall terminate upon
the earlier of (i) the closing of the Company's initial registered public
offering to the public generally, or (ii) the date ten years after the grant
date as set forth in Section 6.1.4.

                                      -7-

<PAGE>
 
          6.1.11 Determination of Value.  For purposes of the Plan, the value of
                 ----------------------                                         
Common Stock or other securities of the Company shall be determined as follows:

                 (a) If the stock of the Company is listed on any established
stock exchange or a national market system, including without limitation the
National Market System of the National Association of Securities Dealers, Inc.
Automated Quotation System, its fair market value shall be the closing sales
price for such stock or the closing bid if no sales were reported, as quoted on
such system or exchange (or the largest such exchange) for the date the value is
to be determined (or if there are no sales for such date, then for the last
preceding business day on which there were sales), as reported in the Wall
                                                                      ----
Street Journal or similar publication.
- --------------

                 (b) If the stock of the Company is regularly quoted by a
recognized securities dealer but selling prices are not reported, its fair
market value shall be the mean between the high bid and low asked prices for the
stock on the date the value is to be determined (or if there are no quoted
prices for the date of grant, then for the last preceding business day on which
there were quoted prices).

                 (c) In the absence of an established market for the stock, the
fair market value thereof shall be determined in good faith by the
Administrator, with reference to the Company's net worth, prospective earning
power, dividend-paying capacity, and other relevant factors, including the
goodwill of the Company, the economic outlook in the Company's industry, the
Company's position in the industry and its management, and the values of stock
of other corporations in the same or a similar line of business.

          6.1.12  Option Term.  Subject to Section 6.3.5, no Option shall be
                  -----------                                               
exercisable more than ten years after the date of grant, or such lesser period
of time as is set forth in the stock option agreement (the end of the maximum
exercise period stated in the stock option agreement is referred to in this Plan
as the "Expiration Date").

          6.1.13  Exercise Price.  The exercise price of any Option granted to
                  --------------                                              
any person who owns, directly or by attribution under the Code currently Section
424(d), stock possessing more than ten percent of the total combined voting
power of all classes of stock of the Company or of any Affiliate (a "Ten Percent
Stockholder") shall in no event be less than 110% of the fair market value
(determined in accordance with Section 6.1.11) of the stock covered by the
Option at the time the Option is granted.

      6.2  Terms and Conditions to Which Only NSOs Are Subject.  Options granted
           ---------------------------------------------------                  
under this Plan which are designated as NSOs shall be subject to the following
terms and conditions:

                                      -8-

<PAGE>
 
           6.2.1  Exercise Price.  Except as set forth in Section 6.1.13, the
                  --------------                                             
exercise price of a NSO shall be not less than 85% of the fair market value
(determined in accordance with Section 6.1.11) of the stock subject to the
Option on the date of grant.

      6.3  Terms and Conditions to Which Only ISOs Are Subject. Options granted
           ---------------------------------------------------                 
under this Plan which are designated as ISOs shall be subject to the following
terms and conditions:

           6.3.1  Exercise Price.  Except as set forth in Section 6.1.13, the
                  --------------                                             
exercise price of an ISO shall be determined in accordance with the applicable
provisions of the Code and shall in no event be less than the fair market value
(determined in accordance with Section 6.1.11) of the stock covered by the
Option at the time the Option is granted.

           6.3.2  Disqualifying Dispositions.  If stock acquired by exercise of
                  --------------------------                                   
an ISO granted pursuant to this Plan is disposed of in a "disqualifying
disposition" within the meaning of Section 422 of the Code, the holder of the
stock immediately before the disposition shall promptly notify the Company in
writing of the date and terms of the disposition and shall provide such other
information regarding the Option as the Company may reasonably require.

           6.3.3  Grant Date. If an ISO is granted in anticipation of employment
                  ----------
as provided in Section 5(d), the Option shall be deemed granted, without further
approval, on the date the grantee assumes the employment relationship forming
the basis for such grant, and, in addition, satisfies all requirements of this
Plan for Options granted on that date.

           6.3.4  Vesting.  Notwithstanding any other provision of this Plan,
                  -------                                                    
ISOs granted under all incentive stock option plans of the Company and its
subsidiaries may not "vest" for more than $100,000 in fair market value of stock
(measured on the grant dates(s)) in any calendar year.  For purposes of the
preceding sentence, an option "vests" when it first becomes exercisable.  If, by
their terms, such ISOs taken together would vest to a greater extent in a
calendar year, and unless otherwise provided by the Administrator, ISOs with
lower exercise prices shall vest before ISOs with higher exercise prices,
regardless of the grant date.

           6.3.5  Term.  Notwithstanding Section 6.1.12, no ISO granted to any
                  ----                                                        
Ten Percent Stockholder shall be exercisable more than five years after the date
of grant.

     7.   MANNER OF EXERCISE
          ------------------
 
          (a) An optionee wishing to exercise an Option shall give written
notice to the Company at its principal executive office, to the attention of the
officer of the Company designated by the Administrator, accompanied by payment
of the exercise

                                      -9-

<PAGE>
 
price as provided in Section 6.1.6.  The date the Company receives written
notice of an exercise hereunder accompanied by payment of the exercise price
will be considered as the date such Option was exercised.

         (b) Promptly after receipt of written notice of exercise of an Option,
the Company shall, without stock issue or transfer taxes to the optionee or
other person entitled to exercise the Option, deliver to the optionee or such
other person a certificate or certificates for the requisite number of shares of
stock. An optionee or permitted transferee of an optionee shall not have any
privileges as a stockholder with respect to any shares of stock covered by the
Option until the date of issuance (as evidenced by the appropriate entry on the
books of the Company or a duly authorized transfer agent) of such shares.

    8.   EMPLOYMENT OR CONSULTING RELATIONSHIP
         -------------------------------------

         Nothing in this Plan or any Option granted thereunder shall interfere
with or limit in any way the right of the Company or of any of its Affiliates to
terminate any optionee's employment or consulting at any time, nor confer upon
any optionee any right to continue in the employ of, or consult with, the
Company or any of its Affiliates.

    9.   FINANCIAL INFORMATION
         ---------------------

         The Company shall provide to each optionee during the period such
optionee holds an outstanding Option, and to each holder of Common Stock
acquired upon exercise of Options granted under the Plan for so long as such
person is a holder of such Common Stock, annual financial statements of the
Company as prepared either by the Company or independent certified public
accountants of the Company. Such financial statements shall include, at a
minimum, a balance sheet and an income statement, and shall be delivered as soon
as practicable following the end of the Company's fiscal year.

    10.  CONDITIONS UPON ISSUANCE OF SHARES.
         ---------------------------------- 

         Shares of Common Stock shall not be issued pursuant to the exercise of
an Option unless the exercise of such Option and the issuance and delivery of
such shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended (the
"Securities Act").

    11.  NONEXCLUSIVITY OF THE PLAN.
         -------------------------- 

         The adoption of the Plan shall not be construed as creating any
limitations on the power of the Company to adopt such other incentive
arrangements as it may deem desirable, including, without limitation, the
granting of stock options other than under the Plan.


                                     -10-

<PAGE>
 
    12.  MARKET STANDOFF.
         --------------- 
 
         Each Optionee, if so requested by the Company or any representative of
the underwriters in connection with any registration of the offering of any
securities of the company under the Securities Act shall not sell or otherwise
transfer any shares of Common Stock acquired upon exercise of Options during the
180-day period following the effective date of a registration statement of the
company filed under the Securities Act; provided, however, that such restriction
shall apply only to the first two registration statements of the Company to
become effective under the Securities Act which includes securities to be sold
on behalf of the Company to the public in an underwritten public offering under
the Securities Act. The Company may impose stop-transfer instructions with
respect to securities subject to the foregoing restriction until the end of such
180-day period.

    13.  AMENDMENTS TO PLAN
         ------------------

         The Board may at any time amend, alter, suspend or discontinue this
Plan. Without the consent of an optionee, no amendment, alteration, suspension
or discontinuance may adversely affect outstanding Options except to conform
this Plan and ISOs granted under this Plan to the requirements of federal or
other tax laws relating to incentive stock options. No amendment, alteration,
suspension or discontinuance shall require stockholder approval unless (a)
stockholder approval is required to preserve incentive stock option treatment
for federal income tax purposes, or (b) the Board otherwise concludes that
stockholder approval is advisable.

    14.  EFFECTIVE DATE OF PLAN
         ----------------------

         This Plan shall become effective upon adoption by the Board provided,
however, that no Option shall be exercisable unless and until written consent of
the stockholders of the Company, or approval of stockholders of the Company
voting at a validly called stockholders' meeting, is obtained within 12 months
after adoption by the Board. If such stockholder approval is not obtained within
such time, Options granted hereunder shall terminate and be of no force and
effect from and after expiration of such 12-month period.  Options may be
granted and exercised under this Plan only after there has been compliance with
all applicable federal and state securities laws.

                                     -11-



<PAGE>
 
THE SYMBOL '**' IS USED THROUGHOUT THIS EXHIBIT TO INDICATE THAT A PORTION OF
THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION

                                  EXHIBIT 10.2
                                  ------------
                                                                   July 11, 1996


Dr. John W. Shell
President and Chief Executive Officer
DepoMed, Inc.
1170 B Chess Drive
Foster City, CA 94404-1167

Dear Dr. Shell:

This Letter Agreement ("Agreement") sets forth the terms and conditions under
which Bristol-Myers Squibb Company ("BMS") and DepoMed, Inc. ("DepoMed") will
collaborate in a joint research project (the "Research") to determine optimal
conditions for the production of a product (the "Product") consisting of
formulations of the chemical compound known as [**] ("[**]") incorporated in the
DepoMed GR System (the "DP System"). The specific terms and conditions of this
Agreement are as follows:

1.  THE RESEARCH
    ------------

     A.   DepoMed agrees to use its diligent efforts to implement and complete
          the Research Plan attached herewith and fully incorporated herein as
          Appendix A. Specific milestones and targets of the Research Plan are
          also summarized in Appendix A. Said milestones and targets may be
          modified, but only by mutual written agreement of BMS and DepoMed (the
          "Parties") at any time during the term of this Agreement.

     B.   BMS agrees to collaborate with and assist
 DepoMed in the
          implementation and completion of the Research Plan set forth in
          Appendix A by providing to DepoMed:

          1.   Bulk [**] in sufficient quantities to perform the Research Plan;

          2.   Appropriate analytical and handling procedures for [**]; and

          3.   Such other technology and expertise possessed by BMS which may be
               deemed necessary, by subsequent mutual agreement of the Parties,
               to achieve the objectives of this Agreement.

     C.   All [**] shall remain the sole property of BMS. DepoMed agrees not to
          make any modifications of the BMS Materials provided by BMS hereunder,
          except as required in the performance of the Research Plan.

     D.   The [**] shall be used solely to conduct the Research Plan, and not
          for any other purpose. The [**] shall not be made available to anyone
          other than employees of DepoMed working in furtherance of the Research
          Plan, shall not be transferred to any other persons outside of DepoMed
          for any purpose, and shall not be transferred to another institution
          or company without the prior written consent of

** CONFIDENTIAL TREATMENT REQUESTED

<PAGE>
 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 2

          BMS, except to authorize subcontractors as provided in Article I.H
          hereinbelow. The [**] shall not be used by DepoMed for research,
          testing or treatment involving human subjects or for making any
          decisions relating to human diagnosis or care.

     E.   Nothing herein shall create or imply any license in intellectual
          property rights related to [**] owned or controlled by BMS to DepoMed,
          except for the non-exclusive license to use the [**] for the research
          purposes expressly set forth herein.

     F.   Upon conclusion of the Research Plan, or upon request by BMS, DepoMed
          shall discontinue use of the [**] and will arrange for the return to
          BMS of all unused [**].

     G.   DepoMed will take appropriate steps to inform all Research Plan
          personnel of their obligations under this Agreement and to obtain
          their agreement to abide by the terms and conditions of this Agreement
          in the same manner as DepoMed.

     H.   DepoMed shall have no right to subcontract portions of the Research
          Plan to be performed by it without the prior written consent of BMS,
          except for the gastric retention study described in Appendix A,
          Section II.B2; provided, however, that (a) any such subcontracts shall
                         --------  -------                                      
          not involve the transfer of confidential information of BMS to the
          subcontracted third party; (b) the subcontracted third party shall
          enter into a written confidentiality agreement with DepoMed adequate
          to preserve the confidentiality of [**] formulations developed
          pursuant to the Research Plan and DepoMed Project Proprietary
          Information, and the rights granted to BMS under this Agreement; and
          (c) promptly after entering into such subcontract, DepoMed shall give
          written notice thereof to BMS.

II.  TERM
     ----

     A.   This Agreement is effective as of April 15, 1996, and shall continue
          in effect for a period of eight and one-half months, until December
          31, 1996, or until DepoMed notifies BMS in writing that the milestones
          and targets set forth in Appendix A have been realized, if earlier.

     B.   The term of this Agreement may be extended at the same rate of
          compensation as is then in effect (pro rated) for up to six (6) months
          at BMS' election, if the aforementioned milestones and targets are not
          realized at the end of the Agreement term.  This election shall be
          made by written notice to DepoMed at least fifteen (15) days prior to
          December 31, 1996, specifying the desired term of the extension.  The
          term of this Agreement may also be extended by an amendment in writing
          executed by both Parties.

** CONFIDENTIAL TREATMENT REQUESTED

<PAGE>
 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 3


III  COSTS/PAYMENTS
     --------------

     A.   DepoMed agrees to perform and complete the Research Plan for a total
          fee of one hundred ninety-seven thousand, seven hundred seventy-eight
          dollars ($197,778.00) in accordance with this Paragraph 3.

     B.   BMS therefore agrees to make the following payments to DepoMed as full
          and complete consideration for the performance and completion of the
          Research Plan by DepoMed:

          1.   A payment of seventy thousand dollars ($70,000.00) which shall be
               paid to DepoMed by BMS within thirty (30) days of the complete
               execution of this Agreement by the Parties.

          2.   A second payment of seventy thousand dollars ($70,000.00) which
               shall be paid to DepoMed by BMS upon completion by DepoMed of the
               work described in Appendix A, Section II.

          3.   A final payment of fifty-seven thousand, seven hundred seventy-
               eight dollars ($57,778.00), payable upon release by BMS of
               formulation for a clinical pharmacokinetic study.

     C.   BMS and DepoMed understand that developments, unforeseen circumstances
          beyond the reasonable control of DepoMed or changes in the scope of
          the Research or DepoMed's responsibilities for the Research may
          increase the funding requirements for the Research.  BMS will consider
          requests for additional funding should such a need arise.  The
          decision to supply such additional funding shall be in the sole
          discretion of BMS.

IV.  PROGRESS REPORTS/JOINT MEETINGS
     -------------------------------

     A.   Commencing with the first day of the first month following the
          effective date of this Agreement, and for each subsequent month for
          the duration of the term of this Agreement, DepoMed shall submit to
          BMS monthly progress reports containing summaries of all Research Plan
          tasks completed or still in progress at the date of such progress
          report.  The Parties agree that information contained in the
          aforementioned progress reports shall be general rather than detailed
          in nature.  All of such information contained in such progress reports
          shall be and shall remain non-enabling proprietary information ("Non-
          Enabling Project Proprietary Information").  It is the express intent
          of the Parties that all Non-Enabling Project Proprietary Information
          provided to BMS by DepoMed shall be in such reasonable detail as shall
          permit BMS to assess DepoMed's progress versus the Research Plan and
          milestones and targets but shall not contain such information or
          detail as might reasonably be expected to enable BMS to reproduce or
          utilize in any way (other than the assessment as aforesaid) DepoMed's
          Enabling Project Proprietary Information (as defined in Paragraph V,

<PAGE>
 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 4


          hereinbelow).  Progress reports submitted to BMS by DepoMed may also
          contain and address any conclusions, problems or issues, which, in the
          opinion of DepoMed are significant matters requiring the attention of
          BMS and, if appropriate, recommendations for necessary action by BMS.

     B.   At least twice during the term of this Agreement and at more frequent
          intervals if deemed necessary by mutual agreement, representatives of
          BMS and DepoMed shall meet at mutually acceptable times and places to
          discuss and evaluate the status and progress of the Research which is
          the subject of this Agreement.


V.   PROPRIETARY/CONFIDENTIAL INFORMATION
     ------------------------------------

     A.   DepoMed and BMS agree that, with the exception of Non-Enabling Project
          Proprietary Information (as defined in Paragraph IV.A, hereinabove),
          any and all data, information, materials and technology produced,
          developed or generated by DepoMed as a result of the Research which
          specifically relates to the DepoMed technology for the formulation of
          [**] shall be enabling proprietary information of DepoMed ("DepoMed
          Enabling Project Proprietary Information"). DepoMed agrees to fully
          disclose to BMS any and all DepoMed Enabling Project Proprietary
          Information referred to in Appendix A, and upon written request from
          BMS, any and all additional DepoMed Enabling Project Proprietary
          Information to BMS.

     B.   BMS and DepoMed agree that all DepoMed Project Proprietary
          Information (i.e. Non-Enabling Project Proprietary Information and
          Enabling Project Proprietary Information) transferred to BMS shall
          be governed by the provision of the [**] Confidentiality Agreement
          dated February 8, 1996, among the Bristol-Myers Squibb
          Pharmaceutical Research Institute, DepoMed, Inc., and [**]
          (hereinafter, the "Prior Agreement"). DepoMed understands and agrees
          that all DepoMed Project Proprietary Information transferred to BMS
          may be transferred by BMS to [**] pursuant to the provisions of the
          Prior Agreement.

     C.   The transfer of all confidential information of the Parties other than
          DepoMed Project Proprietary Information shall be governed by the
          provisions of the Prior Agreement.

     D.   Notwithstanding anything to the contrary contained in this Agreement
          or the Prior Agreement, DepoMed shall have no right to disclose any
          DepoMed Project Proprietary Information to any third party, or use
          such DepoMed Project Proprietary Information for any purpose other
          than for the purpose of collaborating with BMS.


VI.  OPTION
     ------

     A.   DepoMed hereby grants to BMS an option (on terms provided or to be
          negotiated in accordance with Paragraph VI.B) for two (2) years
          following completion of the

** CONFIDENTIAL TREATMENT REQUESTED

<PAGE>
 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 5

          clinical pharmacokinetic study referred to in Article III.B.3
          hereinabove, but in no event later than three (3) years from the date
          of this Agreement, to obtain an exclusive, worldwide license under the
          DepoMed Project Proprietary Information and DepoMed Intellectual
          Property (i.e., any patents, patent applications, know-how, trade
          secrets, licenses or any other intellectual property rights of
          whatever nature, owned or controlled by DepoMed, including without
          limitation DepoMed Patent Rights as defined below) to make, have made,
          use, import, offer for sale and sell the Product incorporating
          formulations of [**]. Such license shall include the right of BMS to
          sublicense any license granted to BMS under DepoMed Project
          Proprietary Information and DepoMed Intellectual Property. Such
          license shall also include the right of BMS to utilize any
          improvements to DepoMed Project Proprietary Information and DepoMed
          Intellectual Property developed by DepoMed during the two (2) years
          following the completion of work under the Research Plan.

     B.   The terms and conditions of any license acquired by BMS from DepoMed
          under the option provided for in Paragraph VI.A., above, shall be as
          agreed by BMS and DepoMed in good faith negotiations regarding the
          terms and conditions of a definitive license agreement consistent with
          this Article VI.B which shall commence upon DepoMed's receipt of BMS'
          written notice of its intention to exercise its option and acquire
          said license.  Any license agreement entered into by BMS and DepoMed
          shall be in a form reasonably acceptable to DepoMed and BMS, and shall
          be consistent with industry standards and permit BMS to fully exploit
          the licensed rights in a manner consistent with this Agreement.  Any
          license agreement entered into between BMS and DepoMed shall provide
          for the following:

          1.   BMS shall be required to pay to DepoMed the following royalty
               amounts:

               a.   [**] of net sales of Licensed Product sold by BMS, its
                    affiliates or sublicensees for the first [**] of net sales
                    of Licensed Product per calendar year within the United
                    States, and [**] of net sales of Licensed Product sold by
                    BMS, its affiliates or sublicensees for net sales of
                    Licensed Product greater than [**] per calendar year within
                    the United States; and

               b.   [**] of net sales of Licensed Product sold by BMS, its
                    affiliates or sublicensees for the first [**] of net sales
                    of Licensed Product per calendar year outside of the United
                    States, and [**] of net sales of Licensed Product sold by
                    BMS, its affiliates or sublicensees for net sales of
                    Licensed Product greater than [**] per calendar year outside
                    of the United States.

          "Licensed Product" shall mean a Product, the manufacture, use or sale
          of which is covered within a country by a claim of an issued and
          unexpired patent included within the DepoMed Intellectual Property
          licensed to BMS by DepoMed which has not been

** CONFIDENTIAL TREATMENT REQUESTED

<PAGE>
 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 6

          held permanently revoked, unenforceable or invalid by a decision of a
          court or other government agency of competent jurisdiction,
          unappealable or unappealed within the time allowed for appeal and
          which has not been abandoned, or admitted to be invalid or
          unenforceable through reissue, disclaimer or otherwise.  The
          obligation to pay royalties will expire on a country-by-country basis
          upon the expiration, invalidity or abandonment of all patents included
          within the DepoMed Intellectual Property covering any such Licensed
          Product within such a country, and not withstanding the number of
          patents included within the DepoMed Intellectual Property licensed to
          BMS by DepoMed, only a single royalty will be due with respect
          thereto.

          2.   BMS shall be required to pay to DepoMed the following milestone
               payments upon the first occurrence of each event set forth below:

               a.   [**] upon complete execution by DepoMed and BMS of the
                    license agreement;

               b.   [**] upon filing by BMS with the United States Food and Drug
                    Administration or the successor thereto of the first New
                    Drug Application for a Licensed Product; and

               c.   [**] upon receipt by BMS of the required marketing approval
                    from the United States Food and Drug Administration or the
                    successor thereto of the first New Drug Application for a
                    Licensed Product.

          3.   Except for such royalties and milestone payments as provided in
               this Agreement, no other payments, royalties, or other
               consideration will be payable with respect to any license granted
               to BMS by DepoMed.  Such royalty and milestone payments shall be
               reduced by the amount of any fees, royalties or other
               consideration (not to exceed [**] of such royalties and milestone
               payments payable to DepoMed) payable by BMS to any third parties
               having dominant rights to DepoMed Project Proprietary Information
               or to DepoMed Intellectual Property.

          4.   BMS shall have the right to terminate any license agreement upon
               sixty (60) days prior written notice to DepoMed.  Termination of
               any such license agreement shall not relieve BMS of the
               obligation to make payments of royalties or milestone payments
               accruing prior to the effective date of such termination.

     C.   Notwithstanding anything to the contrary contained in this Agreement,
          in the event that BMS does not elect to exercise its option as
          aforesaid, or in the event the parties are unable to reach agreement
          on license terms, DepoMed shall have no right, whether by itself or
          with or by any affiliate or third party, to make, have made, use,
          import, offer for sale, sell, develop or otherwise commercialize any
          formulations of [**] developed pursuant to this Agreement, any DepoMed
          Project Proprietary

** CONFIDENTIAL TREATMENT REQUESTED

<PAGE>
 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 7

          Information related solely to [**], or any Inventions related solely
          to [**].

     D.   The decision as to whether to proceed with the preclinical and
          clinical development and marketing of any Product containing
          formulations of [**] developed pursuant to this Agreement shall be in
          the sole discretion of BMS. Nothing contained in this Agreement shall
          be interpreted as requiring BMS to develop or market any such
          formulations of [**].


VII.  PATENTS
      -------

     A.   All rights, title and interest to inventions, discoveries or
          improvements first conceived or made as a result of the performance of
          the Research Plan ("Inventions")

          (i)  shall belong solely to DepoMed, if made solely by DepoMed or its
               employees,

          (ii) shall be jointly owned by DepoMed and BMS, if made jointly by
               DepoMed or one or more employees of DepoMed and by one or more
               employees of BMS ("Joint Inventions"), and

          (iii)  shall belong solely to BMS, if made solely by BMS.

          Determinations of inventorship shall be made in accordance with U.S.
          law.  DepoMed's interest in any Inventions and patent rights
          pertaining thereto described under (i) and (ii) above is referred to
          hereinafter as "DepoMed Patent Rights." BMS's interest in any
          Inventions and patent rights pertaining thereto described under (ii)
          and (iii) above shall not be subject to the terms and conditions of
          this Agreement.

     B.   DepoMed represents and warrants to BMS that any Inventions that may be
          made by its employees in the performance of the Research Plan are
          owned by and shall be assigned to DepoMed, wholly and completely.

     C.   DepoMed will promptly notify BMS in writing of any Inventions that
          relate solely to [**], including without limitation formulations of
          [**], conceived and/or made by DepoMed as a result of the performance
          of the Research Plan. Such notice shall describe the substance of any
          such Invention in writing in sufficient detail so as to enable BMS to
          determine if a patentable Invention has been made.

     D.   BMS shall have the sole right to have prepared, filed and prosecuted
          the necessary papers for obtaining patent protection for any
          Inventions that relate solely to [**], including without limitation
          formulations of [**], in any and all countries of the world which BMS,
          in its sole judgment, determines are of sufficient interest to merit
          such filing. BMS shall bear all costs incurred in connection with the
          preparation, filing, prosecution, issuance and maintenance of any such
          U.S.

** CONFIDENTIAL TREATMENT REQUESTED

<PAGE>
 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 8

          and foreign patent applications.  DepoMed agrees that it will
          cooperate and do whatever is necessary to assist BMS in obtaining and
          maintaining such patent rights at the request and expense of BMS.  In
          the event that BMS, in its sole discretion, decides it is not
          appropriate to file a patent application which constitutes a DepoMed
          Patent Right that relates solely to [**], including without limitation
          formulations of [**], DepoMed shall have no right to file any patent
          applications thereon.

     E.   Except as provided in Article VII.D hereinabove, DepoMed shall have
          the sole right to have prepared, filed and prosecuted the necessary
          papers for obtaining patent protection for any Inventions that relate
          to the DP System in any and all countries of the world which DepoMed,
          in its sole judgment, determines are of sufficient interest to merit
          such filing.  DepoMed shall bear all costs incurred in connection with
          the preparation, filing, prosecution, issuance and maintenance of any
          such U.S. and foreign patent applications.


VIII.  PUBLICITY
       ---------

     A.   Neither BMS or DepoMed shall disclose any material terms of this
          Agreement or any of the information contained in the Appendix to this
          Agreement to any third party other than their professional advisors
          and third parties whose rights are or may be affected thereby
          without the prior written permission of the other Party, except
          where such disclosure is required by law. [**]. Such permission
          shall not be unreasonably withheld or delayed, and shall be deemed
          given unless the party from whom permission is requested responds to
          a request with consent or specific reasons for objection within
          fourteen (14) days after the request is received.

     B.   Neither BMS nor DepoMed shall use the name of the other Party in any
          advertising or promotional context in any medium, provided, that upon
          execution of this Agreement by both Parties, a mutually agreeable
          press release may be jointly published by the Parties.

IX.  COVENANT AND WARRANTY
     ---------------------

     DepoMed hereby covenants that it will use its diligent efforts to conduct
     and complete the Research Plan set forth in Appendix A in accordance with
     the milestones and targets set forth therein.  DepoMed hereby warrants, as
     of the date hereof, and covenants that (a) it has all necessary rights and
     is legally entitled to grant the rights it has agreed to grant to BMS
     hereunder, and (b) its entry into this Agreement and its performance of its
     obligations hereunder do not and will not conflict with any other
     restrictions or obligations of whatsoever nature by which DepoMed is bound.

** CONFIDENTIAL TREATMENT REQUESTED

<PAGE>
 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 9

X.   ASSIGNMENT
     ----------

     This Agreement may not be assigned by either party without the prior
     written consent of the other Party.  No obligations or rights under this
     Agreement may be assigned or delegated by DepoMed without the prior written
     consent of BMS.  This Agreement shall be binding upon and inure to the
     benefit of and be enforceable by the Parties hereto and their respective
     heirs, legal and personal representatives, successors and permitted
     assigns.

XI.  NOTICES
     -------

     All notices permitted or required under this Agreement shall be deemed
     effective upon receipt by the Party to whom it is addressed, if made in
     writing and deposited, postage prepaid in a facility for the collection of
     mail maintained by the United States Post Office or if deposited with
     Federal Express or any other generally recognized expedited delivery
     service, or if personally delivered, or if transmitted by fax, addressed as
     follows:

     To Bristol-Myers Squibb Company:
     ------------------------------- 

     A.   Scientific and Technical Matters:

          Dr. Peter Timmins
          Director, International Development Laboratories
          Bristol-Myers Squibb Pharmaceutical Research Institute
          Reeds Lane, Moreton, Wirral
          Merseyside L46 1QW, England
          FAX: 011-44-151-677-0869

     B.   All Business and Other Matters:

          Ms. Mary Furlong
          Director, Business Development, U.S.
          Bristol-Myers Squibb Company
          P.O. Box 4000
          Princeton, New Jersey 08543-4000
          FAX: (609) 252-3974

     To DepoMed:
     ---------- 

     A.   Scientific and Technical Matters:

          Dr. John W. Shell
          President and Chief Executive Officer
          DepoMed, Inc.
          1170 B Chess Drive
          Foster City, CA 94404-1167
          FAX: (415) 513-0999

<PAGE>
 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 10

     B.  All Business and Other Matters:

         Dr. John W. Shell
         President and Chief Executive Officer
         DepoMed, Inc.
         1170 B Chess Drive
         Foster City, CA 94404-1167
         FAX: (415) 513-0999

XII.  GOVERNING LAW
      -------------

      This Agreement shall be governed by and construed in accordance with the
      laws of the State of New Jersey. Caption and paragraph headings are for
      convenience only and shall not form an interpretive part of this
      Agreement. This Agreement shall not be strictly construed against either
      Party hereto.

XIII. TERMINATION
      -----------

      A.   This Agreement may be terminated by BMS, with or without cause, upon
           thirty (30) days written notice to DepoMed.

      B.   Upon any material breach by a party to the Agreement, the other party
           may terminate this Agreement by thirty (30) days written notice to
           the breaching party, specifying the material breach, default or other
           defect. The termination becomes effective, at the option of the non-
           breaching party, at the end of the thirty (30) day period unless the
           breaching party cures the breach during the thirty (30) day period.

      C.   Upon expiration or termination of this Agreement, the provisions of
           Articles I.F, V, VI, VII, VIII, IX and XII shall continue in full
           force and effect, as well as any other provision herein which, by its
           intent or meaning, is intended to survive such expiration or
           termination.

      D.   Any expiration or early termination of this Agreement shall not
           affect the rights and obligations of the parties accruing under this
           Agreement prior to the effective date of such expiration or
           termination, including, but not limited to, any rights and
           obligations accruing under Articles I.F, V, VI, VII, VIII, IX and
           XII.

XIV.  INDEPENDENT CONTRACTOR
      ----------------------

      For purposes of this Agreement, and in the performance of all services
      hereunder, the relationship of BMS to DepoMed is, and shall be deemed to
      be, one of independent contractors and not as agents or employees of one
      to the other.

XV.   SEVERABILITY
      ------------

<PAGE>
 
Mr. John W. Shell 
DepoMed, Inc.
July 11, 1997
Page 11

     The provisions of this Agreement are severable.  If any item or provision
     of this Agreement shall to any extent be invalid or unenforceable, the
     remainder of this Agreement shall not be affected thereby, and each term
     and provision of this Agreement shall be valid and shall be enforced to the
     fullest extent permitted by law.

XVI. ENTIRE AGREEMENT
     ----------------

     This Agreement and the Prior Agreement constitute the entire agreement
     between BMS and DepoMed with respect to the subject matter hereof and
     supersede any and all previous understandings or agreements between the
     Parties, whether written or verbal.  No terms or provisions of this
     Agreement may be varied or modified by the parties hereto except by a
     written instrument specifically referring to and executed in the same
     manner as this Agreement.  No provision of this Agreement may be waived by
     any act, omission or knowledge of a Party or its agents or employees,
     except by a writing expressly waiving such provision and signed by the
     waiving Party.  The failure of a Party at any time or times to require
     performance of any provision hereof shall in no manner affect its rights at
     a later time to enforce the same.  No waiver by a Party of any condition,
     remedy or term in any one or more instance shall be construed as a
     continuing waiver of such condition, remedy or term or any other condition,
     remedy or term on any successive occasion.  Any inconsistency between the
     terms of this Agreement and any Appendix shall be resolved in favor of the
     text of this Agreement.

If this Letter correctly sets forth the terms and conditions of our Agreement,
please indicate the acceptance thereof by DepoMed in the space provided below
and return an original counterpart of this Agreement to the address first shown
above.  The other original counterpart should be retained in your files.  Thank
you.

                              Sincerely,

                              BRISTOL-MYERS SQUIBB COMPANY


                              By:   /s/  Robert A. Lipper
                                    ------------------------------------------
                              Title:    Vice President, Biopharmaceutics R&D
                                    ------------------------------------------

Accepted and agreed this 15th
day of July, 1996

DEPOMED, INC.


By:   /s/  John W. Shell
      ----------------------
Title:      President
      ----------------------

<PAGE>
 
                                                                      Appendix A
                                                                     Page 1 of 2

RESEARCH PLAN
[**] FORMULATION DEVELOPMENT


[**]


** CONFIDENTIAL TREATMENT REQUESTED

<PAGE>
 
[**]



** CONFIDENTIAL TREATMENT REQUESTED



<PAGE>
 
THE SYMBOL '**' IS USED THROUGHOUT THIS EXHIBIT TO INDICATE THAT A PORTION OF
THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION

                                  EXHIBIT 10.3
                                  ------------


                             FEASIBILITY AGREEMENT



This Agreement is by and between DepoMed, Inc., 1170 B Chess Drive, Foster City,
CA 94404 (DepoMed), and GalaGen Inc., 4001 Lexington Avenue North, Arden Hills,
Minnesota 55126-2998 (GalaGen).

Whereas, both parties have entered into a Mutual Nondisclosure Agreement dated
April 3, 1995;

The parties hereto agree as follows:

1.     GalaGen will provide a quantity of their [**]to DepoMed for the purpose
of certain feasibility studies to be conducted by DepoMed and GalaGen according
to the Protocol and Research Plan (the "Studies") in Schedule A, and not for any
other purposes.

2.     The parties will perform such Studies and provide results of such Studies
to each other.

3.     Results of such Studies will be kept confidential from any third party by
DepoMed and GalaGen in accordance with the terms and conditions of the Mutual
Nondisclosure Agreement.  However, the parties may disclose the results from the
Studies to potential development and commercialization partners and investors
bound by similar terms of confidentiality as the Mutual Nondisclosure
 Agreement.

4.     DepoMed grants to GalaGen the right to use its proprietary technology and
know-how for testing purposes during the term of this Agreement and any
extensions.  Except as provided in Section 5.(c) below, rights to use DepoMed's
proprietary technology and know-how do not extend beyond the term of this
Agreement.

5.(a)  Rights to any invention invented by either party (including persons
obligated to assign inventions to either party) and resulting from such
Studies shall be assigned to DepoMed if pertaining solely to the drug delivery
technology of DepoMed or to GalaGen if pertaining solely to the [**]
technology of GalaGen. Any invention involving the use of DepoMed technology
to deliver an [**] shall be a "Joint Invention" assigned to DepoMed. None of
the present patent rights of either party shall be affected by this Agreement.
Neither Party shall receive any rights to use or

** Confidential Treatment Requested

<PAGE>
 
license any Products or technology of the other Party other than to perform the
Studies.

5.(b)  Should the results of this Agreement lead to a mutual decision to conduct
additional product development studies between the parties, then the parties
shall enter into an appropriate agreement that includes applicable intellectual
property and an exclusive option for a commercial license.  The terms of this
option to license and commercial license shall include, but not be limited to,
the following:

       5(b)i   Payments: Reasonable costs mutually agreed prior to the start of
               the Studies and related directly to the product development and
               incurred by DepoMed will be paid by GalaGen on a reimbursement
               basis.  The Parties shall mutually agree to appropriate milestone
               payments made by GalaGen to DepoMed.

       5(b)ii  Field: FIELD shall be the use or delivery of any [**]
               formulated with DepoMed technology delivered orally in humans and
               non-human animals.

       5(b)iii Territory: TERRITORY shall be all countries of the world.

       5(b)iv  Rights: RIGHTS shall be exclusive and royalty bearing.

5.(c)  Should the results of this Agreement lead to a decision by either party
not to conduct additional product development studies between the parties,
DepoMed agrees to offer to GalaGen an exclusive license of any patent or
technology based on a Joint Invention under commercially reasonable terms to be
negotiated in good faith.  Such offer shall be held open for a period of one (1)
year from the effective date of this Agreement.  Such license shall provide that
if during the two (2) year period following the effective date of the license,
GalaGen has not taken reasonable steps to commercially develop a product based
on such Joint Invention such license shall be renegotiated in good faith between
the parties.

6.     Neither party may, without the prior written consent of the other, file
or prosecute any patent application that effectively discloses Proprietary
Information received from the other, provided such consent shall not be
unreasonably withheld.

7.     GalaGen and DepoMed agree to use diligent efforts to complete the
research activities outlined in Schedule A.

8.     This Agreement shall be binding upon and inure to the benefit of the
successors and assignees of the parties hereto, but neither of the parties
hereto shall assign this Agreement without the prior written consent of the
other.


** Confidential Treatment Requested

                                      -2-

<PAGE>
 
9.     This Agreement may be terminated at any time by either party with written
notice to the other party and unless so terminated shall remain in effect for a
period of two (2) years from the date hereof.  The obligations regarding use of
transferred material and confidentiality shall survive termination of this
Agreement for the same period defined in the Mutual Nondisclosure Agreement.

10.    No modification or waiver of any of the provisions of this Agreement
shall be valid unless in writing and signed by both parties hereto.

11.    Each party receiving information under this Agreement or the Mutual
Nondisclosure Agreement agrees not to analyze or have a third party analyze any
tangible products or materials including Proprietary Information except for the
studies set forth in Schedule A, and all results of any such analysis shall be
considered results of the studies for the purposes of this Agreement and subject
to the obligations of Section 3 above.

12.    This Agreement embodies the entire understanding between the parties and
supersedes all previous Agreements, commitments, and writings with respect
thereto, excepting the Mutual Nondisclosure Agreement.

13.    The effective date of this Agreement is the date of the last signature
below.


AGREED

for DepoMed:



/s/  John W. Shell
- ---------------------
John W. Shell, Ph.D.
President & CEO


     13 May  1996
- ---------------------
(Date)


for GalaGen:



/s/  Peter N. Gray
- ---------------------
Peter N. Gray, Ph.D.
Vice President, Research and Development


     11 May 1996
- ---------------------
(Date)

                                      -3-

<PAGE>
 
                                   SCHEDULE A

                           PROTOCOL AND RESEARCH PLAN




[**]

** Confidential Treatment Requested

                                      -i-

<PAGE>
 
[**]

** Confidential Treatment Requested

                                      ii

<PAGE>
 
[**]

** Confidential Treatment Requested

                                     -iii-

<PAGE>
 
[**]

** Confidential Treatment Requested
                                     -iv-

<PAGE>
 
     Notes:  [**]

** Confidential Treatment Requested

                                      -v-



<PAGE>
 
                                 EXHIBIT 10.4



March 18, 1997

CSO Ventures, LLP
666 3/rd/ Avenue, 30/th/ Floor
New York, NY 10017

Attention:  Mr. Judson Cooper

Dear Judson:

This will confirm the retention of CSO Ventures, LLC ("CSO") by DepoMed, Inc.
(the "Company") as a consultant to the Company to provide business development,
operations and financial advisory services. This consulting engagement is
effective upon the closing of a $1 million bridge loan. Consulting services
shall be provided for a fixed minimum annual fee of $120,000 and for a term of
not less that one year, payable quarterly.

It is also understood that subsequent to the closing of the Company's initial
public offering, CSO will agree to continue its representation on the Company's
Board of Director's with one seat.

This agreement shall commence upon the closing of the bridge loan and shall
automatically be renewed for successive one-year periods unless either party
elects in writing to the other, at least 60 days before the anniversary date,
not to renew the term of this agreement. We also agree to negotiate in good
faith additional success fees for work performed in connection with financings,
merger and acquisition activity, strategic alliances and other corporate
transactions.
 Success fees for merger and acquisition activity, strategic
alliances and other corporate transactions shall be based on the standard Lehman
formula as follows: 5% of the first $1,000,000; 4% of the second $1,000,000; 3%
of the third $1,000,000; 2% of the next $7,000,000; and 1% of all amounts in
excess of $10,000,000.


Very truly yours,                       Agreed:

DepoMed, Inc.                           CSO Ventures, LLC

By:                                     By:

   /s/ John W. Shell                        /s/ Judson Cooper
________________________                ______________________
   John W. Shell, Ph.D.                    Judson Cooper
      Chairman



<PAGE>
 
                                  EXHIBIT 10.5
                                  ------------



                              W I T N E S S E T H:



THAT WHEREAS, Owner, as Landlord, did execute a Lease dated September 2, 1992
with Lessee, as Tenant, covering a portion of that certain real property
described in Exhibit "A" attached hereto and by this reference incorporated
herein; and

WHEREAS, Owner has previously executed, a deed of trust and note in the sum of
$7,225,000.00 dated October 4, 1988, in favor of UNION BANK (hereinafter
referred to as "Lender"), payable with interest and upon the terms and
conditions described therein, which deed of trust was recorded October 6, 1988,
as instrument No. 88135299 in the official Records of San Mateo County,
California;

WHEREAS, it is to the mutual benefit of the parties hereto that Lender has made
such loan to Owner;

NOW, THEREFORE, in consideration of the mutual benefits accruing to the parties
hereto and other valuable consideration, the receipt and sufficiency of which
consideration are hereby acknowledged, it is hereby declared, understood and
agreed as follows:

     1.   That Lender would not have made the loan described above without the
          right to have Lessee enter into this Agreement.

     2.   That this Agreement shall be the whole and only agreement between the
          parties hereto and shall supersede and
 cancel any prior agreements as
          to those provisions contained in the Lease above mentioned, which may
          or do provide for the subordination of the Lease and leasehold
          interest of Lessee to the deed or deeds of trust or a mortgage or
          mortgages to be thereafter executed.

     3.   Lessee and Owner hereby agree and the recordation of this Agreement by
          or on behalf of Lender shall constitute Lender's agreement as follows:

          (a)  In the event of foreclosure of said deed of trust, Lender will
               not join Lessee in any summary proceedings so long as Lessee is
               not in default under any of the terms, covenants or conditions of
               the Lease.

          (b)  It is the express intent of the parties hereto that a foreclosure
               of said deed of trust, the exercise of the power of sale, or the
               exercise of any other remedies provided therein, or provided in
               any other instruments securing the indebtedness

<PAGE>
 
               secured by said deed of trust, or the delivery of a deed to the
               subject premises in lieu of foreclosure, shall not, of itself,
               result in the termination of or otherwise affect the Lease, but
               Lender and any purchaser or other grantee upon foreclosure of
               said deed of trust or conveyance in lieu of foreclosure shall
               thereby automatically succeed to the position of Owner under the
               Lease.

          (c)  If, by dispossession, foreclosure, exercise of the power of sale,
               or otherwise, Lender, its successors or assigns, or any purchaser
               at the foreclosure sale, or otherwise, shall come into possession
               of or become the owner of the premises demised by the Lease, such
               person shall succeed to the interest of Owner under the Lease,
               and, if no default then exists under the terms, conditions and
               provisions of the Lease, the Lease shall remain in effect as a
               lease of said demised premises, together with all of the rights
               and privileges therein contained, between such person and Lessee
               for the balance of the term of the Lease between Owner and
               Lessee.

               Lessee agrees to attorn to accept such person as Lessor under the
               Lease and to be bound by and to perform all of the obligations
               imposed by the Lease upon the Lessee therein, and Lender, its
               successors or assigns, or any purchaser at a foreclosure or
               trustee's sale, or otherwise, will not disturb the possession of
               Lessee and will be bound by all of the obligations imposed by the
               Lease upon the Lessor therein; provided, however, that Lender, or
               any purchaser at a foreclosure or trustee's sale or otherwise
               shall not be

                    (i)  liable for any act or omission of a prior lessor
                         (including Owner); or

                   (ii)  subject to any offsets or defenses which Lessee might
                         have against any prior lessor (including Owner); or

                  (iii)  bound by any rent or additional rent which Lessee might
                         have paid in advance to any prior lessor (including
                         Owner) for any period beyond the month in which the
                         foreclosure, sale termination or conveyance occurs; or

                   (iv)  bound by any agreement or modification of the Lease
                         made without the consent of Lender.

                                      -2-

<PAGE>
 
          (d)  Upon the written request of either Lessee or Lender given to the
               other at the time of a foreclosure of said deed of trust or sale
               under power of sale therein contained or conveyance in lieu of
               foreclosure, and if no default then exists under the terms,
               conditions and provisions of the Lease, Lessee and Lender agree
               to execute a lease of the premises demised by the Lease upon the
               same terms and conditions as the Lease between Owner and Lessee,
               which lease shall cover any unexpired terms of the Lease existing
               prior to such foreclosure, trustee's sale or conveyance in lieu
               of foreclosure.

     4.   This Agreement shall be binding upon and inure to the benefit of
          Lender and the parties hereto and their respective successors and
          assigns upon recordation by or on behalf of Lender.


LESSEE                              OWNER


DepoMed Systems, Inc.,              1170 Chess Drive Limited
a California Corporation            Partnership,
                                    a Texas Limited Partnership


BY:/s/  John W. Shell               BY:
   --------------------------          ------------------------
                                         J. McDonald Williams,
                                         General Partner

                                    BY:  Trammell Crow Foundation,
                                         Ltd., a Texas Limited
                                         Partnership,
                                         General Partner

UNION BANK                             BY: TCF, Inc., a Texas
                                       Corporation, General Partner

BY_________________________              BY:___________________  
Daniel L. Rosenbaum,                         Trammell Crow,
Assistant Vice President                     President



BY_________________________
  Kathleen A. Ormseth,
  Vice President & Manager

                                      -3-

<PAGE>
 
                      This page intentionally left blank.

                                      -4-

<PAGE>
 
                                   EXHIBIT A

                                        
Attached to and made a part of Non-Disturbance and Attornment Agreement

  All that property situated in the State of California, County of San Mateo,
  City of Foster City described as follows:

  PARCEL I
  --------

  Lots 23, 24 and a portion of Lot 29, as designated on the map entitled "Tract
  No. 820 Foster City- Industrial Park No. 1 in unincorporated territory San
  Mateo County, California", which map was filed in the office of the recorder
  of the County of San Mateo, State of California on January 15, 1964 in Book 59
  of Maps at Pages 35, 36 and 37, said portion of Lot 29 being are particularly
  described as follows:

  Beginning at the most Southerly Corner of said Lot 29; thence from said point
  of beginning along the Southwesterly Line of said Lot 29, North 47 degrees 48'
  14" West 218.63 feet; thence North 3 degrees 33' 57" West 134.12 feet; thence
  along the Northerly line of said Lot 29 North 86 degrees 26' 03" East 33.97
  feet; thence crossing Lot 29, South 35 degrees 47' 43" East 297.54 feet to a
  point on the Northwesterly line of Chess Drive as shown on said Map; thence
  along said Northwesterly line South 42 degrees 11' 46" West 56.00 feet to the
  point of beginning.

  This deed is made and accepted upon the covenants and restrictions set forth
  in that Declaration of Restrictions recorded January 15, 1964 in Book 4628 of
  Official Records, San Mateo County at Page 1, and the amendment thereto
  recorded March 18, 1966 in Book 5130 of Official Records, San Mateo County at
  Page 138, all of which are incorporated herein by reference to said
  Declaration with the sam effect as though fully set forth herein.

  PARCEL 2
  --------

  Parcel A as said Parcel is shown on the certain map entitled "Parcel Map 8-73
  in the incorporated territory of the City of Foster City, County of San Mateo,
  State of California, being a resubdivision of Parcels A & B of parcel map
  recorded in Book 12 of parcel maps at Page 21, and also being a resubdivision
  of Lots 25 and 26 Tract No. 820, Foster City, Industrial Park Unit No. 1,
  recorded in Book 59 of Maps at Pages 35 to 37 inclusive, San Mateo County
  Records", which map was filed in the office of the Recorder of the County of
  San Mateo, State of California on July 6, 1973 in Book 21 of Parcel Maps, Page
  19.

  PARCEL 3
  --------

  Parcel "B" as said parcel is shown on that certain nor entitled "Parcel Map 8-
  73 in the incorporated territory of the City of

                                      -5-

<PAGE>
 
  Foster City, County of San Mateo, State of California being a resubdivision of
  Parcel A & B of parcel map recorded in Book 12 of parcel maps at Page 21 and
  also being a resubdivision of Lots 25 & 26 Tract No. 820, Foster City-
  Industrial Park Unit No. 1 recorded in Volume 59 of Maps at Page 35 to 37
  inclusive, San Mateo County Records", which map was filed in the Office of the
  Recorder of the County of San Mateo, State of California on July 6, 1973 in
  Volume 21 of parcel maps at Page 19.

  PARCEL 4
  --------

  Together with a non-exclusive easement for ingress and egress over and across
  the South 10 feet of the West 62 feet of Parcel "C" as said Parcel is shown on
  that certain map entitled "Parcel Map 8-73 in the incorporated territory of
  the City of Foster City, County of San Mateo, State of California being a
  resubdivision of Parcels A & B of parcel map recorded in Book 12 of parcel
  maps at Page 21 and also being a resubdivision of Lots 25 and 26 Tract No.
  820, Foster City-Industrial Park Unit No. 1 recorded in Volume 59 of Maps at
  Pages 35 to 37 inclusive, San Mateo County Records", which map was filed in
  the Office of the Recorder of the County of San Mateo, State of California on
  July 6, 1973 in Volume 21 of parcel maps at Page 19.

                                      -6-

<PAGE>
 
State of California           )
County of California          )


On February 2, 1993 before me, Judith I. Berrett, personally appeared JOHN W.
SHELL, President of DepoMed Systems, Inc. personally known to me (or proved to
me on the basis of satisfactory evidence) to be the person whose name is
subscribed to the within instrument and acknowledged to me that he executed the
same in his authorized capacity, and that by his signature on the instrument the
person, or the entity upon behalf of which the person acted, executed the
instrument.

    WITNESS my hand and official seal.


Signature:  /s/ Judith I. Berrett
            ------------------------

                                                 [OFFICIAL STAMP]


State of California          )
County of ___________________)


On _________  __ ____, before me, _____________________, personally appeared
__________  personally known to me (or proved to me on the basis of satisfactory
evidence) to be the person(s) whose name(s) is/are subscribed to the within
instrument and acknowledged to me that he/she/they executed the same in
his/her/their authorized capacity(ies), and that by his/her/their signature(s)
on the instrument the person(s), or the entity upon behalf of which the
person(s) acted, executed the instrument.

  WITNESS my hand and official seal.

Signature: 
           --------------------


State of California             )
County of ______________________)

On _________  __ ____, before me, _____________________, personally appeared
________________  personally known to me (or proved to me on the basis of
satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to
the within instrument and acknowledged to me that he/she/they executed the same
in his/her/their authorized capacity(ies), and that by his/her/their
signature(s) on the instrument the person(s), or the entity upon behalf of which
the person(s) acted, executed the instrument.

  WITNESS my hand and official seal.

Signature: 
           ----------------------

                                      -7-

<PAGE>
 
                                   EXHIBIT B
                                        
                          TENANT ESTOPPEL CERTIFICATE

Tenant:    Depomed Systems, Inc.
           ---------------------

THIS IS TO CERTIFY:

  1.    That the undersigned is the Tenant under that certain Lease dated
                                                                         
September 15, 1992, by and between 1170 Chess Drive Limited Partnership
- ------------------                 ------------------------------------
("Landlord") and the undersigned ("Tenant") covering  those certain premises as
more particularly described in the Lease (the "Premises").

  2.    A true and correct copy of the Lease and all amendments thereto is
attached hereto as Exhibit A. The Lease is in full force and effect and is the
                   ---------                                                  
only lease or agreement between the Tenant and the Landlord affecting the
Premises.

  3.    To the best of Tenant's knowledge, the information set forth below is
true and correct:


<TABLE> 

<S>                                                <C>     
     (a)  Square footage of the premises:            3,300
                                                     -------
     (b)  Annual rent as of the commencement
          of Lease:                                  31,680
                                                     ------
     (c)  Current annual rent (if different 
          than at commencement):
     (d)  Lease term commenced:                      9/15/92
                                                     -------
     (e)  Lease termination date:                    3/31/95
                                                     -------
     (f)  Rent is paid to and                        
          including:                                 4/30/93
                                                     ------- 
     (g)  Security Deposit:                          3,389
                                                     -------
     (h)  Prepaid rent for and in                    0
          amount of:                                 -------

     (i)  Current charges outstanding
          as of 4/8/93
                ------
</TABLE>
 
 

<TABLE> 
<CAPTION> 

     DATE        AMOUNT           DESCRIPTION
     ----        ------           -----------
     <S>         <C>              <C>   
     3/26/93     $455.89          Electric billback (2/2-3/4)
     -------     -------          ---------------------------
     3/26/93     $122.93          Gas billback (2/2-3/4)
     -------     -------          ---------------------------
</TABLE>


     4.     The Tenant, unless otherwise stated on Exhibit B, now occupies the
Premises, accepts the Premises in their current condition, and is not aware of
any defect in the Premises.  No rent has been collected in the current month
other than disclosed in Paragraph 3 above.  No free rent or other concessions
benefits, or inducements other than as specified in the lease have been granted
to Tenant or undertaken by Landlord.

     5.   The Tenant has not been granted any renewal, expansion or purchase
options and has not been granted any rights of first refusal except as disclosed
in writing in the Lease.

                                      -1-

<PAGE>
 
     6.   Neither Tenant nor Landlord is in default under the Lease and there
has not occurred any event, which by notice or lapse of time or both or
otherwise, will result in any default.

     7.   As of the date hereof and except as set forth in the Lease, the
undersigned is entitled to no credit, offset, or deduction in rent.  Tenant
knows of no liabilities or obligations of Landlord which have accrued but are
unsatisfied under the Lease as of the date of this Certificate.

     8.   To the best of Tenant's knowledge, there are no actions, whether
voluntary or otherwise, pending against the undersigned under the Bankruptcy
laws or other laws for the relief of debtors of the United States or any state
thereof.

DATED this 21st day of April, 1993.
           ----        -----       


                              Tenant

                              Depomed Systems Inc.
                              -------------------------


                              -------------------------
                              a California corporation

 
                              By: /s/ John W. Shell
                                  ----------------------

                              Its:   President & CEO
                                   ---------------------



<PAGE>
 
                                 EXHIBIT 10.6
                                 ------------

                           FIRST AMENDMENT TO LEASE


     THIS FIRST AMENDMENT TO LEASE ("First Amendment") is effective as of
January 1, 1996, by and between SKW II Real Estate Limited Partnership, a
Delaware limited partnership ("Landlord"), and DepoMed, Inc., a California
corporation ("Tenant").

                                    RECITALS
                                    --------

     A.  Original Lease.  Pursuant to that certain Lease dated as of September
         --------------                                                       
2, 1992 (the "Original Lease"), Landlord's predecessor-in-interest, 1170 Chess
Drive Limited Partnership, a Texas limited partnership, leased to Tenant's
predecessor in interest, DepoMed Systems, Inc., a California corporation,
certain premises consisting of approximately 3,300 rentable square feet commonly
known as and located at 1170 B Chess Drive, Foster City, California (the
"Premises"), more particularly described in the Original Lease.  Unless defined
otherwise in this First Amendment, all defined terms used in this First
Amendment shall have the same meaning and definition as given them in the
Original Lease.

     B.  Lease.  The Original Lease, as amended by this First Amendment, shall
         -----                                                                
be referred to herein as the "Lease."

     C.  Purpose.  Landlord and Tenant desire to amend the Original Lease as
         -------                                                            
more fully set forth herein.


                                   AGREEMENT
                                   ---------

     NOW, THEREFORE, for good and valuable consideration,
 the receipt and
adequacy of which are hereby acknowledged, Landlord and Tenant hereby agree that
the Original Lease shall be amended as follows:

     1.  Term.  The Basis Lease Information and paragraph 3 of the Original
         ----                                                              
Lease are hereby amended by addition of the following:

          The term of the Lease is extended for a period of 36 months,
          commencing March 1, 1996 and terminating February 28, 1999.

     2.   Base Rent.  The Basic Lease Information and paragraphs 6 and 38 of the
          ---------                                                             
Original Lease are hereby amended by addition of the following:

<PAGE>
 
          The Base Rent for the Premises payable by Tenant hereunder shall be as
          follows:

          Monthly Period         Monthly Rate           Base Rent Per Month
          --------------         ------------           -------------------

          03/01/96-02/28/97      $0.96 NNN/Square Feet  $3,168.00
          03/01/97-02/28/98      $0.98 NNN/Square Feet  $3,234.00
          03/01/98-02/28/99      $1.00 NNN/Square Feet  $3,300.00

     3.   Tenant Improvements.  Paragraph 39 of the Original Lease is deleted in
          -------------------                                                   
its entirety and the following is substituted in its place:

          Tenant shall lease the Premises in an "as-is, where-is" condition,
          with all faults.

     4.   Landlord's Address.  The paragraph in the Basis Lease Information of
          ------------------                                                  
the Original Lease entitled "Landlord's Address" is deleted in its entirety and
the following is substituted in its place:

          Landlord's Address:  SKW II Real Estate Limited
                               Partnership
                               c/o Lincoln Property Company
                               101 Lincoln Centre Drive
                               Foster City, California 94404-1167
                               Telephone:  (415) 571-2200
                               Facsimile:  (415) 571-2211

     5.   Brokers.  The paragraph in the Basis Lease Information of the Original
          -------                                                               
Lease entitled "Broker" is deleted in its entirely and the following is
substituted in its place:

          Broker:  CB Commercial and Lincoln Property Company.  Landlord shall
          pay a brokerage commission to Broker in accordance with a separate
          agreement between Landlord and Broker.  Tenant hereby makes to
          Landlord the warranty set forth in paragraph 36 of the Original Lease
          with respect to the Broker referenced above.

     6.   Security Deposit.  Landlord and Tenant hereto acknowledge and agree
          ----------------                                                   
that upon execution of this First Amendment, Landlord is holding a deposit in
the sum of $3,389.00 as security for the performance and observance by Tenant of
all Tenant's obligations under the Original Lease.

     7.   Full Force And Effect.  Except as expressly provided in this First
          ---------------------                                             
Amendment, the Original Lease shall remain in full force and effect for the
entire remaining Term and any extensions thereof, and the terms and provisions
of the Original Lease shall remain unchanged except as modified by this First
Amendment.

                                      -2-

<PAGE>
 
     8.   First Amendment Shall Prevail.  In the event of any conflict or
          -----------------------------                                  
inconsistency between the terms and provisions of the Original Lease and the
terms and provisions of this First Amendment,the terms and provisions of this
First Amendment shall prevail.


     IN WITNESS WHEREOF, the parties have executed this First Amendment
effective as of the date first set forth above.


LANDLORD;                                TENANT:


SKW II REAL ESTATE LIMITED               DEPOMED, INC.
PARTNERSHIP, a Delaware limited          a California corporation
partnership



By:  SKW II GEN-PAR, INC.,               By: /s/  John W. Shell
     a Delaware corporation, General         --------------------
     Partner                        
                                         Name:   John W. Shell
                                                 -------------

                                         Title:  President
                                                 ---------


By: /s/ Derrick E. McGavis
    ------------------------------
    Derrick E. McGavic
    Assistant Vice President

                                      -3-



<PAGE>
 
                                                                    EXHIBIT 11.1
 
                                 DEPOMED, INC.
                STATEMENT RE: COMPUTATION OF NET LOSS PER SHARE
 

<TABLE>
<CAPTION>
                                        PERIOD FROM INCEPTION
                                         (AUGUST 7, 1995) TO     YEAR ENDED
                                          DECEMBER 31, 1995   DECEMBER 31, 1996
                                        --------------------- -----------------
<S>                                     <C>                   <C>
Weighted average common shares
 outstanding..........................        2,859,992           3,285,747
Common equivalent shares pursuant to
 Staff Accounting Bulletin Nos. 55, 64
 and 83...............................          184,117             184,117
                                              ---------           ---------
Shares used in computing net loss per
 share................................        3,044,109           3,469,864
                                              =========           =========
Shares used in computing pro forma net
 loss per share:
  Shares from above...................                            3,469,864
  Assumed conversion of preferred
   stock at the date of issuance......                              815,789
                                                                  ---------
  Shares used in computing pro forma
   net loss per share.................                            4,285,653
                                                                  =========
</TABLE>






<PAGE>
 
                                                                    EXHIBIT 23.1
 
               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
  We consent to the references to our firm under the captions "Selected
Financial Data"and "Experts" and to the use of our report dated January 31,
1997 (except for Note 9, as to which the date is April  , 1997) with respect to
the financial statements of DepoMed, Inc. and our report dated January 31, 1997
with respect to the statement of direct expenses of DepoMed Systems Division of
M6 Pharmaceuticals, Inc., in the Registration Statement (Form SB-2) and related
Prospectus of DepoMed, Inc., for the registration of shares of its common
stock.
 
 
Palo Alto, California
   1997
 
 
- --------------------------------------------------------------------------------
 
  The foregoing consent is in the form that will be signed upon completion of
the one-for-three reverse common stock split as described in Note 9 to the
financial statements of DepoMed, Inc.
 
                                                          /s/ Ernst & Young LLP
Palo Alto, California
April 17, 1997





<TABLE> <S> <C>


<PAGE>
<ARTICLE> 5
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1996
<PERIOD-START>                             JAN-01-1996
<PERIOD-END>                               DEC-31-1996
<CASH>                                          10,802
<SECURITIES>                                         0
<RECEIVABLES>                                  120,898
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                               163,237
<PP&E>                                         200,251
<DEPRECIATION>                                  45,112
<TOTAL-ASSETS>                                 333,127
<CURRENT-LIABILITIES>                          679,925
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                    682,759
<COMMON>                                       284,250
<OTHER-SE>                                    (275,000)
<TOTAL-LIABILITY-AND-EQUITY>                   333,127
<SALES>                                              0
<TOTAL-REVENUES>                               317,971
<CGS>                                                0
<TOTAL-COSTS>                                  784,172
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                               6,572
<INCOME-PRETAX>                               (472,773)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                                  0
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                  (472,773)
<EPS-PRIMARY>                                    (0.11)
<EPS-DILUTED>                                    (0.11)
        

</TABLE>