<PAGE>
 
     
  AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1997     
                                                   
                                                REGISTRATION NO. 333-25445     
================================================================================
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                ---------------
                                
                             AMENDMENT NO. 1     
                                       
                                    TO     
                                   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: [_]
 
                                ---------------
 
  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 JUNE 17, 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 908,622 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 either
independently or jointly certain over-the-counter ("OTC") products utilizing
off-patent drugs in 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 (a protein of the immune system) 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
 
                                       3

<PAGE>
 
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
patterns for drugs of almost any solubility and the ability to use drug
combinations previously not feasible due to the pharmacokinetic (absorption,
distribution, metabolism and excretion) 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
products using off-patent and/or OTC drugs 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."
   
AMEX symbols:     
 
  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 as of March 31, 1997. In April 1997, the Board of
    Directors approved an increase of 250,000 shares to the Stock Plan. In
    April and June 1997, the Board of Directors granted options to purchase
    71,666 and 68,333 shares of Common Stock, respectively, at a weighted
    average exercise price of $4.30 per share. See "Management--1995 Stock
    Option Plan."     
       
                                       5

<PAGE>
 
                         SUMMARY FINANCIAL INFORMATION

<TABLE>   
<CAPTION>
                             INCEPTION                  THREE MONTHS ENDED           
                          (AUGUST 7, 1995)  YEAR ENDED       MARCH 31,               
                          TO DECEMBER 31,  DECEMBER 31, --------------------      
                                1995           1996       1996       1997
                          ---------------- ------------ ---------  ---------
<S>                       <C>              <C>          <C>        <C>        
STATEMENTS OF OPERATIONS
 DATA:
Product development rev-
 enue...................     $     --       $ 317,971   $     --   $ 127,039
Operating expenses:
  Research and develop-
   ment.................       138,816        390,496     104,852    135,788
  General and adminis-
   trative..............       155,157        393,676     129,305    170,499
  Purchase of in-process
   research and develop-
   ment.................       298,154            --          --         --
                             ---------      ---------   ---------  ---------
    Total operating ex-
     penses.............       592,127        784,172     234,157    306,287
Loss from operations....      (592,127)      (466,201)   (234,157)  (179,248)
Interest expense, net...         8,541          6,572        (419)     4,470
                             ---------      ---------   ---------  ---------
Net loss................     $(600,668)     $(472,773)  $(233,738) $(183,718)
                             =========      =========   =========  =========
Pro forma net loss per
 share..................                    $   (0.11)  $   (0.05) $   (0.04)
                                            =========   =========  =========
Shares used in computing
 pro forma net loss per
 share(1)...............                    4,312,910   4,290,321  4,444,682
                                            =========   =========  =========
</TABLE>
    
 

<TABLE>   
<CAPTION>
                          MARCH 31, 1997
                    ---------------------------
                                   PRO FORMA
                      ACTUAL     AS ADJUSTED(2)
                    -----------  --------------
<S>       <C>       <C>          <C>
BALANCE SHEET DATA:
Working capital
 (deficit)......... $  (413,071)  $13,586,929
Total assets.......     536,885    14,238,763
Notes payable to
 shareholders......     298,122           --
Deficit accumulated
 during the devel-
 opment stage......  (1,257,159)   (1,257,159)
Total shareholders'
 equity (net capi-
 tal deficiency)...    (265,379)   13,734,621
</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 Bridge Financing, and (ii) 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 March 31, 1997, the
Company had an accumulated deficit of $1,257,159 and a working capital deficit
of $413,071. 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" modification, 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 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."     
 
                                       7

<PAGE>
 
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 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 agencies 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 fund the continued
development of the DepoMed Systems, 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.     
 
  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
 
                                       8

<PAGE>
 
   
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. See "Business--
Collaborative Relationships."     
 
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. Other
companies that have oral drug delivery technologies that are competitive with
the DepoMed Systems include ALZA Corporation ("ALZA"), Elan Corporation plc
("Elan"), Jago Pharma AG ("JAGO"), Skyepharma plc ("Skye"), Dura
Pharmaceuticals, Inc. ("Dura"), Kos Pharmaceuticals, Inc. ("Kos") and Flamel
Aromatic SA ("Flamel"), all of which have oral tablet products designed to
release the incorporated drugs over time. Each of these companies has a
patented technology with attributes different from those of the Company's, and
in some cases with different sites of delivery to the GI tract. 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 all 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 drugs 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, FDA withdrawal of approved
applications or 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
 
                                       9

<PAGE>
 
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, 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 drug 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.     
   
  Most OTC products are subject to an OTC monograph issued by the FDA. If an
OTC product complies with an FDA monograph, it will not require the submission
and approval of an NDA to be lawfully marketed. Such products are subject to
various FDA regulations such as FDA's 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 product labeling, and the requirement
that in addition to active ingredients OTC drugs contain only safe and 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. If an OTC product
differs from the terms of a monograph, it will, in most cases, require FDA
approval of an NDA for the product to be marketed.     
 
  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. 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
 
                                       10

<PAGE>
 
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 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 generally 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 three pending United States patent applications, and has
applied for patents in numerous foreign countries, some of which have been
granted and others are still 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     
 
                                       11

<PAGE>
 
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 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."
 
                                       12

<PAGE>
 
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 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 has
applied for key man life insurance on the lives of Drs. Shell and Fara in the
amount of $2,000,000 each. Management and scientific personnel 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
 
                                       13

<PAGE>
 
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."
 
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 [165% of the initial public offering price
per share of Common Stock] and $    per Warrant [165% 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."     
 
                                      14

<PAGE>
 
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:
(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 17% 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 $4.47 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
 
                                      15

<PAGE>
 
   
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. In April 1997,
the Board of Directors approved an increase of 250,000 shares to the Stock
Plan. In April and June 1997, the Board of Directors granted options to
purchase 71,666 and 68,333 shares of Common Stock, respectively, at a weighted
average exercise price of $4.30 per share.     
 
  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 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............ $ 8,000,000         58%
   Laboratory and facilities capital
    expenditures................................   2,000,000         14%
   Repayment of certain indebtedness............   1,600,000         11%
   Working capital and general corporate
    purposes....................................   2,400,000         17%
                                                 -----------        ---
     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
$47,455 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. Further, 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. 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. See "Risk Factors--Need for Substantial Additional Funds."
    
                                      17

<PAGE>
 
  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.
 
                                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.
 
 
                                       18

<PAGE>
 
                                CAPITALIZATION
   
  The following table sets forth the capitalization of the Company as of March
31, 1997 (i) on an actual basis, and (ii) pro forma as adjusted to give effect
to (a) the Bridge Financing, (b) 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 (c) the conversion of
the Preferred Stock into 908,622 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>
                                                    AS OF MARCH 31, 1997
                                              ----------------------------------
                                                ACTUAL     PRO FORMA AS ADJUSTED
                                              -----------  ---------------------
<S>                                           <C>          <C>
Shareholders' equity (net capital
 deficiency):
  Preferred stock, no par value, 10,000,000
   shares authorized, 2,725,868 shares issued
   and outstanding, actual; 5,000,000 shares
   authorized, none issued and outstanding,
   pro forma as adjusted..................... $   961,259       $       --
  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)...............................     382,250        15,343,509
Deferred compensation........................    (351,729)         (351,729)
Deficit accumulated during the development
 stage.......................................  (1,257,159)       (1,257,159)
                                              -----------       -----------
  Total shareholders' equity (net capital
   deficiency)............................... $  (265,379)      $13,734,621
                                              ===========       ===========
</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 as of March 31, 1997. In April 1997, the Board of Directors
    approved an increase of 250,000 shares to the Stock Plan. In April and
    June 1997, the Board of Directors granted options to purchase 71,666 and
    68,333 shares of Common Stock, respectively, at a weighted average
    exercise price of $4.30 per share. See "Management--1995 Stock Option
    Plan."     
 
                                      19

<PAGE>
 
                                   DILUTION
   
  As of March 31, 1997, the pro forma net tangible book value (deficit) of the
Company's Common Stock was $(265,379), or approximately $(0.06) per share of
Common Stock after giving effect to (i) the Bridge Financing and (ii) 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 March 31, 1997 would have been $13,734,621, or approximately $2.03
per share of Common Stock. This represents an immediate increase in net
tangible book value of $2.09 per share of Common Stock to existing
shareholders of Common Stock and an immediate dilution in net tangible book
value of $4.47 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................................................  (0.06)
   Increase per share attributable to this Offering..............   2.09
                                                                   -----
   Pro forma net tangible book value per share after this
    Offering.....................................................          2.03
                                                                          -----
   Dilution per share to new investors...........................         $4.47
                                                                          =====
</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 March 31, 1997 would have been
$15,932,965 or $2.23 per share of Common Stock, resulting in dilution to new
investors of $4.27 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 March 31, 1997, 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%  $17,287,750   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 as of March 31, 1997. In April 1997, the Board of Directors
    approved an increase of 250,000 shares to the Stock Plan. In April and
    June 1997, the Board of Directors granted options to purchase 71,666 and
    68,333 shares of Common Stock, respectively, at a weighted average
    exercise price of $4.30 per share. See "Management--1995 Stock Option
    Plan."     
(2) Reflects no proceeds received from the sale of the Warrants.
 
                                      20

<PAGE>
 
                            SELECTED FINANCIAL DATA
   
  The selected statements of operations data for the period from inception
(August 7, 1995) to December 31, 1995 and for the year ended December 31, 1996
and the balance sheet data at December 31, 1996 are derived from financial
statements of the Company which have been audited by Ernst & Young LLP,
independent auditors. The selected historical information as of March 31, 1997
and for the three months ended March 31, 1996 and 1997 and for the period from
inception (August 7, 1995) to March 31, 1997 are derived from unaudited
interim financial statements of the Company which are included elsewhere in
this Prospectus and include, in the opinion of management, all adjustments
(consisting only of normal, recurring adjustments) necessary for the fair
presentation of its results for such periods. Results for the three months
ended March 31, 1997 are not necessarily indicative of results for any other
interim period or for the entire year. 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>
                                                                               INCEPTION
                             INCEPTION                  THREE MONTHS ENDED    (AUGUST 7,
                          (AUGUST 7, 1995)  YEAR ENDED       MARCH 31,         1995) TO
                          TO DECEMBER 31,  DECEMBER 31, --------------------   MARCH 31,
                                1995           1996       1996       1997        1997
                          ---------------- ------------ ---------  ---------  -----------
STATEMENTS OF OPERATIONS
DATA:
<S>                       <C>              <C>          <C>        <C>        <C>
Product development
 revenue................     $     --       $ 317,971   $     --   $ 127,039  $   445,010
Operating expenses:
  Research and
   development..........       138,816        390,496     104,852    135,788      665,100
  General and
   administrative.......       155,157        393,676     129,305    170,499      719,332
  Purchase of in-process
   research and
   development..........       298,154            --          --         --       298,154
                             ---------      ---------   ---------  ---------  -----------
    Total operating
     expenses...........       592,127        784,172     234,157    306,287    1,682,586
Loss from operations....      (592,127)      (466,201)   (234,157)  (179,248)  (1,237,576)
Interest expense, net...         8,541          6,572        (419)     4,470       19,583
                             ---------      ---------   ---------  ---------  -----------
Net loss................     $(600,668)     $(472,773)  $(233,738) $(183,718) $(1,257,159)
                             =========      =========   =========  =========  ===========
Pro forma net loss per
 share..................                    $   (0.11)  $   (0.05) $   (0.04)
                                            =========   =========  =========
Shares used in computing
 pro forma net loss per
 share(1)...............                    4,312,910   4,290,321  4,444,682
                                            =========   =========  =========
</TABLE>
    
 

<TABLE>   
<CAPTION>
                              AS OF           AS OF
                        DECEMBER 31, 1996 MARCH 31, 1997
                        ----------------- --------------
<S>     <C>     <C>     <C>               <C>
BALANCE SHEETS DATA:
Working capital
 (deficit).............    $  (516,688)    $  (413,071)
Total assets...........        333,127         536,885
Notes payable to
 shareholders..........        294,238         298,122
Capital lease
 obligation, non-
 current portion.......         34,634          24,338
Deficit accumulated
 during development
 stage.................     (1,073,441)     (1,257,159)
Total shareholders'
 equity (net capital
 deficiency)...........       (381,432)       (265,379)
</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.
 
                                      21

<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
$1,257,159 for the period from its inception through March 31, 1997.     
 
  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.
   
 Three Months Ended March 31, 1996 and 1997     
   
  Revenue for the three months ended March 31, 1997 was $127,039 and consisted
entirely of amounts earned under the research and development arrangement with
BMS. There was no revenue earned for the three months ended March 31, 1996.
       
  Research and development expenses for the three months ended March 31, 1997
were $135,788, compared to $104,852 during the three months ended March 31,
1996. The increase was due to the hiring of additional employees and related
expenses.     
   
  General and administrative expenses for the three months ended March 31,
1997 were $170,499, compared to $129,305 during the three months ended March
31, 1996. The increase was due to the hiring of additional employees and
related expenses.     
 
                                      22

<PAGE>
 
 Year Ended December 31, 1996
   
  Revenue in 1996 was $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.
   
  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 $373,000 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 through March 31, 1997. The Company will record
approximately $144,000 of additional deferred compensation in its quarter
ending June 30, 1997 related to stock options granted in April and June 1997.
    
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. During the three months
ended March 31, 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 the three months ended March 31, 1997 was
$147,097 compared to $168,827 for the three months ended March 31, 1996.
During the three months ended March 31, 1997 increases in accounts payable and
accrued compensation approximated the increase in prepaid expenses, which were
expenses that are anticipated to be capitalized as expenses of the Offering.
During the three months ended March 31, 1996 increases in accrued
compensation, accounts payable and a reduction in current assets were offset
by the net loss and a decrease in other current liabilities.     
   
  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 in
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 in the three months ended March 31, 1997
totaled $19,533 and consisted of purchases of laboratory equipment, furniture
and office equipment. Cash provided by investing activities in the three
months ended March 31, 1996 totaled $45,924 and consisted of sales of short
term investments offset by purchases of laboratory equipment.     
 
  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,
 
                                      23

<PAGE>
 
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 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.
 
 
                                      24

<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 either
independently or jointly certain OTC and products utilizing off-patent drugs
in 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 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
off-patent drugs 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.     
 
 
                                      25

<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. The Company
believes that 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 (through the skin), 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 Company
believes that 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.
 
 
                                      26

<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 (complex organic compounds of high molecular weight,
     containing numerous amino acids) and peptides (low molecular weight
     compounds consisting of two or more amino acids), 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 off-patent drugs. 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, if taken with a meal, 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 upon ingestion. The cylinders
attain a size after ingestion sufficient to be retained in the stomach for
multiple hours while delivering the drug content.     
 
  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 Company believes that 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."     
 
 
                                      27

<PAGE>
 
   
  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, the bacterium which is a cause of
ulcers, and C. parvum, the bacterium that causes 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 (disease characterized by decreased bone density). 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 (general class of hormonal
agents), 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 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 a combination of
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. The Company believes 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.     
 
 
                                      28

<PAGE>
 
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 spherical pellets are composed of an inert matrix of polymeric
material in which the active ingredient is homogeneously dispersed in its
solid state. The spherical 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 spherical pellets
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 (a frequently used antibiotic) 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 (membraneous lining),
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 (morbidity) 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.     
 
                                      29

<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.
      
   COMPARATIVE IRRITATION RESPONSES IN THE RABBIT COLONIC MUCOSAL MODEL     
 
                             [GRAPH APPEARS HERE]
 
 
                                      30

<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
   -------   ----------------  -------------- ----------------  ----------------
   <S>       <C>               <C>            <C>               <C>
     GR      BMS Proprietary   Bristol-Myers  Confidential(2)   . Less frequent
             Compound          Squibb                             dosing
                               Company(1)
     GR      Anti-infective    GalaGen        C. parvum         . Prolonged,
             Immunoglobulin    Inc.(3)        intestinal          continuous
                                              infection           delivery for
                                                                  intestinal
                                                                  therapy
     GR      Anti-infective    GalaGen        H. pylori         . Prolonged,
             Immunoglobulin    Inc.(3)        gastric             continuous
                                              infection           delivery to
                                                                  gastric mucosa
     GR      Calcium           In-house       Osteoporosis,     . Improved
             Supplement                       other calcium       calcium
                                              deficiencies        absorption
     RI      Aspirin           In-house       Multiple,         . Reduced
                                              including           gastric
                                              cardiovascular      irritation
                                              therapy
                                                                . Prolonged low
                                                                  dose delivery
</TABLE>
    
- --------
   
(1) The Company entered into an option agreement relating to this compound
    with BMS in July 1996. See "--Collaborative Relationships."     
   
(2) The potential indication may not be disclosed pursuant to the terms of the
    agreement between the Company and BMS. See "--Collaborative
    Relationships."     
   
(3) The Company entered into a feasibility study relating to this
    immunoglobulin with GalaGen in May 1996. See "--Collaborative
    Relationships."     
   
  The products listed in the above table are in various stages of development.
For the BMS compound, a Phase I pharmacokinetic trial was completed in January
1997 and the product is now in advanced clinical testing. The GalaGen
immunoglobulins are being tested in vitro for the ability of the GR System to
protect and deliver the product in an acid and enzyme rich environment like
the stomach. The calcium supplement and aspirin products are in pre-clinical
development by the Company. As no clinical trials will be required for the
initial commercialization of the calcium supplement product, that product will
be available for manufacturing upon completion of development. The Company
expects to initiate a clinical trial for its reduced irritation aspirin
product during the first half of 1998. See "--Business Strategy" and "--
Government Regulation."     
 
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 product portfolio. By
providing new formulations of existing products using the DepoMed Systems, the
Company believes that it will not only be able to offer its 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     
 
                                      31

<PAGE>
 
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.
   
  In addition to the Company's current programs with BMS and GalaGen, the
Company's goal is to enter into one additional development program with a
major pharmaceutical company over the next twelve months. To meet this goal,
the Company has identified as potential partners six companies that the
Company believes have drugs which can derive potential benefits if
incorporated into the DepoMed Systems. The Company has initiated preliminary
discussions with several of these companies. There can be no assurance that
any of these discussions will lead to the Company's entering into a
development agreement with a collaborative partner or, if such agreement is
entered into, that such collaboration will lead to the successful development
of a product.     
   
  The Company also intends to develop OTC and/or off-patent drug 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 at costs below those of other drug delivery
systems, thereby enabling the Company and its collaborative partners to
compete more effectively in marketing improved off-patent and OTC drug
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.     
   
  Pursuant to this business strategy, two products utilizing the DepoMed
Systems are currently under development: an enhanced absorption OTC calcium
supplement product and a reduced irritation aspirin product. Since calcium
supplements are regarded as food supplements by the FDA rather than drugs, no
clinical trials are required. The Company, consequently, believes that
development time for the calcium supplement product will be shorter than
products that require FDA review and approval. The Company believes that an
OTC calcium supplement product can be developed by the Company and
commercialized within three years from the date of this Prospectus. During
that time, the Company will need to undertake studies to support its claims of
enhanced absorption, develop a manufacturing relationship with a contract
manufacturer and enter into a collaborative marketing arrangement for the
calcium supplement product. There can be no assurance that the studies will be
successfully completed or that the Company will be successful in entering into
a manufacturing relationship or marketing arrangement for the calcium
supplement within three years or at all, or, even if the Company does so, that
the product will be successfully commercialized.     
   
  The Company's reduced irritation aspirin product will require the submission
of an NDA to the FDA. Because clinical trials and FDA review and approval will
be required to support the claim of reduced gastric irritation relating to the
aspirin product, commercialization of the reduced irritation aspirin product
is expected to take at least one year longer than the OTC calcium supplement
product. There can be no assurance that the clinical trials will be successful
or that the Company will be successful in obtaining the required FDA approval
to market the reduced irritation aspirin product, or, if it does, that the
Company's reduced irritation aspirin product will be successfully
commercialized.     
   
  In addition to the calcium supplement and reduced irritation aspirin
products, the Company has a target list of off-patent drugs which the Company
believes can derive potential benefits if incorporated into the DepoMed     
 
                                      32

<PAGE>
 
   
Systems. The Company intends to select one such off-patent drug for
development within twelve months following completion of the Offering. There
can be no assurance that the Company will have sufficient funds to complete
the development of the off-patent drug product chosen or, even if developed,
that the product will be successfully commercialized.     
 
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 successfully 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
   
  Other companies that have oral drug delivery technologies that are
competitive with the DepoMed Systems include ALZA, Elan, JAGO, Skye, Dura,
KOS, and Flamel, all of which have oral tablet products designed to release
the incorporated drugs over time. Each of these companies has a patented
technology with attributes different from those of the Company's, and in some
cases with different sites of delivery to the GI tract. The Company believes
that it is the only drug delivery company that is currently developing
products for oral drug delivery systems both for enhanced retention in the
stomach of an orally administered tablet (the GR System) and the safer oral
administration of otherwise locally irritating drugs (the RI System). The
Company believes that this combination of oral drug delivery technologies
differentiates the Company from other oral drug delivery companies and will
enable the Company to interest pharmaceutical companies in incorporating their
proprietary drugs into the DepoMed Systems and to differentiate any OTC and/or
off-patent drugs that utilize the DepoMed Systems from those of other drug
delivery companies.     
   
  Competition in the areas of pharmaceutical products and drug delivery
systems is intense and is expected to become more intense in the future. 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 all 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     
 
                                      33

<PAGE>
 
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 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 three pending United States patent applications, and has
applied for patents in numerous foreign countries, some of which have been
granted and others of which are still 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
 
                                       34

<PAGE>
 
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.
 
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 (readily absorbing moisture), 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, which results
in very small spherical bodies. 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 generally 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     
 
                                      35

<PAGE>
 
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.
 
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 drugs 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, FDA withdrawal of approved
applications or 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 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 that comply with monographs issued by the FDA are subject to
various FDA regulations such as 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 safe and 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. If an OTC product differs from the terms of a
monograph, it will, in most cases, require FDA approval of an NDA for the
product to be marketed.     
 
 
                                      36

<PAGE>
 
  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 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.
 
 
                                      37

<PAGE>
 
 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 and 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.
 
  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 May 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 non-cancellable lease which expires on February 28, 1999,
and which includes an option to renew for an additional five years. 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.
 
                                      38

<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.....  72 Founder, Chairman of the Board and Chief Scientific Officer
John W. Fara, Ph.D......  54 President, Chief Executive Officer and Director
John N. Shell...........  44 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 the pharmaceutical division, 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 University
of California, Los Angeles.     
 
  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.
 
  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.
 
                                      39

<PAGE>
 
  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 (the "Board"). Mr. John N. Shell is Dr.
Shell's son. There are no other family relationships.     
   
  The Board currently has an Audit Committee consisting of Mr. Cooper and Dr.
Schein. 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.     
   
  The Company is currently seeking to appoint two independent directors to the
Board.     
 
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.
 
                                      40

<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.
 
                                      41

<PAGE>
 
  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            95,833    $26,710     $546,790
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 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 were 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 remained available for future option grants. In April 1997, the
Board approved an increase of 250,000 shares to the Stock Plan. In April and
June 1997, the Board of Directors granted options to purchase 71,666 and
68,333 shares of Common Stock, respectively, at a weighted average exercise
price of $4.30 per share.     
   
  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,
consultants and directors 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
 
                                      42

<PAGE>
 
   
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 a change in control of
the Company all outstanding options will become fully vested.     
 
  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.
   
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS     
   
  The Company entered into employment agreements with two-year terms with John
W. Fara and John W. Shell in February 1997. Pursuant to these agreements, Drs.
Fara and Shell each receive an annual base salary of $185,000. Dr. Fara's
agreement provides for him to receive his salary and benefits for the
remainder of the two-year term of the agreement in the event of his
termination without cause (as defined in the agreement) or in the event of his
involuntary termination following a change in control (as defined in the
agreement). Dr. Shell's employment agreement provides that either party may
terminate employment at any time upon 90 days written notice. Each employment
agreement provides that the employee will not disclose confidential
information of the Company during and after employment and will not compete
with the Company during the term of employment with the Company.     
       
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
intends to enter into indemnification agreements with each of its current
directors and officers.     
 
                                      43

<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. See "Principal Shareholders."     
 
  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 March 31, 1997,
the aggregate principal amount and related interest on the Shell Notes totaled
$173,747. 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 March 31, 1997, the aggregate principal amount of
the Stern Notes and related interest totaled $124,375. See "Use of Proceeds."
       
  Subsequent to December 31, 1996, the Company has granted options to purchase
Common Stock to officers and directors including options to purchase 66,667
shares of Common Stock to Dr. Fara and options to purchase 30,000 shares of
Common Stock to Mr. Hamilton at an exercise price of $3.00 per share of Common
Stock. In June 1997, the Company granted options to purchase 25,000 shares of
Common Stock to Mr. Hamilton at an exercise price of $5.25 per share of Common
Stock.     
 
                                      44

<PAGE>
 
                            PRINCIPAL SHAREHOLDERS
   
  The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 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, Inc. (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 May 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,
     Inc., formerly Cygnus Therapeutics Systems ("Cygnus") if certain
     conditions are met, including the timely tender for cancellation of
     certificates representing shares of M6 held by Cygnus. Cygnus, Inc.'s
     address is 400 Penobscot Drive, Redwood City, California 94063. Cygnus is
     engaged in the development of diagnostic and drug delivery systems, with
     its current efforts primarily focused on three core areas: a painless,
     automatic glucose monitoring device, transdermal drug delivery systems
     and mucosal drug delivery systems.     
 (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) Includes 400,000 shares of Common Stock held on behalf of Cygnus, of
     which Dr. Shell disclaims beneficial ownership. See footnote 4. Dr.
     Shell's address is 1170 B Chess Drive, Foster City, California 94404.
            
 (8) Includes 2,083 shares of Common Stock issuable upon exercise of
     outstanding options which will vest within 60 days of May 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 May 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 May 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.     
 
                                      45

<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.
 
 
                                      46

<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, strategic alliances, joint ventures or other corporate partnerships.
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
 
                                      47

<PAGE>
 
registered, qualified or deemed to be exempt under the securities laws of the
state of residence of the exercising 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.
 
                                      48

<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.
   
  As of March 31, 1997, options granted under the Stock Plan 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. 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. In April 1997, the Board of Directors approved an
increase of 250,000 shares to the Stock Plan. In April and June 1997, the
Board of Directors granted options to purchase 71,666 and 68,333 shares of
Common Stock, respectively. 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. The Representative has no general policy with
respect to the release of shares prior to the expiration of the lock-up period
and no present intention to waive or modify any of these restrictions on the
sale of Company securities. 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."     
 
                                      49

<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 [165% of the initial public offering
price per share of Common Stock] and $    per Warrant [165% 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.     
 
                                      50

<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. The Representative has no general policy with
respect to the release of shares prior to the expiration of the lock-up period
and no present intention to waive or modify any of these restrictions on the
sale of Company 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.
 
                                      51

<PAGE>
 
The factors considered in such negotiations, in addition to prevailing market
conditions, included the history of 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 and for the year
ended December 31, 1996 appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report 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.
 
                                      52

<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS
 

<TABLE>   
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Balance Sheets............................................................. 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
</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 and for
the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.     
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
          
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 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 and for the year ended December 31, 1996 in conformity
with generally accepted accounting principles.     
   
  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.     
   
Palo Alto, California January 31, 1997, except for Note 9, as to which the
date is     , 1997     
 
- -------------------------------------------------------------------------------
   
The foregoing report is in the form that will be signed upon completion of the
one-for-three reverse stock split described in Note 9 to the Financial
Statements.     
 
                                                          /s/ Ernst & Young LLP
   
Palo Alto, California June 16 1997     
 
                                      F-2

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

<TABLE>   
<CAPTION>
                                                                      PRO FORMA
                                                                    SHAREHOLDERS'
                                                                       EQUITY
                                                                    (NET CAPITAL
                                                                     DEFICIENCY)
                                         DECEMBER 31,   MARCH 31,     AT MARCH
                                             1996         1997        31, 1997
                                         ------------  -----------  -------------
                                                       (UNAUDITED)
<S>                                      <C>           <C>          <C>
                 ASSETS
Current assets:
  Cash and cash equivalents............. $    10,802   $  107,523
  Accounts receivable...................     120,898      114,301
  Other current assets..................      31,537      143,031
                                         -----------   ----------
    Total current assets................     163,237      364,855
Property and equipment, net.............     155,139      163,077
Other assets............................      14,751        8,953
                                         -----------   ----------
                                         $   333,127   $  536,885
                                         ===========   ==========
            LIABILITIES AND
          SHAREHOLDERS' EQUITY
        (NET CAPITAL DEFICIENCY)

Current liabilities:
  Accounts payable...................... $    51,746   $  125,241
  Accrued compensation..................     291,374      319,487
  Notes payable to shareholders.........     294,238      298,122

  Capital lease obligation, current
   portion..............................      19,803       14,950
  Other current liabilities.............      22,764       20,126
                                         -----------   ----------
    Total current liabilities...........     679,925      777,926
Capital lease obligation, non-current
 portion................................      34,634       24,338
Commitments
Shareholder's equity (net capital
 deficiency):
  Preferred stock, no par value,
   10,000,000 shares
   authorized (5,000,000 pro forma);
   2,447,368 and 2,725,868 shares issued
   and outstanding at December 31, 1996
   and March 31, 1997, respectively
   (none pro forma); aggregate
   liquidation preference of $750,000
   and $1,028,500 at December 31, 1996
   and March 31, 1997, respectively.....     682,759      961,259    $       --
  Common stock, no par value, 25,000,000
   shares
   authorized; 3,354,825 shares issued
   and outstanding at December 31, 1996
   and March 31, 1997, respectively,
   (4,263,447 shares pro forma).........     284,250      382,250      1,343,509
  Deferred compensation.................    (275,000)    (351,729)      (351,729)
  Deficit accumulated during the
   development stage....................  (1,073,441)  (1,257,159)    (1,257,159)
                                         -----------   ----------    -----------
    Total shareholders' equity (net
     capital deficiency)................    (381,432)    (265,379)   $  (265,379)
                                         -----------   ----------    -----------
                                         $   333,127   $  536,885
                                         ===========   ==========
</TABLE>
    
 
                            See accompanying notes.
 
                                      F-3

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

<TABLE>   
<CAPTION>
                                                                                 INCEPTION
                             INCEPTION                    THREE MONTHS ENDED    (AUGUST 7,
                          (AUGUST 7, 1995)  YEAR ENDED         MARCH 31,         1995) TO
                          TO DECEMBER 31,  DECEMBER 31, -----------------------  MARCH 31,
                                1995           1996        1996        1997        1997
                          ---------------- ------------ ----------- ----------- -----------  
                                                        (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S>                       <C>              <C>          <C>         <C>         <C>          
Product development
 revenue................     $     --       $ 317,971    $     --    $ 127,039  $   445,010
Operating expenses:
  Research and
   development..........       138,816        390,496      104,852     135,788      665,100
  General and
   administrative.......       155,157        393,676      129,305     170,499      719,332
  Purchase of in-process
   research and
   development..........       298,154            --           --          --       298,154
                             ---------      ---------    ---------   ---------  -----------
    Total operating
     expenses...........       592,127        784,172      234,157     306,287    1,682,586
Loss from operations....      (592,127)      (466,201)    (234,157)   (179,248)  (1,237,576)
Interest expense, net...         8,541          6,572         (419)      4,470       19,583
                             ---------      ---------    ---------   ---------  -----------
Net loss................     $(600,668)     $(472,773)   $(233,738)  $(183,718) $(1,257,159)
                             =========      =========    =========   =========  ===========
Pro forma net loss per
 share..................                    $   (0.11)   $   (0.05)  $   (0.04)
                                            =========    =========   =========
Shares used in computing
 pro forma net loss per
 share..................                    4,312,910    4,290,321   4,444,682
                                            =========    =========   =========
</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 MARCH 31, 1997     
 

<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)
Issuance of Series B
 convertible preferred
 stock to investors for
 cash at $1.00 per share
 (unaudited)............         278,500        278,500       --        --          --            --       278,500
Deferred compensation
 related to grants of
 certain stock options
 (unaudited)............             --             --        --     98,000     (98,000)          --           --
Amortization of deferred
 compensation
 (unaudited)............             --             --        --        --       21,271           --        21,271
Net loss (unaudited)....             --             --        --        --          --       (183,718)    (183,718)
                          --------------  ------------- --------- ---------  ----------  ------------   ----------
Balances at March 31,
 1997 (unaudited).......       2,725,868  $     961,259 3,354,825 $ 382,250  $ (351,729) $ (1,257,159)  $ (265,379)
                          ==============  ============= ========= =========  ==========  ============   ==========
</TABLE>
    
 
                                      F-5

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

<TABLE>   
<CAPTION>
                                                                                 INCEPTION
                             INCEPTION                    THREE MONTHS ENDED    (AUGUST 7,
                          (AUGUST 7, 1995)  YEAR ENDED         MARCH 31,         1995) TO
                          TO DECEMBER 31,  DECEMBER 31, -----------------------  MARCH 31,
                                1995           1996        1996        1997        1997
                          ---------------- ------------ ----------- ----------- -----------
                                                        (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S>                       <C>              <C>          <C>         <C>         <C>
Cash flows from
 operating activities:
  Net loss..............     $(600,668)     $(472,773)   $(233,738)  $(183,718) $(1,257,159)
  Adjustments to
   reconcile net loss to
   net cash used in in
   operating activities:
   Depreciation and
    amortization........        12,234         32,878        8,217      11,611       56,723
   Accrued interest
    expense on
    shareholder notes...         2,930         10,688        2,588       3,884       17,502
   Amortization of
    deferred
    compensation
    expense.............           --             --           --       21,271       21,271
   Purchase of in-
    process research
    and development.....       298,154            --           --          --       298,154
   Changes in assets
    and liabilities:
     Accounts
      receivable........           --        (120,898)         --        6,597     (114,301)
     Other current
      assets............        (9,144)       (22,393)         657    (111,494)    (143,031)
     Other assets.......       (10,076)        (4,675)        (787)      5,782       (8,969)
     Accounts payable...        12,000         39,746       37,300      73,495      125,241
     Accrued
      compensation......        62,283        161,615       40,405      28,113      252,011
     Other current
      liabilities.......        38,268        (15,504)     (23,469)     (2,638)      20,126
                             ---------      ---------    ---------   ---------  -----------
       Net cash provided
        by (used in)
        operating
        activities......      (194,019)      (391,316)    (168,827)   (147,097)    (732,432)
                             ---------      ---------    ---------   ---------  -----------
Cash flows from
 investing activities:
  Expenditures for
   property and
   equipment............       (49,645)       (28,708)      (3,283)    (19,533)     (97,886)
  Purchases of short-
   term investments.....       (79,582)           --           --          --       (79,582)
  Sales of short-term
   investments..........           --          79,582       49,207         --        79,582
                             ---------      ---------    ---------   ---------  -----------
  Net cash provided by
   (used in) investing
   activities...........      (129,227)        50,874       45,924     (19,533)     (97,886)
                             ---------      ---------    ---------   ---------  -----------
Cash flows from
 financing activities:
  Payments on capital
   lease obligations....       (22,506)       (45,013)      (7,242)    (15,149)     (82,668)
  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            --           --      278,500      961,259
                             ---------      ---------    ---------   ---------  -----------
  Net cash provided by
   financing
   activities...........       661,253         13,237       (7,242)    263,351      937,841
                             ---------      ---------    ---------   ---------  -----------
  Net increase
   (decrease) in cash
   and cash
   equivalents..........       338,007       (327,205)    (130,145)     96,721      107,523
  Cash and cash
   equivalents at
   beginning of period..           --         338,007      338,007      10,802          --
                             ---------      ---------    ---------   ---------  -----------
  Cash and cash
   equivalents at end of
   period...............     $ 338,007      $  10,802    $ 207,862   $ 107,523  $   107,523
                             =========      =========    =========   =========  ===========
Supplemental 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    $   1,260   $   1,714  $    12,188
                             =========      =========    =========   =========  ===========
</TABLE>
    
 
                            See accompanying notes.
 
                                      F-6

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                         NOTES TO FINANCIAL STATEMENTS
    
 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
                                         
(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. During the three months ended March 31,
1997, the Company raised $278,500 in gross proceeds from the private placement
of Series B preferred stock.     
 
  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 908,622 shares of common stock based on the
shares of convertible preferred stock outstanding as of March 31, 1997. Pro
forma shareholders' equity at March 31, 1997, as adjusted for the conversion
of preferred stock, is disclosed on the balance sheet.     
   
 Interim Financial Information     
   
  The financial information at March 31, 1997, for the three months ended
March 31, 1996 and 1997 and for the period from inception (August 7, 1995) to
March 31, 1997 is unaudited but includes all adjustments (consisting only of
normal recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such date and the operating results
and cash flows for those periods. Results for the three months ended March 31,
1997 are not necessarily indicative of results for any other interim period or
for the entire year.     
 
(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
 
                                      F-7

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
    
 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
                                          
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.
 
 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>
                                                                   THREE MONTHS ENDED
                                PERIOD FROM INCEPTION  YEAR ENDED       MARCH 31,
                                 (AUGUST 7, 1995) TO  DECEMBER 31, --------------------  
                                  DECEMBER 31, 1995       1996       1996       1997
                                --------------------- ------------ ---------  ---------
      <S>                       <C>                   <C>          <C>        <C>        
      Net loss per share......        $   (0.19)       $   (0.14)  $   (0.07)     (0.05)
                                      =========        =========   =========  =========
      Shares used in computing
       net loss per share.....        3,071,367        3,497,121   3,474,532  3,566,199
                                      =========        =========   =========  =========
</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.
 
 
                                      F-8

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
    
 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
                                             
  Pro forma net loss per share for the period from inception (August 7, 1995)
to December 31, 1995 is as follows:     
 

<TABLE>   
      <S>                                                           <C>
      Pro forma net loss per share................................. $    (0.18)
                                                                    ==========
      Shares used in computing pro forma net loss per share........  3,279,748
                                                                    ==========
</TABLE>
    
   
 Impact of Recently Issued Accounting Pronouncements     
   
  In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute loss per share and to restate all prior periods. The impact is
expected to result in no change to loss per share for any of the periods
presented and the quarters ended March 31, 1997 and March 31, 1996.     
 
 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) RESEARCH ARRANGEMENTS     
   
 Bristol-Myers Squibb Company     
   
  In July 1996, the Company and Bristol-Myers Squibb Company ("BMS") entered
into a joint research agreement to develop a product incorporating a BMS
proprietary compound into the DepoMed Gastric Retentive ("GR") 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.     
 
  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 and the three month period ended March 31, 1997, 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 and
$127,039 and the amounts receivable under the arrangement totaled $63,120 and
$114,301 as of December 31, 1996 and March 31, 1997, respectively.     
   
 GalaGen Inc.     
   
  In May 1996, the Company and GalaGen Inc. ("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.     
 
                                      F-9

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
    
 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
                                          
(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.
 
(6) RELATED PARTY TRANSACTIONS
   
 CSO Ventures LLC     
   
  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     
 
                                      F-10

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
    
 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
                                             
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.
Two members of CSO are also directors of the Company. Through December 31, 1996
and March 31, 1997, the Company has paid $120,000 in fees to CSO under these
arrangements.     
 
 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 is $171,488 and $173,747 as of December 31, 1996 and
March 31, 1997, respectively.     
 
 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
aggregate principal balance of all outstanding notes including the related
interest due the shareholder is $122,750 and $124,375 as of December 31, 1996
and March 31, 1997, respectively.     
 
(7) SHAREHOLDERS' EQUITY
 
 Convertible Preferred Stock
   
  The Company is authorized to issue 10,000,000 shares of preferred stock,
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.
 
                                      F-11

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
    
 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
                                          
  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.
 
 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-12

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
    
 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
                                             
  A summary of the Company's stock option activity, and related information for
the period from inception (August 7, 1995) to March 31, 1997 follows:     
 

<TABLE>   
<CAPTION>
                                                         OUTSTANDING OPTIONS
                                                     ----------------------------
                                           SHARES    NUMBER
                                          AVAILABLE    OF     PRICE PER AGGREGATE
                                          FOR GRANT  SHARES     SHARE     PRICE
                                          ---------  -------  --------- ---------
<S>                                       <C>        <C>      <C>       <C>
 Shares authorized.......................  250,000
 Options granted......................... (120,000)  120,000    0.09      10,800
                                          --------   -------    ----     -------
Balanced at December 31, 1995............  130,000   120,000    0.09      10,800
 Shares authorized.......................      --        --      --          --
 Options granted at fair value...........   (3,334)    3,334    0.09         300
 Options granted below fair value........  (83,333)   83,333    0.90      75,000
 Options cancelled.......................      --        --      --          --
 Options exercised.......................      --    (91,667)   0.09      (8,250)
                                          --------   -------    ----     -------
Balance at December 31, 1996.............   43,333   115,000    0.68      77,850
 Shares authorized.......................  166,667       --      --          --
 Options granted at fair value...........      --        --      --          --
 Options granted below fair value........  (81,667)   81,667    3.00     245,000
 Options cancelled.......................      --        --      --          --
 Options exercised.......................      --        --      --          --
                                          --------   -------    ----     -------
Balance at March 31, 1997................  128,333   196,667    1.64     322,850
                                          ========   =======    ====     =======
</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
                                         AVERAGE  CONTRACTUAL  NUMBER     AVERAGE
                               NUMBER OF EXERCISE  LIFE (IN      OF       EXERCISE
 EXRCISE PRICESE                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>
    
   
  Exercise prices for options outstanding as of March 31, 1997 ranged from
$0.09 to $3.00. The following table summarizes information about options
outstanding at March 31, 1997:     
 

<TABLE>   
<CAPTION>
                                    OUTSTANDING OPTIONS       EXERCISABLE OPTIONS
                               ------------------------------ ---------------------
                                         WEIGHTED  REMAINING              WEIGHTED
                                         AVERAGE  CONTRACTUAL  NUMBER     AVERAGE
                               NUMBER OF EXERCISE  LIFE (IN      OF       EXERCISE
 EXRCISE PRICESE                OPTIONS   PRICE     YEARS)     OPTIONS     PRICE
- ---------------                --------- -------- ----------- ---------  ----------
      <S>                      <C>       <C>      <C>         <C>        <C>         
      $0.09...................   31,667   $0.09      8.62          7,083  $    0.09
      $0.90...................   83,333    0.90      9.58            --         --
      $3.00...................   81,667    3.00      9.83            --         --
                                -------
                                196,667
                                =======
</TABLE>
    
 
                                      F-13

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
    
 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
                                            
  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 has been
recorded in the quarter ended March 31, 1997 based on the deemed fair value of
common stock on the grant date of $4.20. In April 1997, the Company granted
options to purchase 71,666 shares of common stock at $3.00 per share. In June
1997, the Company granted options to purchase 33,333 shares of common stock at
exercise prices ranging from $3.00 to $5.25 per share and options to purchase
35,000 shares at an exercise price equal to the closing price of the Company's
anticipated initial public offering. Deferred compensation of approximately
$144,000 related to certain of the aforementioned stock options will be
recorded in the quarter ending June 30, 1997. The fair value of the underlying
common stock, as determined by the Board of Directors approximated $4.80 in
April 1997 and $5.25 in June 1997.     
 
(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.
 
  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>

 
                                     F-14

<PAGE>
 
                                 DEPOMED, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
    
 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
                                          
(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 908,622 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 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.
   
  In April 1997, the Board of Directors approved an increase of 250,000 shares
to the Company's 1995 Stock Option Plan.     
   
 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.     
 
                                      F-15

<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...........................................................  19
Dilution.................................................................  20
Selected Financial Data..................................................  21
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  22
Business.................................................................  25
Management...............................................................  39
Certain Transactions.....................................................  44
Principal Shareholders...................................................  45
Description of Securities................................................  46
Shares Eligible for Future Sale..........................................  49
Underwriting.............................................................  50
Legal Matters............................................................  52
Experts..................................................................  52
Additional Information...................................................  52
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
  **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
    4.5 Form of Lock-up 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
   10.7 Employment Agreement between DepoMed, Inc. and John W. Shell
   10.8 Employment Agreement between DepoMed, Inc. and John W. Fara
   10.9 Agreement re: Settlement of Lawsuit, Conveyance of Assets and
         Assumption of Liabilities dated August 28, 1995 by and among DepoMed
         Systems, Inc., Dr. John W. Shell and M6 Pharmaceuticals, Inc.
   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>
    
- --------
   
*  Previously filed.     
   
** 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 Amendment No. 1
to the 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 June 17, 1997.     
 
                                          DEPOMED, INC.
                                                
                                             /s/ John F. Hamilton     
                                          By: ___________________________
                                                
                                             John F. Hamilton     
                                                
                                             Vice President, Finance, Chief
                                             Financial Officer     
          
  Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form SB-2 has been signed by the
following persons in the capacities and on the dates indicated.     
 

<TABLE>     

<S>                                   <C>                       <C> 
                                       
            *                          Chairman of the          June 17, 1997
- -------------------------------         Board of Directors                   
     John W. Shell, Ph.D.               and Chief                            
                                        Scientific Officer                    



                                       
            *                          President, Chief         June 17, 1997 
- -------------------------------         Executive Officer                     
      John W. Fara, Ph.D.               and Director                          
                                        (Principal                            
                                        Executive Officer)                     



                                       
            *                          Vice President,          June 17, 1997 
- -------------------------------         Operations and                       
         John N. Shell                  Director                              
 

                                       
   /s/ John F. Hamilton                Vice President,          June 17, 1997 
- -------------------------------         Finance Chief                        
       John F. Hamilton                 Financial Officer                    
                                        (Principal                           
                                        Financial Officer)                    


                                       
            *                          Director                 June 17, 1997   
- -------------------------------                                    
       Judson A. Cooper
 
            

            *                          Director                 June 17, 1997   
- -------------------------------                                      
     Joshua Schein, Ph.D.


     
*By:  /s/ John F. Hamilton  
     --------------------------
          JOHN F. HAMILTON 
          ATTORNEY-IN-FACT 

</TABLE>
      
 
                                     II-4

<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
  **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
    4.5  Form of Lock-up 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
   10.7  Employment Agreement between DepoMed, Inc. and John W.
          Shell
   10.8  Employment Agreement between DepoMed, Inc. and John W.
          Fara
   10.9  Agreement re: Settlement of Lawsuit, Conveyance of
          Assets and Assumption of Liabilities dated August 28,
          1995 by and among DepoMed Systems, Inc., Dr. John W.
          Shell and M6 Pharmaceuticals, Inc.
   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>
    
- --------
   
*  Previously filed.     
   
** To be filed by amendment.     
   
+  Confidential treatment requested.     
 





<PAGE>

                                                                     EXHIBIT 1.1

        [Form of Underwriting Agreement - Subject to Additional Review]


                        2,500,000 SHARES OF COMMON STOCK
                       AND 1,250,000 REDEEMABLE WARRANTS

                                 DEPOMED, INC.

                             UNDERWRITING AGREEMENT
                             ----------------------


                                                              New York, New York
                                                                          , 1997


NATIONAL SECURITIES CORPORATION
 As Representative of the
 Several Underwriters listed on Schedule A hereto
1001 Fourth Avenue
Suite 2200
Seattle, Washington  98154

Ladies and Gentlemen:

    DepoMed, Inc., a California corporation (the "Company"), confirms its
agreement with National Securities Corporation ("National") and each of the
underwriters named in Schedule A hereto (collectively, the "Underwriters," which
term shall also include any underwriter substituted as hereinafter provided in
Section 11), for whom National is acting as representative (in such capacity,
- -------                                                                      
National shall hereinafter be referred to as "you" or the "Representative"),
with respect to the sale by the Company and the purchase by the Underwriters,
acting severally and not jointly, of the respective numbers of shares ("Shares")
of the Company's common stock, no par value per share ("Common Stock"), and
redeemable common stock purchase warrants (the "Redeemable Warrants"), each to
purchase one share of Common Stock, set forth in Schedule A hereto.  The

aggregate 2,500,000 Shares and 1,250,000 Redeemable Warrants will be separately
tradeable upon issuance and are hereinafter referred to as the "Firm
Securities."  Each Redeemable Warrant is exercisable commencing on ____________,
1998 [12 months from

<PAGE>
 
the date of this Agreement] until ____________, 2002 [60 months from the date of
this Agreement], unless previously redeemed by the Company, at an initial
exercise price of $_______ [140% of the initial public offering price] per share
of Common Stock.  The Redeemable Warrants may be redeemed by the Company at a
redemption price of $.10 per Redeemable Warrant at any time after _____________,
1998 [18 months from the date of this Agreement] on thirty (30) days' prior
written notice, provided that the closing bid price of the Common Stock equals
or exceeds $_______________ [150% of the initial public offering price of Common
Stock] per share, for any twenty (20) trading days within a period of thirty
(30) consecutive trading days ending on the fifth trading day prior to the
notice of redemption, all in accordance with the terms and conditions of the
Warrant Agreement (herein defined).

    Upon your request, as provided in Section 2(b) of this Agreement, the
Company shall also issue and sell to the Underwriters, acting severally and not
jointly, up to an additional 375,000 shares of Common Stock and/or 125,000
Redeemable Warrants for the purpose of covering over-allotments, if any.  Such
375,000 shares of Common Stock and 187,500 Redeemable Warrants are hereinafter
collectively to as the "Option Securities."  The Company also proposes to issue
and sell to you warrants (the "Representative's Warrants") pursuant to the
Representative's Warrant Agreement (the "Representative's Warrant Agreement")
for the purchase of an additional 250,000 shares of Common Stock and/or 187,500
Redeemable Warrants.  The shares of Common Stock and Redeemable Warrants
issuable upon exercise of the Representative's Warrants are hereinafter referred
to as the "Representative's Securities."  The Firm Securities, the Option
Securities, the Representative's Warrants and the Representative's Securities
(collectively, hereinafter referred to as the "Securities") are more fully
described in the Registration Statement and the Prospectus referred to below.

    1. Representations and Warranties of the Company.  The Company represents
       ---------------------------------------------                         
and warrants to, and agrees with, each of the Underwriters as of the date
hereof, and as of the Closing Date (as hereinafter defined) and each Option
Closing Date (as hereinafter defined), if any, as follows:

       (a) The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and an amendment or
amendments thereto, on Form SB-2 (No. 333-_________), including any related
preliminary prospectus ("Preliminary Prospectus"), for the registration of the
Firm Securities, the Option Securities and the Representative's Securities under
the Securities Act of 1933, as amended (the "Act"), which registration statement
and amendment or amendments have been prepared by the Company in conformity with
the requirements of the Act, and the rules and regulations (the "Regulations")
of the Commission under the Act.  The Company will promptly file a further
amendment to said registration statement in the form heretofore delivered to the
Underwriters and will not file any other amendment thereto to which the
Underwriters shall have objected in writing after having been furnished with a
copy thereof.  Except as the context may otherwise require, such registration
statement, as amended, on file with the Commission at the time the registration
statement becomes effective (including the prospectus, financial statements,
schedules, exhibits and all other documents filed as a part thereof or
incorporated therein (including, but not limited to those documents or
information incorporated by reference therein) and all information deemed to be
a part thereof as of such time pursuant to paragraph (b) of Rule 430(A) of the

                                       2

<PAGE>
 
Regulations), is hereinafter called the "Registration Statement", and the form
of prospectus in the form first filed with the Commission pursuant to Rule
424(b) of the Regulations, is hereinafter called the "Prospectus."  For purposes
hereof, "Rules and Regulations" mean the rules and regulations adopted by the
Commission under either the Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as applicable.

       (b) Neither the Commission nor any state regulatory authority has issued
any order preventing or suspending the use of any Preliminary Prospectus, the
Registration Statement or Prospectus or any part of any thereof and no
proceedings for a stop order suspending the effectiveness of the Registration
Statement or any of the Company's securities have been instituted or are pending
or threatened.  Each of the Preliminary Prospectus, the Registration Statement
and Prospectus at the time of filing thereof conformed with the requirements of
the Act and the Rules and Regulations, and none of the Preliminary Prospectus,
the Registration Statement or Prospectus at the time of filing thereof contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that this representation and warranty does not apply to statements made in
reliance upon and in conformity with written information furnished to the
Company with respect to the Underwriters by or on behalf of the Underwriters
expressly for use in such Preliminary Prospectus, Registration Statement or
Prospectus or any amendment thereof or supplement thereto.

       (c) When the Registration Statement becomes effective and at all times
subsequent thereto up to the Closing Date (as defined herein) and each Option
Closing Date (as defined herein), if any, and during such longer period as the
Prospectus may be required to be delivered in connection with sales by the
Underwriters or a dealer, the Registration Statement and the Prospectus will
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and will conform to the requirements
of the Act and the Rules and Regulations; neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, will contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided, however,
                                                          --------  ------- 
that this representation and warranty does not apply to statements made or
statements omitted in reliance upon and in conformity with information
furnished to the Company in writing by or on behalf of any Underwriter expressly
for use in the Preliminary Prospectus, Registration Statement or Prospectus or
any amendment thereof or supplement thereto.

       (d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the state of its incorporation.
Except as set forth in the Prospectus, the Company does not own an interest in
any corporation, partnership, trust, joint venture or other business entity.
The Company is duly qualified and licensed and in good standing as a foreign
corporation in each jurisdiction in which its ownership or leasing of any
properties or the character of its operations requires such qualification or
licensing.  The Company has all requisite power and authority (corporate and
other), and has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without limitation,
those

                                       3

<PAGE>
 
having jurisdiction over environmental or similar matters), to own or lease its
properties and conduct its business as described in the Prospectus; the Company
is and has been doing business in compliance with all such authorizations,
approvals, orders, licenses, certificates, franchises and permits and all
applicable federal, state, local and foreign laws, rules and regulations; and
the Company has not received any notice of proceedings relating to the
revocation or modification of any such authorization, approval, order, license,
certificate, franchise, or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would materially and
adversely affect the condition, financial or otherwise, or the earnings,
position, prospects, value, operation, properties, business or results of
operations of the Company.  The disclosures in the Registration Statement
concerning the effects of federal, state, local, and foreign laws, rules and
regulations on the Company's business as currently conducted and as contemplated
are correct in all material respects and do not omit to state a material fact
required to be stated therein or necessary to make the statements contained
therein not misleading in light of the circumstances under which they were made.

       (e) The Company has a duly authorized, issued and outstanding
capitalization as set forth in the Prospectus under "Capitalization" and
"Description of Securities" and will have the adjusted capitalization set forth
therein on the Closing Date and each Option Closing Date, if any, based upon the
assumptions set forth therein, and the Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities, except for this Agreement,
the Warrant Agreement, the Representative's Warrant Agreement and as described
in the Prospectus.  The Securities and all other securities issued or issuable
by the Company conform or, when issued and paid for, will conform, in all
respects to all statements with respect thereto contained in the Registration
Statement and the Prospectus.  All issued and outstanding securities of the
Company have been duly authorized and validly issued and are fully paid and non-
assessable and the holders thereof have no rights of rescission with respect
thereto, and are not subject to personal liability by reason of being such
holders; and none of such securities were issued in violation of the preemptive
rights of any holders of any security of the Company or similar contractual
rights granted by the Company.  The Securities are not and will not be subject
to any preemptive or other similar rights of any stockholder, have been duly
authorized and, when issued, paid for and delivered in accordance with the terms
hereof, will be validly issued, fully paid and non-assessable and will conform
to the description thereof contained in the Prospectus; the holders thereof will
not be subject to any liability solely as such holders; all corporate action
required to be taken for the authorization, issue and sale of the Securities has
been duly and validly taken; and the certificates representing the Securities
will be in due and proper form.  Upon the issuance and delivery pursuant to the
terms hereof of the Securities to be sold by the Company hereunder, the
Underwriters or the Representative, as the case may be, will acquire good and
marketable title to such Securities free and clear of any lien, charge, claim,
encumbrance, pledge, security interest, defect or other restriction or equity of
any kind whatsoever.

       (f) The financial statements of the Company, together with the related
notes and schedules thereto, included in the Registration Statement, each
Preliminary Prospectus and the Prospectus fairly present the financial position,
income, changes in cash flow, changes in stockholders' equity and the results of
operations of the Company at the respective dates and for the respective periods
to which they apply and such financial statements have been prepared in

                                       4

<PAGE>
 
conformity with generally accepted accounting principles and the Rules and
Regulations, consistently applied throughout the periods involved and such
financial statements as are audited have been examined by Ernst & Young LLP, who
are independent certified public accountants within the meaning of the Act and
the Rules and Regulations, as indicated in their reports filed therewith.  There
has been no adverse change or development involving a prospective adverse change
in the condition, financial or otherwise, or in the earnings, position,
prospects, value, operation, properties, business, or results of operations of
the Company, whether or not arising in the ordinary course of business, since
the date of the financial statements included in the Registration Statement and
the Prospectus and the outstanding debt, the property, both tangible and
intangible, and the business of the Company, conform in all material respects to
the descriptions thereof contained in the Registration Statement and the
Prospectus.  Financial information (including, without limitation, any pro forma
financial information) set forth in the Prospectus under the headings "Summary
Financial Information," "Selected Financial Data,"  "Capitalization," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," fairly present, on the basis stated in the Prospectus, the
information set forth therein, and have been derived from or compiled on a basis
consistent with that of the audited financial statements included in the
Prospectus; and, in the case of pro forma financial information, if any, the
assumptions used in the preparation thereof are reasonable and the adjustments
used therein are appropriate to give effect to the transactions and
circumstances referred to therein.  The amounts shown as accrued for current and
deferred income and other taxes in such financial statements are sufficient for
the payment of all accrued and unpaid federal, state, local and foreign income
taxes, interest, penalties, assessments or deficiencies applicable to the
Company, whether disputed or not, for the applicable period then ended and
periods prior thereto; adequate allowance for doubtful accounts has been
provided for unindemnified losses due to the operations of the Company; and the
statements of income do not contain any items of special or nonrecurring income
not earned in the ordinary course of business, except as specified in the notes
thereto.

       (g) The Company (i) has paid all federal, state, local, and foreign taxes
for which it is liable, including, but not limited to, withholding taxes and
amounts payable under Chapters 21 through 24 of the Internal Revenue Code of
1986, as amended (the "Code"), and has furnished all information returns it is
required to furnish pursuant to the Code, (ii) has established adequate reserves
for such taxes which are not due and payable, and (iii) does not have any tax
deficiency or claims outstanding, proposed or assessed against it.

       (h) No transfer tax, stamp duty or other similar tax is payable by or on
behalf of the Underwriters in connection with (i) the issuance by the Company of
the Securities, (ii) the purchase by the Underwriters of the Firm Securities and
the Option Securities from the Company and the purchase by the Representative of
the Representative's Warrants from the Company, (iii) the consummation by the
Company of any of its obligations under this Agreement, or (iv) resales of the
Firm Securities and the Option Securities in connection with the distribution
contemplated hereby.

       (i) The Company maintains insurance policies, including, but not limited
to, general liability, malpractice and property insurance, which insures each of
the Company and its employees, against such losses and risks generally insured
against by comparable businesses.

                                       5

<PAGE>
 
The Company (A) has not failed to give notice or present any insurance claim
with respect to any matter, including but not limited to the Company's business,
property or employees, under any insurance policy or surety bond in a due and
timely manner, (B) does not have any disputes or claims against any underwriter
of such insurance policies or surety bonds or has failed to pay any premiums due
and payable thereunder, or (C) has failed to comply with all conditions
contained in such insurance policies and surety bonds.  There are no facts or
circumstances under any such insurance policy or surety bond which would relieve
any insurer of its obligation to satisfy in full any valid claim of the Company.

       (j) There is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding (including, without
limitation, those having jurisdiction over environmental or similar matters),
domestic or foreign, pending or threatened against (or circumstances that may
give rise to the same), or involving the properties or business of, the Company
which (i) questions the validity of the capital stock of the Company, this
Agreement, the Warrant Agreement or the Representative's Warrant Agreement, or
of any action taken or to be taken by the Company pursuant to or in connection
with this Agreement, the Warrant Agreement or the Representative's Warrant
Agreement, (ii) is required to be disclosed in the Registration Statement which
is not so disclosed (and such proceedings as are summarized in the Registration
Statement are accurately summarized in all material respects), or (iii) might
materially and adversely affect the condition, financial or otherwise, or the
earnings, position, prospects, stockholders' equity, value, operation,
properties, business or results of operations of the Company.

       (k) The Company has full legal right, power and authority to authorize,
issue, deliver and sell the Securities, enter into this Agreement, the Warrant
Agreement and the Representative's Warrant Agreement and to consummate the
transactions provided for in this Agreement, the Warrant Agreement and the
Representative's Warrant Agreement; and this Agreement, the Warrant Agreement
and the Representative's Warrant Agreement have each been duly and properly
authorized, executed and delivered by the Company.  Each of this Agreement, the
Warrant Agreement and the Representative's Warrant Agreement constitutes a
legal, valid and binding agreement of the Company enforceable against the
Company in accordance with its terms, and none of the Company's issue and sale
of the Securities, execution or delivery of this Agreement, the Warrant
Agreement or the Representative's Warrant Agreement, its performance hereunder
and thereunder, its consummation of the transactions contemplated herein and
therein, or the conduct of its business as described in the Registration
Statement, the Prospectus, and any amendments or supplements thereto, conflicts
with or will conflict with or results or will result in any breach or violation
of any of the terms or provisions of, or constitutes or will constitute a
default under, or result in the creation or imposition of any lien, charge,
claim, encumbrance, pledge, security interest, defect or other restriction or
equity of any kind whatsoever upon, any property or assets (tangible or
intangible) of the Company pursuant to the terms of (i) the certificate of
incorporation or by-laws of the Company, (ii) any license, contract, collective
bargaining agreement, indenture, mortgage, deed of trust, lease, voting trust
agreement, stockholders agreement, note, loan or credit agreement or any other
agreement or instrument to which the Company is a party or by which the Company
is or may be bound or to which its or assets (tangible or intangible) is or may
be subject, or any indebtedness, or (iii) any statute, judgment, decree, order,
rule or regulation applicable to the Company of any arbitrator, court,

                                       6

<PAGE>
 
regulatory body or administrative agency or other governmental agency or body
(including, without limitation, those having jurisdiction over environmental or
similar matters), domestic or foreign, having jurisdiction over the Company or
any of its activities or properties.

       (l)  No consent, approval, authorization or order of, and no filing with,
any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Securities pursuant to the
Prospectus and the Registration Statement, the performance of this Agreement,
the Warrant Agreement and the Representative's Warrant Agreement and the
transactions contemplated hereby and thereby, including without limitation, any
waiver of any preemptive, first refusal or other rights that any entity or
person may have for the issue and/or sale of any of the Securities, except such
as have been or may be obtained under the Act or may be required under state
securities or Blue Sky laws in connection with the Underwriters' purchase and
distribution of the Firm Securities and the Option Securities, and the
Representative's Warrants to be sold by the Company hereunder.

       (m) All executed agreements, contracts or other documents or copies of
executed agreements, contracts or other documents filed as exhibits to the
Registration Statement to which the Company is a party or by which it or they
may be bound or to which its or their respective assets, properties or business
may be subject have been duly and validly authorized, executed and delivered by
the Company and constitute the legal, valid and binding agreements of the
Company, as the case may be, enforceable against it in accordance with its
terms.  The descriptions in the Registration Statement of agreements, contracts
and other documents are accurate and fairly present the information required to
be shown with respect thereto by Form SB-2, and there are no contracts or other
documents which are required by the Act to be described in the Registration
Statement or filed as exhibits to the Registration Statement which are not
described or filed as required, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to be copies.

       (n) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and Prospectus, and except as may otherwise
be indicated or contemplated herein or therein, the Company has not (i) issued
any securities or incurred any liability or obligation, direct or contingent,
for borrowed money, (ii) entered into any transaction other than in the ordinary
course of business, or (iii) declared or paid any dividend or made any other
distribution on or in respect of its capital stock of any class, and there has
not been any change in the capital stock, or any change in the debt (long or
short term) or liabilities or material adverse change in or affecting the
general affairs, management, financial operations, stockholders' equity or
results of operations of the Company.

       (o) No default exists in the due performance and observance of any term,
covenant or condition of any license, contract, collective bargaining agreement,
indenture, mortgage, installment sale agreement, lease, deed of trust, voting
trust agreement, stockholders agreement, partnership agreement, note, loan or
credit agreement, purchase order, or any other agreement or instrument
evidencing an obligation for borrowed money, or any other material agreement or
instrument to which the Company is a party or by which the Company may be bound
or to which the property or assets (tangible or intangible) of the Company is
subject or affected.

                                       7

<PAGE>
 
       (p) The Company has generally enjoyed a satisfactory employer-employee
relationship with its employees and is in compliance with all federal, state,
local, and foreign laws and regulations respecting employment and employment
practices, terms and conditions of employment and wages and hours.  There are no
pending investigations involving the Company by the U.S. Department of Labor, or
any other governmental agency responsible for the enforcement of such federal,
state, local, or foreign laws and regulations.  There is no unfair labor
practice charge or complaint against the Company pending before the National
Labor Relations Board or any lockout, strike, picketing, boycott, dispute,
slowdown or stoppage pending or threatened against or involving the Company, or
any predecessor entity, and none has ever occurred.  No representation question
exists respecting the employees of the Company, and no collective bargaining
agreement or modification thereof is currently being negotiated by the Company.
No grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company.  No labor dispute with the
employees of the Company exists, or, is imminent.

       (q) The Company does not maintain, sponsor or contribute to any program
or arrangement that is an "employee pension benefit plan," an "employee welfare
benefit plan," or a "multiemployer plan" as such terms are defined in Sections
3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA") ("ERISA Plans").  The Company does not
maintain or contribute, now or at any time previously, to a defined benefit
plan, as defined in Section 3(35) of ERISA.  No ERISA Plan (or any trust created
thereunder) has engaged in a "prohibited transaction" within the meaning of
Section 406 of ERISA or Section 4975 of the Code, which could subject the
Company or the Subsidiaries to any tax penalty on prohibited transactions and
which has not adequately been corrected.  Each ERISA Plan is in compliance with
all reporting, disclosure and other requirements of the Code and ERISA as they
relate to any such ERISA Plan.  Determination letters have been received from
the Internal Revenue Service with respect to each ERISA Plan which is intended
to comply with Code Section 401(a), stating that such ERISA Plan and the
attendant trust are qualified thereunder.  None of the Company has ever
completely or partially withdrawn from a "multiemployer plan."

       (r) Neither the Company, nor any of its employees, directors,
stockholders, partners, or affiliates (within the meaning of the Rules and
Regulations) of any of the foregoing has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might be
expected to cause or result in, under the Exchange Act, or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or otherwise.

       (s) Except as otherwise disclosed in the Prospectus, none of the patents,
patent applications, trademarks, service marks, trade names and copyrights, and
licenses and rights to the foregoing presently owned or held by the Company, are
in dispute so far as known by the Company or are in any conflict with the right
of any other person or entity.  The Company (i) owns or has the right to use,
free and clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects or other restrictions or equities of any kind whatsoever, all
patents, trademarks, service marks, trade names and copyrights, technology and
licenses and rights with respect to the foregoing, used in the conduct of its
business as now conducted or proposed to

                                       8

<PAGE>
 
be conducted without infringing upon or otherwise acting adversely to the right
or claimed right of any person, corporation or other entity under or with
respect to any of the foregoing and (ii) is not obligated or under any liability
whatsoever to make any payment by way of royalties, fees or otherwise to any
owner or licensee of, or other claimant to, any patent, trademark, service mark,
trade name, copyright, know-how, technology or other intangible asset, with
respect to the use thereof or in connection with the conduct of its business or
otherwise.

       (t) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property stated
in the Prospectus to be owned or leased by it, free and clear of all liens,
charges, claims, encumbrances, pledges, security interests, defects, or other
restrictions or equities of any kind whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable.

       (u) Ernst & Young LLP, whose report is filed with the Commission as a
part of the Registration Statement, are independent certified public accountants
as required by the Act and the Rules and Regulations.

       (v) The Company has caused to be duly executed legally binding and
enforceable agreements pursuant to which each of the Company's officers,
directors, stockholders and holders of securities exchangeable or exercisable
for or convertible into shares of Common Stock has agreed not to, directly
or indirectly, issue, offer, offer to sell, sell, grant any option for the sale
or purchase of, assign, transfer, pledge, hypothecate or otherwise encumber or
dispose of any shares of Common Stock or securities convertible into,
exercisable or exchangeable for or evidencing any right to purchase or subscribe
for any shares of Common Stock (either pursuant to Rule 144 of the Rules and
Regulations or otherwise) or dispose of any beneficial interest therein for a
period of not less than twelve (12) months following the effective date of the
Registration Statement without the prior written consent of the Representative
and the Company. During the 12 month period commencing on the effective date
of the Registration Statement, the Company shall not, without the prior
written consent of the Representative, sell, contract or offer to sell, issue,
transfer, assign, pledge, distribute, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any options, rights or warrants with
respect to any shares of Common Stock. The Company will cause the Transfer
Agent (as hereinafter defined) to mark an appropriate legend on the face of
stock certificates representing all of such securities and to place "stop
transfer" orders on the Company's stock ledgers.

       (w) There are no claims, payments, issuances, arrangements or
understandings, whether oral or written, for services in the nature of a
finder's or origination fee with respect to the sale of the Securities hereunder
or any other arrangements, agreements, understandings, payments or issuance with
respect to the Company, or any of its officers, directors, stockholders,
partners, employees or affiliates, that may affect the Underwriters'
compensation, as determined by the National Association of Securities Dealers,
Inc. ("NASD").

                                       9

<PAGE>
 
       (x) The Common Stock has been approved for listing on the American 
Stock Exchange ("Amex") SmallCap Market ("Nasdaq").

       (y) None of the Company, nor any of its officers, employees, agents or
any other person acting on behalf of the Company has, directly or indirectly,
given or agreed to give any money, gift or similar benefit (other than legal
price concessions to customers in the ordinary course of business) to any
customer, supplier, employee or agent of a customer or supplier, or official or
employee of any governmental agency (domestic or foreign) or instrumentality of
any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is, or may be in a
position to help or hinder the business of the Company (or assist the Company in
connection with any actual or proposed transaction) which (a) might subject the
Company, or any other such person to any damage or penalty in any civil,
criminal or governmental litigation or proceeding (domestic or foreign), (b) if
not given in the past, might have had a material adverse effect on the assets,
business or operations of the Company, or (c) if not continued in the future,
might adversely affect the assets, business, condition, financial or otherwise,
earnings, position, properties, value, operations or prospects of the Company.
The Company's internal accounting controls are sufficient to cause the Company
to comply with the Foreign Corrupt Practices Act of 1977, as amended.

       (z) Except as set forth in the Prospectus, no officer, director,
stockholder or partner of the Company, or any "affiliate" or "associate" (as
these terms are defined in Rule 405 promulgated under the Rules and Regulations)
of any of the foregoing persons or entities has or has had, either directly or
indirectly, (i) an interest in any person or entity which (A) furnishes or sells
services or products which are furnished or sold or are proposed to be furnished
or sold by the Company, or (B) purchases from or sells or furnishes to the
Company any goods or services, or (ii) a beneficiary interest in any contract or
agreement to which the Company is a party or by which it may be bound or
affected.  Except as set forth in the Prospectus under "Certain Transactions,"
there are no existing agreements, arrangements, understandings or transactions,
or proposed agreements, arrangements, understandings or transactions, between or
among the Company, and any officer, director, or 5% or greater securityholder of
the Company, or any partner, affiliate or associate of any of the foregoing
persons or entities.

       (aa) Any certificate signed by any officer of the Company, and delivered
to the Underwriters or to Underwriters' Counsel (as defined herein) shall be
deemed a representation and warranty by the Company to the Underwriters as to
the matters covered thereby.

       (bb) The minute books of the Company have been made available to the
Underwriters and contain a complete summary of all meetings and actions of the
directors (including committees thereof) and stockholders of the Company, since
the time of its incorporation, and reflect all transactions referred to in such
minutes accurately in all material respects.

       (cc) Except and to the extent described in the Prospectus, no holders of
any securities of the Company or of any options, warrants or other convertible
or exchangeable securities of the Company have the right to include any
securities issued by the Company in the Registration Statement or any
registration statement to be filed by the Company or to require the Company

                                       10

<PAGE>
 
to file a registration statement under the Act and no person or entity holds any
anti-dilution rights with respect to any securities of the Company.

       (dd) The Company has as of the effective date of the Registration
Statement (i) entered into an employment agreement with each of
__________________ and __________________ in the form filed as Exhibit ______
and Exhibit __, respectively, to the Registration Statement and (ii) purchased
term key person insurance on the lives of each of __________________ and
__________________ in the amount of $__ million which policies name the Company
as the sole beneficiary thereof.

       (ee) The Company confirms as of the date hereof that it is in compliance
with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act
                                                                     ------
Relating to Disclosure of Doing Business with Cuba, and the Company further
- --------------------------------------------------                         
agrees that if it or any affiliate commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after the
date the Registration Statement becomes or has become effective with the
Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported or
incorporated by reference in the Prospectus, if any, concerning the Company's,
or any affiliate's, business with Cuba or with any person or affiliate located
in Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to the
Department.

       (ff) The Company is not, and upon the issuance and sale of the Securities
as herein contemplated and the application of the net proceeds therefrom as
described in the Prospectus under the caption "Use of Proceeds" will not be, an
"investment company" or an entity "controlled" by an "investment company" as
such terms are defined in the Investment Company Act of 1940, as amended (the
"1940 Act").

       (gg) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparations of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorizations; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

       (ah) The Company has entered into a warrant agreement substantially in
the form filed as Exhibit ____ to the Registration Statement (the "Warrant
Agreement") with Continental Stock Transfer and Trust Company, as Warrant Agent,
in form and substance satisfactory to the Representative, with respect to the
Redeemable Warrants and providing for the payment of the commission contemplated
by Section 4(v).

                                       11

<PAGE>
 
    2. Purchase, Sale and Delivery of the Securities.
       --------------------------------------------- 

       (a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase from the Company at a price of
$_______ [92% of the public offering price] per Share and $_______ [92% of the
public offering price] per Redeemable Warrant, that number of Firm Securities
set forth in Schedule A opposite the name of such Underwriter, subject to such
adjustment as the Representative in its sole discretion shall make to eliminate
any sales or purchases of fractional shares, plus any additional number of Firm
Securities which such Underwriter may become obligated to purchase pursuant to
the provisions of Section 11 hereof.
                  -------           

       (b) In addition, on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
Underwriters, severally and not jointly, to purchase all or any part of an
additional 375,000 shares of Common Stock at a price of $ ____ [92% of the
public offering price] per share of Common Stock and/or an additional 187,500
Redeemable Warrants at a price of $______ [92% of the public offering price] per
Redeemable Warrant.  The option granted hereby will expire forty-five (45) days
after (i) the date the Registration Statement becomes effective, if the Company
has elected not to rely on Rule 430A under the Rules and Regulations, or (ii)
the date of this Agreement if the Company has elected to rely upon Rule 430A
under the Rules and Regulations, and may be exercised in whole or in part from
time to time only for the purpose of covering over-allotments which may be made
in connection with the offering and distribution of the Firm Securities upon
notice by the Representative to the Company setting forth the number of Option
Securities as to which the several Underwriters are then exercising the option
and the time and date of payment and delivery for any such Option Securities.
Any such time and date of delivery (an "Option Closing Date") shall be
determined by the Representative, but shall not be later than three (3) full
business days after the exercise of said option, nor in any event prior to the
Closing Date, as hereinafter defined, unless otherwise agreed upon by the
Representative and the Company.  Nothing herein contained shall obligate the
Underwriters to make any over-allotments.  No Option Securities shall be
delivered unless the Firm Securities shall be simultaneously delivered or shall
theretofore have been delivered as herein provided.

       (c) Payment of the purchase price for, and delivery of certificates for,
the Firm Securities shall be made at the offices of the Representative at 1001
Fourth Avenue, Suite 2200, Seattle, Washington 98154, or at such other place as
shall be agreed upon by the Representative and the Company.  Such delivery and
payment shall be made at 10:00 a.m. (New York City time) on ________________,
1997 or at such other time and date as shall be agreed upon by the
Representative and the Company, but not less than three (3) nor more than five
(5) full business days after the effective date of the Registration Statement
(such time and date of payment and delivery being herein called the "Closing
Date").  In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
office of the Representative or at such other place as shall be agreed upon by
the Representative and the Company on each Option Closing Date as specified in
the notice from the Representative to

                                       12

<PAGE>
 
the Company.  Delivery of the certificates for the Firm Securities and the
Option Securities, if any, shall be made to the Underwriters against payment by
the Underwriters, severally and not jointly, of the purchase price for the Firm
Securities and the Option Securities, if any, to the order of the Company for
the Firm Securities and the Option Securities, if any, by New York Clearing
House funds.  In the event such option is exercised, each of the Underwriters,
acting severally and not jointly, shall purchase that proportion of the total
number of Option Securities then being purchased which the number of Firm
Securities set forth in Schedule A hereto opposite the name of such Underwriter
bears to the total number of Firm Securities, subject in each case to such
adjustments as the Representative in its discretion shall make to eliminate any
sales or purchases of fractional shares.  Certificates for the Firm Securities
and the Option Securities, if any, shall be in definitive, fully registered
form, shall bear no restrictive legends and shall be in such denominations and
registered in such names as the Underwriters may request in writing at least two
(2) business days prior to the Closing Date or the relevant Option Closing Date,
as the case may be.  The certificates for the Firm Securities and the Option
Securities, if any, shall be made available to the Representative at such office
or such other place as the Representative may designate for inspection, checking
and packaging no later than 9:30 a.m. on the last business day prior to the
Closing Date or the relevant Option Closing Date, as the case may be.

       (d)  On the Closing Date, the Company shall issue and sell to the
Representative Representative's Warrants at a purchase price of $.0001 per
warrant, which Representative's Warrants shall entitle the holders thereof to
purchase an aggregate of 250,000 shares of Common Stock and/or 125,000
Redeemable Warrants. The Representative's Warrants shall be exercisable for a
period of four (4) years commencing one (1) year from the effective date of
the Registration Statement at a price equaling one hundred sixty five percent
(165%) of the respective initial public offering price of the Shares and the
Redeemable Warrants. The Representative's Warrant Agreement and form of
Warrant Certificate shall be substantially in the form filed as Exhibit [___]
to the Registration Statement. Payment for the Representative's Warrants shall
be made on the Closing Date.

    3. Public Offering of the Shares and Redeemable Warrants.  As soon after the
       -----------------------------------------------------                    
Registration Statement becomes effective as the Representative deems advisable,
the Underwriters shall make a public offering of the Shares and Redeemable
Warrants (other than to residents of or in any jurisdiction in which
qualification of the Shares and Redeemable Warrants is required and has not
become effective) at the price and upon the other terms set forth in the
Prospectus.  The Representative may from time to time increase or decrease the
respective public offering price after distribution of the Shares and Redeemable
Warrants has been completed to such extent as the Representative, in its sole
discretion deems advisable.  The Underwriters may enter into one of more
agreements as the Underwriters, in each of their sole discretion, deem advisable
with one or more broker-dealers who shall act as dealers in connection with such
public offering.

    4. Covenants and Agreements of the Company.  The Company covenants and
       ---------------------------------------                            
agrees with each of the Underwriters as follows:

                                       13

<PAGE>
 
       (a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or Exchange
Act before termination of the offering of the Shares and Redeemable Warrants by
the Underwriters of which the Representative shall not previously have been
advised and furnished with a copy, or to which the Representative shall have
objected or which is not in compliance with the Act, the Exchange Act or the
Rules and Regulations.

       (b) As soon as the Company is advised or obtains knowledge thereof, the
Company will advise the Representative and confirm the notice in writing (i)
when the Registration Statement, as amended, becomes effective, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any post-
effective amendment to the Registration Statement becomes effective; (ii) of the
issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of the Preliminary
Prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose; (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any of the Securities for offering or sale in
any jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose; (iv) of the receipt of any comments from the Commission; and (v)
of any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission shall enter a stop order or
suspend such qualification at any time, the Company will make every effort to
obtain promptly the lifting of such order.

       (c) The Company shall file the Prospectus (in form and substance
satisfactory to the Representative) or transmit the Prospectus by a means
reasonably calculated to result in filing with the Commission pursuant to Rule
424(b)(1) (or, if applicable and if consented to by the Representative, pursuant
to Rule 424(b)(4)) not later than the Commission's close of business on the
earlier of (i) the second business day following the execution and delivery of
this Agreement and (ii) the fifth business day after the effective date of the
Registration Statement.

       (d) The Company will give the Representative notice of its intention to
file or prepare any amendment to the Registration Statement (including any post-
effective amendment) or any amendment or supplement to the Prospectus (including
any revised prospectus which the Company proposes for use by the Underwriters in
connection with the offering of the Securities which differs from the
corresponding prospectus on file at the Commission at the time the Registration
Statement becomes effective, whether or not such revised prospectus is required
to be filed pursuant to Rule 424(b) of the Rules and Regulations), and will
furnish the Representative with copies of any such amendment or supplement a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file any such prospectus to which the Representative or Orrick,
Herrington & Sutcliffe LLP ("Underwriters' Counsel") shall object.

                                       14

<PAGE>
 
       (e) The Company shall endeavor in good faith, in cooperation with the
Representative, at or prior to the time the Registration Statement becomes
effective, to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as the Representative may designate to permit the
continuance of sales and dealings therein for as long as may be necessary to
complete the distribution, and shall make such applications, file such documents
and furnish such information as may be required for such purpose; provided,
                                                                  -------- 
however, the Company shall not be required to qualify as a foreign corporation
- -------                                                                       
or file a general or limited consent to service of process in any such
jurisdiction.  In each jurisdiction where such qualification shall be effected,
the Company will, unless the Representative agrees that such action is not at
the time necessary or advisable, use all reasonable efforts to file and make
such statements or reports at such times as are or may reasonably be required by
the laws of such jurisdiction to continue such qualification.

       (f) During the time when a prospectus is required to be delivered under
the Act, the Company shall use all reasonable efforts to comply with all
requirements imposed upon it by the Act and the Exchange Act, as now and
hereafter amended and by the Rules and Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealings in
the Securities in accordance with the provisions hereof and the Prospectus, or
any amendments or supplements thereto.  If at any time when a prospectus
relating to the Securities is required to be delivered under the Act, any event
shall have occurred as a result of which, in the opinion of counsel for the
Company or Underwriters' Counsel, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the Prospectus
to comply with the Act, the Company will notify the Representative promptly and
prepare and file with the Commission an appropriate amendment or supplement in
accordance with Section 10 of the Act, each such amendment or supplement to be
satisfactory to Underwriters' Counsel, and the Company will furnish to the
Underwriters copies of such amendment or supplement as soon as available and in
such quantities as the Underwriters may request.

       (g) As soon as practicable, but in any event not later than forty-five
(45) days after the end of the 12-month period beginning on the day after the
end of the fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (ninety (90) days in the event that the end of
such fiscal quarter is the end of the Company's fiscal year), the Company shall
make generally available to its security holders, in the manner specified in
Rule 158(b) of the Rules and Regulations, and to the Representative, an earnings
statement which will be in the detail required by, and will otherwise comply
with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules
and Regulations, which statement need not be audited unless required by the Act,
covering a period of at least twelve (12) consecutive months after the effective
date of the Registration Statement.

       (h) During a period of seven (7) years after the date hereof, the Company
will furnish to its stockholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the Representative:

                                       15

<PAGE>
 
       i. concurrently with furnishing such quarterly reports to its
    stockholders, statements of income of the Company for each quarter in the
    form furnished to the Company's stockholders and certified by the Company's
    principal financial or accounting officer;

       ii. concurrently with furnishing such annual reports to its stockholders,
    a balance sheet of the Company as at the end of the preceding fiscal year,
    together with statements of operations, stockholders' equity, and cash flows
    of the Company for such fiscal year, accompanied by a copy of the
    certificate thereon of independent certified public accountants;

       iii. as soon as they are available, copies of all reports (financial or
    other) mailed to stockholders;

       iv. as soon as they are available, copies of all reports and financial
    statements furnished to or filed with the Commission, the NASD or any
    securities exchange;

       v. every press release and every material news item or article of
    interest to the financial community in respect of the Company, or its
    affairs, which was released or prepared by or on behalf of the Company; and

       vi. any additional information of a public nature concerning the Company
    (and any future subsidiary) or its businesses which the Representative may
    request.

    During such seven-year period, if the Company has an active subsidiary, the
foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiary(ies) are consolidated, and
will be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.

       (i) The Company will maintain a transfer agent and warrant agent
("Transfer Agent") and, if necessary under the jurisdiction of incorporation of
the Company, a Registrar (which may be the same entity as the Transfer Agent)
for its Common Stock and Redeemable Warrants.

       (j) The Company will furnish to the Representative or on the
Representative's order, without charge, at such place as the Representative may
designate, copies of each Preliminary Prospectus, the Registration Statement and
any pre-effective or post-effective amendments thereto (two of which copies will
be signed and will include all financial statements and exhibits), the
Prospectus, and all amendments and supplements thereto, including any prospectus
prepared after the effective date of the Registration Statement, in each case as
soon as available and in such quantities as the Representative may request.

       (k) On or before the effective date of the Registration Statement, the
Company shall provide the Representative with true original copies of duly
executed, legally binding and enforceable agreements pursuant to which, for a
period of twelve (12) months from the effective date of the Registration
Statement, each of the Company's stockholders and holders of securities
exchangeable or exercisable for or convertible into shares of Common Stock
agrees that it or he or she will not, directly or indirectly, issue, offer
to sell, sell, grant an option for the sale

                                       16

<PAGE>
 
or purchase of, assign, transfer, pledge, hypothecate or otherwise encumber or
dispose of any shares of Common Stock or securities convertible into,
exercisable or exchangeable for or evidencing any right to purchase or subscribe
for any shares of Common Stock (either pursuant to Rule 144 of the Rules and
Regulations or otherwise) or dispose of any beneficial interest therein without
the prior consent of the Representative (collectively, the "Lock-up
Agreements"). During the 12 month period commencing on the effective date of
the Registration Statement, the Company shall not, without the prior written
consent of the Representative, sell, contract or offer to sell, issue,
transfer, assign, pledge, distribute, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any options, rights or warrants with
respect to any shares of Common Stock. On or before the Closing Date, the
Company shall deliver instructions to the Transfer Agent authorizing it to
place appropriate legends on the certificates representing the securities
subject to the Lock-up Agreements and to place appropriate stop transfer
orders on the Company's ledgers.

       (l) None of the Company, nor any of its officers, directors,
stockholders, nor any of its affiliates (within the meaning of the Rules and
Regulations) will take, directly or indirectly, any action designed to, or which
might in the future reasonably be expected to cause or result in, stabilization
or manipulation of the price of any securities of the Company.

       (m) The Company shall apply the net proceeds from the sale of the
Securities in the manner, and subject to the conditions, set forth under "Use of
Proceeds" in the Prospectus.  No portion of the net proceeds will be used,
directly or indirectly, to acquire any securities issued by the Company.

       (n) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a Form SR as may be
required pursuant to Rule 463 under the Act) from time to time, under the Act,
the Exchange Act, and the Rules and Regulations, and all such reports, forms and
documents filed will comply as to form and substance with the applicable
requirements under the Act, the Exchange Act, and the Rules and Regulations.

       (o) The Company shall furnish to the Representative as early as
practicable prior to each of the date hereof, the Closing Date and each Option
Closing Date, if any, but no later than two (2) full business days prior
thereto, a copy of the latest available unaudited interim financial statements
of the Company (which in no event shall be as of a date more than thirty (30)
days prior to the date of the Registration Statement) which have been read by
the Company's independent public accountants, as stated in their letters to be
furnished pursuant to Sections 6(l) and 6(m) hereof.
                      --------                      

       (p) The Company shall cause the Common Stock and Redeemable Warrants to
be on listed on Amex and, for a period of seven (7) years from the date hereof,
use its best efforts to maintain the Amex quotation of the Common Stock and
the Redeemable Warrants to the extent outstanding.

                                       17

<PAGE>
 
       (q) For a period of five (5) years from the Closing Date, the Company
shall furnish to the Representative at the Company's sole expense, (i) daily
consolidated transfer sheets relating to the Common Stock and Redeemable
Warrants (ii) the list of holders of all of the Company's securities and (iii) a
Blue Sky "Trading Survey" for secondary sales of the Company's securities
prepared by counsel to the Company.

       (r) As soon as practicable, (i) but in no event more than five (5)
business days before the effective date of the Registration Statement, file a
Form 8-A with the Commission providing for the registration under the Exchange
Act of the Securities and (ii) but in no event more than thirty (30) days after
the effective date of the Registration Statement, take all necessary and
appropriate actions to be included in Standard and Poor's Corporation
Descriptions and Moody's OTC Manual and to continue such inclusion for a period
of not less than seven (7) years.

       (s) The Company hereby agrees that, except for the 750,000 shares 
reserved for future issuance under the Company's 1995 Stock Option Plan it
will not, for a period of twelve (12) months from the effective date of the
Registration Statement, adopt, propose to adopt or otherwise permit to exist
any employee, officer, director, consultant or compensation plan or similar
arrangement permitting (i) the grant, issue, sale or entry into any agreement
to grant, issue or sell any option, warrant or other contract right (x) at an
exercise price that is less than the greater of the public offering price of
the Shares set forth herein and the fair market value on the date of grant or
sale or (y) to any of its executive officers or directors or to any holder of
5% or more of the Common Stock; (ii) the maximum number of shares of Common
Stock or other securities of the Company purchasable at any time pursuant to
options or warrants issued by the Company to exceed the such 750,000 shares
reserved for future issuance under the Company's 1995 Stock Option Plan; (iii)
the payment for such securities with any form of consideration other than
cash; or (iv) the existence of stock appreciation rights, phantom options or
similar arrangements.

       (t) Until the completion of the distribution of the Securities, the
Company shall not, without the prior written consent of the Representative and
Underwriters' Counsel, issue, directly or indirectly, any press release or other
communication or hold any press conference with respect to the Company or its
activities or the offering contemplated hereby, other than trade releases issued
in the ordinary course of the Company's business consistent with past practices
with respect to the Company's operations.

       (u) For a period equal to the lesser of (i) seven (7) years from the date
hereof, and (ii) the sale to the public of the Representative's Securities, the
Company will not take any action or actions which may prevent or disqualify the
Company's use of Form SB-2 (or other appropriate form) for the registration
under the Act of the Representative's Securities.  The Company further agrees to
use its best efforts to file such post-effective amendments to the Registration
Statement, as may be necessary, in order to maintain its effectiveness and to
keep such Registration Statement effective while any of the Redeemable Warrants
or Representative's Warrants remain outstanding.

       (v) Commencing one year and one day from the date hereof, if the Company
engages the Representative as a warrant solicitation agent under the terms of
the Warrant Agreement, the Company shall pay the Representative a commission
equal to five percent (5%)

                                       18

<PAGE>
 
of the exercise price of the Redeemable Warrants, payable on the date of the
exercise thereof on the terms provided in the Warrant Agreement; provided,
                                                                 -------- 
however, the Representative shall be entitled to receive the commission
- -------                                                                
contemplated by this Section 4(v) only if: (i) the Representative has provided
actual services in connection with the solicitation of the exercise of a
Redeemable Warrant by a Warrantholder and (ii) the Warrantholder exercising a
Redeemable Warrant affirmatively designates in writing on the exercise form on
the reverse side of the Redeemable Warrant Certificate that the exercise of such
Warrantholder's Redeemable Warrant was solicited by the Representative.

    5. Payment of Expenses.
       ------------------- 

       (a) The Company hereby agrees to pay on each of the Closing Date and the
Option Closing Date (to the extent not paid at the Closing Date) all expenses
and fees (other than fees of Underwriters' Counsel, except as provided in (iv)
below) incident to the performance of the obligations of the Company under this
Agreement, the Warrant Agreement and the Representative's Warrant Agreement,
including, without limitation, (i) the fees and expenses of accountants and
counsel for the Company, (ii) all costs and expenses incurred in connection with
the preparation, duplication, printing (including mailing and handling charges),
filing, delivery and mailing (including the payment of postage with respect
thereto) of the Registration Statement and the Prospectus and any amendments and
supplements thereto and the printing, mailing (including the payment of postage
with respect thereto) and delivery of this Agreement, the Warrant Agreement, the
Representative's Warrant Agreement, the Agreement Among Underwriters, the
Selected Dealer Agreements, and related documents, including the cost of all
copies thereof and of the Preliminary Prospectuses and of the Prospectus and any
amendments thereof or supplements thereto supplied to the Underwriters and such
dealers as the Underwriters may request, in quantities as hereinabove stated,
(iii) the printing, engraving, issuance and delivery of the Securities
including, but not limited to, (x) the purchase by the Underwriters of the Firm
Securities and the Option Securities and the purchase by the Representative of
the Representative's Warrants from the Company, (y) the consummation by the
Company of any of its obligations under this Agreement, the Warrant Agreement
and the Representative's Warrant Agreement, and (z) resale of the Firm
Securities and the Option Securities by the Underwriters in connection with the
distribution contemplated hereby, (iv) the qualification of the Securities under
state or foreign securities or "Blue Sky" laws and determination of the status
of such securities under legal investment laws, including the costs of printing
and mailing the "Preliminary Blue Sky Memorandum", the "Supplemental Blue Sky
Memorandum" and "Legal Investments Survey," if any, and disbursements and fees
of counsel in connection therewith (such counsel fees not to exceed $35,000 if
the Securities are listed on Nasdaq or elsewhere or $20,000 if the Securities
are listed on the Nasdaq National Market or a national exchange), (v)
advertising costs and expenses, including but not limited to costs and expenses
in connection with the "road show", information meetings and presentations,
bound volumes and prospectus memorabilia and "tomb-stone" advertisement
expenses, (vi) costs and expenses in connection with due diligence
investigations (not to exceed $15,000), including but not limited to the fees of
any independent counsel, expert or consultant retained, (vii) fees and expenses
of the Transfer Agent and registrar and all issue and transfer taxes, if any,
(viii) applications for assignment of a rating of the Securities by qualified
rating agencies, (ix) the fees payable to the Commission

                                       19

<PAGE>
 
and the NASD, and (x) the fees and expenses incurred in connection with the
quotation of the Securities on Nasdaq and any other exchange.

       (b) If this Agreement is terminated by the Underwriters in accordance
with the provisions of Section 6 or Section 12, the Company shall reimburse and
                       -------      -------                                    
indemnify the Underwriters for all of their actual out-of-pocket expenses,
including the fees and disbursements of Underwriters' Counsel, less any amounts
already paid pursuant to Section 5(c) hereof.
                         -------             

       (c) The Company further agrees that, in addition to the expenses payable
pursuant to subsection (a) of this Section 5, it will pay to the Representative
                                   -------                                     
on the Closing Date by certified or bank cashier's check or, at the election of
the Representative, by deduction from the proceeds of the offering of the Firm
Securities, a non-accountable expense allowance equal to 2 1/2% of the gross
proceeds received by the Company from the sale of the Firm Securities, $50,000
of which has been paid to date.  In the event the Representative elects to
exercise the overallotment option described in Section 2(b) hereof, the Company
                                               -------                         
further agrees to pay to the Representative on each Option Closing Date, by
certified or bank cashier's check, or at the Representative's election, by
deduction from the proceeds of the Option Securities purchased on such Option
Closing Date, a non-accountable expense allowance equal to 2 1/2% of the gross
proceeds received by the Company from the sale of such Option Securities.

    6. Conditions of the Underwriters' Obligations.  The obligations of the
       -------------------------------------------                         
Underwriters hereunder shall be subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date and each Option Closing Date, if any, as if they had been
made on and as of the Closing Date or each Option Closing Date, as the case may
be; the accuracy on and as of the Closing Date or Option Closing Date, if any,
of the statements of the officers of the Company made pursuant to the provisions
hereof; and the performance by the Company on and as of the Closing Date and
each Option Closing Date, if any, of its covenants and obligations hereunder and
to the following further conditions:

       (a) The Registration Statement shall have become effective not later than
12:00 P.M., New York time, on the date of this Agreement or such later date and
time as shall be consented to in writing by the Representative, and, at the
Closing Date and each Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Underwriters' Counsel.  If the Company has elected to rely upon
Rule 430A of the Rules and Regulations, the price of the Shares and Redeemable
Warrants and any price-related information previously omitted from the effective
Registration Statement pursuant to such Rule 430A shall have been transmitted to
the Commission for filing pursuant to Rule 424(b) of the Rules and Regulations
within the prescribed time period and, prior to the Closing Date, the Company
shall have provided evidence satisfactory to the Representative of such timely
filing, or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations.

                                       20

<PAGE>
 
       (b) The Representative shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein not misleading, or
that the Prospectus, or any supplement thereto, contains an untrue statement of
fact which, in the Representative's opinion, is material, or omits to state a
fact which, in the Representative's opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.

       (c) On or prior to each of the Closing Date and each Option Closing Date,
if any, the Representative shall have received from Underwriters' Counsel, such
opinion or opinions with respect to the organization of the Company, the
validity of the Securities, the Registration Statement, the Prospectus and other
related matters as the Representative may request and Underwriters' Counsel
shall have received such papers and information as they request to enable them
to pass upon such matters.

       (d) At the Closing Date, the Underwriters shall have received the
favorable opinion of Heller Ehrman White & McAuliffe, counsel to the Company and
the Subsidiaries, dated the Closing Date, addressed to the Underwriters and 
substantially in the form of Schedule C.

                                     21

<PAGE>
 
       (e) At the Closing Date, the Underwriters shall have received the
favorable opinion of __________________ , patent counsel to the Company, dated
the Closing Date, addressed to the Underwriters, in form and substance
satisfactory to Underwriters' Counsel and in substantially the form of Schedule
B hereto.

       (f) At each Option Closing Date, if any, the Underwriters shall have
received the favorable opinions of each of Heller Ehrman White & McAuliffe,
counsel to the Company, and __________________, patent counsel to the Company
dated such Option Closing Date, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel confirming as of such Option
Closing Date the statements made by each of Heller Ehrman White & McAuliffe, and
__________________, in their respective opinions delivered on the Closing Date.

       (g) On or prior to each of the Closing Date and each Option Closing Date,
if any, Underwriters' Counsel shall have been furnished such documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
        -------                                                         
satisfaction of any of the representations, warranties or conditions of the
Company, or herein contained.

       (h) Prior to each of the Closing Date and each Option Closing Date, if
any, (i) there shall have been no material adverse change nor development
involving a prospective change in the condition, financial or otherwise,
earnings, position, value, properties, results of operations, prospects,
stockholders' equity or the business activities of the Company, whether or not
in the ordinary course of business, from the latest dates as of which such
condition is set forth in the Registration Statement and Prospectus; (ii) there
shall have been no transaction, not in the ordinary course of business, entered
into by the Company, from the latest date as of which the financial condition of
the Company is set forth in the Registration Statement and Prospectus which is
adverse to the Company; (iii) the Company shall not be in default under any
provision of any instrument relating to any outstanding indebtedness; (iv) none
of the Company shall not have issued any securities (other than the Securities)
or declared or paid any dividend or made any distribution in respect of its
capital stock of any class and there has not been any change in the capital
stock or any material change in the debt (long or short term) or liabilities or
obligations of the Company (contingent or otherwise); (v) no material amount of
the assets of the Company shall have been pledged or mortgaged, except as set
forth in the Registration Statement and Prospectus; (vi) no action, suit or
proceeding, at law or in equity, shall have been pending or threatened (or
circumstances giving rise to same) against the Company, or affecting any of its
or their respective properties or businesses before or by any court or federal,
state or foreign commission, board or other administrative agency wherein an
unfavorable decision, ruling or finding may adversely affect the business,
operations, earnings, position, value,

                                       22

<PAGE>
 
properties, results of operations, prospects or financial condition or income of
the Company and the Subsidiaries taken as a whole; and (vii) no stop order shall
have been issued under the Act and no proceedings therefor shall have been
initiated, threatened or contemplated by the Commission.

       (i) At each of the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial or chief accounting
officer of the Company, dated the Closing Date or Option Closing Date, as the
case may be, to the effect that each of such persons has carefully examined the
Registration Statement, the Prospectus and this Agreement, and that:

       i. The representations and warranties of the Company in this Agreement
    are true and correct, as if made on and as of the Closing Date or the Option
    Closing Date, as the case may be, and the Company has complied with all
    agreements and covenants and satisfied all conditions contained in this
    Agreement on its part to be performed or satisfied at or prior to such
    Closing Date or Option Closing Date, as the case may be;

       ii. No stop order suspending the effectiveness of the Registration
    Statement or any part thereof has been issued, and no proceedings for that
    purpose have been instituted or are pending or, to the best of each of such
    person's knowledge, are contemplated or threatened under the Act;

       iii. The Registration Statement and the Prospectus and, if any, each
    amendment and each supplement thereto, contain all statements and
    information required to be included therein, and none of the Registration
    Statement, the Prospectus nor any amendment or supplement thereto includes
    any untrue statement of a material fact or omits to state any material fact
    required to be stated therein or necessary to make the statements therein
    not misleading and neither the Preliminary Prospectus or any supplement
    thereto included any untrue statement of a material fact or omitted to state
    any material fact required to be stated therein or necessary to make the
    statements therein, in light of the circumstances under which they were
    made, not misleading; and

       iv. Subsequent to the respective dates as of which information is given
    in the Registration Statement and the Prospectus, (a) the Company has not
    incurred up to and including the Closing Date or the Option Closing Date, as
    the case may be, other than in the ordinary course of its business, any
    material liabilities or obligations, direct or contingent; (b) the Company
    has not paid or declared any dividends or other distributions on its capital
    stock; (c) the Company has not entered into any transactions not in the
    ordinary course of business; (d) there has not been any change in the
    capital stock or long-term debt or any increase in the short-term borrowings
    (other than any increase in the short-term borrowings in the ordinary course
    of business) of the Company; (e) the Company has not sustained any loss or
    damage to its properties or assets, whether or not insured; (f) there is no
    litigation which is pending or threatened (or circumstances giving rise to
    same) against the Company or any affiliated party which is required to be
    set forth in an amended or supplemented Prospectus which has not been set
    forth; and (g) there has

                                       23

<PAGE>
 
    occurred no event required to be set forth in an amended or supplemented
    Prospectus which has not been set forth.

References to the Registration Statement and the Prospectus in this subsection
(j) are to such documents as amended and supplemented at the date of such
certificate.

       (j) By the Closing Date, the Underwriters will have received clearance
from the NASD as to the amount of compensation allowable or payable to the
Underwriters, as described in the Registration Statement.

       (k) At the time this Agreement is executed, the Underwriters shall have
received a letter, dated such date, addressed to the Underwriters in form and
substance satisfactory (including the non-material nature of the changes or
decreases, if any, referred to in clause (iii) below) in all respects to the
Underwriters and Underwriters' Counsel, from Ernst & Young LLP:

       i. confirming that they are independent certified public accountants with
    respect to the Company within the meaning of the Act and the applicable
    Rules and Regulations;

       ii. stating that it is their opinion that the financial statements and
    supporting schedules of the Company included in the Registration Statement
    comply as to form in all material respects with the applicable accounting
    requirements of the Act and the Rules and Regulations thereunder and that
    the Representative may rely upon the opinion of Ernst & Young LLP with
    respect to the financial statements and supporting schedules included in the
    Registration Statement;

       iii. stating that, on the basis of a limited review which included a
    reading of the latest available unaudited interim financial statements of
    the Company, a reading of the latest available minutes of the stockholders
    and board of directors and the various committees of the board of directors
    of the Company, consultations with officers and other employees of the
    Company responsible for financial and accounting matters and other specified
    procedures and inquiries, nothing has come to their attention which would
    lead them to believe that (A) the unaudited financial statements and
    supporting schedules of the Company included in the Registration Statement
    do not comply as to form in all material respects with the applicable
    accounting requirements of the Act and the Rules and Regulations or are not
    fairly presented in conformity with generally accepted accounting principles
    applied on a basis substantially consistent with that of the audited
    financial statements of the Company included in the Registration Statement,
    or (B) at a specified date not more than five (5) days prior to the
    effective date of the Registration Statement, there has been any change in
    the capital stock or long-term debt of the Company, or any decrease in the
    stockholders' equity or net current assets or net assets of the Company as
    compared with amounts shown in the December 31, 1996 balance sheet included
    in the Registration Statement, other than as set forth in or contemplated by
    the Registration Statement, or, if there was any change or decrease, setting
    forth the amount of such change or decrease, and (C) during the period from
    December 31, 1996 to a specified date not more than five (5) days prior to
    the effective date of the Registration Statement, there

                                       24

<PAGE>
 
    was any decrease in net revenues, net earnings or increase in net earnings
    per common share of any of the Company or the Subsidiaries, in each case as
    compared with the corresponding period beginning December 31, 1995, other
    than as set forth in or contemplated by the Registration Statement, or, if
    there was any such decrease, setting forth the amount of such decrease;

       iv. setting forth, at a date not later than five (5) days prior to the
    date of the Registration Statement, the amount of liabilities of the Company
    and the Subsidiaries taken as a whole (including a break-down of commercial
    paper and notes payable to banks);

       v. stating that they have compared specific dollar amounts, numbers of
    shares, percentages of revenues and earnings, statements and other financial
    information pertaining to the Company set forth in the Prospectus in each
    case to the extent that such amounts, numbers, percentages, statements and
    information may be derived from the general accounting records, including
    work sheets, of the Company and excluding any questions requiring an
    interpretation by legal counsel, with the results obtained from the
    application of specified readings, inquiries and other appropriate
    procedures (which procedures do not constitute an examination in accordance
    with generally accepted auditing standards) set forth in the letter and
    found them to be in agreement;

       vi. statements as to such other matters incident to the transaction
    contemplated hereby as the Representative may request.

       (l) At the Closing Date and each Option Closing Date, if any, the
Underwriters shall have received from Ernst & Young LLP a letter, dated as of
the Closing Date or the Option Closing Date, as the case may be, to the effect
that they reaffirm that statements made in the letter furnished pursuant to
subsection (k) of this Section, except that the specified date referred to shall
- ----------             -------                                                  
be a date not more than five (5) days prior to the Closing Date or the Option
Closing Date, as the case may be, and, if the Company has elected to rely on
Rule 430A of the Rules and Regulations, to the further effect that they have
carried out procedures as specified in clause (v) of subsection (k) of this
                                                     ----------            
Section with respect to certain amounts, percentages and financial information
as specified by the Representative and deemed to be a part of the Registration
Statement pursuant to Rule 430A(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).

       (m) On each of the Closing Date and each Option Closing Date, if any,
there shall have been duly tendered to the Representative for the several
Underwriters' accounts the appropriate number of Securities.

       (n) No order suspending the sale of the Securities in any jurisdiction
designated by the Representative pursuant to subsection (e) of Section 4 hereof
                                             ----------        -------         
shall have been issued on either the Closing Date or the Option Closing Date, if
any, and no proceedings for that purpose shall have been instituted or shall be
contemplated.

       (o) On or before the Closing Date, the Company shall have executed and
delivered to the Representative, (i) the Representative's Warrant Agreement
substantially in the form filed

                                       25

<PAGE>
 
as Exhibit [___] to the Registration Statement, in final form and substance
satisfactory to the Representative, and (ii) the Representative's Warrants in
such denominations and to such designees as shall have been provided to the
Company.

       (p) On or before the Closing Date, the Firm Securities and Option
Securities shall have been duly approved for quotation on Nasdaq, subject to
official notice of issuance.

       (q) On or before the Closing Date, there shall have been delivered to the
Representative all of the Lock-up Agreements, in form and substance satisfactory
to Underwriters' Counsel.

       (r) On or before the Closing Date, the Company shall have executed and
delivered to the Representative and the Transfer Agent the Warrant Agreement
substantially in the form filed as Exhibit [___] to the Registration Statement,
in final form and substance satisfactory to the Representative.

    If any condition to the Underwriters' obligations hereunder to be fulfilled
prior to or at the Closing Date or the relevant Option Closing Date, as the case
may be, is not so fulfilled, the Representative may terminate this Agreement or,
if the Representative so elects, it may waive any such conditions which have not
been fulfilled or extend the time for their fulfillment.

    7. Indemnification.
       --------------- 

       (a) The Company agrees to indemnify and hold harmless each of the
Underwriters (for purposes of this Section 7 "Underwriter" shall include the
                                   -------                                  
officers, directors, partners, employees, agents and counsel of the Underwriter,
including specifically each person who may be substituted for an Underwriter as
provided in Section 11 hereof), and each person, if any, who controls the
            -------                                                      
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions,
proceedings, investigations, inquiries, suits and litigation in respect
thereof), whatsoever (including but not limited to any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any such claim, action, proceeding, investigation, inquiry, suit or litigation,
commenced or threatened, or any claim whatsoever), as such are incurred, to
which the Underwriter or such controlling person may become subject under the
Act, the Exchange Act or any other statute or at common law or otherwise or
under the laws of foreign countries, arising out of or based upon (A) any untrue
statement or alleged untrue statement of a material fact contained (i) in any
Preliminary Prospectus, the Registration Statement or the Prospectus (as from
time to time amended and supplemented); (ii) in any post-effective amendment or
amendments or any new registration statement and prospectus in which is included
securities of the Company issued or issuable upon exercise of the Securities; or
(iii) in any application or other document or written communication (in this
Section 7 collectively called "application") executed by the Company or based
- -------                                                                      
upon written information furnished by the Company in any jurisdiction in order
to qualify the Securities under the securities laws thereof or filed with the
Commission, any state securities commission or agency, Nasdaq or any other
securities exchange; (B) the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the

                                       26

<PAGE>
 
statements therein not misleading (in the case of the Prospectus, in the light
of the circumstances under which they were made), or (C) any breach of any
representation, warranty, covenant or agreement of the Company contained herein
or in any certificate by or on behalf of the Company or any of its officers
delivered pursuant hereto, unless, in the case of clause (A) or (B) above, such
statement or omission was made in reliance upon and in strict conformity with
written information furnished to the Company with respect to any Underwriter by
or on behalf of such Underwriter expressly for use in any Preliminary
Prospectus, the Registration Statement or Prospectus, or any amendment thereof
or supplement thereto, or in any application, as the case may be.

    The indemnity agreement in this subsection (a) shall be in addition to any
                                    ----------                                
liability which the Company may have at common law or otherwise.

       (b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of the Act, to the same extent
as the foregoing indemnity from the Company to the Underwriters but only with
respect to statements or omissions, if any, made in any Preliminary Prospectus,
the Registration Statement or Prospectus or any amendment thereof or supplement
thereto or in any application made in reliance upon, and in strict conformity
with, written information furnished to the Company with respect to any
Underwriter by such Underwriter expressly for use in such Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment thereof or
supplement thereto or in any such application, provided that such written
information or omissions only pertain to disclosures in the Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering.  The
Company acknowledges that the statements with respect to the public offering of
the Firm Securities and the Option Securities set forth under the heading
"Underwriting" and the stabilization legend in the Prospectus have been
furnished by the Underwriters expressly for use therein and constitute the only
information furnished in writing by or on behalf of the Underwriters for
inclusion in the Prospectus.

       (c) Promptly after receipt by an indemnified party under this Section 7
                                                                     -------  
of notice of the commencement of any claim, action, suit, investigation,
inquiry, proceeding or litigation, such indemnified party shall, if a claim in
respect thereof is to be made against one or more indemnifying parties under
this Section 7, notify each party against whom indemnification is to be sought
     -------                                                                  
in writing of the commencement thereof (but the failure so to notify an
indemnifying party shall not relieve it from any liability which it may have
under this Section 7 except to the extent that it has been prejudiced in any
           -------                                                          
material respect by such failure or from any liability which it may have
otherwise).  In case any such claim, action, suit, investigation, inquiry,
proceeding or litigation is brought against any indemnified party, and it
notifies an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties will be entitled to participate therein, and to
the extent it may elect by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party.  Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such case
but the fees and expenses of such counsel shall be at

                                       27

<PAGE>
 
the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by the indemnifying parties
in connection with the defense of thereof at the expense of the indemnifying
party, (ii) the indemnifying parties shall not have employed counsel reasonably
satisfactory to such indemnified party to have charge of the defense thereof
within a reasonable time after notice of commencement thereof, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense thereof on
behalf of the indemnified party or parties), in any of which events such fees
and expenses of one additional counsel shall be borne by the indemnifying
parties.  In no event shall the indemnifying parties be liable for fees and
expenses of more than one counsel (in addition to any local counsel) separate
from their own counsel for all indemnified parties in connection with any one
claim, action, suit, investigation, inquiry, proceeding or litigation or
separate but similar or related claims, actions, suits, investigations,
inquiries, proceedings or litigation in the same jurisdiction arising out of the
same general allegations or circumstances.  Anything in this Section 7 to the
                                                             -------         
contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim, action, suit, investigation, inquiry, proceeding or
litigation effected without its written consent; provided, however, that such
                                                 --------  -------           
consent was not unreasonably withheld.  An indemnifying party will not, without
the prior written consent of the indemnified parties, settle, compromise or
consent to the entry of any judgment with respect to any pending or threatened
claim, action, suit, investigation, inquiry, proceeding or litigation in respect
of which indemnification or contribution may be sought hereunder (whether or not
the indemnified parties are actual or potential parties to such claim, action,
suit, investigation, inquiry, proceeding or litigation), unless such settlement,
compromise or consent (i) includes an unconditional release of each indemnified
party from all liability arising out of such claim, action, suit, investigation,
inquiry, proceeding or litigation and (ii) does not include a statement as to or
an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.

       (d) In order to provide for just and equitable contribution in any case
in which (i) an indemnified party makes claim for indemnification pursuant to
this Section 7, but it is judicially determined (by the entry of a final
     -------                                                            
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
the express provisions of this Section 7 provide for indemnification in such
                               -------                                      
case, or (ii) contribution under the Act may be required on the part of any
indemnified party, then each indemnifying party shall contribute to the amount
paid as a result of such losses, claims, damages, expenses or liabilities (or
actions in respect thereof) (A) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified on the other hand, from the offering of
the Firm Securities and the Option Securities or (B) if the allocation provided
by clause (A) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each of the contributing parties, on the
one hand, and the party to be indemnified on the other hand in connection with
the statements or omissions that resulted in such losses, claims, damages,
expenses or liabilities, as well as any other relevant equitable considerations.
In any case where the Company is the contributing party and the Underwriters are
the indemnified party, the relative benefits received by the Company on the one
hand, and

                                       28

<PAGE>
 
the Underwriters, on the other, shall be deemed to be in the same proportion as
the total net proceeds from the offering of the Firm Securities and the Option
Securities (before deducting expenses) bear to the total underwriting discounts
received by the Underwriters hereunder, in each case as set forth in the table
on the Cover Page of the Prospectus.  Relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, or by the Underwriters, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission.  The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
expenses or liabilities (or actions in respect thereof) referred to above in
this subsection (d) shall be deemed to include any legal or other expenses
     ----------                                                           
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim.  Notwithstanding the provisions of this
subsection (d), the Underwriters shall not be required to contribute any amount
- ----------                                                                     
in excess of the underwriting discount applicable to the Firm Securities and the
Option Securities purchased by the Underwriters hereunder.  No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.  For purposes of this Section 7, each person, if
                                                    -------                   
any, who controls the Company or the Underwriter within the meaning of the Act,
each officer of the Company who has signed the Registration Statement, and each
director of the Company shall have the same rights to contribution as the
Company or the Underwriter, as the case may be, subject in each case to this
subsection (d).  Any party entitled to contribution will, promptly after receipt
- ----------                                                                      
of notice of commencement of any action, suit or proceeding against such party
in respect to which a claim for contribution may be made against another party
or parties under this subsection (d), notify such party or parties from whom
                      ----------                                            
contribution may be sought, but the omission so to notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have hereunder or otherwise than under this
subsection (d), or to the extent that such party or parties were not adversely
- ----------                                                                    
affected by such omission.  The contribution agreement set forth above shall be
in addition to any liabilities which any indemnifying party may have at common
law or otherwise.

    8. Representations and Agreements to Survive Delivery.  All representations,
       --------------------------------------------------                       
warranties and agreements contained in this Agreement or contained in
certificates of officers of the Company submitted pursuant hereto, shall be
deemed to be representations, warranties and agreements at the Closing Date and
the Option Closing Date, as the case may be, and such representations,
warranties and agreements of the Company and the indemnity agreements contained
in Section 7 hereof, shall remain operative and in full force and effect
   -------                                                              
regardless of any investigation made by or on behalf of any Underwriter, the
Company, any controlling person of any Underwriter or the Company, and shall
survive termination of this Agreement or the issuance and delivery of the
Securities to the Underwriters and the Representative, as the case may be.

    9. Effective Date.  This Agreement shall become effective at 10:00 a.m., New
       --------------                                                           
York City time, on the next full business day following the date hereof, or at
such earlier time after the Registration Statement becomes effective as the
Representative, in its discretion, shall release the Securities for sale to the
public; provided, however, that the provisions of Sections 5, 7 and
        --------  -------                         --------         

                                       29

<PAGE>
 
10 of this Agreement shall at all times be effective.  For purposes of this
Section 9, the Securities to be purchased hereunder shall be deemed to have been
- -------                                                                         
so released upon the earlier of dispatch by the Representative of telegrams to
securities dealers releasing such securities for offering or the release by the
Representative for publication of the first newspaper advertisement which is
subsequently published relating to the Securities.

    10.  Termination.
         ----------- 

       (a) Subject to subsection (b) of this Section 10, the Representative
                      ----------             -------                       
shall have the right to terminate this Agreement, (i) if any domestic or
international event or act or occurrence has materially adversely disrupted, or
in the Representative's opinion will in the immediate future materially
adversely disrupt, the financial markets; or (ii) if any material adverse
change in the financial markets shall have occurred; or (iii) if trading
generally shall have been suspended or materially limited on or by, as the
case may be, any of the New York Stock Exchange, the American Stock Exchange,
the NASD, the Commission or any governmental authority having jurisdiction
over such matters; or (iv) if trading of any of the securities of the Company
shall have been suspended, or any of the securities of the Company shall have
been delisted, on any exchange or in any over-the-counter market; (v) if the
United States shall have become involved in a war or major hostilities, or if
there shall have been an escalation in an existing war or major hostilities or
a national emergency shall have been declared in the United States; or (vi) if
a banking moratorium has been declared by a state or federal authority; or
(vii) if a moratorium in foreign exchange trading has been declared; or (viii)
if the Company shall have sustained a loss material or substantial to the
Company by fire, flood, accident, hurricane, earthquake, theft, sabotage or
other calamity or malicious act which, whether or not such loss shall have
been insured, will, in the Representative's opinion, make it inadvisable to
proceed with the offering, sale and/or delivery of the Securities; or (ix) if
there shall have been such a material adverse change in the conditions or
prospects of the Company, or such material adverse change in the general
market, political or economic conditions, in the United States or elsewhere,
that, in each case, in the Representative's judgment, would make it
inadvisable to proceed with the offering, sale and/or delivery of the
Securities or (x) if either John W. Fara or John W. Shell shall no longer
serve the Company in his present capacity.

       (b) If this Agreement is terminated by the Representative in accordance
with the provisions of Section 10(a) the Company shall promptly reimburse and
                       -------                                               
indemnify the Representative for all of its actual out-of-pocket expenses, in
an amount not to exceed $100,000, including the fees and disbursements of
counsel for the Underwriters and all Blue Sky Counsel fees (excluding filing
fees) and disbursements (less amounts previously paid pursuant to Section 5(c)
                                                                  -------
above). Notwithstanding any contrary provision contained in this Agreement, if
this Agreement shall not be carried out within the time specified herein, or
any extension thereof granted to the Representative, by reason of any failure
on the part of the Company to perform any undertaking or satisfy any condition
of this Agreement by it to be performed or satisfied (including, without
limitation, pursuant to Section 6 (except if this Agreement is terminated 
                        -------
pursuant to Sections 6(c), 6(k) or 6(o) or Section 12) then, the Company shall
                                           -------
promptly reimburse and indemnify the Representative for all of its actual out-
of-pocket expenses, including the fees and disbursements of counsel for the
Underwriters (less amounts previously paid pursuant to Section 5(c) above). In
                                                       -------
addition, the Company shall remain liable for all Blue Sky counsel fees and
disbursements, expenses and filing fees (such counsel fees not to exceed
$35,000 if the Securities are listed on Nasdaq or elsewhere or $20,000 if the
Securities are listed on the Nasdaq National

                                       30

<PAGE>
 
Market or a national exchange).  Notwithstanding any contrary provision
contained in this Agreement, any election hereunder or any termination of this
Agreement (including, without limitation, pursuant to Sections 6, 10, 11 and 12
                                                      --------                 
hereof), and whether or not this Agreement is otherwise carried out, the
provisions of Section 5 and Section 7 shall not be in any way affected by such
              -------       -------                                           
election or termination or failure to carry out the terms of this Agreement or
any part hereof.

    11.  Substitution of the Underwriters.  If one or more of the Underwriters
         --------------------------------                                     
shall fail (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 6, Section 10 or Section 12
                                       -------    -------       -------   
hereof) to purchase the Securities which it or they are obligated to purchase on
such date under this Agreement (the "Defaulted Securities"), the Representative
shall have the right, within 24 hours thereafter, to make arrangement for one or
more of the non-defaulting Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Securities in such amounts as may
be agreed upon and upon the terms herein set forth; if, however, the
Representative shall not have completed such arrangements within such 24-hour
period, then:

       (a) if the number of Defaulted Securities does not exceed 10% of the
    total number of Firm Securities to be purchased on such date, the non-
    defaulting Underwriters shall be obligated to purchase the full amount
    thereof in the proportions that their respective underwriting obligations
    hereunder bear to the underwriting obligations of all non-defaulting
    Underwriters, or

       (b) if the number of Defaulted Securities exceeds 10% of the total number
    of Firm Securities, this Agreement shall terminate without liability on the
    part of any non-defaulting Underwriters (or, if such default shall occur
    with respect to any Option Securities to be purchased on an Option Closing
    Date, the Underwriters may at the Representative's option, by notice from
    the Representative to the Company, terminate the Underwriters' obligation to
    purchase Option Securities from the Company on such date).

    No action taken pursuant to this Section 11 shall relieve any defaulting
                                     -------                                
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.

    In the event of any such default which does not result in a termination of
this Agreement, the Representative shall have the right to postpone the Closing
Date for a period not exceeding seven (7) days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements.

    12.  Default by the Company.  If the Company shall fail at the Closing Date
         ----------------------                                                
or at any Option Closing Date, as applicable, to sell and deliver the number of
Securities which it is obligated to sell hereunder on such date, then this
Agreement shall terminate (or, if such default shall occur with respect to any
Option Securities to be purchased on an Option Closing Date, the Underwriters
may at the Representative's option, by notice from the Representative to the
Company, terminate the Underwriters' obligation to purchase Option Securities
from the Company on such date) without any liability on the part of any non-
defaulting party other than

                                       31

<PAGE>
 
pursuant to Section 5, Section 7 and Section 10 hereof.  No action taken
            -------    -------       -------                            
pursuant to this Section 12 shall relieve the Company from liability, if any, in
                 -------                                                        
respect of such default.

    13.  Notices.  All notices and communications hereunder, except as herein
         -------                                                             
otherwise specifically provided, shall be in writing and shall be deemed to have
been duly given if mailed or transmitted by any standard form of
telecommunication.  Notices to the Underwriters shall be directed to the
Representative at National Securities Corporation, 1001 Fourth Avenue, Suite
2200, Seattle, Washington 98154, Attention:  Steven A. Rothstein, Chairman, with
a copy to Orrick, Herrington & Sutcliffe LLP, 666 Fifth Avenue, New York, New
York 10103, Attention:  Lawrence B. Fisher, Esq.  Notices to the Company shall
be directed to the Company at 1170 B Chess Drive, Foster City, California,
94404, Attention: John W. Fara, President and Chief Executive Officer, with a
copy to: Heller Ehrman White & McAuliffe, 525 University Avenue, Palo Alto,
California 94301, Attention: Julian N. Stern, Esq.

    14.  Parties.  This Agreement shall inure solely to the benefit of and shall
         -------                                                                
be binding upon, the Underwriters, the Company and the controlling persons,
directors and officers referred to in Section 7 hereof, and their respective
                                      -------                               
successors, legal representatives and assigns, and no other person shall have or
be construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provisions herein contained.
No purchaser of Securities from any Underwriter shall be deemed to be a
successor by reason merely of such purchase.

    15.  Construction.  This Agreement shall be governed by and construed and
         ------------                                                        
enforced in accordance with the laws of the State of New York without giving
effect to the choice of law or conflict of laws principles.

    16.  Counterparts.  This Agreement may be executed in any number of
         ------------                                                  
counterparts, each of which shall be deemed to be an original, and all of which
taken together shall be deemed to be one and the same instrument.

    17.  Entire Agreement; Amendments.  This Agreement, the Warrant Agreement
         ----------------------------                                        
and the Representative's Warrant Agreement constitute the entire agreement of
the parties hereto and supersede all prior written or oral agreements,
understandings and negotiations with respect to the subject matter hereof.  This
Agreement may not be amended except in a writing, signed by the Representative
and the Company.

                                       32

<PAGE>
 
    If the foregoing correctly sets forth the understanding between the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.

                                      Very truly yours,

                                      DEPOMED, INC.



                                      By:_____________________________________
                                         John W. Fara
                                         President and Chief Executive Officer

Confirmed and accepted as of
the date first above written.


NATIONAL SECURITIES CORPORATION

For itself and as Representative
 of the several Underwriters named
 in Schedule A hereto.


By:_______________________________
  Steven A. Rothstein
  Chairman



<PAGE>
 
                                  SCHEDULE A
                                  ----------

<TABLE>
<CAPTION>
 
 
 
NAME OF UNDERWRITERS                    NUMBER OF         NUMBER OF
- --------------------                   SHARES OF         REDEEMABLE
                                      COMMON STOCK        WARRANTS
                                     TO BE PURCHASED   TO BE PURCHASED
                                     ---------------   ---------------
 
<S>                                  <C>               <C>
 
National Securities Corporation...
 
 
 
 
 
 
 
Total.............................         2,500,000         1,250,000
                                     ===============   ===============
======================================================================
 
</TABLE>




<PAGE>
 
                                   SCHEDULE B
                                   ----------



                    [FORM OF INTELLECTUAL PROPERTY OPINION]



                                 ___________________, 1997



NATIONAL SECURITIES CORPORATION
 As Representative of the several
 Underwriters named in Schedule A
 to the Underwriting Agreement
1001 Fourth Avenue
Suite 2200
Seattle, Washington  98154

          Re:  Initial Public Offering of 2,500,000 Shares of Common Stock and
               1,250,000 Redeemable Common Stock Purchase Warrants
               of DepoMed, Inc.
               -----------------------------------------------------------------

Gentlemen:

          We have acted as special counsel to DepoMed, Inc., a California
corporation (the "Company"), in connection with the entering into by the Company
of that certain Underwriting Agreement by and between National Securities
Corporation (as representative of the several underwriters named therein) (the
"Representative") and the Company, dated _______________, 1997 (the
"Underwriting Agreement").  This opinion is provided to you pursuant to Section
6(e) of the Underwriting Agreement.

          For the purpose of rendering the opinions set forth below we have
reviewed the following (collectively, the "Documents"):

          (i)  the Underwriting Agreement;

          (ii) that certain Form SB-2 as filed by the Company with the
          Securities and Exchange Commission on ______, 1997, together with any
          and all exhibits and schedules and all heretofore filed amendments
          thereto (collectively, the "Registration Statement");

          (iii)  the Company's prospectus dated _______________, 1997 (the
          "Prospectus");

          (iv) a search of the United States Patent and Trademark Office records
          relevant to ownership of any and all:



<PAGE>
 
                                      -2-
                                                      ________________, 1997
                                                  
               patents and patent applications (including, without limitation,
               the patents and patent applications listed on Schedule A annexed
               hereto and hereby incorporated by reference herein (collectively,
               the "Patents")), and trademarks, trademark applications, service
               marks and service mark applications (collectively, the "Marks")
               (including, without limitation, the Marks listed on Schedule B
               annexed hereto and hereby incorporated by reference herein
               (collectively, the "Trademarks")),

          owned, purportedly owned or licensed by either the Company or the
          Subsidiary (including, those patents, patent applications and Marks
          licensed, without limitation, pursuant to the licenses listed on
          Schedule C annexed hereto and hereby incorporated by reference herein
          (collectively, the "Licenses")), conducted by ____________________
          and certified as true and correct as of _________________________,
          1997 (no earlier than 5 days prior to the effective date of the
          Registration Statement);

          (v) a search of the United States Copyright Office records relevant to
          ownership of any and all copyrighted material (including, without
          limitation, the copyright in, or license permitting the Company's
          actual use of, the material licensed or otherwise distributed by
          either the Company and listed on Schedule D annexed hereto and hereby
          incorporated by reference herein (collectively, the "Copyrighted
          Material")), owned, purportedly owned or licensed by the Company
          conducted by _____________________ and certified as true and correct
          as of __________________, 1997 (no earlier than 5 days prior to the
          effective date of the Registration Statement);

          (vi) an intellectual property litigation search with respect to all
          Patents, Trademarks, Licenses and Copyrighted Material, listed on
          Schedules A, B, C and D, respectively;

          (vii)  a search of the Uniform Commercial Code ("UCC") recordation
          offices, in the following jurisdictions -- California, Delaware and
          New York, with respect to the following two categories of general
          intangibles:

               (a)  the intellectual property general intangibles of the
               Company, including, without limitation, the Company's patents,
               patent applications, inventions, know how, trademarks, service
               marks, copyrights, service and trade names, intellectual property
               licenses and other rights, and

               (b)  the intellectual property general intangibles licensed to
               the Company, including, without limitation, the patents, patent
               applications, inventions, know how, trademarks, service marks,
               copyrights, service and trade names and other

<PAGE>
 
                                      -3-

                                                    ________________, 1997    

               intellectual property rights licensed to the Company pursuant to
               the Licenses (listed on Schedule C),

          said search certified to us as complete and accurate by
          ________________ and current through ________________________, 1997
          (no earlier than 5 days prior to the effective date of the
          Registration Statement) and said jurisdictions being the only
          jurisdictions in which filing of UCC financing statements or other
          documents may be filed to effectively evidence a security or other
          interest in said general intangibles; and

          (viii)  any and all records, documents, instruments and agreements in
          our possession or under our control relating to the Company.

          We have also examined such corporate records, documents, instruments
and agreements, and inquired into such other matters, as we have deemed
necessary or appropriate as a basis for the opinions set forth herein.  Whenever
our opinion herein is qualified by the phrase "to the best of our knowledge" or
"to the best of our knowledge, after due inquiry," such language means that,
based upon (i) our inquiries of officers of the Company, (ii) our review of the
Documents, and (iii) our review of such other corporate records, documents,
instruments and agreements described in the first sentence of this paragraph, we
believe that such opinions are factually correct.

          To the best of our knowledge, as to all matters of fact represented to
you by the Company, we advise you that nothing has come to our attention that
would cause us to believe that such facts are incorrect, incomplete or
misleading or that reliance thereon is not warranted under the circumstances.
We call to your attention that our opinion is limited to such facts as they
exist on the date hereof and do not take into account any change of
circumstances, fact or law subsequent thereto.

          Based upon and subject to the foregoing, we are of the opinion that:

               1.  To the best of our knowledge, after due inquiry, except as
          described in the Prospectus, the Company owns or has the right to use,
          free and clear of all liens, encumbrances, pledges, security
          interests, defects or other restrictions or equities of any kind
          whatsoever,

               (i) all patents and patent applications (including, without
               limitation, the Patents),

               (ii) all trademarks and service marks (including, without
               limitation, the Trademarks),

               (iii)  all copyrights (including, without limitation, the
               Copyrighted Material),

               (iv) all service and trade names, and

<PAGE>
 
                                      -4-

                                                   __________________, 1997

               (v)  all intellectual property licenses (including, without
               limitation, the Licenses),

          used in, or required for, the conduct of the Company's respective
          business.

               2.  To the best of our knowledge, after due inquiry, the Company
          possesses all material intellectual property licenses or rights used
          in, or required for, the conduct of its respective business
          (including, the Licenses and without limitation, any such licenses or
          rights described in the Prospectus as being owned, possessed or
          licensed by the Company) and such licenses and rights are in full
          force and effect.

               3.  To the best of our knowledge, after due inquiry, there is no
          claim or action, pending, threatened or potential, which affects or
          could affect the rights of the Company with respect to any trademarks,
          service marks, copyrights, service names, trade names, patents, patent
          applications or licenses used in, or required for, the conduct of the
          Company's business.

               4.  To the best of our knowledge, after due inquiry, there is no
          intellectual property based claim or action, pending, threatened or
          potential, which affects or could affect the rights of the Company
          with respect to any products, services, processes or licenses,
          including, without limitation, the Licenses used in the conduct of the
          Company's business.

               5.  To the best of our knowledge, after due inquiry, except as
          described in the Prospectus, the Company is not under any obligation
          to pay royalties or fees to any third party with respect to any
          material, technology or intellectual properties developed, employed,
          licensed or used by the Company.

               6.  To the best of our knowledge, after due inquiry, the
          statements in the Prospectus under the headings, "Risk Factors -
          Uncertainty Regarding Patents and Proprietary Rights," and "Business -
          Patents and Proprietary Rights", are accurate in all material
          respects, fairly represent the information disclosed therein and do
          not omit to state any fact necessary to make the statements made
          therein complete and accurate.

               7.  To the best of our knowledge, after due inquiry, the
          statements in the Registration Statement and Prospectus do not contain
          any untrue statement of a material fact with respect to the
          intellectual property position of the Company, or omit to state any
          material fact relating to the intellectual property position of the
          Company which is required to be stated in the Registration Statement
          and the Prospectus or is necessary to make the statements therein not
          misleading.

<PAGE>
 
                                      -5-
                                                  _____________________, 1997

          We call your attention to the fact that the members of this firm are
licensed to practice law in the State of ______________ and before the United
States Patent and Trademark Office as Registered Patent Attorneys.  Accordingly,
we express no opinion with respect to the laws, rules and regulations of any
jurisdictions other than the State of ___________ and the United States of
America.

          The opinions expressed herein are for the sole benefit of, and may be
relied upon only by, the several Underwriters named in Schedule A to the
Underwriting Agreement and Orrick, Herrington & Sutcliffe LLP.

                  Very truly yours,



<PAGE>
 
                                                                     Exhibit 3.2

                              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.

     This Corporation is authorized to issue two classes of shares, which shall
be known as Common Stock and Preferred Stock respectively.  The total number of
shares of Common Stock which this Corporation is authorized to issue is
25,000,000 shares, and the total number of shares of Preferred Stock this
Corporation is authorized to issue is 5,000,000 shares.

     Shares of Preferred Stock may be issued from time to time in one or more
series.  The Board of Directors shall determine the designation of each series
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 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

<PAGE>
 
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.


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


                                       V.

     The right to cumulate votes in the election of directors shall be
eliminated in accordance with Section 301.5 of the California Corporations Code.
This provision shall become effective only when the Corporation becomes a listed
corporation within the meaning of Section 301.5 of the Corporations Code.


                                      VI.

     Any action required or permitted to be taken by the shareholders of the
Corporation at any time after the registration of any class of securities of
this Corporation pursuant to the Securities Act of 1933 must be effected as a
duly called annual or special meeting of shareholders of the Corporation and may
not be effected by any consent in writing by the shareholders.

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

     4.   The foregoing Amended and Restated Articles of Incorporation have been
duly approved by the required vote of the

<PAGE>
 
shareholders of this Corporation in accordance with Sections 902 and 903 of the
California Corporations Code.  The total number of outstanding shares of stock
of the Corporation is 2,327,368 shares of Series A Preferred, 278,500 shares of
Series B Preferred and 10,064,474 shares of Common Stock.  The number of shares
voting in favor of the amendment equaled or exceeded the vote required, such
required vote being a majority of the outstanding shares of the Preferred and of
the outstanding shares of the Common Stock voting together as a class and a
majority of the outstanding shares of the Series A Preferred, Series B Preferred
and the Common Stock voting as separate classes.

     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 our
own knowledge.

     Executed at Palo Alto, California, this __th day of ____, 1997.



                              ----------------------------------------
                              JOHN W. FARA, President



                              ---------------------------------------- 
                              JULIAN N. STERN, Secretary

                                      -3-



<PAGE>
 
                                                                     EXHIBIT 4.3

                                                                       OHS DRAFT
                                                                         6/12/97


                  [FORM OF REPRESENTATIVE'S WARRANT AGREEMENT]
                         [SUBJECT TO ADDITIONAL REVIEW]

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



                                 DEPOMED, INC.

                                      AND

                        NATIONAL SECURITIES CORPORATION


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



                                REPRESENTATIVE'S
                               WARRANT AGREEMENT



                           DATED AS OF ________, 1997



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

<PAGE>
 
     REPRESENTATIVE'S WARRANT AGREEMENT dated as of _______, 1997 between
DEPOMED, INC., a California corporation (the "Company"), and NATIONAL SECURITIES
CORPORATION (hereinafter referred to variously as the "Holder" or the
"Representative").

                              W I T N E S S E T H:
                              - - - - - - - - - - 

     WHEREAS, the Company proposes to issue to the Representative warrants
("Warrants") to purchase up to an aggregate 250,000 shares of Common Stock, no
par value, of the Company and/or 125,000 redeemable common stock purchase
warrants of the Company ("Redeemable Warrants"), each Redeemable Warrant to
purchase one additional share of Common Stock; and

     WHEREAS, the Representative has agreed pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof between the
Company and the several Underwriters listed therein to act as the Representative
in connection with the Company's proposed public offering of up to 2,500,000
shares of Common Stock and 1,250,000 Redeemable Warrants (the "Public Warrants")
at a public offering price of $____ per
 share of Common Stock and $.10 per
Public Warrant (the "Public Offering"); and

     WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representative in consideration for, and as
part of the Representative's compensation in connection with, the Representative
acting as the Representative pursuant to the Underwriting Agreement;

<PAGE>
 
     NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate twenty-five dollars ($25.00), the
agreements herein set forth and other good and valuable consideration, hereby
acknowledged, the parties hereto agree as follows:

     1.  Grant.  The Representative (or its designees) is hereby granted the
         -----                                                              
right to purchase, at any time from _______, 1998 [one year from the effective
date of the Registration Statement], until 5:30 P.M., New York time, on _______,
2002 [five years from the effective date of the Registration Statement], up to
an aggregate of 250,000 shares of Common Stock and/or 125,000 Redeemable
Warrants at an initial exercise price (subject to adjustment as provided in
                                                                           
Section 8 hereof) of $____ per share of Common Stock [165% of the initial public
- -------                                                                         
offering price per share] and $____ per Redeemable Warrant [165% of the initial
public offering price per Redeemable Warrant], subject to the terms and
conditions of this Agreement.  One Redeemable Warrant is exercisable to purchase
one additional share of Common Stock at an initial exercise price of $_____
[140% of the initial public offering price per share] from _______, 1998 [one
year from the effective date of the registration statement] until 5:30 p.m. New
York time on _____, 2002 [five years from the effective date of the registration
statement], at which time the Redeemable Warrants shall expire.  Except as set
forth herein, the shares of Common Stock and the Redeemable Warrants issuable
upon exercise of the Warrants are in all respects identical to the shares of
Common Stock and the Public Warrants being purchased by the Underwriters for
resale to the public pursuant to the terms and provisions of the Underwriting
Agreement.  The shares of Common Stock and the Redeemable Warrants issuable upon
exercise of the Warrants are sometimes hereinafter referred to collectively as
the "Securities."

                                     -2-

<PAGE>
 
     2.  Warrant Certificates.  The warrant certificates (the "Warrant
         --------------------                                         
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.

     3.  Exercise of Warrant.
         ------------------- 

     3.1  Method of Exercise.  The Warrants initially are exercisable
          ------------------                                         
at an aggregate initial exercise price (subject to adjustment as provided in
                                                                            
Section 8 hereof) per share of Common Stock and Redeemable Warrant set forth in
- -------                                                                        
Section 6 hereof payable by certified or official bank check in New York
- -------                                                                 
Clearing House funds, subject to adjustment as provided in Section 8 hereof.
                                                           -------           
Upon surrender of a Warrant Certificate with the annexed Form of Election to
Purchase duly executed, together with payment of the Exercise Price (as
hereinafter defined) for the shares of Common Stock and/or Redeemable Warrants
purchased at the Company's principal executive offices in New York (presently
located at 1170 B Chess Drive, Foster City, California 94404) the registered
holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to
receive a certificate or certificates for the shares of Common Stock so
purchased and a certificate or certificates for the Redeemable Warrants so
purchased.  The purchase rights represented by each Warrant Certificate are
exercisable at the option of the Holder thereof, in whole or in part (but not as
to fractional shares of the Common Stock and Redeemable Warrants underlying the
Warrants).  In the event the Company redeems all of the Public Warrants (other
than the Redeemable Warrants underlying the Warrants), then the Warrants may
only be exercised if such exercise is accompanied by the simultaneous exercise
of the Redeemable Warrant(s) underlying the Warrants being so exercised.
Warrants may be exercised to purchase all or part of the shares of Common Stock
together with an equal or unequal number of the Redeemable Warrants represented
thereby.  In the case of the

                                     -3-

<PAGE>
 
purchase of less than all the shares of Common Stock and/or Redeemable Warrants
purchasable under any Warrant Certificate, the Company shall cancel said Warrant
Certificate upon the surrender thereof and shall execute and deliver a new
Warrant Certificate of like tenor for the balance of the shares of Common Stock
and/or Redeemable Warrants purchasable thereunder.

     3.2  Exercise by Surrender of Warrant.  In addition to the method
          --------------------------------                            
of payment set forth in Section 3.1 and in lieu of any cash payment required
                        -------                                             
thereunder, the Holder(s) of the Warrants shall have the right at any time and
from time to time to exercise the Warrants in full or in part by surrendering
the Warrant Certificate in the manner specified in Section 3.1 hereof.  The
                                                   -------                 
number of shares of Common Stock to be issued pursuant to this Section 3.2 shall
                                                               -------          
be equal to the difference between (a) the number of shares of Common Stock in
respect of which the Warrants are exercised and (b) a fraction, the numerator of
which shall be number of shares of Common Stock in respect of which the Warrants
are exercised multiplied by the Exercise Price and the denominator of which
shall be the Market Price (as defined in Section  3.3 hereof) of the Common
                                         --------                          
Stock.  The number of Redeemable Warrants to be issued pursuant to this Section
                                                                        -------
3.2 shall be equal to the difference between (a) the number of Redeemable
Warrants in respect of which the Warrants are exercised and (b) a fraction, the
numerator of which shall be the number of Redeemable Warrants in respect of
which the Warrants are exercised multiplied by the Exercise Price and the
denominator of which shall be the Market Price (as defined in Section 3.3
                                                              -------    
hereof) of the Redeemable Warrants.  Solely for the purposes of this paragraph,
Market Price shall be calculated either (i) on the date on which the form of
election attached hereto is deemed to have been sent to the Company pursuant to
Section 14 hereof ("Notice Date") or (ii) as the average of the Market Prices
for each of the five trading days preceding the Notice Date, whichever of (i) or
(ii) is greater.

                                     -4-

<PAGE>
 
     3.3  Definition of Market Price. As used herein, the phrase "Market
          --------------------------                                    
Price" at any date shall be deemed to be (i) when referring to the Common Stock,
the last reported sale price, or, in case no such reported sale takes place on
such day, the average of the last reported sale prices for the last three (3)
trading days, in either case as officially reported by the principal securities
exchange on which the Common Stock is listed or admitted to trading or by the
Nasdaq SmallCap Market ("Nasdaq SmallCap") or by the National Association of
Securities Dealers Automated Quotation System ("Nasdaq"), or, if the Common
Stock is not listed or admitted to trading on any national securities exchange
or quoted by Nasdaq, the average closing bid price as furnished by the National
Association of Securities Dealers, Inc. ("NASD") through Nasdaq or similar
organization if Nasdaq is no longer reporting such information, or if the Common
Stock is not quoted on Nasdaq, as determined in good faith (using customary
valuation methods) by resolution of the members of the Board of Directors of the
Company, based on the best information available to it or (ii) when referring to
a Redeemable Warrant, the last reported sales price, or, in the case no such
reported sale takes place on such day, the average of the last reported sale
prices for the last three (3) trading days, in either case as officially
reported by the principal securities exchange on which the Redeemable Warrants
are listed or admitted to trading or by Nasdaq, or, if the Redeemable Warrants
are not listed or admitted to trading on any national securities exchange or
quoted by Nasdaq, the average closing bid price as furnished by the NASD through
Nasdaq or similar organization if Nasdaq is no longer reporting such
information, or if the Redeemable Warrants are not quoted on Nasdaq or are no
longer outstanding, the Market Price of a Redeemable Warrant shall equal the
difference between the Market Price of the Common Stock and the Exercise Price
of the Redeemable Warrant.

     4.  Issuance of Certificates.  Upon the exercise of the
         ------------------------                           
Warrants, the issuance of certificates for shares of Common Stock and/or
Redeemable Warrants and/or other securities,

                                     -5-

<PAGE>
 
properties or rights underlying such Warrants and, upon the exercise of the
Redeemable Warrants, the issuance of certificates for shares of Common Stock
and/or other securities, properties or rights underlying such Redeemable
Warrants shall be made forthwith (and in any event within five (5) business days
thereafter) without charge to the Holder thereof including, without limitation,
any tax which may be payable in respect of the issuance thereof, and such
certificates shall (subject to the provisions of Sections 5 and 7 hereof) be
                                                 --------                   
issued in the name of, or in such names as may be directed by, the Holder
thereof; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificates in a name other than that of the Holder, and
the Company shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.

     The Warrant Certificates and the certificates representing the shares of
Common Stock and the Redeemable Warrants underlying the Warrants and the shares
of Common Stock underlying the Redeemable Warrants (and/or other securities,
property or rights issuable upon the exercise of the Warrants or the Redeemable
Warrants) shall be executed on behalf of the Company by the manual or facsimile
signature of the then Chairman or Vice Chairman of the Board of Directors or
President or Vice President of the Company.  Warrant Certificates shall be dated
the date of execution by the Company upon initial issuance, division, exchange,
substitution or transfer.  Certificates representing the shares of Common Stock
and Redeemable Warrants, and the shares of Common Stock underlying each
Redeemable Warrant (and/or other securities, property or rights issuable upon
exercise of the Warrants) shall be dated as of the Notice Date (regardless of
when

                                     -6-

<PAGE>
 
executed or delivered) and dividend bearing securities so issued shall accrue
dividends from the Notice Date.

     5.  Restriction On Transfer of Warrants.  The Holder of a Warrant
         -----------------------------------                          
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof; that the Warrants may not be sold, transferred, assigned, hypothecated
or otherwise disposed of, in whole or in part, for a period of one (1) year from
the date hereof, except to officers of the Representative.

     6.  Exercise Price.
         -------------- 

     6.1  Initial and Adjusted Exercise Price.  Except as otherwise provided
          -----------------------------------                               
in Section 8 hereof, the initial exercise price of each Warrant shall be $____
   -------                                                                    
[165% of the initial public offering price] per share of Common Stock and $_____
per Redeemable Warrant [165% of the initial public offering price per Public
Warrant].  The adjusted exercise price shall be the price which shall result
from time to time from any and all adjustments of the initial exercise price in
accordance with the provisions of Section 8 hereof.  Any transfer of a Warrant
                                  -------                                     
shall constitute an automatic transfer and assignment of the registration rights
set forth in Section 7 hereof with respect to the Securities or other
             -------                                                 
securities, properties or rights underlying the Warrants.

     6.2  Exercise Price.  The term "Exercise Price" herein shall mean the
          --------------                                                  
initial exercise price or the adjusted exercise price, depending upon the
context or unless otherwise specified.

                                     -7-

<PAGE>
 
     7.  Registration Rights.
         ------------------- 

     7.1 Registration Under the Securities Act of 1933.  The Warrants, the
         ---------------------------------------------                    
shares of Common Stock and Redeemable Warrants or other securities issuable upon
exercise of the Warrants, and the shares of Common Stock or other securities
issuable upon exercise of the Redeemable Warrants (collectively, the "Warrant
Securities") have been registered under the Securities Act of 1933, as amended
(the "Act") pursuant to the Company's Registration Statement on Form SB-2
(Registration No. 333-25445) (the "Registration Statement").  All of the
representatives and warranties of the Company contained in the Underwriting
Agreement relating to the Registration Statement, the Preliminary Prospectus and
Prospectus (as such terms are defined in the Underwriting Agreement) and made as
of the dates provided therein, are incorporated by reference herein.  The
Company agrees and covenants promptly to file post-effective amendments to such
Registration Statement as may be necessary in order to maintain its
effectiveness and otherwise to take such action as may be necessary to maintain
the effectiveness of the Registration Statement as long as any Warrants are
outstanding.  In the event that, for any reason, whatsoever, the Company shall
fail to maintain the effectiveness of the Registration Statement, the
certificates representing the Warrant Securities shall bear the following
legend:

     The securities represented by this certificate have not been registered
     under the Securities Act of 1933, as amended ("Act"), and may not be
     offered or sold except pursuant to (i) an effective registration statement
     under the Act, (ii) to the extent applicable, Rule 144 under the Act (or
     any similar rule under such Act relating to the disposition of securities),
     or (iii) an opinion of counsel, if such opinion shall be reasonably
     satisfactory to counsel to the issuer, that an exemption from registration
     under such Act is available.

     7.2  Piggyback Registration.  If, at any time commencing after the date
          ----------------------                                            
hereof and expiring seven (7) years thereafter, the Company proposes to register
any of its securities under the

                                     -8-

<PAGE>
 
Act (other than pursuant to Form S-4, Form S-8 or a comparable registration
statement) it will give written notice by registered mail, at least thirty (30)
days prior to the filing of each such registration statement, to the
Representative and to all other Holders of the Warrants and/or the Warrant
Securities of its intention to do so.  If the Representative or other Holders of
the Warrants and/or Warrant Securities notify the Company within twenty (20)
business days after receipt of any such notice of its or their desire to include
any such securities in such proposed registration statement, the Company shall
afford the Representative and such Holders of the Warrants and/or Warrant
Securities the opportunity to have any such Warrant Securities registered under
such registration statement.

     Notwithstanding the provisions of this Section 7.2, the Company shall have
                                            -------                            
the right at any time after it shall have given written notice pursuant to this
                                                                               
Section 7.2 (irrespective of whether a written request for inclusion of any such
- -------                                                                         
securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.

     7.3  Demand Registration.
          ------------------- 

     (a)  At any time commencing after the date hereof and expiring five (5)
years thereafter, the Holders of the Warrants and/or Warrant Securities
representing a "Majority" (as hereinafter defined) of such securities (assuming
the exercise of all of the Warrants) shall have the right (which right is in
addition to the registration rights under Section 7.2 hereof), exercisable by
                                          -------                            
written notice to the Company, to have the Company prepare and file with the
Securities and Exchange Commission (the "Commission"), on one occasion, a
registration statement and such other documents, including a prospectus, as may
be necessary in the opinion of both counsel for the Company and counsel for the
Representative and Holders, in order to comply with the

                                     -9-

<PAGE>
 
provisions of the Act, so as to permit a public offering and sale of their
respective Warrant Securities for six (6) consecutive months by such Holders and
any other Holders of the Warrants and/or Warrant Securities who notify the
Company within ten (10) days after receiving notice from the Company of such
request.

     (b)  The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by any Holder or Holders to all
                                -------                                    
other registered Holders of the Warrants and the Warrant Securities within ten
(10) days from the date of the receipt of any such registration request.

     (c)  Notwithstanding anything to the contrary contained herein, if the
Company shall not have filed a registration statement for the Warrant Securities
within the time period specified in Section 7.4(a) hereof pursuant to the
                                    -------                              
written notice specified in Section 7.3(a) of a Majority of the Holders of the
                            -------                                           
Warrants and/or Warrant Securities, the Company may, at its option, upon the
written notice of election of a Majority of the Holders of the Warrants and/or
Warrant Securities requesting such registration, repurchase (i) any and all
Warrant Securities of such Holders at the higher of the Market Price per share
of Common Stock and per Redeemable Warrant on (x) the date of the notice sent
pursuant to Section 7.3(a) or (y) the expiration of the period specified in
            -------                                                        
Section 7.4(a) and (ii) any and all Warrants of such Holders at such Market
- -------                                                                    
Price less the Exercise Price of such Warrant.  Such repurchase shall be in
immediately available funds and shall close within two (2) days after the later
of (i) the expiration of the period specified in Section 7.4(a) or (ii) the
                                                 -------                   
delivery of the written notice of election specified in this Section 7.3(c).
                                                             -------        
                                    -10-

<PAGE>
 
     (d) If all of the Holders are able to sell the Warrant Securities  pursuant
to Rule 144 under the Securities Act of 1933, as amended, and without regard to
the volume limitations thereunder, the Holders' rights under Section 7.2 and
                                                             -------        
7.3(a) shall terminate.

     7.4  Covenants of the Company With Respect to Registration.  In
          -----------------------------------------------------     
connection with any registration under Section 7.2 or 7.3 hereof, the Company
                                       -------                               
covenants and agrees as follows:

     (a)  The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand therefor, shall use
its best efforts to have any registration statements declared effective at the
earliest possible time, and shall furnish each Holder desiring to sell Warrant
Securities such number of prospectuses as shall reasonably be requested.

     (b)  The Company shall pay all costs (excluding fees and expenses of
Holder(s)' counsel and any underwriting or selling commissions), fees and
expenses in connection with all registration statements filed pursuant to
                                                                         
Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's
- --------                                                                   
legal and accounting fees, printing expenses, blue sky fees and expenses.

     (c)  The Company will take all necessary action which may be required in
qualifying or registering the Warrant Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.

     (d)  The Company shall indemnify the Holder(s) of the Warrant Securities to
be sold pursuant to any registration statement and each person, if any, who
controls such Holders within the meaning of Section 15 of the Act or Section
                                            -------                  -------
20(a) of the Securities Exchange Act of 1934, as

                                    -11-

<PAGE>
 
amended ("Exchange Act"), against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Act, the Exchange Act or otherwise, arising from such registration
statement but only to the same extent and with the same effect as the provisions
pursuant to which the Company has agreed to indemnify each of the Underwriters
contained in Section 7 of the Underwriting Agreement.
             -------                                 

     (e)  The Holder(s) of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
                                                       -------                 
Section 20(a) of the Exchange Act, against all loss, claim, damage, expense or
- -------                                                                       
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in Section 7 of the Underwriting
                                               -------                      
Agreement pursuant to which the Underwriters have agreed to indemnify the
Company.

     (f)  Nothing contained in this Agreement shall be construed as requiring
the Holder(s) to exercise their Warrants prior to the initial filing of any
registration statement or the effectiveness thereof.

     (g)  The Company shall not permit the inclusion of any securities other
than the Warrant Securities to be included in any registration statement filed
pursuant to Section 7.3 hereof, or permit any other registration statement to be
            -------                                                             
or remain effective during the effectiveness of a registration statement filed
pursuant to Section 7.3 hereof (other than (i) shelf registrations effective
            -------                                                         

                                    -12-

<PAGE>
 
prior thereto and (ii) registrations on Form S-4 or S-8), without the prior
written consent of the Holders of the Warrants and Warrant Securities
representing a Majority of such securities.

     (h)  The Company shall furnish to each Holder participating in the offering
and to each underwriter, if any, a signed counterpart, addressed to such
Holder or underwriter, of (i) an opinion of counsel to the Company, dated the
effective date of such registration statement (and, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement) relating to the due incorporation of
the Company, the validity of the shares issued and the due authorization and
execution of the Agreement, and (ii) a "cold comfort" letter dated the
effective date of such registration statement (and, if such registration
includes an underwritten public offering, a letter dated the date of the
closing under the underwriting agreement) signed by the independent public
accountants who have issued a report on the Company's financial statements
included in such registration statement covering substantially the same
matters with respect to such registration statement (and the prospectus
included therein) and, in the case of such accountants' letter, with respect
to events subsequent to the date of such financial statements, as are
customarily covered in accountants' letters delivered to underwriters in
underwritten public offerings of securities.

     (i) The Company shall as soon as practicable after the effective date of
the registration statement, and in any event within 15 months thereafter, make
"generally available to its security holders" (within the meaning of Rule 158
under the Act) an earnings statement (which need not be audited) complying with
                                                                               
Section 11(a) of the Act and covering a period of at least 12 consecutive months
- -------                                                                         
beginning after the effective date of the registration statement.

     (j) The Company shall deliver promptly to each Holder participating in the
offering requesting the correspondence and memoranda described below and to the
managing underwriters, copies of all correspondence between the Commission and
the Company, its counsel or auditors

                                    -13-

<PAGE>
 
and all memoranda relating to discussions with the Commission or its staff with
respect to the registration statement and permit each Holder and underwriter to
do such investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the registration statement as it deems
reasonably necessary to comply with applicable securities laws or rules of the
NASD.  Such investigation shall include access to books, records and properties
and opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable times
and as often as any such Holder or underwriter shall reasonably request.

     (k) The Company shall enter into an underwriting agreement with the
managing underwriters selected for such underwriting by Holders holding a
Majority of the Warrant Securities requested pursuant to Section 7.3(a) to be
included in such underwriting, which may be the Representative.  Such agreement
shall be satisfactory in form and substance to the Company, each Holder and such
managing underwriter(s), and shall contain such representations, warranties and
covenants by the Company and such other terms as are customarily contained in
agreements of that type used by the managing underwriter(s).  The Holders shall
be parties to any underwriting agreement relating to an underwritten sale of
their Warrant Securities whether pursuant to Section 7.2 or Section 7.3(a) and
may, at their option, require that any or all of the representations, warranties
and covenants of the Company to or for the benefit of such underwriter(s) shall
also be made to and for the benefit of such Holders.  Such Holders shall not be
required to make any representations or warranties to or agreements with the
Company or the underwriter(s) except as they may relate to such Holders and
their intended methods of distribution.

     (l)  For purposes of this Agreement, the term "Majority" in reference to
the Holders of Warrants or Warrant Securities, shall mean in excess of fifty
percent (50%) of the then

                                    -14-

<PAGE>
 
outstanding Warrants or Warrant Securities that (i) are not held by the Company,
an affiliate, officer, creditor, employee or agent thereof or any of their
respective affiliates, members of their family, persons acting as nominees or in
conjunction therewith and (ii) have not been resold to the public pursuant to a
registration statement filed with the Commission under the Act.

     8.  Adjustments to Exercise Price and Number of Securities.
         ------------------------------------------------------ 

        8.1 Subdivision and Combination.  In case the Company shall at any time
            ---------------------------                                        
subdivide or combine the outstanding shares of Common Stock, the Exercise Price
shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.

        8.2  Stock Dividends and Distributions.  In case the Company shall pay a
             ---------------------------------                                  
dividend in, or make a distribution of, shares of Common Stock or of the
Company's capital stock convertible into Common Stock, the Exercise Price shall
forthwith be proportionately decreased.  An adjustment made pursuant to this
                                                                            
Section 8.2 shall be made as of the record date for the subject stock dividend
- -------                                                                       
or distribution.

        8.3  Adjustment in Number of Securities.  Upon each adjustment of the
             ----------------------------------                              
Exercise Price pursuant to the provisions of this Section 8, the number of
                                                  -------                 
Warrant Securities issuable upon the exercise at the adjusted exercise price of
each Warrant shall be adjusted to the nearest full amount by multiplying a
number equal to the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Securities issuable upon exercise of the
Warrants immediately prior to such adjustment and dividing the product so
obtained by the adjusted Exercise Price.

        8.4  Definition of Common Stock.  For the purpose of this Agreement, the
             --------------------------                                         
term "Common Stock" shall mean (i) the class of stock designated as Common Stock
in the Certificate of Incorporation of the Company as may be amended as of the
date hereof, or (ii) any other class

                                    -15-

<PAGE>
 
of stock resulting from successive changes or reclassifications of such Common
Stock consisting solely of changes in par value, or from par value to no par
value, or from no par value to par value.

        8.5  Merger or Consolidation.  In case of any consolidation of the
             -----------------------                                      
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant agreement providing that the holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of securities of the Company for which such Warrant might have been exercised
immediately prior to such consolidation, merger, sale or transfer.  Such
supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in Section 8.  The above provision of this
                                         -------                                
subsection shall similarly apply to successive consolidations or mergers.

        8.6  No Adjustment of Exercise Price in Certain Cases.  No adjustment of
             ------------------------------------------------                   
the Exercise Price shall be made if the amount of said adjustment shall be less
than two cents (2c) per Warrant Security, provided, however, that in such case
any adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to at least two cents (2c) per Warrant Security.

                                    -16-

<PAGE>
 
     9.  Exchange and Replacement of Warrant Certificates.  Each Warrant
         ------------------------------------------------               
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Warrant Securities in such denominations as
shall be designated by the Holder thereof at the time of such surrender.

     Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.

     10.  Elimination of Fractional Interests.  The Company shall not be
          -----------------------------------                           
required to issue certificates representing fractions of shares of Common Stock
or Redeemable Warrants upon the exercise of the Warrants, nor shall it be
required to issue scrip or pay cash in lieu of fractional interests, it being
the intent of the parties that all fractional interests shall be eliminated by
rounding any fraction up to the nearest whole number of shares of Common Stock
or Redeemable Warrants or other securities, properties or rights.

     11.  Reservation and Listing of Securities.  The Company shall at all times
          -------------------------------------                                 
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Warrants and the Redeemable
Warrants, such number of shares of Common Stock or other securities, properties
or rights as shall be issuable upon the exercise thereof.  The Company covenants
and agrees that, upon exercise of the Warrants and payment of the Exercise Price
therefor, all shares of Common Stock, Redeemable Warrants and other securities

                                    -17-

<PAGE>
 
issuable upon such exercise shall be duly and validly issued, fully paid, non-
assessable and not subject to the preemptive rights of any stockholder.  The
Company further covenants and agrees that upon exercise of the Redeemable
Warrants underlying the Warrants and payment of the respective Redeemable
Warrant exercise price therefor, all shares of Common Stock and other securities
issuable upon such exercises shall be duly and validly issued, fully paid, non-
assessable and not subject to the preemptive rights of any stockholder.  As long
as the Warrants shall be outstanding, the Company shall use its best efforts to
cause all shares of Common Stock issuable upon the exercise of the Warrants and
Redeemable Warrants and all Redeemable Warrants underlying the Warrants to be
listed (subject to official notice of issuance) on all securities exchanges on
which the Common Stock or the Public Warrants issued to the public in connection
herewith may then be listed and/or quoted on Nasdaq SmallCap or Nasdaq.

     12.  Notices to Warrant Holders.  Nothing contained in this Agreement shall
          --------------------------                                            
be construed as conferring upon the Holders the right to vote or to consent or
to receive notice as a stockholder in respect of any meetings of stockholders
for the election of directors or any other matter, or as having any rights
whatsoever as a stockholder of the Company.  If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:

          (a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings or
capital surplus (in accordance with applicable law), as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or

                                    -18-

<PAGE>
 
               (b) the Company shall offer to all the holders of its Common
     Stock any additional shares of capital stock of the Company or securities
     convertible into or exchangeable for shares of capital stock of the
     Company, or any option, right or warrant to subscribe therefor; or

               (c) a dissolution, liquidation or winding up of the Company
     (other than in connection with a consolidation or merger) or a sale of all
     or substantially all of its property, assets and business as an entirety
     shall be proposed;

then, in any one or more of said events, the Company shall give written notice
of such event at least thirty (30) days prior to the date fixed as a record date
or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale.  Such notice shall
specify such record date or the date of closing the transfer books, as the case
may be.  Failure to give such notice or any defect therein shall not affect the
validity of any action taken in connection with the declaration or payment of
any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.

     13.  Redeemable Warrants.
          ------------------- 

     The form of the certificate representing Redeemable Warrants (and the form
of election to purchase shares of Common Stock upon the exercise of Redeemable
Warrants and the form of assignment printed on the reverse thereof) shall be
substantially as set forth in Exhibit "A" to the Warrant Agreement dated as of
the date hereof by and between the Company and Continental Stock Transfer and
Trust Company (the "Redeemable Warrant Agreement").  Each Redeemable Warrant
issuable upon exercise of the Warrants shall evidence the right to initially
purchase a fully

                                    -19-

<PAGE>
 
paid and non-assessable share of Common Stock at an initial purchase price of
$______ [140% of the initial public offering price per share] from ______ 1998
[one year from the effective date of the Registration Statement] until 5:30 p.m.
New York time on _________ 2002 [5 years from the effective date of the
Registration Statement] at which time the Redeemable Warrants, unless the
exercise period has been extended, shall expire.  The exercise price of the
Redeemable Warrants and the number of shares of Common Stock issuable upon the
exercise of the Redeemable Warrants are subject to adjustment, whether or not
the Warrants have been exercised and the Redeemable Warrants have been issued,
in the manner and upon the occurrence of the events set forth in Section 8 of
the Redeemable Warrant Agreement, which is hereby incorporated herein by
reference and made a part hereof as if set forth in its entirety herein.
Subject to the provisions of this Agreement and upon issuance of the Redeemable
Warrants underlying the Warrants, each registered holder of such Redeemable
Warrant shall have the right to purchase from the Company (and the Company shall
issue to such registered holders) up to the number of fully paid and non-
assessable shares of Common Stock (subject to adjustment as provided herein and
in the Redeemable Warrant Agreement), free and clear of all preemptive rights of
stockholders, provided that such registered holder complies with the terms
governing exercise of the Redeemable Warrant set forth in the Redeemable Warrant
Agreement, and pays the applicable exercise price, determined in accordance with
the terms of the Redeemable Warrant Agreement.  Upon exercise of the Redeemable
Warrants, the Company shall forthwith issue to the registered holder of any such
Redeemable Warrant in his name or in such name as may be directed by him,
certificates for the number of shares of Common Stock so purchased.  Except as
otherwise provided in this Agreement, the Redeemable Warrants underlying the
Warrants shall be governed in all respects by the terms of the Redeemable
Warrant Agreement.  The Redeemable Warrants shall be

                                    -20-

<PAGE>
 
transferable in the manner provided in the Redeemable Warrant Agreement, and
upon any such transfer, a new Redeemable Warrant Certificate shall be issued
promptly to the transferee.  The Company covenants to, and agrees with, the
Holder(s) that without the prior written consent of the Holder(s), which will
not be unreasonably withheld, the Redeemable Warrant Agreement will not be
modified, amended, canceled, altered or superseded, and that the Company will
send to each Holder, irrespective of whether or not the Warrants have been
exercised, any and all notices required by the Redeemable Warrant Agreement to
be sent to holders of Redeemable Warrants.

     14.  Notices.
          ------- 

     All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly made and sent when delivered,
or mailed by registered or certified mail, return receipt requested:

               (a) If to the registered Holder of the Warrants, to the address
     of such Holder as shown on the books of the Company; or

               (b) If to the Company, to the address set forth in Section 3
                                                                  -------  
     hereof or to such other address as the Company may designate by notice to
     the Holders.

     15.  Supplements and Amendments.  The Company and the Representative may
          --------------------------                                         
from time to time supplement or amend this Agreement without the approval of any
Holders of Warrant Certificates (other than the Representative) in order to cure
any ambiguity, to correct or supplement any provision contained herein which may
be defective or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which the Company
and the Representative may deem necessary or desirable and which the Company and
the Representative deem shall not adversely affect the interests of the Holders
of Warrant Certificates.

                                    -21-

<PAGE>
 
     16.  Successors.  All the covenants and provisions of this Agreement shall
          ----------                                                           
be binding upon and inure to the benefit of the Company, the Holders and their
respective successors and assigns hereunder.

     17.  Termination.  This Agreement shall terminate at the close of business
          -----------                                                          
on _______, 2004.  Notwithstanding the foregoing, the indemnification provisions
of Section 7 shall survive such termination until the close of business on
   -------                                                                
_______, 2010.

     18.  Governing Law; Legal Costs and Expenses.  This Agreement and each
          ---------------------------------------                          
Warrant Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws.

     The Company, the Representative and the Holders agree that the prevailing
party(ies) in any action, proceeding or claim arising out of, or relating in any
way to this Agreement shall be entitled to recover from the other party(ies) all
of its/their reasonable legal costs and expenses relating to such action or
proceeding and/or incurred in connection with the preparation therefor.

     19.  Entire Agreement; Modification.  This Agreement (including
          ------------------------------
the Underwriting Agreement and the Redeemable Warrant Agreement to the extent
portions thereof are referred to herein) contains the entire understanding
between the parties hereto with respect to the subject matter hereof and may not
be modified or amended except by a writing duly signed by the party against whom
enforcement of the modification or amendment is sought.

     20.  Severability.  If any provision of this Agreement shall be
          ------------                                              
held to be invalid or unenforceable, such invalidity or unenforceability shall
not affect any other provision of this Agreement.

                                    -22-

<PAGE>
 
     21.  Captions.  The caption headings of the Sections of this
          --------                                               
Agreement are for convenience of reference only and are not intended, nor should
they be construed as, a part of this Agreement and shall be given no substantive
effect.

     22.  Benefits of this Agreement.  Nothing in this Agreement shall be
          --------------------------                                     
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Warrant Certificates or
Warrant Securities any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole benefit of the Company and
the Representative and any other registered Holders of Warrant Certificates or
Warrant Securities.

     23.  Counterparts.  This Agreement may be executed in any number of
          ------------                                                  
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.

                                    -23-

<PAGE>
 
     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.

                                     DEPOMED, INC.



                                     By:________________________________________
                                        Name:
                                        Title:

Attest:


________________________________
Secretary



                                     NATIONAL SECURITIES CORPORATION



                                     By:________________________________________
                                        Name:
                                        Title:

<PAGE>
 
                                                                       EXHIBIT A



                         [FORM OF WARRANT CERTIFICATE]

THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.

THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.

                            EXERCISABLE ON OR BEFORE
                   5:30 P.M., NEW YORK TIME, __________, 2002

No. W-                                                      Warrants to Purchase
                                              ____ Shares of Common Stock and/or
                                                        ____ Redeemable Warrants



                              WARRANT CERTIFICATE

          This Warrant Certificate certifies that __________, or registered
assigns, is the registered holder of _____________ Warrants to purchase
initially, at any time from __________, 1998 [one year from the effective date
of the Registration Statement] until 5:30 p.m. New York time on ___________,
2002 [five years from the effective date of the Registration Statement]
("Expiration Date"), up to __________ fully-paid and non-assessable shares of
common stock, no par value ("Common Stock"), of DEPOMED, INC., a California
corporation (the "Company"), and/or _____ Redeemable Warrants of the Company
(one Redeemable Warrant entitling the owner to purchase one fully-paid and non-
assessable share of Common Stock) at the initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), of $______ [165% of the
initial public offering price] per share of Common Stock and $____ [165% of the
initial public offering price] per Redeemable Warrant upon surrender of this
Warrant Certificate and payment of the Exercise Price at an office or agency of
the Company, but subject to the conditions set forth herein and in the warrant
agreement dated as of _______, 1997 between the Company and NATIONAL

                                     A-1

<PAGE>
 
SECURITIES CORPORATION (the "Warrant Agreement").  Payment of the Exercise Price
shall be made by certified or official bank check in New York Clearing House
funds payable to the order of the Company or by surrender of this Warrant
Certificate.

          No Warrant may be exercised after 5:30 p.m., New York time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.

          The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.

          The Warrant Agreement provides that upon the occurrence of certain
events the Exercise Price and the type and/or number of the Company's securities
issuable thereupon may, subject to certain conditions, be adjusted.  In such
event, the Company will, at the request of the holder, issue a new Warrant
Certificate evidencing the adjustment in the Exercise Price and the number
and/or type of securities issuable upon the exercise of the Warrants; provided,
however, that the failure of the Company to issue such new Warrant Certificates
shall not in any way change, alter, or otherwise impair, the rights of the
holder as set forth in the Warrant Agreement.

          Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax or other governmental charge
imposed in connection with such transfer.

          Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.

          The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.

          All terms used in this Warrant Certificate which are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.

                                     A-2

<PAGE>
 
                   IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.

Dated as of ___________, 1997

                                     DEPOMED, INC.



                                     By:________________________________________
                                         Name:
                                         Title:
 
                                    A-3 

<PAGE>
 
             [FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1]

          The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:


[_]  _______________________  shares of Common Stock;


[_]  _______________________  Redeemable Warrants;

[_]  _______________________  shares of Common Stock together with an
                              equal number of Redeemable Warrants; or

[_]  _______________________  shares of Common Stock together with
     _______________________  Redeemable Warrants.


and herewith tenders in payment for such securities a certified or official bank
check payable in New York Clearing House Funds to the order of Depomed, Inc. in
the amount of $_______________________, all in accordance with the terms of
Section 3.1 of the Representative's Warrant Agreement dated as of
______________________, 1997 between Depomed, Inc. and National Securities
Corporation.  The undersigned requests that a certificate for such securities be
registered in the name of _________________________________ whose address is
______________________________________ and that such Certificate be delivered to
______________________________________ whose address is ________________________
___________________________________.


Dated:
                                         Signature_____________________________
                                         (Signature must conform in all 
                                         respects to name of holder as 
                                         specified on the face of the Warrant 
                                         Certificate.)


                                         _______________________________________
                                         (Insert Social Security or Other
                                         Identifying Number of Holder)

                                     A-4

<PAGE>
 
               [FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.2]

     The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase:


[_]  _______________________  shares of Common Stock;

[_]  _______________________  Redeemable Warrants;

[_]  _______________________  shares of Common Stock together with an
                              equal number of Redeemable Warrants; or

[_]  _______________________  shares of Common Stock together with
     _______________________  Redeemable Warrants.


and herewith tenders in payment for such securities ________ Warrants all in
accordance with the terms of Section 3.2 of the Representative's Warrant
Agreement dated as of __________________, 1997 between Depomed, Inc. and
National Securities Corporation.  The undersigned requests that a certificate
for such securities be registered in the name of ______________________________
___________________________ whose address is __________________________________
and that such Certificate be delivered to ____________________________________
whose address is __________________________________________________.


Dated:
                                         Signature_____________________________
                                         (Signature must conform in all
                                         respects to name of holder as
                                         specified on the face of the Warrant
                                         Certificate. )


                                         ______________________________________
                                         (Insert Social Security or Other
                                         Identifying Number of Holder)

                                     A-5

<PAGE>
 
                              [FORM OF ASSIGNMENT]



            (To be executed by the registered holder if such holder
                 desires to transfer the Warrant Certificate.)


         FOR VALUE RECEIVED ____________________________________ hereby sells,
assigns and transfers unto____________________________________________________
                              (Please print name and address of transferee)

this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________ Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.



Dated:__________________________

                                        Signature:_____________________________
                                        (Signature must conform in all
                                        respects to name of holder as
                                        specified on the face of the Warrant
                                        Certificate.)



                                        _______________________________________
                                        (Insert Social Security or Other
                                        Identifying Number of Assignee)

                                     A-6



<PAGE>
 
                                                                     EXHIBIT 4.4
                                                                      OH&S DRAFT
                                                                         6/10/97

            [Form of Warrant Agreement Subject to Additional Review]

================================================================================



                                 DEPOMED, INC.

                                      AND

                  CONTINENTAL STOCK TRANSFER AND TRUST COMPANY

                                      AND

                        NATIONAL SECURITIES CORPORATION


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



                               WARRANT AGREEMENT



                        DATED AS OF ___________ __, 1997



================================================================================

<PAGE>
 
     AGREEMENT, dated this ____ day of __________, 1997, by and among DEPOMED,
INC., a California corporation (the "Company"), CONTINENTAL STOCK TRANSFER AND
TRUST COMPANY, as Warrant Agent (the "Warrant Agent") and NATIONAL SECURITIES
CORPORATION ("National" or the "Representative").

                              W I T N E S S E T H:

     WHEREAS, in connection with (i) the offering to the public of up to
2,500,000 shares of Common Stock (as defined in Section 1) and 1,250,000
redeemable common stock purchase warrants (the "Warrants"), each warrant
entitling the holder thereof to purchase one additional share of Common Stock,
(ii) the over-allotment option to purchase up to an additional 375,000 shares of
Common Stock and/or 187,500 Warrants (the "Over-allotment Option"), and (iii)
the sale to National of warrants (the "Representative's Warrants") to purchase
up to 250,000 shares of Common Stock and/or 125,000 Warrants, the Company will
issue up to 1,562,500 Warrants (subject to increase as provided in the
Representative's Warrant Agreement); and

     WHEREAS, the Company desires to provide for the issuance of certificates
representing the Warrants; and

     WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the Warrants
and the rights of the holders thereof.

     NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the

<PAGE>
 
Company, National, the holders of certificates representing the Warrants and the
Warrant Agent, the parties hereto agree as follows:

     SECTION 1.  Definitions.  As used herein, the following terms shall have
                 -----------                                                 
the following meanings, unless the context shall otherwise require:

                 (a)  "Act" shall mean the Securities Act of 1933, as amended.

                 (b)  "Common Stock" shall mean the authorized stock of the
Company of any class, whether now or hereafter authorized, which has the right

to participate in the voting and in the distribution of earnings and assets of
the Company without limit as to amount or percentage.

                 (c)  "Commission" shall mean the Securities and Exchange
Commission.

                 (d)  "Corporate Office shall mean the office of the Warrant
Agent (or its successor) at which at any particular time its business in New
York, New York, shall be administered, which office is located on the date
hereof at 2 Broadway.

                 (e)  "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.

                 (f)  "Exercise Date" shall mean, subject to the provisions of
Section 5(b) hereof, as to any Warrant, the date on which the Warrant Agent
shall have received both (i) the Warrant Certificate representing such
Warrant, with the exercise form thereon duly executed by the Registered Holder
thereof or his attorney duly authorized in writing, and (ii) payment in cash
or by official bank or certified check made payable to the Warrant Agent for
the account of the Company, of the amount in lawful money of the United States
of America equal to the applicable Purchase Price (as hereinafter defined) in
good funds.

                                      2

<PAGE>
 
                 (g) "Initial Public Offering Price" shall mean $________
[initial public offering price of the Common Stock].

                 (h) "Initial Warrant Exercise Date" shall mean _____________
__, 1998 [12 months from the effective date of the Registration Statement].

                 (i) "Initial Warrant Redemption Date" shall mean
_______________ __, 1998 [18 months from the effective date of the
Registration Statement].

                 (j) "NASD" shall mean the National Association of Securities
Dealers, Inc.
                 (k) "Nasdaq" shall mean the Nasdaq Stock Market.

                 (l) "Purchase Price" shall mean, subject to modification and
adjustment as provided in Section 8, $_____ [140% of the initial public
offering price of the Common Stock] and further subject to the Company's
right, in its sole discretion, to decrease the Purchase Price for a period of
not less than 30 days on not less than 30 days' prior written notice to the
Registered Holders and National.

                 (m) "Redemption Date" shall mean the date (which may not
occur before the Initial Warrant Redemption Date) fixed for the redemption of
the Warrants in accordance with the terms hereof.

                 (n) "Redemption Price" shall mean the price at which the
Company may, at its option, redeem the Warrants, in accordance with the terms
hereof, which price shall be $0.10 per Warrant, subject to adjustment from
time to time pursuant to the provisions of Section 9 hereof.

                 (o) "Registered Holder" shall mean the person in whose name any
certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.

                                      3

<PAGE>
 
                 (p) "Transfer Agent" shall mean Continental Stock Transfer and
Trust Company, or its authorized successor.

                 (q) "Underwriting Agreement" shall mean the underwriting
agreement dated ______________ __, 1997 [the date of the Prospectus] between
the Company and the several underwriters listed therein relating to the
purchase for resale to the public of the 2,500,000 shares of Common Stock and
1,250,000 Warrants.

                 (r) "Representative's Warrant Agreement" shall mean the
agreement dated as of _______________ __, 1997 [the date of the Prospectus]
between the Company and National relating to and governing the terms and
provisions of the Representative's Warrants.

                 (s) "Warrant Certificate" shall mean a certificate
representing each of the Warrants substantially in the form annexed hereto as
Exhibit A.

                 (t) "Warrant Expiration Date" shall mean, unless the Warrants
are redeemed as provided in Section 9 hereof prior to such date, 5:30 p.m.
(New York time), on ______________ __, 2002 [60 months after the date of the
Prospectus], or the Redemption Date as defined herein, whichever date is
earlier; provided that if such date shall in the State of New York be a
         --------
holiday or a day on which banks are authorized to close, then 5:30 p.m. (New
York time) on the next following day which, in the State of New York, is not a
holiday or a day on which banks are authorized to close. Upon five business
days' prior written notice to the Registered Holders, the Company shall have
the right to extend the Warrant Expiration Date.

     SECTION 2.  Warrants and Issuance of Warrant Certificates.
                 ----------------------------------------------

                 (a)  Each Warrant shall initially entitle the Registered
Holder of the Warrant Certificate representing such Warrant to purchase at the
Purchase Price therefor from the Initial Warrant Exercise Date until the
Warrant Expiration Date one share of Common Stock upon the

                                      4

<PAGE>
 
exercise thereof in accordance with the terms hereof, subject to modification
and adjustment as provided in Section 8.

          (b)  Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Underwriting Agreement
(subject to modification and adjustment as provided in Section 8) shall be
executed by the Company and delivered to the Warrant Agent.

          (c)  Upon exercise of the Representative's Warrants as provided
therein, Warrant Certificates representing all or a portion of 125,000 Warrants
to purchase up to an aggregate of 125,000 shares of Common Stock (subject to
modification and adjustment as provided in Section 8 hereof and in the
Representative's Warrant Agreement), shall be countersigned, issued and
delivered by the Warrant Agent upon written order of the Company signed by its
Chairman of the Board, Chief Executive Officer, President or a Vice President
and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary.

          (d)  From time to time, up to the Warrant Expiration Date or the
Redemption Date, whichever date is earlier, the Warrant Agent shall countersign
and deliver Warrant Certificates in required denominations of one or whole
number multiples thereof to the person entitled thereto in connection with any
transfer or exchange permitted under this Agreement.  Except as provided herein,
no Warrant Certificates shall be issued except (i) Warrant Certificates
initially issued hereunder and those issued on or after the Initial Warrant
Exercise Date, upon the exercise of fewer than all Warrants held by the
exercising Registered Holder, (ii) Warrant Certificates issued upon any transfer
or exchange of Warrants, (iii) Warrant Certificates issued in replacement of
lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7,
(iv) Warrant Certificates issued pursuant to the Representative's Warrant
Agreement, and (v) at the option of the Company, Warrant

                                      5

<PAGE>
 
Certificates in such form as may be approved by its Board of Directors, to
reflect any adjustment or change in the Purchase Price, the number of shares of
Common Stock purchasable upon exercise of the Warrants or the Redemption Price
therefor made pursuant to Section 8 hereof.

     SECTION 3.  Form and Execution of Warrant Certificates.
                 ------------------------------------------ 

                 (a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A (the provisions of which are hereby incorporated
herein) and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed or
engraved thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
law or with any rule or regulation made pursuant thereto or with any rule or
regulation of any stock exchange on which the Warrants may be listed, or to
conform to usage.  The Warrant Certificates shall be dated the date of issuance
thereof (whether upon initial issuance, transfer, exchange or in lieu of
mutilated, lost, stolen or destroyed Warrant Certificates) and issued in
registered form.  Warrants shall be numbered serially with the letter W on the
Warrants.

                 (b) Warrant Certificates shall be executed on behalf of the
Company by its Chairman of the Board, Chief Executive Officer, President or
any Vice President and by its Treasurer or an Assistant Treasurer or its
Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of
the Company's seal. Warrant Certificates shall be manually countersigned by
the Warrant Agent and shall not be valid for any purpose unless so
countersigned. In case any officer of the Company who shall have signed any of
the Warrant Certificates shall cease to be such officer of the Company before
the date of issuance of the Warrant Certificates or before countersignature by
the Warrant Agent and issue and delivery thereof, such Warrant Certificates,
nevertheless, may be countersigned by the Warrant

                                      6

<PAGE>
 
Agent, issued and delivered with the same force and effect as though the person
who signed such Warrant Certificates had not ceased to be such officer of the
Company.  After countersignature by the Warrant Agent, Warrant Certificates
shall be delivered by the Warrant Agent to the Registered Holder promptly and
without further action by the Company, except as otherwise provided by Section
4(a) hereof.

     SECTION 4.  Exercise.
                 -------- 

                 (a) Warrants in denominations of one or whole number
multiples thereof may be exercised by the Registered Holder thereof commencing
at any time on or after the Initial Warrant Exercise Date, but not after the
Warrant Expiration Date, upon the terms and subject to the conditions set
forth herein and in the applicable Warrant Certificate. A Warrant shall be
deemed to have been exercised immediately prior to the close of business on
the Exercise Date and the person entitled to receive the securities
deliverable upon such exercise shall be treated for all purposes as the
holder, upon exercise thereof, as of the close of business on the Exercise
Date. If Warrants in denominations other than whole number multiples thereof
shall be exercised at one time by the same Registered Holder, the number of
full shares of Common Stock which shall be issuable upon exercise thereof
shall be computed on the basis of the aggregate number of full shares of
Common Stock issuable upon such exercise. As soon as practicable on or after
the Exercise Date and in any event within five business days after such date,
if one or more Warrants have been exercised, the Warrant Agent on behalf of
the Company shall cause to be issued to the person or persons entitled to
receive the same a Common Stock certificate or certificates for the shares of
Common Stock deliverable upon such exercise, and the Warrant Agent shall
deliver the same to the person or persons entitled thereto. Upon the exercise
of any one or more Warrants, the Warrant Agent shall promptly notify the
Company in writing of such fact and of the number of securities delivered upon

                                      7

<PAGE>
 
such exercise and, subject to subsection (b) below, shall cause all payments of
an amount in cash or by check made payable to the order of the Company, equal to
the Purchase Price, to be deposited promptly in the Company's bank account.

          (b)  At any time upon the exercise of any Warrants after one year and
one day from the date hereof, the Warrant Agent shall, on a daily basis, within
two business days after such exercise, notify National of the exercise of any
such Warrants and shall, on a weekly basis (subject to collection of funds
constituting the tendered Purchase Price, but in no event later than five
business days after the last day of the calendar week in which such funds were
tendered), remit to National an amount equal to five percent (5%) of the
Purchase Price of such Warrants then being exercised unless National shall have
notified the Warrant Agent that the payment of such amount with respect to such
Warrant is violative of the General Rules and Regulations promulgated under the
Exchange Act, or the rules and regulations of the NASD or applicable state
securities or "blue sky" laws, or the Warrants are those underlying the
Representative's Warrants in which event, the Warrant Agent shall remit the full
Purchase Price to the Company; provided, that the Warrant Agent shall not be
obligated to pay any amounts pursuant to this Section 4(b) during any week that
such amounts payable are less than $1,000 and the Warrant Agent's obligation to
make such payments shall be suspended until the amount payable aggregates
$1,000, and provided further, that, in any event, any such payment (regardless
of amount) shall be made not less frequently than monthly.  Notwithstanding the
foregoing, National shall be entitled to receive the commission contemplated by
this Section 4(b) as Warrant solicitation agent only if: (i) National has
provided actual services in connection with the solicitation of the exercise of
a Warrant by a Registered Holder and (ii) the Registered Holder exercising a
Warrant affirmatively designates in writing on the exercise form on

                                      8

<PAGE>
 
the reverse side of the Warrant Certificate that the exercise of such Registered
Holder's Warrant was solicited by National.

          (c) The Company shall not be required to issue fractional shares on
the exercise of Warrants.  Warrants may only be exercised in such multiples as
are required to permit the issuance by the Company of one or more whole shares.
If one or more Warrants shall be presented for exercise in full at the same time
by the same Registered Holder, the number of whole shares which shall be
issuable upon such exercise thereof shall be computed on the basis of the
aggregate number of shares purchasable on exercise of the Warrants so presented.
If any fraction of a share would, except for the provisions provided herein, be
issuable on the exercise of any Warrant (or specified portion thereof), the
Company shall pay an amount in cash equal to such fraction multiplied by the
then current market value of a share of Common Stock, determined as follows:

     (1) If the Common Stock is listed, or admitted to unlisted trading
privileges on a national securities exchange, or is traded on Nasdaq, the
current market value of a share of Common Stock shall be the closing sale price
of the Common Stock at the end of the regular trading session on the last
business day prior to the date of exercise of the Warrants on whichever of such
exchanges or Nasdaq had the highest average daily trading volume for the Common
Stock on such day; or

     (2) If the Common Stock is not listed or admitted to unlisted trading
privileges on any national securities exchange, or listed, quoted or reported
for trading on Nasdaq, but is traded in the over-the-counter market, the current
market value of a share of Common Stock shall be the average of the last
reported bid and asked prices of the Common Stock reported by the National
Quotation Bureau, Inc. on the last business day prior to the date of exercise of
the Warrants; or

                                      9

<PAGE>
 
             (3) If the Common Stock is not listed, admitted to unlisted trading
privileges on any national securities exchange, or listed, quoted or reported
for trading on Nasdaq, and bid and asked prices of the Common Stock are not
reported by the National Quotation Bureau, Inc., the current market value of a
share of Common Stock shall be an amount, not less than the book value thereof
as of the end of the most recently completed fiscal quarter of the Company
ending prior to the date of exercise, determined by the members of the Board of
Directors of the Company exercising good faith and using customary valuation
methods.

     SECTION 5.  Reservation of Shares; Listing; Payment of Taxes; etc.
                 ------------------------------------------------------

                 (a) The Company covenants that it will at all times reserve
and keep available out of its authorized Common Stock, solely for the purpose
of issue upon exercise of Warrants, such number of shares of Common Stock as
shall then be issuable upon the exercise of all outstanding Warrants. The
Company covenants that all shares of Common Stock which shall be issuable upon
exercise of the Warrants shall, at the time of delivery thereof, be duly and
validly issued and fully paid and nonassessable and free from all preemptive
or similar rights, taxes, liens and charges with respect to the issue thereof,
and that upon issuance such shares shall be listed on each securities
exchange, if any, on which the other shares of outstanding Common Stock of the
Company are then listed.

                 (b) The Company covenants that if any securities to be
reserved for the purpose of exercise of Warrants hereunder require
registration with, or approval of, any governmental authority under any
federal securities law before such securities may be validly issued or
delivered upon such exercise, then the Company will file a registration
statement under the federal securities laws or a post-effective amendment, use
its best efforts to cause the same to become effective and to keep such
registration statement current while any of the Warrants are outstanding

                                     10

<PAGE>
 
and deliver a prospectus which complies with Section 10(a)(3) of the Act, to the
Registered Holder exercising the Warrant (except, if in the opinion of counsel
to the Company, such registration is not required under the federal securities
law or if the Company receives a letter from the staff of the Commission stating
that it would not take any enforcement action if such registration is not
effected).  The Company will use its best efforts to obtain appropriate
approvals or registrations under state "blue sky" securities laws with respect
to any such securities.  However, Warrants may not be exercised by, or shares of
Common Stock issued to, any Registered Holder in any state in which such
exercise would be unlawful.

                 (c) The Company shall pay all documentary, stamp or similar
taxes and other governmental charges that may be imposed with respect to the
issuance of Warrants, or the issuance or delivery of any shares of Common
Stock upon exercise of the Warrants; provided, however, that if shares of
Common Stock are to be delivered in a name other than the name of the
Registered Holder of the Warrant Certificate representing any Warrant being
exercised, then no such delivery shall be made unless the person requesting
the same has paid to the Warrant Agent the amount of transfer taxes or charges
incident thereto, if any.

                 (d) The Warrant Agent is hereby irrevocably authorized as the
Transfer Agent to requisition from time to time certificates representing
shares of Common Stock or other securities required upon exercise of the
Warrants, and the Company will comply with all such requisitions.

     SECTION 6.  Exchange and Registration of Transfer.
                 ------------------------------------- 

                 (a)  Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part.  Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office,
and, upon satisfaction of the terms and provisions hereof, the Company shall

                                     11

<PAGE>
 
execute and the Warrant Agent shall countersign, issue and deliver in exchange
therefor the Warrant Certificate or Certificates which the Registered Holder
making the exchange shall be entitled to receive.

          (b)  The Warrant Agent shall keep, at its office, books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in accordance with customary
practice.  Upon due presentment for registration of transfer of any Warrant
Certificate at such office, the Company shall execute and the Warrant Agent
shall issue and deliver to the transferee or transferees a new Warrant
Certificate or Certificates representing an equal aggregate number of Warrants
of the same class.

          (c)  With respect to all Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription or
exercise form, as the case may be, on the reverse thereof shall be duly endorsed
or be accompanied by a written instrument or instruments of transfer and
subscription, in form satisfactory to the Company and the Warrant Agent, duly
executed by the Registered Holder thereof or his attorney-in-fact duly
authorized in writing.

          (d) A service charge may be imposed by the Warrant Agent for any
exchange or registration of transfer of Warrant Certificates.  In addition, the
Company may require payment by such Holder of a sum sufficient to cover any tax
or other governmental charge that may be imposed in connection therewith.

          (e)  All Warrant Certificates surrendered for exercise or for exchange
in case of mutilated Warrant Certificates shall be promptly canceled by the
Warrant Agent and thereafter retained by the Warrant Agent until termination of
this Agreement.

          (f)  Prior to due presentment for registration of transfer thereof,
the Company and the Warrant Agent may deem and treat the Registered Holder of
any Warrant Certificate as the

                                     12

<PAGE>
 
absolute owner thereof and of each Warrant represented thereby  (notwithstanding
any notations of ownership or writing thereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.

     SECTION 7.  Loss or Mutilation.  Upon receipt by the Company and the
                 ------------------                                      
Warrant Agent of evidence satisfactory to them of the ownership of and the loss,
theft, destruction or mutilation of any Warrant Certificate and (in the case of
loss, theft or destruction) of indemnity satisfactory to them, and (in case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall (in the absence of notice to the Company and/or the
Warrant Agent that a new Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number of
Warrants.  Applicants for a substitute Warrant Certificate shall also comply
with such other reasonable regulations and pay such other reasonable charges as
the Warrant Agent may prescribe.

     SECTION 8.  Adjustment of Purchase Price and Number of Shares of Common
                 -----------------------------------------------------------
Stock Deliverable.
- ----------------- 

                 (a) Except as hereinafter provided, in the event the Company
shall, at any time or from time to time after the date hereof and until
_________, 1999 [two years after the effective date of the Registration
Statement], issue or sell any shares of Common Stock for a consideration per
share less than the Initial Public Offering Price of the Common Stock or issue
any shares of Common Stock as a stock dividend to the holders of Common Stock,
or subdivide or combine the outstanding shares of Common Stock into a greater
or lesser number of shares (any such issuance, subdivision or combination
being herein called a "Change of Shares"), then, and thereafter upon each
further Change of Shares, the Purchase Price for the Warrants (whether or not
the same shall be

                                     13

<PAGE>
 
issued and outstanding) in effect immediately prior to such Change of Shares
shall be changed to a price (including any applicable fraction of a cent to the
nearest cent) determined by dividing (i) the sum of (a) the total number of
shares of Common Stock outstanding immediately prior to such Change of Shares,
multiplied by the Purchase Price in effect immediately prior to such Change of
Shares and (b) the consideration, if any, received by the Company upon such
sale, issuance, subdivision or combination, by (ii) the total number of shares
of Common Stock outstanding immediately after such Change of Shares; provided,
                                                                     -------- 
however, that in no event shall the Purchase Price be adjusted pursuant to this
- -------                                                                        
computation to an amount in excess of the Purchase Price in effect immediately
prior to such computation, except in the case of a combination of outstanding
shares of Common Stock.

     For the purposes of any adjustment to be made in accordance with this
Section 8(a), the following provisions shall be applicable:

          (A) In case of the issuance or sale of shares of Common Stock (or of
other securities deemed hereunder to involve the issuance or sale of shares of
Common Stock) for a consideration part or all of which shall be cash, the amount
of the cash portion of the consideration therefor deemed to have been received
by the Company shall be (i) the subscription price, if shares of Common Stock
are offered by the Company for subscription, or (ii) the public offering price
(before deducting therefrom any compensation paid or discount allowed in the
sale, underwriting or purchase thereof by underwriters or dealers or others
performing similar services, or any expenses incurred in connection therewith),
if such securities are sold to underwriters or dealers for public offering
without a subscription offering, or (iii) the gross amount of cash actually
received by the Company for such securities, in any other case.

                                     14

<PAGE>
 
          (B) In case of the issuance or sale (otherwise than as a dividend or
other distribution on any stock of the Company, and otherwise than on the
exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor other than cash deemed to have been
received by the Company shall be the value of such consideration as determined
in good faith by the Board of Directors of the Company, using customary
valuation methods and on the basis of prevailing market values for similar
property or services.

          (C) Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of shareholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.

          (D) The reclassification of securities of the Company other than
shares of Common Stock into securities including shares of Common Stock shall be
deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Common
Stock shall be determined as provided in subsection (B) of this Section 8(a).

          (E) The number of shares of Common Stock at any one time outstanding
shall be deemed to include the aggregate maximum number of shares issuable
(subject to readjustment upon the actual issuance thereof) upon the exercise of
options, rights or warrants and upon the conversion or exchange of convertible
or exchangeable securities.

                                     15

<PAGE>
 
          (b) Upon each adjustment of the Purchase Price pursuant to this
Section 8, the number of shares of Common Stock purchasable upon the exercise of
each Warrant shall be the number derived by multiplying the number of shares of
Common Stock purchasable immediately prior to such adjustment by the Purchase
Price in effect prior to such adjustment and dividing the product so obtained by
the applicable adjusted Purchase Price.

          (c) In case the Company shall at any time after the date hereof until
_________, 1999 [two years after the effective date of the Registration
Statement] issue options, rights or warrants to subscribe for shares of Common
Stock, or issue any securities convertible into or exchangeable for shares of
Common Stock, for a consideration per share (determined as provided in Sections
8(a) and 8(b) and as provided below) less than the Initial Public Offering Price
of the Common Stock, or without consideration (including the issuance of any
such securities by way of dividend or other distribution), the Purchase Price
for the Warrants (whether or not the same shall be issued and outstanding) in
effect immediately prior to the issuance of such options, rights or warrants, or
such convertible or exchangeable securities, as the case may be, shall be
reduced to a price determined by making the computation in accordance with the
provisions of Sections 8(a) and 8(b) hereof, provided that:
                                             --------      

          (A) The aggregate maximum number of shares of Common Stock, as the
case may be, issuable or that may become issuable under such options, rights or
warrants (assuming exercise in full even if not then currently exercisable or
currently exercisable in full) shall be deemed to be issued and outstanding at
the time such options, rights or warrants were issued, for a consideration equal
to the minimum purchase price per share provided for in such options, rights or
warrants at the time of issuance, plus the consideration, if any, received by
the Company for such options, rights or warrants; provided, however, that upon
                                                  --------  -------           
the expiration or other termination of such

                                     16

<PAGE>
 
options, rights or warrants, if any thereof shall not have been exercised, the
number of shares of Common Stock deemed to be issued and outstanding pursuant to
this subsection (A) (and for the purposes of subsection (E) of Section 8(a)
hereof) shall be reduced by the number of shares as to which options, warrants
and/or rights shall have expired, and such number of shares shall no longer be
deemed to be issued and outstanding, and the Purchase Price then in effect shall
forthwith be readjusted and thereafter be the price that it would have been had
adjustment been made on the basis of the issuance only of the shares actually
issued plus the shares remaining issuable upon the exercise of those options,
rights or warrants as to which the exercise rights shall not have expired or
terminated unexercised.

          (B) The aggregate maximum number of shares of Common Stock issuable or
that may become issuable upon conversion or exchange of any convertible or
exchangeable securities (assuming conversion or exchange in full even if not
then currently convertible or exchangeable in full) shall be deemed to be issued
and outstanding at the time of issuance of such securities, for a consideration
equal to the consideration received by the Company for such securities, plus the
minimum consideration, if any, receivable by the Company upon the conversion or
exchange thereof; provided, however, that upon the termination of the right to
                  --------  -------                                           
convert or exchange such convertible or exchangeable securities (whether by
reason of redemption or otherwise), the number of shares of Common Stock deemed
to be issued and outstanding pursuant to this subsection (B) (and for the
purposes of subsection (E) of Section 8(a) hereof) shall be reduced by the
number of shares as to which the conversion or exchange rights shall have
expired or terminated unexercised, and such number of shares shall no longer be
deemed to be issued and outstanding, and the Purchase Price then in effect shall
forthwith be readjusted and thereafter be the price that it would have been had
adjustment been made on the basis of the issuance only of the shares actually
issued plus the shares

                                     17

<PAGE>
 
remaining issuable upon conversion or exchange of those convertible or
exchangeable securities as to which the conversion or exchange rights shall not
have expired or terminated unexercised.

          (C) If any change shall occur in the price per share provided for in
any of the options, rights or warrants referred to in subsection (A) of this
Section 8(c), or in the price per share or ratio at which the securities
referred to in subsection (B) of this Section 8(c) are convertible or
exchangeable, such options, rights or warrants or conversion or exchange rights,
as the case may be, to the extent not theretofore exercised, shall be deemed to
have expired or terminated on the date when such price change became effective
in respect of shares not theretofore issued pursuant to the exercise or
conversion or exchange thereof, and the Company shall be deemed to have issued
upon such date new options, rights or warrants or convertible or exchangeable
securities.

          (d) In case of any reclassification or change of outstanding shares of
Common Stock issuable upon exercise of the Warrants (other than a change in par
value, or from par value to no par value, or from no par value to par value or
as a result of a subdivision or combination), or in case of any consolidation or
merger of the Company with or into another corporation (other than (1) a merger
with a subsidiary of the Company in which merger the Company is the continuing
corporation or (2) any consolidation or merger of the Company with or into
another corporation which, in either instance, does not result in any
reclassification or change of the then outstanding shares of Common Stock or
other capital stock issuable upon exercise of the Warrants (other than a change
in par value, or from par value to no par value, or from no par value to par
value or as a result of subdivision or combination)) or in case of any sale or
conveyance to another corporation of the property of the Company as an entirety
or substantially as an entirety, then, as a condition of such reclassification,
change, consolidation, merger, sale or conveyance, the Company, or such
successor or purchasing corporation, as the case may be, shall make lawful and
adequate provision

                                     18

<PAGE>
 
whereby the Registered Holder of each Warrant then outstanding shall have the
right thereafter to receive on exercise of such Warrant the kind and amount of
securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of
securities issuable upon exercise of such Warrant immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance and shall
forthwith file at the Corporate Office of the Warrant Agent a statement signed
by its Chief Executive Officer, President or a Vice President and by its
Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary
evidencing such provision.  Such provisions shall include provision for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Sections 8(a), (b) and (c).  The above provisions of
this Section 8(d) shall similarly apply to successive reclassifications and
changes of shares of Common Stock and to successive consolidations, mergers,
sales or conveyances.

          (e) Irrespective of any adjustments or changes in the Purchase Price
or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(e) hereof, continue to express the Purchase Price per
share and the number of shares purchasable thereunder as the Purchase Price per
share and the number of shares purchasable thereunder were expressed in the
Warrant Certificates when the same were originally issued.

          (f)  After each adjustment of the Purchase Price pursuant to this
Section 8, the Company will promptly prepare a certificate signed by the
Chairman, Chief Executive Officer or President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company
setting forth:  (i) the Purchase Price as so adjusted, (ii) the number of shares
of Common Stock purchasable upon exercise of each Warrant, after such
adjustment, and (iii) a brief

                                     19

<PAGE>
 
statement of the facts accounting for such adjustment.  The Company will
promptly file such certificate with the Warrant Agent and cause a brief summary
thereof to be sent by ordinary first class mail to each Registered Holder at his
last address as it shall appear on the registry books of the Warrant Agent.  No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity thereof except as to the holder to whom the Company
failed to mail such notice, or except as to the holder whose notice was
defective.  The affidavit of an officer of the Warrant Agent or the Secretary or
an Assistant Secretary of the Company that such notice has been mailed shall, in
the absence of fraud, be prima facie evidence of the facts stated therein.

          (g)  No adjustment of the Purchase Price shall be made as a result of
or in connection with (A) the issuance or sale of shares of Common Stock
pursuant to options, warrants, stock purchase agreements and convertible or
exchangeable securities outstanding or in effect on the date hereof and on the
terms described in the final prospectus relating to the public offering
contemplated by the Underwriting Agreement; (B) stock options to be granted
under the Company's 1995 Stock Option Plan to employees; (C) shares of Common
Stock, options or warrants issued to outside parties in connection with
strategic alliances, joint ventures or other corporate partnerships with the
Company, or (D) the issuance or sale of shares of Common Stock if the amount of
said adjustment shall be less than $.10, provided, however, that in such case,
                                         --------  -------                    
any adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment that shall amount, together with any adjustment so carried forward,
to at least $.10. In addition, Registered Holders shall not be entitled to cash
dividends paid by the Company prior to the exercise of any Warrant or Warrants
held by them.

                                     20

<PAGE>
 
     SECTION 9. Redemption.
                ---------- 

                (a) Commencing on the Initial Warrant Redemption Date, the 
Company may, on 30 days' prior written notice, redeem all the Warrants at ten
cents ($.10) per Warrant, provided, however, that before any such call for
                          --------  -------
redemption of Warrants can take place, the average closing sale price for the
Common Stock as reported by the American Stock Exchange, if the Common Stock
is then traded on the American Stock Exchange, (or the closing bid price, if
the Common Stock is then traded on Nasdaq) shall have equalled or exceeded
$______ [150% of the initial public offering price per share of Common Stock]
per share for any twenty (20) trading days within a period of thirty (30)
consecutive trading days ending on the fifth trading day prior to the date on
which the notice contemplated by (b) and (c) below is given (subject to
adjustment in the event of any stock splits or other similar events as
provided in Section 8 hereof).

                (b)  In case the Company shall exercise its right to redeem
all of the Warrants, it shall give or cause to be given notice to the
Registered Holders of the Warrants, by mailing to such Registered Holders a
notice of redemption, first class, postage prepaid, at their last address as
shall appear on the records of the Warrant Agent. Any notice mailed in the
manner provided herein shall be conclusively presumed to have been duly given
whether or not the Registered Holder receives such notice. Not less than four
(4) trading days prior to the mailing to the Registered Holders of the
Warrants of the notice of redemption, the Company shall deliver or cause to be
delivered to National a similar notice telephonically and confirmed in writing
together with a list of the Registered Holders (including their respective
addresses and number of Warrants beneficially owned) to whom such notice of
redemption has been or will be given.

                (c)  The notice of redemption shall specify (i) the redemption
price, (ii) the Redemption Date, which shall in no event be less than thirty
(30) days after the date of mailing of

                                     21

<PAGE>
 
such notice, (iii) the place where the  Warrant Certificate shall be delivered
and the redemption price shall be paid, (iv) if National is engaged as a Warrant
solicitation agent, that National shall receive the commission contemplated by
Section 4(b) hereof, and (v) that the right to exercise the Warrant shall
terminate at 5:30 p.m. (New York time) on the business day immediately preceding
the date fixed for redemption.  No failure to mail such notice nor any defect
therein or in the mailing thereof shall affect the validity of the proceedings
for such redemption except as to a holder (a) to whom notice was not mailed or
(b) whose notice was defective.  An affidavit of the Warrant Agent or the
Secretary or Assistant Secretary of the Company that notice of redemption has
been mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.

          (d)  Any right to exercise a Warrant shall terminate at 5:30 p.m. (New
York time) on the business day immediately preceding the Redemption Date.  The
redemption price payable to the Registered Holders shall be mailed to such
persons at their addresses of record.

          (e) The Company shall indemnify National and each person, if any, who
controls National within the meaning of Section 15 of the Act or Section 20(a)
of the Exchange Act against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Act, the Exchange Act or otherwise, arising from the registration
statement or prospectus referred to in Section 5(b) hereof to the same extent
and with the same effect (including the provisions regarding contribution) as
the provisions pursuant to which the Company has agreed to indemnify National
contained in Section 7 of the Underwriting Agreement.

          (f) Five business days prior to the Redemption Date, the Company shall
furnish to National (i) an opinion of counsel to the Company, dated such date
and addressed to National, and (ii) a "cold comfort" letter dated such date
addressed to National, signed by the

                                     22

<PAGE>
 
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities.

     SECTION 10.  Concerning the Warrant Agent.
                  ---------------------------- 

                  (a)  The Warrant Agent acts hereunder as agent and in a
ministerial capacity for the Company and National, and its duties shall be
determined solely by the provisions hereof. The Warrant Agent shall not, by
issuing and delivering Warrant Certificates or by any other act hereunder, be
deemed to make any representations as to the validity or value or
authorization of the Warrant Certificates or the Warrants represented thereby
or of any securities or other property delivered upon exercise of any Warrant
or whether any stock issued upon exercise of any Warrant is fully paid and
nonassessable.

                  (b)  The Warrant Agent shall not at any time be under any
duty or responsibility to any holder of Warrant Certificates to make or cause
to be made any adjustment of the Purchase Price or the Redemption Price
provided in this Agreement, or to determine whether any fact exists which may
require any such adjustments, or with respect to the nature or extent of any
such adjustments, when made, or with respect to the method employed in making
the same. It shall not (i) be liable for any recital or statement of fact
contained herein or for any action taken, suffered or omitted by it in
reliance on any Warrant Certificate or other document or instrument believed
by it in good faith to be genuine and to have been signed or presented by the
proper party or parties, (ii) be responsible for any failure on the part of
the Company to comply with any of its covenants and

                                     23

<PAGE>
 
obligations contained in this Agreement or in any Warrant Certificate, or (iii)
be liable for any act or omission in connection with this Agreement except for
its own negligence, bad faith or willful misconduct.

          (c)  The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company or for National) and
shall incur no liability or responsibility for any action taken, suffered or
omitted by it in good faith in accordance with the opinion or advice of such
counsel.

          (d)  Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed by
the Chairman of the Board of Directors, Chief Executive Officer, President or
any Vice President (unless other evidence in respect thereof is herein
specifically prescribed).  The Warrant Agent shall not be liable for any action
taken, suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order or demand reasonably believed by it to be
genuine.

          (e)  The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; the Company further agrees to indemnify the Warrant Agent
and save it harmless from and against any and all losses, expenses and
liabilities, including judgments, costs and counsel fees, for anything done or
omitted by the Warrant Agent in the execution of its duties and powers hereunder
                                                                                
except losses, expenses and liabilities arising as a result of the Warrant
- ------                                                                    
Agent's negligence, bad faith or willful misconduct.

          (f)  The Warrant Agent may resign its duties and be discharged from
all further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own gross negligence or willful misconduct), after
giving 30 days' prior written notice to the

                                     24

<PAGE>
 
Company.  At least 15 days prior to the date such resignation is to become
effective, the Warrant Agent shall cause a copy of such notice of resignation to
be mailed to the Registered Holder of each Warrant Certificate at the Company's
expense.  Upon such resignation, or any inability of the Warrant Agent to act as
such hereunder, the Company shall appoint in writing a new warrant agent.  If
the Company shall fail to make such appointment within a period of 15 days after
it has been notified in writing of such resignation by the resigning Warrant
Agent, then the Registered Holder of any Warrant Certificate may apply to any
court of competent jurisdiction for the appointment of a new warrant agent.  Any
new warrant agent, whether appointed by the Company or by such a court, shall be
a bank or trust company having a capital and surplus, as shown by its last
published report to its stockholders, of not less than $10,000,000 or a stock
transfer company.  After acceptance in writing of such appointment by the new
warrant agent is received by the Company, such new warrant agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named herein as the Warrant Agent, without any further assurance,
conveyance, act or deed; but if for any reason it shall be necessary or
expedient to execute and deliver any further assurance, conveyance, act or deed,
the same shall be done at the expense of the Company and shall be legally and
validly executed and delivered by the resigning Warrant Agent.  Not later than
the effective date of any such appointment the Company shall file notice thereof
with the resigning Warrant Agent and shall forthwith cause a copy of such notice
to be mailed to the Registered Holder of each Warrant Certificate.

          (g)  Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent under

                                     25

<PAGE>
 
this Agreement without any further act, provided that such corporation is
eligible for appointment as successor to the Warrant Agent under the provisions
of the preceding paragraph.  Any such successor warrant agent shall promptly
cause notice of its succession as warrant agent to be mailed to the Company and
to the Registered Holders of each Warrant Certificate.

          (h)  The Warrant Agent, its subsidiaries and affiliates, and any of
its or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effect as though it were not Warrant Agent.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.

          (i)  The Warrant Agent shall retain for a period of two years from the
date of exercise any Warrant Certificate received by it upon such exercise.

     SECTION 11.  Modification of Agreement.
                  ------------------------- 

     The Warrant Agent and the Company may by supplemental agreement make any
changes or corrections in this Agreement (i) that they shall deem appropriate to
cure any ambiguity or to correct any defective or inconsistent provision or
manifest mistake or error herein contained; or (ii) that they may deem necessary
or desirable and which shall not adversely affect the interests of the holders
of Warrant Certificates; provided, however, that no change in the number or
                         --------  -------                                 
nature of the securities purchasable upon the exercise of any Warrant, or to
increase the Purchase Price therefor or to accelerate the Warrant Expiration
Date, shall be made without the consent in writing of the Registered Holders
representing not less than 66//2/3//% of the Warrants then outstanding, other
than such changes as are presently specifically prescribed by this Agreement
as originally executed. In addition, this Agreement may not be modified,
amended or supplemented without the prior written consent of National, other
than to cure any ambiguity or to correct any provision which is

                                     26

<PAGE>
 
inconsistent with any other provision of this Agreement or to make any such
change that is necessary or desirable and which shall not adversely affect the
interests of National and except as may be required by law.

     SECTION 12.  Notices.
                  ------- 

     All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been made when delivered or mailed first-
class registered or certified mail, postage prepaid, as follows: if to the
Registered Holder of a Warrant Certificate, at the address of such holder as
shown on the registry books maintained by the Warrant Agent; if to the Company
at 1170 B Chess Drive, Foster City, California 94404, Attention:  John W. Fara,
President and Chief Executive Officer, or at such other address as may have been
furnished to the Warrant Agent in writing by the Company; and if to the Warrant
Agent, at its Corporate Office.  Copies of any notice delivered pursuant to this
Agreement shall also be delivered to National Securities Corporation, 1001
Fourth Avenue, Suite 2200, Seattle, Washington 98154-1100, Attention: General
Counsel, or at such other address as may have been furnished to the Company and
the Warrant Agent in writing.

     SECTION 13.  Governing Law.
                  ------------- 
     This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without giving effect to conflicts of laws.

     SECTION 14.  Binding Effect.
                  -------------- 

     This Agreement shall be binding upon and inure to the benefit of the
Company, National, the Warrant Agent and their respective successors and assigns
and the holders from time to time of Warrant Certificates or any of them.
Nothing in this Agreement is intended or shall be

                                     27

<PAGE>
 
construed to confer upon any other person any right, remedy or claim, in equity
or at law, or to impose upon any other person any duty, liability or obligation.

     SECTION 15.  Termination.
                  ----------- 

     This Agreement shall terminate at the close of business on the Expiration
Date of all of the Warrants or such earlier date upon which all Warrants have
been exercised or redeemed, except that the Warrant Agent shall account to the
Company for cash held by it and the provisions of Section 10 hereof shall
survive such termination.

     SECTION 16.  Counterparts.
                  ------------ 
     This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.

                                     28

<PAGE>
 
     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.

[SEAL]
                                DEPOMED, INC.



 
                            
                                By: 
                                   ___________________________
                                Name:
                                Title:

Attest:


By:_____________________________
Name:
Title:

                                CONTINENTAL STOCK TRANSFER AND TRUST COMPANY,
                                As Warrant Agent



 
                            
                                By:
                                   ___________________________
                                Name:
                                Title:


                                NATIONAL SECURITIES CORPORATION



                                        
                                        
                                By:
                                   ___________________________
                                Name:  Steven A. Rothstein
                                Title: Chairman

<PAGE>
 
                                                                     EXHIBIT A
                                                                     ---------


No. W __________                                    VOID AFTER _________, 2002

                                             WARRANTS


                      REDEEMABLE WARRANT CERTIFICATE TO
                     PURCHASE ONE SHARE OF COMMON STOCK

                                DEPOMED, INC.

                                         CUSIP _______

THIS CERTIFIES THAT, FOR VALUE RECEIVED


or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Warrants (the "Warrants") specified above.  Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and nonassessable share of Common Stock, no par value,
of Depomed, Inc., a California corporation (the "Company"), at any time between
_______________, 1998 (the "Initial Warrant Exercise Date"), and the Expiration
Date (as hereinafter defined) upon the presentation and surrender of this
Warrant Certificate with the Subscription Form on the reverse hereof duly
executed, at the corporate office of Continental Stock Transfer and Trust
Company, as Warrant Agent, or its successor (the "Warrant Agent"), accompanied
by payment of $_____, [140% of the initial public offering price of the Common
Stock] subject to adjustment (the "Purchase Price"), in lawful money of the
United States of America in cash or by check made payable to the Warrant Agent
for the account of the Company.

          This Warrant Certificate and each Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement"), dated
_______________, 1997 [date of the Prospectus], between the Company and the
Warrant Agent.

          In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.

          Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued.  In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and

                                     A-1

<PAGE>
 
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.

          The term "Expiration Date" shall mean 5:30 p.m. (New York time) on the
date which is forty-eight (48) months after the Initial Warrant Exercise Date.
If each such date shall in the State of New York be a holiday or a day on which
the banks are authorized to close, then the Expiration Date shall mean 5:30 p.m.
(New York time) on the next following day which in the State of New York is not
a holiday or a day on which banks are authorized to close.

          The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act"), with respect to such securities
is effective or an exemption thereunder is available.  The Company has
covenanted and agreed that it will file a registration statement under the
Federal securities laws, use its best efforts to cause the same to become
effective, use its best efforts to keep such registration statement current, if
required under the Act, while any of the Warrants are outstanding, and deliver a
prospectus which complies with Section 10(a)(3) of the Act to the Registered
Holder exercising this Warrant.  This Warrant shall not be exercisable by a
Registered Holder in any state where such exercise would be unlawful.

          This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender.  Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.

          Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.

          Subject to the provisions of the Warrant Agreement, this Warrant may
be redeemed at the option of the Company, at a redemption price of $0.10 per
Warrant, at any time commencing after ______________, 1998 [18 months after the
effective date of the Registration Statement], provided that the average closing
sale price for the Common Stock as reported by the American Stock Exchange (or
the closing bid price, if the Common Stock is then traded on Nasdaq), shall have
equalled or exceeded $_________ [150% of the initial public offering price per
share of Common Stock] per share for any twenty (20) trading days within a
period of thirty (30) consecutive trading days ending on the fifth trading day
prior to the Notice of Redemption, as defined below (subject to adjustment in
the event of any stock splits or other similar events).  Notice of redemption
(the "Notice of Redemption") shall be given not later than the thirtieth day
before the date fixed for redemption, all as provided in the Warrant Agreement.
On and after the date fixed for redemption,

                                     A-2

<PAGE>
 
the Registered Holder shall have no rights with respect to the Warrants except
to receive the $.01 per Warrant upon surrender of this Warrant Certificate.

          Under certain circumstances, National Securities Corporation may be
entitled to receive an aggregate of five percent (5%) of the Purchase Price of
the Warrants represented hereby.

          Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.

          This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to
conflicts of laws.

          This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.

          IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.

Dated:
                                        DEPOMED, INC.
[SEAL]



                                        By:
                                           __________________________
                                        Name:
                                        Title:


                                        By:
                                           __________________________
                                           Secretary

COUNTERSIGNED:

CONTINENTAL STOCK TRANSFER AND TRUST COMPANY,
  as Warrant Agent


By:
   __________________________
   Authorized Officer

                                     A-3

<PAGE>
 
                               SUBSCRIPTION FORM
                               -----------------

                    To Be Executed by the Registered Holder
                         in Order to Exercise Warrants

          The undersigned Registered Holder hereby irrevocably elects to
exercise ________________________ Warrants represented by this Warrant
Certificate, and to purchase the securities issuable upon the exercise of such
Warrants, and requests that certificates for such securities shall be issued in
the name of

                         PLEASE INSERT SOCIAL SECURITY
                          OR OTHER IDENTIFYING NUMBER

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

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

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

                    ----------------------------------------
                    (please print or type name and address)

and be delivered to

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

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

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

                    ----------------------------------------
                    (please print or type name and address)

and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.

                                     A-4

<PAGE>
 
                   IMPORTANT:  PLEASE COMPLETE THE FOLLOWING:

          1.     The exercise of this Warrant was solicited by
                 National Securities Corporation.    [_]


          2.     The exercise of this Warrant was solicited by

                 ______________.  [_]


          3.     The exercise of this Warrant was not solicited.  [_]



Dated:
      ______________________
                                        X ______________________________

                                          ______________________________

                                          ______________________________
                                                     Address


                                          ______________________________
                                            Social Security or Taxpayer
                                               Identification Number


                                          ______________________________
                                                Signature Guaranteed


                                          ______________________________

                                     A-5

<PAGE>
 
                                   ASSIGNMENT
                                   ----------

                    To Be Executed by the Registered Holder
                          in Order to Assign Warrants

          FOR VALUE RECEIVED, _______________________________, hereby sells,
assigns and transfers unto

                        PLEASE INSERT SOCIAL SECURITY OR
                            OTHER IDENTIFYING NUMBER

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

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

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

                    ----------------------------------------
                    (please print or type name and address)


____________ of the Warrants represented by this Warrant Certificate, and hereby
irrevocably constitutes and appoints _____________________________________
Attorney to transfer this Warrant Certificate on the books of the Company, with
full power of substitution in the premises.

Dated:______________________              X ________________________________
                                            Signature Guaranteed

                                            ________________________________

THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.

                                     A-6



<PAGE>
 
                                  EXHIBIT 4.5
                                  -----------



NATIONAL SECURITIES CORPORATION
As Representative of the several Underwriters
1001 Fourth Avenue
Suite 2200
Seattle, Washington 98154

Ladies and Gentlemen:

          In order to induce National Securities Corporation, the representative
of the several underwriters (the "Representative") and DepoMed, Inc. (together
with its predecessors, successors and assigns, the "Company") to enter into an
underwriting agreement with respect to the public offering of 2,500,000 shares
of Common Stock and 1,250,000 Common Stock Purchase Warrants, the undersigned
hereby agrees that for a period of twelve (12) months following the effective
date of the Company's Registration Statement on Form SB-2 (the "Lock-up
Period"), he, she or it will not, without the prior written consent of the
Representative, directly or indirectly, issue, offer, agree or offer to sell,
sell, grant an option for the purchase or sale of, transfer, pledge, assign,
hypothecate, distribute or otherwise encumber or dispose of any shares of Common
Stock or options, rights, warrants or other securities convertible into,
exchangeable or exercisable for or evidencing any right to purchase or subscribe
for shares of Common Stock (whether or not beneficially
 owned by the
undersigned), or any beneficial interest therein (collectively, the
"Securities").

<PAGE>
 
          In order to enable the aforesaid covenants to be enforced, the
undersigned hereby consents to the placing of legends and/or stop-transfer
orders with the Transfer Agent of the Company's securities with respect to any
of the Securities registered in the name of the undersigned or beneficially
owned by the undersigned.

Dated:  __________________, 1997


                                    ----------------------------------------- 
                                    Signature


 
                                    ----------------------------------------- 
                                    Print Name


 
                                    ----------------------------------------- 
                                    Print Address


 
                                    ----------------------------------------- 
                                    Print Social Security Number
                                    or Taxpayer I.D. Number


                                       2



<PAGE>
 
                                                                    Exhibit 10.5
                            BASIC LEASE INFORMATION


LEASE DATE:         September 2, 1992

TENANT:             DepoMed Systems, Inc., a California Corporation

TENANTS ADDRESS:    1170 B Chess Drive
                    Foster City, CA  94404

LANDLORD:           1170 CHESS DRIVE LIMITED PARTNERSHIP, a Texas Limited
                    Partnership

LANDLORD'S ADDRESS:c/o   Trammell Crow Company
                         1820 Gateway Drive, Suite 200
                         San Mateo, CA  94404

PROJECT:            FOSTER CITY TECHNOLOGY CENTER

DESCRIPTION:        That 66,869 square foot, two-building complex, located at
                    the corner of Hatch and Chess Drives, in Foster City,
                    California, commonly known as the Foster City Technology
                    Center as outlined in green on Exhibit A.

BUILDING
DESCRIPTION:        That 33,849 square foot, one-story, concrete, tilt-up
                    building commonly known as 1170 Chess Drive, Foster City,
                    California.  The building is in the southwestern most corner
                    of the Project, as outlined in blue on Exhibit "A".

PREMISES:           That approximately 3,300 square feet of rentable area of the
                    building commonly known as 1170 B Chess Drive, Foster City,
                    California as outlined in red on Exhibit "A".

PERMITTED USE:      Office, laboratory and warehouse

PARKING DENSITY:    Three (3) spaces per 1,000 square feet - See Paragraph 40.

ESTIMATED TERM COMMENCEMENT DATE:   September 15, 1992

LENGTH OF TERM:                     Thirty (30) Months.
 See Paragraph 3.

RENT:

 BASE RENT:                                   $ See Paragraph 38.

 ESTIMATED FIRST YEAR BASIC OPERATING COST:   $  667.00 per month

 SECURITY DEPOSIT:                            $ 3,389.00

TENANT'S PROPORTIONATE SHARE:

 OF BUILDING:       9.75%

 OF PROJECT:        4.94%

BROKER:             Bruce Bean, TRI Commercial Brokerage

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

                                      -1-

<PAGE>
 
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                            PAGE
<S>                                                                        <C>
BASIC LEASE INFORMATION....................................................... 1
TABLE OF CONTENTS............................................................. 2
 1.   PREMISES................................................................ 3
 2.   POSSESSION AND LEASE COMMENCEMENT....................................... 3
 3.   TERM.................................................................... 3
 4.   USE..................................................................... 4
 5.   RULES AND REGULATIONS................................................... 5
 6.   RENT.................................................................... 6
 7.   BASIC OPERATING COST.................................................... 6
 8.   INSURANCE AND INDEMNIFICATION...........................................10
 9.   WAIVER OF SUBROGATION...................................................13
10.   LANDLORD'S REPAIRS AND SERVICES.........................................13
11.   TENANT'S REPAIRS........................................................14
12.   ALTERATIONS.............................................................14
13.   SIGNS...................................................................15
14.   INSPECTION/POSTING NOTICES..............................................16
15.   UTILITIES...............................................................16
16.   SUBORDINATION...........................................................17
17.   FINANCIAL STATEMENTS....................................................17
18.   ESTOPPEL CERTIFICATE....................................................17
19.   SECURITY DEPOSIT........................................................18
20.   TENANT'S REMEDIES.......................................................18
21.   ASSIGNMENT AND SUBLETTING...............................................19
22.   AUTHORITY OF PARTIES....................................................20
23.   CONDEMNATION............................................................20
24.   CASUALTY DAMAGE.........................................................21
25.   HOLDING OVER............................................................23
26.   DEFAULT.................................................................23
27.   LIENS...................................................................26
28.   TRANSFERS BY LANDLORD...................................................26
29.   RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS.........................27
30.   WAIVER..................................................................27
31.   NOTICES.................................................................28
32.   ATTORNEYS' FEES.........................................................28
33.   SUCCESSORS AND ASSIGNS..................................................28
34.   FORCE MAJEURE...........................................................29
35.   BROKERAGE COMMISSION....................................................29
36.   MISCELLANEOUS...........................................................29
37.   ADDITIONAL PROVISIONS...................................................31


EXHIBITS
- --------

EXHIBIT A...........................................Site Plan, Legal Description
EXHIBIT B.................................Tenant Improvements and Specifications
</TABLE>


                                      -2-

<PAGE>
 
                                     LEASE

THIS LEASE is made as of this 2nd day of September, 1992, by and between 1170
Chess Drive Limited Partnership, a Texas Limited Partnership (hereinafter called
"Landlord") and DepoMed Systems, Inc., a California Corporation (hereinafter
called "Tenant").

                                   PREMISES

1.   Landlord leases to Tenant and Tenant leases from Landlord, upon the terms
     and conditions hereinafter set forth, those premises (the "Premises")
     outlined in red on Exhibit A and described in the Basic Lease Information.
     The Premises may be all or part of the building (the "Building") or of the
     project (the "Project") which may consist of more than one building.  The
     Building and Project are outlined in blue and green respectively on Exhibit
     A.

                       POSSESSION AND LEASE COMMENCEMENT

2.   CONSTRUCTION OF IMPROVEMENTS.  In the event this Lease pertains to a
     Building to be constructed or improvements to be constructed within a
     Building, the provisions of this Paragraph 2.A. shall apply in lieu of the
     provisions of some or all of the Premises, or (2) the improvements
     constructed or to be constructed in the Premises shall have been
     substantially completed in accordance with the plans and specifications
     described on __________ whether or not substantial completion of the
     Building itself shall have occurred.  If for any reason Landlord cannot
     deliver possession of the Premises to Tenant on the Estimated Term
     Commencement Date, Landlord shall not be subject to any liability therefor,
     nor shall Landlord be in default hereunder.  In the event of any dispute as
     to substantial completion of work performed or required to be performed by
     Landlord, the certificate of Landlord's architect or general contractor
     shall be conclusive.  Substantial completion shall have occurred
     notwithstanding Tenant's submission of a punchlist to Landlord, which
     Tenant shall submit, if at all, within thirty (30) days after the Term
     Commencement Date.  Tenant shall, upon demand, execute and deliver to
     Landlord a letter of acceptance of delivery of the Premises.

                                     TERM

3.   The Term of this Lease shall commence on the Term Commencement Date and
     continue in full force and effect for the number of months specified as the
     Length of Term in the Basic Lease Information or until this Lease is
     terminated as otherwise provided herein.  If the Term Commencement Date is
     a date other than the first day of the calendar month, the Term shall be
     the number of months of the Length of Term in addition to the remainder of
     the calendar month following the Term Commencement Date.

                                      -3-

<PAGE>
 
                                      USE

4.   A.   GENERAL.  Tenant shall use the Premises for the Permitted Use and for
     no other use or purpose.  Tenant shall control Tenant's employees, agents,
     customers, visitors, invitees, licensees, contractors, assignees and
     subtenants (collectively, "Tenant's Parties") in such a manner that Tenant
     and Tenant's Parties cumulatively do not exceed the Parking Density at any
     time.  Tenant and Tenant's Parties shall have the nonexclusive right to
     use, in common with other parties occupying the Building or Project, the
     parking areas and driveways of the Project, subject to such rules and
     regulations as Landlord may from time to time prescribe.

     B.  LIMITATIONS.  Tenant shall not permit any odors, smoke, dust, gas,
     substances, noise or vibrations to emanate from the Premises, nor take any
     action which would constitute a nuisance or would disturb, obstruct or
     endanger any other tenants of the Building or Project in which the Premises
     are situated or interfere with their use of their respective premises.
     Storage outside the Premises of materials, vehicles or any other items is
     prohibited.  Tenant shall not use or allow the Premises to be used for any
     improper, immoral, unlawful or objectionable purpose, nor shall Tenant
     cause or maintain or permit any nuisance in, on or about the Premises.
     Tenant shall not commit or suffer the commission of any waste in, on or
     about the Premises.  Tenant shall not allow any sale by auction upon the
     Premises, or place any loads upon the floors, walls or ceilings which
     endanger the structure, or place any harmful liquids in the drainage system
     of the Building or Project.  No waste, materials or refuse shall be dumped
     upon or permitted to remain outside the Premises except in trash containers
     placed inside exterior enclosures designated for that purpose by Landlord.
     Landlord shall not be responsible to Tenant for the non-compliance by any
     other tenant or occupant of the Building or Project with any of the above-
     referenced rules or any other terms or provisions of such tenant's or
     occupant's lease or other contract.

     C.  COMPLIANCE WITH REGULATIONS.  By entering the Premises.  Tenant accepts
     the Premises in the condition existing as of the date of such entry,
     subject to all existing or future applicable municipal, state and federal
     and other governmental statutes, regulations, laws and ordinances,
     including zoning ordinances and regulations governing and relating to the
     use, occupancy and possession of the Premises and the use, storage,
     generation and disposal of Hazardous Materials (hereinafter defined) in, on
     and under the Premises (collectively "Regulations").  Except for pre-
     existing violations, Tenant shall, at Tenant's sole expense, strictly
     comply with all Regulations now in force or which may hereafter be in force
     relating to the Premises and the use of the Premises and/or the use,
     storage, generation of Hazardous Materials in, on and under the Premises.
     Tenants shall  at its sole cost and expense obtain any and all

                                      -4-

<PAGE>
 
     licenses or permits necessary for Tenant's use of the Premises.  Tenant
     shall promptly comply with the requirements of any board of fire
     underwriters or other similar body now or hereafter constituted.  Tenant
     shall not do or permit anything to be done in, on, or about the Premises or
     bring or keep anything which will in any way increase the rate of any
     insurance upon the Premises, Building or Project, or upon any contents
     therein or cause a cancellation of said insurance or otherwise affect said
     insurance in any manner.  Tenant shall indemnity, defend, protect and hold
     Landlord harmless from and against any loss, cost, expense, damage,
     attorneys' fees or liability arising out of the failure of Tenant to comply
     with any applicable law or comply with the requirements as set forth
     herein.

     D.  HAZARDOUS WASTES.  Tenant shall not cause, or allow any of Tenant's
     Parties to cause, any Hazardous Materials to be used, generated, stored or
     disposed of on or about the Premises, the Building or the Project.  As used
     in this Lease, "Hazardous Materials" shall include, but not be limited to,
     hazardous, toxic and radioactive materials and those substances defined as
     "hazardous substances," "hazardous materials ... hazardous wastes," "toxic
     substances," or other similar designations in any federal, state, or local
     law, regulation, or ordinance.  Landlord shall have the right at all
     reasonable times to inspect the Premises and to conduct tests and
     investigations to determine whether Tenant is in compliance with the
     foregoing provisions, the costs of all such inspections, tests and
     investigations to be borne by Tenant.  Tenant shall indemnify, defend,
     protect and hold Landlord harmless from and against all liabilities,
     losses, costs and expenses, demands, causes of action, claims or judgments
     directly or indirectly arising out of the use, generation, storage or
     disposal of Hazardous Materials by Tenant or any of Tenant's Parties, which
     indemnity shall include, without limitation, the cost of any required or
     necessary repair, cleanup or detoxification, and the preparation of any
     closure or other required plans, whether such action is required or
     necessary prior to or following the termination of this Lease.  Neither the
     written consent by Landlord to the use, generation, storage or disposal of
     Hazardous Materials nor the strict compliance by Tenant with all laws
     pertaining to Hazardous Materials shall excuse Tenant from Tenant's
     obligation of indemnification pursuant to this Paragraph 4.D.
     Tenant's,obligations pursuant to the foregoing indemnity shall survive the
     termination of this Lease.

                             RULES AND REGULATIONS

5.   Tenant shall faithfully observe and comply with any reasonable rules and
     regulations Landlord may from time to time prescribe in writing for the
     purpose of maintaining the proper care, cleanliness, safety, traffic flow
     and general order of the Premises or Project.  Tenant shall cause

                                      -5-

<PAGE>
 
     Tenant's Parties to comply with such rules and regulations.  Landlord shall
     not be responsible to Tenant for the non-compliance by any other tenant or
     occupant of the Building or Project with any of the rules and regulations.

                                     RENT

6.   A.   BASE RENT.  Tenant shall pay to Landlord, without demand throughout
     the Term, Base Rent as specified in the Basic Lease Information, payable in
     monthly installments in advance on or before the first day of each calendar
     month, in lawful money of the United States, without deduction or offset
     whatsoever, at the address specified in the Basic Lease Information or to
     such other place as Landlord may from time to time designate in writing.
     Base Rent for the first full month of the Term shall be paid by Tenant upon
     Tenant's execution of this Lease.  If the obligation for payment of Base
     Rent commences on other than the first day of a month, then Base Rent shall
     be prorated and the prorated installment shall be paid on the first day of
     the calendar month next succeeding the Term Commencement Date.

     B.  ADDITIONAL RENT.  All monies other than Base Rent required to be paid
     by Tenant hereunder, including, but not limited to, the interest and late
     charge described in Paragraph 26.D., any monies spent by Landlord pursuant
     to Paragraph 30, and Tenant's Proportionate Share of Basic Operating Cost,
     as specified in Paragraph 7 of this Lease, shall be considered additional
     rent ("Additional Rent").  "Rent" shall mean Base Rent and Additional Rent.

                             BASIC OPERATING COST

7.   A.   BASIC OPERATING COST.  In addition to the Base Rent required to be
     paid hereunder, Tenant shall pay as Additional Rent, Tenant's Proportionate
     Share, as defined in the Basic Lease Information, of Basic Operating Cost
     in the manner set forth below.  Landlord shall account for each item of
     Basic Operating Cost as either a cost attributable to the Building or to
     the Project, as determined by Landlord in Landlord's sole discretion, and
     unless provided to the contrary in this Lease, Tenant shall pay the
     applicable Tenant's Proportionate Share of each such Basic Operating Cost,
     as set forth in the Basic Lease Information.  Basic Operating Cost shall
     mean all expenses and costs of every kind and nature which Landlord shall
     pay or become obligated to pay, because of or in connection with the
     management, maintenance, preservation and operation of the Project and its
     supporting facilities (determined in accordance with generally accepted
     accounting principles, consistently applied) including but not limited to
     the following:

     (1) TAXES.  All real property taxes, possessory interest taxes, business or
     license taxes or fees, service payments in lieu of such taxes or fees,
     annual or periodic license or use fees, excises, transit charges, housing
     fund

                                      -6-

<PAGE>
 
     assessments, open space charges, assessments, levies, fees or charges,
     general and special, ordinary and extraordinary, unforeseen as well as
     foreseen, of any kind (including fees "in-lieu" of any such tax or
     assessment) which are assessed, levied, charged, confirmed, or imposed by
     any public authority upon the Project, its operations or the Rent (or any
     portion or component thereof (all of the foregoing being hereinafter
     collectively referred to as "real property taxes"), or any tax imposed in
     substitution, partially or totally, of any tax previously included within
     the definition of real property taxes, or any additional tax the nature of
     which was previously included within the definition of real property taxes,
     except (a) inheritance or estate taxes imposed upon or assessed against the
     Project, or any part thereof or interest therein, and (b) taxes computed
     upon the basis of net income of Landlord or the owner of any interest
     therein.  Basic Operating Cost shall also include any taxes, assessments,
     or any other fees imposed by any public authority upon or measured by the
     monthly rental or other charges payable hereunder, including, without
     limitation, any gross income tax or excise tax levied by the local
     governmental authority in which the Project is located, the federal
     government, or any other governmental body with respect to receipt of such
     rental, or upon, with respect to or by reason of the development,
     possession, leasing, operation, management, maintenance, alteration,
     repair, use or occupancy by Tenant of the Premises or any portion thereof,
     or upon this transaction or any document to which Tenant is a party
     creating or transferring an interest or an estate in the Premises.  In the
     event that it shall not be lawful for Tenant to reimburse Landlord for all
     or any part of such taxes, the monthly rental payable to Landlord under
     this Lease shall be revised to net to Landlord the same net rental after
     imposition of any such taxes by Landlord as would have been payable to
     Landlord prior to the payment of any such taxes.

     (2) INSURANCE.  All insurance premiums and costs, including but not limited
     to, any deductible amounts, premiums and cost of insurance incurred by
     Landlord, as more fully set forth in Paragraph 8.A. herein.

     (3) REPAIRS AND IMPROVEMENTS.  Repairs, replacements and general
     maintenance for the Premises, Building and Project (except for those
     repairs expressly made the financial responsibility of Landlord pursuant to
     the terms of this Lease, repairs to the extent paid for by proceeds of
     insurance or by Tenant or other third parties, and alterations attributable
     solely to tenants of the Project other than Tenant).  Such repairs,
     replacements, and general maintenance shall include the cost of any capital
     improvements made to or capital assets acquired for the Project, Building,
     or Premises after the Term Commencement Date that reduce any other Basic
     Operating Cost, are reasonably necessary for the health and safety of the

                                      -7-

<PAGE>
 
     occupants of the Project, or are made to the Building by Landlord after the
     date of this Lease and are required under any governmental law or
     regulation, such costs or allocable portions thereof to be amortized over
     such reasonable period as Landlord shall determine, together with interest
     on the unamortized balance at the "prime rate" charged at the time such
     improvements or capital assets are constructed or acquired by Wells Fargo
     Bank, N.A. (San Francisco), plus two (2) percentage points, but in no event
     more than the maximum rate permitted by law.

     (4) SERVICES.  All expenses relating to maintenance, janitorial and service
     agreements and services, and costs of supplies and equipment used in
     maintaining the Premises, Building and Project and the equipment therein
     and the adjacent sidewalks, driveways, parking and service areas,
     including, without limitation, alarm service, window cleaning, elevator
     maintenance, Building exterior maintenance and landscaping.

     (5) UTILITIES.  Utilities which benefit all or a portion of the Premises,
     Building or Project.

     (6) MANAGEMENT FEE.  A management and accounting cost recovery fee equal to
     three percent (3%) of the sum of Base Rent and Basic Operating Cost.

     (7) LEGAL AND ACCOUNTING.  Reasonable legal and accounting expenses
     relating to the Project, including the cost of audits by certified public
     accountants.

     In the event that the Building is not fully occupied during any fiscal year
     of the Term as determined by Landlord, an adjustment shall be made in
     computing the Basic Operating Cost for such year so that Tenant pays an
     equitable portion of all variable items of Basic Operating Cost, as
     reasonably determined by Landlord; provided, however, that in no event
     shall Landlord be entitled to collect in excess of one hundred percent
     (100%) of the total Basic Operating Cost from all of the tenants in the
     Building including Tenant.

     Basic Operating Cost shall not include specific costs incurred for the
     account of, separately billed to and paid by specific tenants.
     Notwithstanding anything herein to the contrary, in any instance wherein
     Landlord, in Landlord's sole discretion, deems Tenant to be responsible for
     any amounts greater than Tenant's Proportionate Share, Landlord shall have
     the right to allocate costs in any reasonable manner Landlord deems
     appropriate.

     B.  PAYMENT OF ESTIMATED BASIC OPERATING COST.  "Estimated Basic Operating
     Cost" for any particular year shall mean Landlord's estimate of the Basic
     Operating Cost for such fiscal year made prior to commencement of such
     fiscal year as hereinafter provided.  Landlord shall have the right from
     time to time to revise its fiscal year and interim

                                      -8-

<PAGE>
 
     accounting periods so long as the periods as so revised are reconciled with
     prior periods in accordance with generally accepted accounting principles
     applied in a consistent manner.  During the last month of each fiscal year
     during the Term, or as soon thereafter as practicable, Landlord shall give
     Tenant written notice of the Estimated Basic Operating Cost made in good
     faith for the ensuing fiscal year.  Tenant shall pay Tenant's Proportionate
     Share of the Estimated Basic Operating Cost with installments of Base Rent
     for the fiscal year to which the Estimated Basic Operating Cost applies in
     monthly installments on the first day of each calendar month during such
     year, in advance.  If at any time during the course of the fiscal year,
     Landlord determines in good faith that Basic Operating Cost is projected to
     vary from the then Estimated Basic Operating Cost by more than ten percent
     (10%), Landlord may, by written notice to Tenant, revise the Estimated
     Basic Operating Cost for the balance of such fiscal year, and Tenant's
     monthly installments for the remainder of such year shall be adjusted so
     that by the end of such fiscal year Tenant has paid to Landlord Tenant's
     Proportionate Share of the revised Estimated Basic Operating Cost for such
     year.

     C.  COMPUTATION OF BASIC OPERATING COST ADJUSTMENT.  "Basic Operating Cost
     Adjustment" shall mean the difference between Estimated Basic Operating
     Cost and Basic Operating Cost for any fiscal year determined as hereinafter
     provided.  Within one hundred twenty (120) days after the end of each
     fiscal year, as determined by Landlord, or as soon thereafter as
     practicable, Landlord shall deliver to Tenant a statement of Basic
     Operating Cost for the fiscal year just ended, accompanied by a computation
     of Basic Operating Cost Adjustment.  If such statement shows that Tenant's
     payment based upon Estimated Basic Operating Cost is less than Tenant's
     Proportionate Share of Basic Operating Cost, then Tenant shall pay to
     Landlord the difference within twenty (20) days after receipt of such
     statement. If such statement shows that Tenant's payments of Estimated
     Basic Operating Cost exceed Tenant's Proportionate Share of Basic Operating
     Cost, then (provided that Tenant is not in default under this Lease)
     Landlord shall pay to Tenant the difference within twenty (20) days after
     delivery of such statement to Tenant.  If this Lease has been terminated or
     the Term hereof has expired prior to the date of such statement, then the
     Basic Operating Cost Adjustment shall be paid by the appropriate party
     within twenty (20) days after the date of delivery of the statement.
     Should this Lease commence or terminate at any time other than the first
     day of the fiscal year, Tenant's Proportionate Share of the Basic Operating
     Cost Adjustment shall be prorated by reference to the exact number of
     calendar days during such fiscal year that this Lease is in effect.

     D.  NET LEASE.  This shall be a net Lease and Base Rent shall be paid to
     Landlord absolutely net of all costs and expenses, except as specifically
     provided to the contrary in

                                      -9-

<PAGE>
 
     this Lease.  The provisions for payment of Basic Operating Cost and the
     Basic Operating Cost Adjustment are intended to pass on to Tenant and
     reimburse Landlord for all costs and expenses of the nature described in
     Paragraph 7.A. incurred in connection with the ownership, maintenance and
     operation of the Building or Project and such additional facilities now and
     in subsequent years as may be determined by Landlord to be necessary to the
     Building or Project.

     E.  TENANT AUDIT.  In the event that Tenant shall dispute the amount set
     forth in any statement provided by Landlord under Paragraph 7.B. or 7.C.
     above, Tenant shall have the right, not later than ninety (90) days
     following the receipt of such statement and upon the condition that Tenant
     shall first deposit with Landlord the full amount in dispute, to cause
     Landlord's books and records with respect to Basic Operating Cost for such
     fiscal year to be audited by certified public accountants selected by
     Tenant and subject to Landlord's reasonable right of approval.  The Basic
     Operating Cost Adjustment shall be appropriately adjusted on the basis of
     such audit.  If such audit discloses a liability for a refund in excess of
     ten percent (10%) of Tenant's Proportionate Share of the Basic Operating
     Cost Adjustment previously reported, the cost of such audit shall be borne
     by Landlord; otherwise the cost of such audit shall be paid by Tenant.  If
     Tenant shall not request an audit in accordance with the provisions of this
     Paragraph 7.E. within ninety (90) days after receipt of Landlord's
     statement provided pursuant to Paragraph 7.B. or 7.C., such statement shall
     be final and binding for all purposes hereof.

                         INSURANCE AND INDEMNIFICATION

8.   A.   LANDLORD'S INSURANCE.  Landlord agrees to maintain insurance insuring
     the Building against fire, lightning, vandalism and malicious mischief
     (including, if Landlord elects, "All Risk" coverage, earthquake, and/or
     flood insurance), in an amount not less than eighty percent (80%) of the
     replacement cost thereof, with deductibles and the form and endorsements of
     such coverage as selected by Landlord.  Such insurance may also include, at
     Landlord's option, insurance against loss of Base Rent and Additional Rent,
     in an amount equal to the amount of Base Rent and Additional Rent payable
     by Tenant for a period of at least twelve (12) months commencing on the
     date of loss.  Such insurance shall be for the sole benefit of Landlord and
     under Landlord's sole control.  Landlord shall not be obligated to insure
     any furniture, equipment, machinery, goods or supplies which Tenant may
     keep or maintain in the Premises, or any leasehold improvements, additions
     or alterations within the Premises.  Landlord may also carry such other
     insurance as Landlord may deem prudent or advisable, including, without
     limitation, liability insurance in such amounts and on such terms as
     Landlord shall determine.

                                      -10-

<PAGE>
 
     B.   TENANT'S INSURANCE.

     (1) PROPERTY INSURANCE.  Tenant shall procure at Tenant's sole cost and
     expense and keep in effect from the date of this Lease and at all times
     until the end of the Term, insurance on all personal property and fixtures
     of Tenant and all improvements made by or for Tenant to the Premises,
     insuring such property for the full replacement value of such property.

     (2) LIABILITY INSURANCE.  Tenant shall procure at Tenant's sole cost and
     expense and keep in effect from the date of this Lease and at all times
     until the end of the Term either Comprehensive General Liability insurance
     or Commercial General Liability insurance applying to the use and occupancy
     of the Premises and the Building, and any part of either, and any areas
     adjacent thereto, and the business operated by Tenant, or by any other
     occupant on the Premises.  Such insurance shall include Broad Form
     Contractual Liability insurance coverage insuring all of Tenant's indemnity
     obligations under this Lease.  Such coverage shall have a minimum combined
     single limit of liability of at least One Million Dollars ($1,000,000.00),
     and a general aggregate limit of Two Million Dollars ($2,000,000.00).  All
     such policies shall be written to apply to all bodily injury, property
     damage or loss, personal injury and other covered loss, however occasioned,
     occurring during the policy term, shall be endorsed to add Landlord and any
     party holding an interest to which this Lease may be subordinated as an
     additional insured, and shall provide that such coverage shall be primary
     and that any insurance maintained by Landlord shall be excess insurance
     only.  Such coverage shall also contain endorsements:  (i) deleting any
     employee exclusion on personal injury coverage; (ii) including employees as
     additional insureds; (iii) deleting any liquor liability exclusion; and
     (iv) providing for coverage of employer's automobile non-ownership
     liability.  All such insurance shall provide for severability of interests;
     shall provide that an act or omission of one of the named insureds shall
     not reduce or avoid coverage to the other named insureds; and shall afford
     coverage for all claims based on acts, omissions, injury and damage, which
     claims occurred or arose (or the onset of which occurred or arose) in whole
     or in part during the policy period.  Said coverage shall be written on an
     "occurrence" basis, if available.  If an "occurrence" basis form is not
     available, Tenant must purchase "tail" coverage for the most number of
     years available, and tenant must also purchase "tail" coverage if the
     retroactive date of an "occurrence" basis form is changed so as to leave a
     gap in coverage for occurrences that might have occurred in prior years.
     If a "claims made" policy is ever used, the policy must be endorsed so that
     Landlord is given the right to purchase "tail" coverage should Tenant for
     any reason not do so or if the policy is to be cancelled for nonpayment of
     premium.

                                      -11-

<PAGE>
 
     (3) GENERAL INSURANCE REQUIREMENTS. All coverages described in this
     Paragraph 8.B. shall be endorsed to provide Landlord with thirty (30) days'
     notice of cancellation or change in terms. If at any time during the Term
     the amount or coverage of insurance which Tenant is required to carry under
     this Paragraph 8.B. is, in Landlord's reasonable judgment, materially less
     than the amount or type of insurance coverage typically carried by owners
     or tenants of properties located in the general area in which the Premises
     are located which are similar to and operated for similar purposes as the
     Premises, Landlord shall have the right to require Tenant to increase the
     amount or change the types of insurance coverage required under this
     Paragraph 8.B. All insurance policies required to be carried under this
     Lease shall be written by companies rated A+XII or better in "Best's
     Insurance Guide" and authorized to do business in California. Any
     deductible amounts under any insurance policies required hereunder shall be
     subject to Landlord's prior written approval. In any event deductible
     amounts shall not exceed One Thousand Dollars ($1,000,00.00). Tenant shall
     deliver to Landlord on or before the Term Commencement Date, and thereafter
     at least thirty (30) days before the expiration dates of the expiring
     policies, certified copies of Tenant's insurance policies, or a certificate
     evidencing the same issued by the insurer thereunder, showing that all
     premiums have been paid for the full policy period; and, in the event
     Tenant shall fail to procure such insurance, or to deliver such policies or
     certificates, Landlord may, at Landlord's option and in addition to
     Landlord's other remedies in the event of a default by Tenant hereunder,
     procure the same for the account of Tenant, and the cost thereof shall be
     paid to Landlord as Additional Rent.

     C.  INDEMNIFICATION.  Landlord shall not be liable to Tenant for any loss
     or damage to person or property caused by theft, fire, acts of God, acts of
     a public enemy, riot, strike, insurrection, war, court order, requisition
     or order of governmental body or authority or for any damage or
     inconvenience which may arise through repair or alteration of any part of
     the Building or Project or failure to make any such repair, except as
     expressly otherwise provided in Paragraph 10.  Tenant shall indemnify,
     defend by counsel reasonably acceptable to Landlord, protect and hold
     Landlord harmless from and against any and all liabilities, losses, costs,
     damages, injuries or expenses, including reasonable attorneys' fees and
     court costs, arising out of or related to: (1) claims of injury to or death
     of persons or damage to property occurring or resulting directly or
     indirectly from the use or occupancy of the Premises, or from activities of
     Tenant, Tenant's Parties or anyone in or about the Premises or Project, or
     from any cause whatsoever; (2) claims for work or labor performed, or for
     materials or supplies furnished to or at the request of Tenant in
     connection with performance of any work done for the account of Tenant
     within the Premises or Project; and (3) claims arising from

                                      -12-

<PAGE>
 
     any breach or default on the part of Tenant in the performance of any
     covenant contained in this Lease.  The foregoing indemnity shall not be
     applicable to claims arising from the active negligence or willful
     misconduct of Landlord.  The provisions of this Paragraph shall survive the
     expiration or termination of this Lease with respect to any claims or
     liability occurring prior to such expiration or termination.

                             WAIVER OF SUBROGATION

9.   To the extent permitted by law and without affecting the coverage provided
     by insurance to be maintained hereunder, Landlord and Tenant each waive any
     right to recover against the other for:  (a) damages for injury to or death
     of persons; (b) damages to property; (c) damages to the Premises or any
     part thereof; and (d) claims arising by reason of the foregoing due to
     hazards covered by insurance to the extent of proceeds recovered therefrom.
     This provision is intended to waive fully, and for the benefit of each
     party, any rights and/or claims which might give rise to a right of
     subrogation in favor of any insurance carrier.  The coverage obtained by
     each party pursuant to this Lease shall include, without limitation, a
     waiver of subrogation by the carrier which conforms to the provisions of
     this paragraph.

                        LANDLORD'S REPAIRS AND SERVICES

10.  Landlord shall at Landlord's expense maintain the structural soundness of
     the structural beams of the roof, foundations and exterior walls of the
     Building in good repair, reasonable wear and tear excepted.  The term
     "exterior walls" as used herein shall not include windows, glass or plate
     glass, doors, special store fronts or office entries.  Landlord shall
     perform on behalf of Tenant and other tenants of the Project, as an item of
     Basic Operating Cost, the maintenance of the Building, Project, and public
     and common areas of the Project, including but not limited to the roof,
     pest extermination, the landscaped areas, parking areas, driveways, the
     truck staging areas, rail spur areas, fire sprinkler systems, sanitary and
     storm sewer lines, utility services, electric and telephone equipment
     servicing the Building(s), exterior lighting, and anything which affects
     the operation and exterior appearance of the Project, which determination
     shall be at Landlord's sole discretion.  Except for the expenses directly
     involving the items specifically described in the first sentence of this
     Paragraph 10, Tenant shall reimburse Landlord for all such costs in
     accordance with Paragraph 7.  Any damage caused by or repairs necessitated
     by any act of Tenant may be repaired by Landlord at Landlord's option and
     at Tenant's expense.  Tenant shall immediately give Landlord written notice
     of any defect or need of repairs after which Landlord shall have a
     reasonable opportunity to repair same.  Landlord's liability with respect
     to any defects, repairs, or maintenance for

                                      -13-

<PAGE>
 
     which Landlord is responsible under any of the provisions of this Lease
     shall be limited to the cost of such repairs or maintenance.

                               TENANT'S REPAIRS

11.  Tenant shall at Tenant's expense maintain all parts of the Premises in a
     good, clean and secure condition, reasonable wear and tear excepted, and
     promptly make all necessary repairs and replacements, including but not
     limited to all windows, glass, doors, walls and wall finishes, floor
     covering, heating, ventilating and air conditioning systems, truck doors,
     dock bumpers, dock plates and levelers, plumbing work and fixtures,
     downspouts, electrical and lighting systems, and fire sprinklers.  Tenant
     shall at Tenant's expense also perform regular removal of trash and debris.
     If required by the railroad company, Tenant agrees to sign a joint
     maintenance agreement governing the use of the rail spur, if any.  Tenant
     shall, at Tenant's own expense, enter into a regularly scheduled preventive
     maintenance/service contract with a maintenance contractor for servicing
     all hot water, heating and air conditioning systems and equipment within or
     serving the Premises.  The maintenance contractor and the contract must be
     approved by Landlord.  The service contract must include all services
     suggested by the equipment manufacturer within the operation/maintenance
     manual and must become effective and a copy thereof delivered to Landlord
     within thirty (30) days after the Term Commencement Date.  Tenant shall not
     damage any demising wall or disturb the integrity and support provided by
     any demising wall and shall, at its sole expense, immediately repair any
     damage to any demising wall caused by Tenant or Tenant's Parties.  See
     Paragraph 41.

                                  ALTERATIONS

12.  Tenant shall not make, or allow to be made, any alterations or physical
     additions in, about or to the Premises without obtaining the prior written
     consent of Landlord, which consent shall not be unreasonably withheld with
     respect to proposed alterations and additions which:  (a) comply with all
     applicable laws, ordinances, rules and regulations; (b) are in Landlord's
     opinion compatible with the Project and its mechanical, plumbing,
     electrical, heating/ventilation/ air conditioning systems; and (c) will not
     interfere with the use and occupancy of any other portion of the Building
     or Project by any other tenant or its invitees.  Specifically, but without
     limiting the generality of the foregoing, Landlord shall have the right of
     written consent for all plans and specifications for the proposed
     alterations or additions, construction means and methods, all appropriate
     permits and licenses, any contractor or subcontractor to be employed on the
     work of alteration or additions, and the time for performance of such work.
     Tenant shall also supply to Landlord any documents and information
     reasonably requested by Landlord in connection

                                      -14-

<PAGE>
 
     with Landlord's consideration of a request for approval hereunder.  Tenant
     shall reimburse Landlord for all costs which Landlord may incur in
     connection with granting approval to Tenant for any such alterations and
     additions, including any costs or expenses which Landlord may incur in
     electing to have outside architects and engineers review said plans and
     specifications.  All such alterations, physical additions or improvements
     (other than trade fixtures paid for by Tenant which shall be and remain the
     property of Tenant) shall remain the property of Tenant until termination
     of this Lease, at which time they shall be and become the property of
     Landlord if Landlord so elects; provided, however, that Landlord may, at
     Landlord's option, require that Tenant, at Tenant's expense, remove any or
     all alterations, additions, improvements and partitions made by Tenant and
     restore the Premises by the termination of this Lease, whether by lapse of
     time, or otherwise, to their condition existing prior to the construction
     of any such alterations, additions, partitions or leasehold improvements.
     All such removals and restoration shall be accomplished in a good and
     workmanlike manner so as not to cause any damage to the Premises or Project
     whatsoever.  If Tenant fails to so remove such alterations, additions,
     improvements and partitions or Tenant's trade fixtures or furniture,
     Landlord may keep and use them or remove any of them and cause them to be
     stored or sold in accordance with applicable law, at Tenant's sole expense.
     In addition to and wholly apart from Tenant's obligation to pay Tenant's
     Proportionate Share of Basic Operating Cost, Tenant shall be responsible
     for and shall pay prior to delinquency any taxes or governmental service
     fees, possessory interest taxes, fees or charges in lieu of any such taxes,
     capital levies, or other charges imposed upon, levied with respect to or
     assessed against its personal property, on the value of the alterations,
     additions or improvements within the Premises, and on Tenant's interest
     pursuant to this Lease.  To the extent that any such taxes are not
     separately assessed or billed to Tenant, Tenant shall pay the amount
     thereof as invoiced to Tenant by Landlord.

                                     SIGNS

13.  All signs, notices and graphics of every kind or character, visible in or
     from public view or corridors, the common areas or the exterior of the
     Premises, shall be subject to Landlord's prior written approval.  Tenant
     shall not place or maintain any banners whatsoever or any window decor in
     or on any exterior window or window fronting upon any common areas or
     service area or upon any truck doors or man doors without Landlord's prior
     written approval.  Any installation of signs or graphics on or about the
     Premises and Project shall be subject to any applicable governmental laws,
     ordinances, regulations and to any other requirements imposed by Landlord.
     Tenant shall remove all such signs and graphics prior to the termination of
     this Lease.  Such installations and removals shall be made in such manner
     as

                                      -15-

<PAGE>
 
     to avoid injury or defacement of the Premises, Building or Project and any
     other improvements contained therein, and Tenant shall repair any injury or
     defacement, including without limitation, discoloration caused by such
     installation or removal.

                          INSPECTION/POSTING NOTICES

14.  After reasonable notice, except in emergencies where no such notice shall
     be required, Landlord, and Landlord's agents and representatives, shall
     have the right to enter the Premises to inspect the same, to clean, to
     perform such work as may be permitted or required hereunder, to make
     repairs or alterations to the Premises or Project or to other tenant spaces
     therein, to deal with emergencies, to post such notices as may be permitted
     or required by law to prevent the perfection of liens against Landlord's
     interest in the Project or to exhibit the Premises to prospective tenants,
     purchasers, encumbrancers or others, or for any other purpose as Landlord
     may deem necessary or desirable:  provided, however, that Landlord shall
     use reasonable efforts not to unreasonably interfere with Tenant's business
     operations.  Tenant shall not be entitled to any abatement of Rent by
     reason of the exercise of any such right of entry.  At any time within six
     (6) months prior to the end of the Term, Landlord shall have the right to
     erect on the Premises and/or Project a suitable sign indicating that the
     Premises are available for lease.  Tenant shall give written notice to
     Landlord at least thirty (30) days prior to vacating the Premises and shall
     meet with Landlord for a joint inspection of the Premises at the time of
     vacating. In the event of Tenant's failure to give such notice or
     participate in such joint inspection, Landlord's inspection at or after
     Tenant's vacating the Premises shall conclusively be deemed correct for
     purposes of determining Tenant's responsibility for repairs and
     restoration.

                                   UTILITIES

15.  Tenant shall pay directly for all water, gas, heat, air conditioning,
     light, power, telephone, sewer, sprinkler charges and other utilities and
     services used on or from the Premises, together with any taxes, penalties,
     surcharges or the like pertaining thereto, and maintenance charges for
     utilities and shall furnish all electric light bulbs, ballasts and tubes.
     If any such services are not separately metered to Tenant, Tenant shall pay
     a reasonable proportion, as determined by Landlord, of all charges jointly
     serving other premises. Landlord shall not be liable for any damages
     directly or indirectly resulting from nor shall the Rent or any monies owed
     Landlord under this Lease herein reserved be abated by reason of:  (a) the
     installation, use or  interruption of use of any equipment used in
     connection with the furnishing of any such utilities or services; (b) the
     failure to furnish or delay in furnishing any such utilities or services
     when such failure or delay is caused by acts of

                                      -16-

<PAGE>
 
     God or the elements, labor disturbances of any character, or any other
     accidents or other conditions beyond the reasonable control of Landlord; or
     (c) the limitation, curtailment, rationing or restriction on use of water,
     electricity, gas or any other form of energy or any other service or
     utility whatsoever serving the Premises or Project. Landlord shall be
     entitled to cooperate voluntarily and in a reasonable manner with the
     efforts of national, state or local governmental agencies or utility
     suppliers in reducing energy or other resource consumption.  The obligation
     to make services available hereunder shall be subject to the limitations of
     any such voluntary, reasonable program.

                                 SUBORDINATION

16.  Without the necessity of any additional document being executed by Tenant
     for the purpose of effecting a subordination, the Lease shall be subject
     and subordinate at all times to:  (a) all ground leases or underlying
     leases which may now exist or hereafter be executed affecting the Premises
     and/or the land upon which the Premises and Project are situated, or both;
     and (b) any mortgage or deed of trust which may now exist or be placed upon
     said Project, land, ground leases or underlying leases, or Landlord's
     interest or estate in any of said items which is specified as security.
     Notwithstanding the foregoing, Landlord shall have the right to subordinate
     or cause to be subordinated any such ground leases or underlying leases or
     any such liens to this Lease.  In the event that any ground lease or
     underlying lease terminates for any reason or any mortgage or deed of trust
     is foreclosed or a conveyance in lieu of foreclosure is made for any
     reason, Tenant shall, notwithstanding any subordination, attorn to and
     become the Tenant of the successor in interest to Landlord at the option of
     such successor in interest.  Within ten (10) days after request by
     Landlord, Tenant shall execute and deliver any additional documents
     evidencing Tenant's attornment or the subordination of this Lease with
     respect to any such ground leases or underlying leases or any such mortgage
     or deed of trust, in the form requested by Landlord or by any ground
     landlord, mortgagee, or beneficiary under a deed of trust.

                             FINANCIAL STATEMENTS

17.  At the request of Landlord, Tenant shall provide to Landlord Tenant's
     current financial statement or other information discussing financial worth
     of Tenant, which Landlord shall use solely for purposes of this Lease and
     in connection with the ownership, management and disposition of the
     Project.

                             ESTOPPEL CERTIFICATE

18.  Tenant agrees from time to time, within ten (10) days after request of
     Landlord, to deliver to Landlord, or Landlord's

                                      -17-

<PAGE>
 
     designee, an estoppel certificate stating that this Lease is in full force
     and effect, the date to which Rent has been paid, the unexpired portion of
     this Lease, and such other matters pertaining to this Lease as may be
     reasonably requested by Landlord.  Failure by Tenant to execute and deliver
     such certificate shall constitute an acceptance of the Premises and
     acknowledgment by Tenant that the statements included are true and correct
     without exception.  Landlord and Tenant intend that any statement delivered
     pursuant to this Paragraph may be relied upon by any mortgagee,
     beneficiary, purchaser or prospective purchaser of the Project or any
     interest therein.  The parties agree that Tenant's obligation to furnish
     such estoppel certificates in a timely fashion is a material inducement for
     Landlord's execution of the Lease, and shall be an event of default if
     Tenant fails to fully comply.

                               SECURITY DEPOSIT

19.  Tenant agrees to deposit with Landlord upon execution of this Lease, a
     Security Deposit as stated in the Basic Lease Information, which sum shall
     be held by Landlord, without obligation for interest, as security for the
     performance of Tenant's covenants and obligations under this Lease.  The
     Security Deposit is not an advance rental deposit or a measure of damages
     incurred by Landlord in case of Tenant's default.  Upon the occurrence of
     any event of default by Tenant, Landlord may, from time to time, without
     prejudice to any other remedy provided herein or provided by law, use such
     fund to the extent necessary to make good any arrears of Rent or other
     payments due to Landlord hereunder, and any other damage, injury, expense
     or liability caused by such event of default, and Tenant shall pay to
     Landlord, on demand, the amount so applied in order to restore the Security
     Deposit to its original amount.  Although the Security Deposit shall be
     deemed the property of Landlord, any remaining balance of such deposit
     shall be returned by Landlord to Tenant at such time after termination of
     this Lease that all of Tenant's obligations under this Lease have been
     fulfilled.  Landlord may use and commingle the Security Deposit with other
     funds of Landlord.

                               TENANT'S REMEDIES

20.  The liability of Landlord to Tenant for any default by Landlord under the
     terms of this Lease are not personal obligations of the individual or other
     partners, directors, officers and shareholders of Landlord, and Tenant
     agrees to look solely to Landlord's interest in the Project for the
     recovery of any amount from Landlord, and shall not look to other assets of
     Landlord nor seek recourse against the assets of the individual or other
     partners, directors, officers and shareholders of Landlord.  Any lien
     obtained to enforce any such judgment and any levy of execution thereon
     shall be subject and subordinate to any lien, mortgage or deed of trust on
     the Project.

                                      -18-

<PAGE>
 
                           ASSIGNMENT AND SUBLETTING

21.  A.   GENERAL.  Tenant shall not assign or sublet the Premises or any part
     thereof without Landlord's prior written approval except as provided
     herein.  If Tenant desires to assign this Lease or sublet any or all of the
     Premises, Tenant shall give Landlord written notice forty-five (45) days
     prior to the anticipated effective date of the assignment or sublease.
     Landlord shall then have a period of thirty (30) days following receipt of
     such notice to notify Tenant in writing that Landlord elects either:  (1)
     to terminate this Lease as to the space so affected as of the date so
     requested by Tenant; or (2) to permit Tenant to assign this Lease or sublet
     such space, subject, however, to Landlord's prior written approval of the
     proposed assignee or subtenant and of any related documents or agreements
     associated with the assignment or sublease.  If Landlord should fail to
     notify Tenant in writing of such election within said period, Landlord
     shall be deemed to have waived option (1) above, but written approval by
     Landlord of the proposed assignee or subtenant shall be required.  If
     Landlord does not exercise the option provided in subitem (1) above,
     Landlord's consent to a proposed assignment or sublet shall not be
     unreasonably withheld.  Without limiting the other instances in which it
     may be reasonable for Landlord to withhold Landlord's consent to an
     assignment or subletting, Landlord and Tenant acknowledge that it shall be
     reasonable for Landlord to withhold Landlord's consent in the following
     instances:  The use of the Premises by such proposed assignee or subtenant
     would not be a permitted use or would increase the Parking Density of the
     Project; the proposed assignee or subtenant is not of sound financial
     condition; the proposed assignee or subtenant is a governmental agency; the
     proposed assignee or subtenant does not have a good reputation as a tenant
     of property; the proposed assignee or subtenant is a person with whom
     Landlord is negotiating to lease space in the Project; the assignment or
     subletting would entail any alterations which would lessen the value of the
     leasehold improvements in the Premises; or if Tenant is in default of any
     obligation of Tenant under this Lease, or Tenant has defaulted under this
     Lease on three (3) or more occasions during any twelve (12) months
     preceding the date that Tenant shall request consent.  Failure by Landlord
     to approve a proposed assignee or subtenant shall not cause a termination
     of this Lease.  Upon a termination under this Paragraph 21.A., Landlord may
     lease the Premises to any party, including parties with whom Tenant has
     negotiated an assignment or sublease, without incurring any liability to
     Tenant.

     B.  BONUS RENT.  Any Rent or other consideration realized by Tenant under
     any such sublease or assignment in excess of the Rent payable hereunder,
     after amortization of a reasonable brokerage commission, shall be divided
     and paid, ten percent (10%) to Tenant, ninety percent (90%) to

                                      -19-

<PAGE>
 
     Landlord.  In any subletting or assignment undertaken by Tenant, Tenant
     shall diligently seek to obtain the maximum rental amount available in the
     marketplace for such subletting or assignment.

     C.  PARTNERSHIP.  If Tenant is a partnership, joint venture or other
     incorporated business form, a transfer of the interest of persons, firms or
     entities responsible for managerial control of Tenant by sale, assignment,
     bequest, inheritance, operation of law or other disposition, so as to
     result in a change in the present control of said entity and/or a change in
     the identity of the persons responsible for the general credit obligations
     of said entity shall constitute an assignment for all purposes of this
     Lease.

     D.  LIABILITY.  No assignment or subletting by Tenant shall relieve Tenant
     of any obligation under this Lease.  Any assignment or subletting which
     conflicts with the provisions hereof shall be void.

                             AUTHORITY OF PARTIES

22.  Landlord represents and warrants that it has full right and authority to
     enter into this Lease and to perform all of Landlords's obligations
     hereunder.  Tenant represents and warrants that it has full right and
     authority to enter into this Lease and to perform all of Tenant's
     obligations hereunder.

                                 CONDEMNATION

23.  A.   CONDEMNATION RESULTING IN TERMINATION.  If the whole or any
     substantial part of the Project of which the Premises are a part should be
     taken or condemned for any public use under governmental law, ordinance or
     regulation, or by right of eminent domain, or by private purchase in lieu
     thereof, and the taking would prevent or materially interfere with the
     Permitted Use of the Premises, this Lease shall terminate and the Rent
     shall be abated during the unexpired portion of this Lease, effective when
     the physical taking of said Premises shall have occurred.

     B.  CONDEMNATION NOT RESULTING IN TERMINATION.  If a portion of the Project
     of which the Premises are a part should be taken or condemned for any
     public use under any governmental law, ordinance, or regulation, or by
     right of eminent domain, or by private purchase in lieu thereof, and this
     Lease is not terminated as provided in Paragraph 23.A. above, this Lease
     shall not terminate, but the Rent payable hereunder during the unexpired
     portion of the Lease shall be reduced, beginning on the date when the
     physical taking shall have occurred, to such amount as may be fair and
     reasonable under all of the circumstances.

     C.  AWARD.  Landlord shall be entitled to any and all payment, income,
     rent, award, or any interest therein

                                      -20-

<PAGE>
 
     whatsoever which may be paid or made in connection with such taking or
     conveyance and Tenant shall have no claim against Landlord or otherwise for
     the value of any unexpired portion of this Lease.  Notwithstanding the
     foregoing, any compensation specifically awarded Tenant for loss of
     business, Tenant's personal property, moving costs or loss of goodwill,
     shall be and remain the property of Tenant.

                                CASUALTY DAMAGE

24.  A.   GENERAL.  If the Premises or Building should be damaged or destroyed
     by fire, tornado or other casualty, Tenant shall give immediate written
     notice thereof to Landlord.  Within thirty (30) days after Landlord's
     receipt of such notice, Landlord shall notify Tenant whether in Landlord's
     opinion such repairs can reasonably be made either: (1) within ninety (90)
     days; (2) in more than ninety (90) days but in less than one hundred eighty
     (180) days; or (3) in more than one hundred eighty (180) days from the date
     of such notice.  Landlord's determination shall be binding on Tenant.

     B.  LESS THAN 90 DAYS.  If the Premises or Building should be damaged by
     fire, tornado or other casualty but only to such extent that rebuilding or
     repairs can in Landlord's estimation be reasonably completed within ninety
     (90) days after the date of such damage, this Lease shall not terminate,
     and provided that insurance proceeds are available to fully repair the
     damage, Landlord shall proceed to rebuild and repair the Premises in the
     manner determined by Landlord, except that Landlord shall not be required
     to rebuild, repair or replace any part of the partitions, fixtures,
     additions and other leasehold improvements which may have been placed in,
     on or about the Premises.  If the Premises are untenantable in whole or in
     part following such damage, the Rent payable hereunder during the period in
     which they are untenantable shall be abated proportionately, but only to
     the extent of rental abatement insurance proceeds received by Landlord
     during the time and to the extent the Premises are unfit for occupancy.

     C.  GREATER THAN 90 DAYS.  If the Premises or Building should be damaged by
     fire, tornado or other casualty but only to such extent that rebuilding or
     repairs can in Landlord's estimation be reasonably completed in more than
     ninety (90) days but in less than one hundred eighty (180) days, then
     Landlord shall have the option of either: (1) terminating the Lease
     effective upon the date of the occurrence of such damage, in which event
     the Rent shall be abated during the unexpired portion of the Lease; or (2)
     electing to rebuild or repair the Premises to substantially the condition
     in which they existed prior to such damage, provided that insurance
     proceeds are available, to fully repair the damage, except that Landlord
     shall not be required to rebuild, repair or replace any part of the
     partitions, fixtures, additions and other improvements which

                                      -21-

<PAGE>
 
     may have been placed in, on or about the Premises.  If the Premises are
     untenantable in whole or in part following such damage, the Rent payable
     hereunder during the period in which they are untenantable shall be abated
     proportionately, but only to the extent of rental abatement insurance
     proceeds received by Landlord during the time and to the extent the
     Premises are unfit for occupancy.  In the event that Landlord should fail
     to complete such repairs and rebuilding within one hundred eighty days
     (180) days after the date upon which Landlord is notified by Tenant of such
     damage, such period of time to be extended for delays caused by the fault
     or neglect of Tenant or because of acts of God, acts of public agencies,
     labor disputes, strikes, fires, freight embargoes, rainy or stormy weather,
     inability to obtain materials, supplies or fuels, or delays of the
     contractors or subcontractors or any other causes or contingencies beyond
     the reasonable control of Landlord, Tenant may at Tenant's option within
     ten (10) days after the expiration of such one hundred eighty (180) day
     period (as such may be extended), terminate this Lease by delivering
     written notice of termination to Landlord as Tenant's exclusive remedy,
     whereupon all rights hereunder shall cease and terminate thirty (30) days
     after Landlord's receipt of such termination notice.

     D.  GREATER THAN 180 DAYS.  If the Premises or Building should be so
     damaged by fire, tornado or other casualty that rebuilding or repairs
     cannot in Landlord's estimation be completed within one hundred eighty
     (180) days after such damage, this Lease shall terminate and the Rent shall
     be abated during the unexpired portion of this Lease, effective upon the
     date of the occurrence of such damage.

     E.  TENANT'S FAULT.  If the Premises or any other portion of the Building
     are damaged by fire or other casualty resulting from the fault, negligence,
     or breach of this Lease by Tenant or any of Tenant's Parties, Base Rent and
     Additional Rent shall not be diminished during the repair of such damage
     and Tenant shall be liable to Landlord for the cost and expense of the
     repair and restoration of the Building caused thereby to the extent such
     cost and expense is not covered by insurance proceeds.

     F.  UNINSURED CASUALTY.  Notwithstanding anything herein to the contrary,
     in the event that the Premises or Building are damaged or destroyed and are
     not fully covered by the insurance proceeds received by Landlord or in the
     event that the holder of any indebtedness secured by a mortgage or deed of
     trust covering the Premises requires that the insurance proceeds be applied
     to such indebtedness, then in either case Landlord shall have the right to
     terminate this Lease by delivering written notice of termination to Tenant
     within thirty (30) days after the date of notice to Landlord that said
     damage or destruction is not fully covered by insurance or such requirement
     is made by any such holder, as the case

                                      -22-

<PAGE>
 
     may be, whereupon all rights and obligations hereunder shall cease and
     terminate.

     G.  WAIVER.  Except as otherwise provided in this Paragraph 24, Tenant
     hereby waives the provisions of Sections 1932(a), 1933(4), 1941 and 1942 of
     the Civil Code of California.

                                 HOLDING OVER

25.  If Tenant shall retain possession of the Premises or any portion thereof
     without Landlord's consent following the expiration of the Lease or sooner
     termination for any reason, then Tenant shall pay to Landlord for each day
     of such retention triple the amount of the daily rental as of the last
     month prior to the date of expiration or termination.  Tenant shall also
     indemnify, defend, protect and hold Landlord harmless from any loss,
     liability or cost, including reasonable attorneys' fees, resulting from
     delay by Tenant in surrendering the Premises, including, without
     limitation, any claims made by any succeeding tenant founded on such delay.
     Acceptance of Rent by Landlord following expiration or termination shall
     not constitute a renewal of this Lease, and nothing contained in this
     Paragraph 25 shall waive Landlord's right of reentry or any other right.
     Unless Landlord consents in writing to Tenant's holding over, Tenant shall
     be only a Tenant at sufferance, whether or not Landlord accepts any Rent
     from Tenant while Tenant is holding over without Landlord's written
     consent. Additionally, in the event that upon termination of the Lease,
     Tenant has not fulfilled its obligation with respect to repairs and cleanup
     of the Premises or any other Tenant obligations as set forth in this Lease,
     then Landlord shall have the right to perform any such obligations as it
     deems necessary at Tenant's sole cost and expense, and any time required by
     Landlord to complete such obligations shall be considered a period of
     holding over and the terms of this Paragraph 25 shall apply.

                                    DEFAULT

26.  A.   EVENTS OF DEFAULT.  The occurrence of any of the following shall
     constitute an event of default on the part of Tenant:

     (1) ABANDONMENT.  Abandonment of the Premises for a continuous period in
     excess of five days.  Tenant waives any right to notice Tenant may have
     under Section 1951.3 of the Civil Code of the State of California, the
     terms of this Paragraph 26.A. being deemed such notice to Tenant as
     required by said Section 1951.3.

     (2) NONPAYMENT OF RENT.  Failure to pay any installment of Rent or any
     other amount due and payable hereunder upon the date when said payment is
     due.

                                      -23-

<PAGE>
 
     (3) OTHER OBLIGATIONS.  Failure to perform any obligation, agreement or
     covenant under this Lease other than those matters specified in
     subparagraphs (1) and (2) of this Paragraph 26.A., such failure continuing
     for fifteen (15) days after written notice of such failure.

     (4) GENERAL ASSIGNMENT.  A general assignment by Tenant for the benefit of
     creditors.

     (5) BANKRUPTCY.  The filing of any voluntary petition in bankruptcy by
     Tenant, or the filing of involuntary petition by Tenant's creditors, which
     involuntary petition remains undischarged for a period of thirty (30) days.
     In the event that under applicable law the trustee in bankruptcy Tenant has
     the right to affirm this Lease and continue to perform the obligations of
     Tenant hereunder, such trustee or Tenant shall, in such time period as may
     be permitted by the bankruptcy court having jurisdiction, cure all defaults
     of Tenant hereunder outstanding as of the date of the affirmance of this
     Lease and provide to Landlord such adequate assurances as may be necessary
     to ensure Landlord of the continued performance of Tenant's obligations
     under the Lease.

     (6) RECEIVERSHIP.  The employment of a receiver to take possession of
     substantially all of Tenant's assets or the Premises, if such appointment
     remains undismissed or undischarged for a period of ten (10) days after the
     order therefor.

     (7) ATTACHMENT.  The attachment, execution or other judicial seizure of all
     or substantially all of Tenant's assets or the Premises, if such attachment
     or other seizure remains undismissed or undischarged for a period of ten
     (10) days after the levy thereof.

     B.  REMEDIES UPON DEFAULT.

     (1) TERMINATION.  In the event of the occurrence of any event of default,
     Landlord shall have the right to give a written termination notice to
     Tenant, and on the date specified in such notice Tenant's right to
     possession shall terminate, and this Lease shall terminate unless on or
     before such date all arrears of rental and all other sums payable by Tenant
     under this Lease and all cost and expenses incurred by or on behalf of
     Landlord hereunder shall have been paid by Tenant and all other events of
     default of this Lease by Tenant at the time existing shall have been fully
     remedied to the satisfaction of Landlord.  At any time after such
     termination, Landlord may recover possession of the Premises or any part
     thereof and expel and remove therefrom Tenant and any other person
     occupying the same, by any lawful means, and again repossess and enjoy the
     Premises without prejudice to any of the remedies that Landlord may have
     under this Lease, or at law or equity by reason of Tenant's default or of
     such termination.

                                      -24-

<PAGE>
 
     (2) CONTINUATION AFTER DEFAULT.  Even though an event of default may have
     occurred, this Lease shall continue in effect for so long as Landlord does
     not terminate Tenant's right to possession under Paragraph 26.B.(1) hereof,
     and Landlord may enforce all of Landlord's rights and remedies under this
     Lease, including without limitation, the right to recover Rent as it
     becomes due, and Landlord, without terminating this Lease, may exercise all
     of the rights and remedies of a landlord under Section 1951.4 of the Civil
     Code of the State of California or any successor code section.  Acts of
     maintenance, preservation or efforts to lease the Premises or the
     appointment of a receiver upon application of Landlord to protect
     Landlord's interest under this Lease shall not constitute an election to
     terminate Tenant's right to possession.

     C.  DAMAGES AFTER DEFAULT.  Should Landlord terminate this Lease pursuant
     to the provisions of Paragraph 26.B.(1) hereof, Landlord shall have the
     rights and remedies of a landlord provided by Section 1951.2 of the Civil
     Code of the State of California, or successor code sections.  Upon such
     termination, in addition to any other rights and remedies to which Landlord
     may be entitled under applicable law, Landlord shall be entitled to recover
     from Tenant:  (1) the worth at the time of award of the unpaid Rent and
     other amounts which had been earned at the time of termination, (2) the
     worth at the time of award of the amount by which the unpaid Rent which
     would have been earned after termination until the time of award exceeds
     the amount of such Rent loss that Tenant proves could have been reasonably
     avoided; (3) the worth at the time of award of the amount by which the
     unpaid Rent for the balance of the Term after the time of award exceeds the
     amount of such Rent loss that the Tenant proves could be reasonably
     avoided; and (4) any other amount necessary to compensate Landlord for all
     the detriment proximately caused by Tenant's failure to perform Tenant's
     obligations under this Lease or which, in the ordinary course of things,
     would be likely to result therefrom.  The "worth at the time of award" of
     the amounts referred to in (1) and (2), above shall be computed at the
     lesser of the "prime rate," as announced from time to time by Wells Fargo
     Bank, N.A. (San Francisco), plus five (5) percentage points, or the maximum
     interest rate allowed by law ("Applicable Interest Rate").  The "worth at
     the time of award" of the amount referred to in (3) above shall be computed
     by discounting such amount at the Federal Discount Rate of the Federal
     Reserve Bank of San Francisco at the time of the award.  If this Lease
     provides for any periods during the Term during which Tenant is not
     required to pay Base Rent or if Tenant otherwise receives a Rent
     concession, then upon the occurrence of an event of default, Tenant shall
     owe to Landlord the full amount of such Base Rent or value of such Rent
     concession, plus interest at the Applicable Interest Rate, calculated from
     the date that such Base Rent or Rent concession would have been payable.

                                      -25-

<PAGE>
 
     D. LATE CHARGE.  If any installment of Rent is not paid within five (5)
     days promptly when due, such amount shall bear interest at the Applicable
     Interest Rate from the date on which said payment shall be due until the
     date on which Landlord shall receive said payment.  In addition, Tenant
     shall pay Landlord a late charge equal to five percent (5%) of the
     delinquency, to compensate Landlord for the loss of the use of the amount
     not paid and the administrative costs caused by the delinquency, the
     parties agreeing that Landlord's damage by virtue of such delinquencies
     would be difficult to compute and the amount stated herein represents a
     reasonable estimate thereof.  This provision shall not relieve Tenant of
     Tenant's obligation to pay Rent at the time and in the manner herein
     specified.

     E.  REMEDIES CUMULATIVE.  All rights, privileges and elections of the
     parties are cumulative and not alternative, to the extent permitted by law
     and except as otherwise provided herein.

                                     LIENS

27.  Tenant shall keep the Premises free from liens arising out of or related to
     work performed, materials or supplies furnished or obligations incurred by
     Tenant or in connection with work made, suffered or done by or on behalf of
     Tenant in or on the Premises or Project.  In the event that Tenant shall
     not, within ten (10) days following the imposition of any such lien, cause
     the same to be released of record by payment or posting of a proper bond,
     Landlord shall have, in addition to all other remedies provided herein and
     by law, the right, but not the obligation, to cause the same to be released
     by such means as Landlord shall deem proper, including payment of the claim
     giving rise to such lien.  All sums paid by Landlord on behalf of Tenant
     and all expenses incurred by Landlord in connection therefor shall be
     payable to Landlord by Tenant on demand with interest at the Applicable
     Interest Rate.  Landlord shall have the right at all times to post and keep
     posted on the Premises any notices permitted or required by law, or which
     Landlord shall deem proper, for the protection of Landlord, the Premises,
     the Project and any other party having an interest therein, from mechanics'
     and materialmen's liens, and Tenant shall give Landlord not less than ten
     (10) business days prior written notice of the commencement of any work in
     the Premises or Project which could lawfully give rise to a claim for
     mechanics' or materialmen's liens.

                             TRANSFERS BY LANDLORD

28.  In the event of a sale or conveyance by Landlord of the Building or a
     foreclosure by any creditor of Landlord, the same shall operate to release
     Landlord from any liability upon any of the covenants or conditions,
     express or implied, herein contained in favor of Tenant, to the extent
     required to be performed after the passing of title to Landlord's

                                      -26-

<PAGE>
 
     successor-in-interest.  In such event, Tenant agrees to look solely to the
     responsibility of the successor-in-interest of Landlord under this Lease
     with respect to the performance of the covenants and duties of "Landlord"
     to be performed after the passing of title to Landlord's successor-in-
     interest.  This Lease shall not be affected by any such sale and Tenant
     agrees to attorn to the purchaser or assignee.  Landlord's successor(s)-in-
     interest shall not have liability to Tenant with respect to the failure to
     perform all of the obligations of "Landlord", to the extent required to be
     performed prior to the date such successor(s)-in-interest became the owner
     of the Building.

                RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS

29.  All covenants and agreements to be performed by Tenant under any of the
     terms of this Lease shall be performed by Tenant at Tenant's sole cost and
     expense and without any abatement of Rent.  If Tenant shall fail to pay any
     sum of money, other than Base Rent and Basic Operating Cost, required to be
     paid by Tenant hereunder or shall fail to perform any other act on Tenant's
     part to be performed hereunder, and such failure shall continue for five
     (5) days after notice thereof by Landlord, Landlord may, but shall not be
     obligated to do so, and without waiving or releasing Tenant from any
     obligations of Tenant, make any such payment or perform any such act on
     Tenant's part to be made or performed.  All sums, so paid by Landlord and
     all necessary incidental costs together with interest thereon at the
     Applicable Interest Rate from the date of such payment by Landlord shall be
     payable to Landlord on demand, and Tenant covenants to pay such sums, and
     Landlord shall have, in addition to any other right or remedy of Landlord,
     the same right and remedies in the event of the non-payment thereof by
     Tenant as in the case of default by Tenant in the payment of Base Rent and
     Basic Operating Cost.

                                    WAIVER

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

                                      -27-

<PAGE>
 
                                    NOTICES

31.  Each provision of this Lease or of any applicable governmental laws,
     ordinances, regulations and other requirements with reference to sending,
     mailing or delivery of any notice or the making of any payment by Landlord
     or Tenant to the other shall be deemed to be complied with when and if the
     following steps are taken:

     A.  RENT.  All Rent and other payments required to be made by Tenant to
     Landlord hereunder shall be payable to Landlord at the address set forth in
     the Basic Lease Information, or at such other address as Landlord may
     specify from time to time by written notice delivered in accordance
     herewith.  Tenant's obligation to pay Rent and any other amounts to
     Landlord under the terms of this Lease shall not be deemed satisfied until
     such Rent and other amounts have been actually received by Landlord.

     B.  OTHER.  All notices, demands, consents and approvals which may or are
     required to be given by either party to the other hereunder shall be in
     writing and either personally delivered, sent by commercial overnight
     courier, or mailed, certified or registered, postage prepaid, and addressed
     to the party to be notified at the address for such party as specified in
     the Basic Lease Information or to such other place as the party to be
     notified may from time to time designate by at least fifteen (15) days
     notice to the notifying party.  Notices shall be deemed served upon receipt
     or refusal to accept delivery. Tenant appoints as its agent to receive the
     service of all default notices and notice of commencement of unlawful
     detainer proceedings the person in charge of or apparently in charge of
     occupying the Premises at the time, and, if there is no such person, then
     such service may be made by attaching the same on the main entrance of the
     Premises.

                                ATTORNEYS' FEES

32.  In the event that Landlord places the enforcement of this Lease, or any
     part thereof, or the collection of any Rent due, or to become due
     hereunder, or recovery of possession of the Premises in the hands of an
     attorney, Tenant shall pay to Landlord, upon demand, Landlord's reasonable
     attorneys' fees and court costs. In any action which Landlord or Tenant
     brings to enforce its respective rights hereunder, the unsuccessful party
     shall pay all costs incurred by the prevailing party including reasonable
     attorneys' fees, to be fixed by the court, and said costs and attorneys'
     fees shall be a part of the judgment in said action.

                            SUCCESSORS AND ASSIGNS

33.  This Lease shall be binding upon and inure to the benefit of Landlord, its
     successors and assigns, and shall be binding

                                      -28-

<PAGE>
 
     upon and inure to the benefit of Tenant, its successors, and to the extent
     assignment is approved by Landlord hereunder, Tenant's assigns.

                                 FORCE MAJEURE

34.  Whenever a period of time is herein prescribed for action to be taken by
     Landlord, Landlord shall not be liable or responsible for, and there shall
     be excluded from the computation for any such period of time, any delays
     due to strikes, riots, acts of God, shortages of labor or materials, war,
     governmental laws, regulations or restrictions or any other causes of any
     kind whatsoever which are beyond the control of Landlord.

                             BROKERAGE COMMISSION

35.  Landlord shall pay a brokerage commission to Broker in accordance with a
     separate agreement between Landlord and Broker. Tenant warrants to Landlord
     that Tenant's sole contact with Landlord or with the Premises in connection
     with this transaction has been directly with Landlord and Broker, and that
     no other broker or finder can properly claim a right to a commission or a
     finder's fee based upon contacts between the claimant and Tenant with
     respect to Landlord or the Premises.  Tenant shall indemnify, defend by
     counsel acceptable to Landlord, protect and hold Landlord harmless from and
     against any loss, cost or expense, including, but not limited to,
     attorneys' fees and costs, resulting from any claim for a fee or commission
     by any broker or finder in connection with the Premises and this Lease
     other than Broker.

                                 MISCELLANEOUS

36.  A.   GENERAL.  The term "Tenant" or any pronoun used in place thereof shall
     indicate and include the masculine or feminine, the singular or plural
     number, individuals, firms or corporations, and their respective
     successors, executors, administrators and permitted assigns, according to
     the context hereof.

     B.  TIME.  Time is of the essence regarding this Lease and all of its
     provisions.

     C.  CHOICE OF LAW.  This Lease shall in all respects be governed by the
     laws of the State of California.

     D.  ENTIRE AGREEMENT.  This Lease, together with its Exhibits, contains all
     the agreements of the parties hereto and supersedes any previous
     negotiations.  There have been no representations made by the Landlord or
     understandings made between the parties other than those set forth in this
     Lease and its exhibits.

                                      -29-

<PAGE>
 
     E. MODIFICATION.  This Lease may not be modified except by a written
     instrument by the parties hereto.

     F.  SEVERABILITY.  If, for any reason whatsoever, any of the provisions
     hereof shall be unenforceable or ineffective, all of the other provisions
     shall be and remain in full force and effect.

     G.  RECORDATION.  Tenant shall not record this Lease or a short form
     memorandum hereof.

     H.  EXAMINATION OF LEASE.  Submission of this Lease to Tenant does not
     constitute an option or offer to lease and this Lease is not effective
     otherwise until execution and delivery by both Landlord and Tenant.

     I.  ACCORD AND SATISFACTION.  No payment by Tenant of a lesser amount than
     the Rent nor any endorsement on any check or letter accompanying any check
     or payment of Rent shall be deemed an accord and satisfaction of full
     payment of Rent, and Landlord may accept such payment without prejudice to
     Landlord's right to recover the balance of such Rent or to pursue other
     remedies.

     J.  EASEMENTS.  Landlord may grant easements on the Project and dedicate
     for public use portions of the Project without Tenant's consent; provided
     that no such grant or dedication shall substantially interfere with
     Tenant's use of the Premises.  Upon Landlord's demand, Tenant shall
     execute, acknowledge and deliver to Landlord documents, instruments, maps
     and plats necessary to effectuate Tenant's covenants hereunder.

     K.  DRAFTING AND DETERMINATION PRESUMPTION.  The parties acknowledge that
     this Lease has been agreed to by both the parties, that both Landlord and
     Tenant have consulted with attorneys with respect to the terms of this
     Lease and that no presumption shall be created against Landlord because
     Landlord drafted this Lease.  Except as otherwise specifically set forth in
     this Lease, with respect to any consent, determination or estimation of
     Landlord required in this Lease or requested of Landlord, Landlord's
     consent, determination or estimation shall be made in Landlord's good faith
     opinion, whether objectively reasonable or unreasonable.

     L.  EXHIBITS.  Exhibits A and B attached hereto are hereby incorporated
     herein by this reference.

     M.  NO LIGHT, AIR OR VIEW EASEMENT.  Any diminution or shutting off of
     light, air or view by any structure which may be erected on lands adjacent
     to or in the vicinity of the Building shall in no way affect this Lease or
     impose any liability on Landlord.

                                      -30-

<PAGE>
 
     N. NO THIRD PARTY BENEFIT.  This Lease is a contract between Landlord and
     Tenant and nothing herein is intended to create any third party benefit.

                             ADDITIONAL PROVISIONS
 
37.  Exhibits A and B and Paragraphs 38, 39 and 40
     ---------------------------------------------
 
     Exhibit A      -   Site Plan
     Exhibit B      -   Personal Guaranty
     Paragraph 38   -   Base Rent
     Paragraph 39   -   Tenant Improvements
     Paragraph 40   -   Designated Parking

     Paragraph 38.  Base Rent
     ------------------------

     Base rent for the Premises shall be as follows:

      1-15          $2,640.00 per month
     16-30          $2,723.00 per month

     Paragraph 39.  Tenant Improvements
     ----------------------------------

     Tenant agrees to accept the Premises substantially in an "as-is" condition
     except for the following improvements:

      .   Paint office walls.
      .   Patch office walls.
      .   Clean carpet.
      .   Replace damaged or stained ceiling tiles.
      .   Remove plywood phone panels.
      .   Designate two (2) parking spaces.

     These improvements shall be constructed at Landlord's sole cost and
     expense.

     Paragraph 40.  Designated Parking
     ---------------------------------

     Landlord will label two (2) parking spaces in front of Tenant's premises
     for Tenant's use.  Landlord will in no way be responsible for the policing
     of such spaces or the ability of Tenant to maintain "reserved" parking
     through the term of the lease.  Currently, the City of Foster City does not
     permit designated parking.  Tenant's ability to maintain designated parking
     will in no way affect the rest of Tenant's obligations under this Lease.

     Paragraph 41.  Tenant's Repairs
     -------------------------------

     Landlord warrants that all building systems are in good working condition
     at the time of lease commencement.



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

                                      -31-

<PAGE>
 
"Landlord"

1170 CHESS DRIVE LIMITED PARTNERSHIP, A TEXAS LIMITED PARTNERSHIP


By:_______________________________
     Vice President

Its:______________________________

"Tenant"

DEPOMED SYSTEMS, INC., A CALIFORNIA CORPORATION


By:_______________________________
     Vice President

Its:______________________________

                                      -32-

<PAGE>
 
                                   EXHIBIT A



<PAGE>
 
                                   EXHIBIT B

                          Guaranty of Lease Agreement
                          ---------------------------


Mr. John W. Shell ("Guarantor"), whose address is 952 Tournament Drive,
Hillsborough, CA 94010, as a material inducement to and in consideration of 1170
Chess Drive Limited Partnership, a Texas Limited Partnership ("Landlord")
entering into this Lease with DepoMed Systems, Inc., a California Corporation
("Tenant"), unconditionally guarantees and promises to and for the benefit of
Landlord that Tenant shall perform its obligations under the Lease that Tenant
is to perform.

Guarantor waives the benefit of any statute of limitations affecting Guarantor's
liability under this guaranty.

The provisions of the Lease may be changed by agreement between Landlord and
Tenant at any time, or by course of conduct, without the consent of or without
notice to the Guarantor.  This guaranty shall guarantee the performance of the
Lease as changed.  Assignment of the Lease shall not affect this guaranty.

This guaranty shall not be affected by Landlord's failure to delay to enforce
any of its rights.

If Tenant defaults under the Lease, Landlord can proceed immediately against the
Guarantor or Tenant, or both, or Landlord can enforce against the Guarantor or
Tenant, or both, any rights that it has under the Lease, or pursuant to
applicable laws.

The Guarantor waives the right to require Landlord to (1) proceed against
Tenant; (2) proceed against or exhaust any security that Landlord holds from
Tenant; or (3) pursue any other remedy in Landlord's power.  The Guarantor
waives any defense by reason of any disability of Tenant, and waives any other
defense based on the termination of Tenant's liability from any cause.  Until
all Tenant's obligations to Landlord have been discharged in full, the Guarantor
has no right of subrogation against Tenant.  The Guarantor waives any right to
participate in any security now or later held by Landlord.  The Guarantor waives
all presentments, demands for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, and notices of acceptance of this
guaranty, and waives all notices of the existence, creation, or incurring of new
or additional obligations.

The Guarantor agrees that this guaranty shall be construed as an absolute,
unconditional, continuing and unlimited obligation of Guarantor without regard
to the regularity, validity or enforceability of any liability or obligation
hereby guaranteed.  Without limiting the generality of the foregoing, the
obligations of Guarantor hereunder shall in no way be released, diminished or
otherwise affected by reason of any voluntary or involuntary proceedings by or
against Tenant in bankruptcy or for an



<PAGE>
 
arrangement or reorganization or for any other relief under any provision of the
Bankruptcy Act as from time to time in effect.

The Guarantor further agrees that if any of their obligations hereunder shall be
held to be unenforceable, the remainder of this guaranty and its application to
all obligations than those with respect to which it is held unenforceable shall
not be affected thereby and shall remain in full force and effect.

If Landlord is required to enforce the Guarantor's obligations by legal
proceedings, the Guarantor shall pay to Landlord all costs incurred, including,
without limitation, reasonable attorneys' fees.

Guarantor's obligations under this guaranty shall be binding on Guarantor's
successors.

IN WITNESS WHEREOF, the Guarantor has executed this guaranty this 3rd day of
September 1992 with the intent to be legally bound thereby.


"GUARANTOR"


- -----------------------------------
John W. Shell

 
- -----------------------------------
Address

 
- -----------------------------------
Driver's License Number

 
- -----------------------------------
Bank Account Number

 
- -----------------------------------
Date





<PAGE>
 
                                                                    EXHIBIT 10.7
                             EMPLOYMENT AGREEMENT
                             --------------------


     THIS EMPLOYMENT AGREEMENT, dated as of ____________, 1997, is made and
entered into by and between DepoMed, Inc., a California corporation (the
"Company") and John W. Shell, an individual ("Employee").

                                R E C I T A L S:
                                --------------- 

     WHEREAS, the Company, desires to employ Employee and Employee desires to
perform the duties and obligations hereinafter described for a period commencing
on the date of this Agreement (the "Effective Date") and ending on the second
anniversary of the Effective Date, upon the terms and conditions hereinafter set
forth;

     NOW THEREFORE, in consideration of the premises and mutual agreements
herein, the Company and Employee agree as follows:

     1.   Employment.  The Company hereby agrees to employ Employee, and
          ----------                                                    
Employee agrees to serve the Company in the capacity of Chairman and Chief
Scientific Officer, subject to the terms and conditions of this Agreement.
Employee shall, during the term of this Agreement, in good faith perform his
duties as Chairman and Chief Scientific Officer and shall implement the policies
of the Company.

     2.   Employment Term.   Employment of Employee shall commence on the
          ---------------                                                
Effective Date and shall continue until two years from the Effective Date,
unless terminated pursuant
 to Section 6 below.

     3.   Compensation and Benefits.  From and after the Effective Date and so
          -------------------------                                           
long as Employee is employed by the Company, Employee shall be entitled to the
following compensation and benefits:

          (a) Salary.  Employee shall receive an annual salary of $185,000 to be
              ------                                                            
paid in periodic installments, in accordance with the Company's standard payroll
practice.

          (b) Vacation. Employee shall receive vacation in accordance with
              --------                                                    
Company's standard vacation policy for employees; provided, however, in no event
shall the Employee receive less than three weeks of vacation per year.

          (c) Benefits.  Employee shall receive health insurance and dental
              --------                                                     
insurance equivalent to those benefits accorded the Company's other employees.
Employee shall receive reimbursement for business-related expenses in accordance
with the Company's policies, and shall have the right to contribute to any
401(k) plan or other similar plan established by the Company, on the same terms
as the Company's other employees.

<PAGE>
 
     4.  Duties.  Employee shall (i) faithfully devote full-time attention,
         ------                                                            
skill and ability to discharge the duties assigned to him by the Board of
Director, (ii) use best efforts to promote and protect the interests of the
Company, (iii) comply with all reasonable and lawful instructions that the Board
of Directors give from time to time, and (iv) provide information and assistance
as requested by the Board of Directors.  During the term of this Agreement,
Employee shall not engage in any work, enterprise or activity which is not in
the best interests of the Company, or contrary to, or detracting from, the due
performance of the business of the Company or the discharge of Employee's duties
to the Company.

     5.   Non-Competition and Confidentiality.
          ----------------------------------- 

          (a) Non-Competition.   Employee agrees that during the term of his
              ---------------                                               
employment by the Company, he shall not carry on any business that is directly
or indirectly competitive with or similar to the business conducted by the
Company.  For purposes of this Agreement, each of the following activities,
without limitation, shall be deemed to constitute carrying on a business:  to
own or control an interest, directly or indirectly, in any enterprise or
endeavor, either individually, in partnership or in conjunction with any person,
firm, association, company or corporation, or act as a director, officer, agent,
employee, consultant, partner or stockholder of a business; provided, however,
that Employee shall not be prohibited from (i) owning less than 5% of the equity
securities of an entity, (ii) serving as a director of an entity, where Employee
served in such capacity as of the Effective Date; or (iii) engaging in advising
or consulting activities approved by the Company's Board of Directors.

          (b)  Confidentiality.
               --------------- 

               (i) Definition of Confidential Information.  As used herein, the
                   --------------------------------------    
term "Confidential Information" shall mean all information Employee acquired
from any source in the course of his employment by the Company if (A) such
information is not either in the public domain or part of Employee's general
knowledge learned apart from his work for the Company and (B) Employee has
reason to believe that such information is confidential information of the
Company (or an affiliate of the Company). Information shall be "Confidential
Information" even if no legal protection has been obtained or sought for such
information under federal, state or foreign laws and whether or not Employee has
been specifically notified that such information is "Confidential Information."
"Confidential Information" includes, by way of example and without limitation,
the operation methods of the Company (and affiliates of the Company), customer
lists and arrangements with licensees.

               (ii) Use of Confidential Information.  Without limiting or
                    -------------------------------      
otherwise affecting Employee's obligations under

                                       2

<PAGE>
 
Section 5(a) of this Agreement, Employee agrees not to disclose, communicate or
use to the detriment of the Company or for the benefit of any other person
(including himself), or misuse in any way any Confidential Information.
Employee acknowledges and agrees that all Confidential Information received
heretofore or to be received hereafter by him from the Company (or an affiliate
of the Company) was or will be received by him in confidence and as a fiduciary
of the Company.  The obligation not to disclose, communicate, use or misuse
Confidential Information shall continue indefinitely after the termination, if
any, of this Agreement.

     6.   Termination.  Employee or the Company may terminate this Agreement at
          -----------                                                          
any time upon 90 days written notice to the other party.

     7.   General Provisions.
          ------------------ 

          (a) Waiver.  Failure of either party to enforce any of the provisions
              ------                                                           
of this Agreement, or any rights with respect thereto, or failure to exercise
any election provided for herein, shall in no way be considered a waiver of such
provisions, rights or elections, or in any way affect the validity of this
Agreement.  The failure of either party to enforce any of said provisions,
rights or elections shall not prejudice such party from later enforcing or
exercising the same or any other provisions, rights or elections which it may
have under this Agreement.

          (b) No Assignment.  The rights and duties of Employee under this
              -------------                                               
Agreement shall not be subject to alienation, assignment or transfer, whether
voluntary or involuntary.

          (c) Notices.  Any notice or other communication required or permitted
              -------                                                          
hereunder shall be in writing and shall be deemed to have been duly given on the
date of service if served personally or by facsimile, or five days after the
date of mailing if mailed by first class mail, registered or certified, postage
prepaid.  Notices shall be addressed as follows:


          If to Company:      DepoMed, Inc.
                              1170 B Chess Drive
                              Foster City, California 94404
                              ATTENTION:  President

                                       3

<PAGE>
 
          If to Employee:     John W. Shell
                              952 Tournament Drive
                              Hillsborough, California 94010


          (d) Supersedes Prior Agreements.  This Agreement supersedes all prior
              ---------------------------                                      
employment agreements, understandings, oral or written, between Employee and the
Company (or any affiliate of the Company).

          (e) Captions.  The captions used in this Agreement are intended solely
              --------                                                          
for convenience of reference and shall not in any manner amplify, limit, modify
or otherwise be used in the construction or interpretation of any of the
provisions hereof.

          (f) Construction.  The language used in this Agreement will be deemed
              ------------                                                     
to be the language chosen by each of the parties hereto to express their mutual
intent, and no rule of strict construction, including the rule that ambiguities
are to be resolved against the drafting party, shall be applied against either
party.

          (g) Severability.  If any term of this Agreement or any application
              ------------                                                   
thereof shall be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining terms contained herein and any
other application of said terms shall not in any way be affected or impaired
thereby.

          (h) Governing Law.  This Agreement shall be governed by and construed
              -------------                                                    
in accordance with the laws of the State of California applicable to contracts
entered into by residents of California and to be performed wholly within the
State of California.

          (i) No Third Party Beneficiaries.  This Agreement shall not confer any
              ----------------------------                                      
rights or remedies upon any person other than the parties and their respective
successors and permitted assigns.

          (j) Entire Agreement.  This Agreement constitutes the entire agreement
              ----------------                                                  
between the parties pertaining to the subject matter hereof, and no changes in,
additions to, or modifications of this Agreement shall be valid unless set forth
in writing and signed by each of the parties.

                                       4

<PAGE>
 
          IN WITNESS WHEREOF, the undersigned have executed this Agreement on
the date first above written.

COMPANY:                      DEPOMED, INC.


                              By:
                                  -------------------------------------- 
                              Title:
                                     -----------------------------------


EMPLOYEE:                     ------------------------------------------
                              John W. Shell

                                       5



<PAGE>
 
                                                                    EXHIBIT 10.8
                             EMPLOYMENT AGREEMENT
                             --------------------


     THIS EMPLOYMENT AGREEMENT, dated as of February 1, 1997, is made and
entered into by and between DepoMed, Inc. a California corporation ("Company"),
and John W. Fara, an individual ("Employee").

                                R E C I T A L S:
                                --------------- 

     The Company desires to employ Employee and Employee desires to perform the
duties and obligations hereinafter described for a period commencing on the date
of this Agreement (the "Effective Date") and ending on the second anniversary of
the Effective Date, upon the terms and conditions hereinafter set forth.

                               A G R E E M E N T
                               -----------------

     NOW THEREFORE, in consideration of the mutual covenants and conditions
herein contained and their performance, the Company and Employee agree as
follows:

     1.   Employment.  The Company hereby agrees to employ Employee, and
          ----------                                                    
Employee agrees to serve the Company in the capacity of President and Chief
Executive Officer, subject to the direction of the Board of Directors of the
Company and the terms and conditions of this Agreement.  Employee shall, during
the term of this Agreement, in good faith perform such duties of the office of
President and Chief Executive Officer and shall implement the policies of the
Company.

     2.   Employment Term.  Employment of Employee shall
 commence on the
          ---------------                                               
Effective Date and shall continue until two years from the Effective Date.

     3.   Compensation and Benefits.  From and after the Effective Date and so
          -------------------------                                           
long as Employee is employed by the Company, Employee shall be entitled to the
following compensation and benefits:

          (a) Salary.  Employee shall receive an annual salary of $185,000, to
              ------                                                          
be paid in periodic installments, in accordance with the Company's standard
payroll practice.

          (b) Vacation.  Employee shall receive vacation in accordance with
              --------                                                     
Company's standard vacation policy for employees; provided, however, in no event
shall the Employee receive less than three weeks of vacation per year.

          (c) Benefits.  Employee shall receive health insurance and dental
              --------                                                     
insurance equivalent to those benefits accorded the Company's other employees.
Employee shall receive reimbursement for business-related expenses in accordance
with the Company's policies, and shall have the right to contribute to any
401(k)

<PAGE>
 
plan or other similar plan established by the Company, on the same terms as the
Company's other employees.

     4.   Duties.  Employee shall (i) faithfully devote full-time attention,
          ------                                                            
skill and ability to discharge the duties assigned to him by the Board of
Directors of the Company, (ii) use best efforts to promote and protect the
interests of the Company, (iii) comply with all reasonable and lawful
instructions that the Board of Directors of the Company give from time to time,
and (iv) provide information and assistance as requested by the Board of
Directors of the Company.  During the term of this Agreement, Employee shall not
engage in any work, enterprise or activity which is, in the opinion of the Board
of Directors of the Company, not in the best interests of the Company, or
contrary to, or detracting from, the due performance of the business of the
Company or the discharge of Employee's duties to the Company.

     5.   Non-Competition and Confidentiality.
          ----------------------------------- 

          (a) Non-Competition.  Employee agrees that during the term of his
              ---------------                                              
employment by the Company, he shall not carry on any business that is directly
or indirectly competitive with or similar to the business conducted by the
Company. For purposes of this Agreement, each of the following activities,
without limitation, shall be deemed to constitute carrying on a business: to own
or control an interest, directly or indirectly, in any enterprise or endeavor,
either individually, in partnership or in conjunction with any person, firm,
association, company or corporation, or act as a director, officer, agent,
employee, consultant, partner or stockholder of a business; provided, however,
that Employee shall not be prohibited from (i) owning less than 5% of the equity
securities of an entity, (ii) serving as a director of an entity, where Employee
served in such capacity as of the Effective Date; or (iii) engaging in advising
or consulting activities approved by the Company's Board of Directors.

          (b)  Confidentiality.
               --------------- 

                (i) Definition of Confidential Information.  As used herein, the
                    -------------------------------------- 
term "Confidential Information" shall mean all information Employee acquired
from any source in the course of his employment by the Company if (A) such
information is not either in the public domain or part of Employee's general
knowledge learned apart from his work for the Company and (B) Employee has
reason to believe that such information is confidential information of the
Company. Information shall be "Confidential Information" even if no legal
protection has been obtained or sought for such information under federal, state
or foreign laws and whether or not Employee has been specifically notified that
such information is "Confidential Information." "Confidential Information"
includes, by way of example and without limitation, the operation methods of the
Company, customer lists and arrangements with Licensees.

                                      -2-

<PAGE>
 
                (ii) Use of Confidential Information.  Without limiting or
                     -------------------------------     
otherwise affecting Employee's obligations under Section 5(a) of this Agreement,
Employee agrees not to disclose, communicate or use to the detriment of the
Company or for the benefit of any other person (including himself), or misuse in
any way any Confidential Information. Employee acknowledges and agrees that all
Confidential Information received heretofore or to be received hereafter by him
from the Company was or will be received by him in confidence and as a fiduciary
of the Company. The obligation not to disclose, communicate, use or misuse
Confidential Information shall continue indefinitely after the termination, if
any, of this Agreement.

     6.   Termination and Severance Payments.
          ---------------------------------- 

          (a) General.  Employee's employment hereunder shall terminate upon the
              -------                                                           
occurrence of any of the following:  (i) the death of Employee; (ii) termination
of Employee by the Board of Directors of the Company without Cause (as defined
below); (iii) termination of Employee by the Board of Directors of the  Company
for Cause; (iv) Involuntary Termination of Employee after a Change of Control
(as such terms are defined below) or (v) resignation by Employee.

          (b) Definition of Cause.  As used herein, the term "Cause" shall mean
              -------------------                                              
(i) willful and habitual breach of the duties or obligations required of him by
the terms of this Agreement, (ii) habitual neglect of the duties or obligations
required of him by the terms of this Agreement, (iii) commission of fraud,
embezzlement or misappropriation, or other willful acts of dishonesty or willful
misconduct, or commission of a crime of moral turpitude involving Employee
whether or not a criminal or civil charge is filed in connection therewith, (iv)
the willful unauthorized disclosure of Confidential Information or, (v) breach
of the covenant not to compete under Section 5.1 of this Agreement.

          (c)  Definition of Change of Control.  As used herein, "Change of
               -------------------------------                             
Control" means the occurrence of any of the following events:   (i)  any
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 50% or more of the total voting power represented by
the Company"s then outstanding voting securities; or  (ii) the stockholders of
the Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least 50% of the total voting
power represented by the voting securities of such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company

                                      -3-

<PAGE>
 
approve a plan of complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or substantially all the Company's
assets.

          (d)  Definition of Involuntary Termination.  As used herein,
               -------------------------------------                  
"Involuntary Termination" means (i) the elimination of  Employee's job position
or a material reduction of Employee's job position or a material reduction of
Employee's duties, authority or responsibilities, relative to Employee's job
position or duties, authority or responsibilities as in effect immediately prior
to such reduction; (ii) the relocation of Employee to a facility or a location
more than 50 miles from Company's then present location; or (iii) any other
involuntary termination of Employee's employment without Cause, except in the
event of disability.

          (e)  Severance Payments.
               ------------------ 

               (i) If Employee's employment with the Company is terminated
during the term of this Agreement without Cause or, if following a Change of
Control, Employee's employment is terminated as a result of an Involuntary
Termination, other than for Cause, following such Change of Control, then the
Company shall pay to Employee an amount equal to Employee's compensation under
this Agreement, in the same periodic installments that Employee would otherwise
receive such salary ("Severance Payments"); provided, however, that the Company
may, in its sole discretion, pay to Employee a lump sum cash payment with the
present value of such Severance Payments within thirty (30) days of Employee's
termination. In addition, the Company shall pay, so as to provide coverage
through the term of this Agreement, or when Employee obtains other employment
providing health care coverage, the COBRA insurance premium on behalf of
Employee for the group health benefits that he has received while employed by
the Company, to the extent permitted under the Company's benefits plans as they
may be amended and pursuant to applicable law. This payment of COBRA premiums by
the Company does not expand or extend the maximum period of COBRA coverage to
which Employee would otherwise be entitled. Employee will not accrue or be
entitled to any employee or other benefits, including without limitation, the
Company's life insurance coverage, nor shall he accrue vacation under the
Company's existing policies or any other arrangements after his termination,
other than as expressly set forth in this Agreement.

               (ii) If Employee terminates his employment or if the Company
terminates Employee for Cause or by reason of Employee's death, then Employee
shall not receive the Severance Payments or other payments set forth in (i)
above.
 
               (iii) Employee agrees that the Severance Payments shall fully
compensate him for, and he agrees fully and forever to release any and all
claims, if any then exist, arising out of his employment and the termination
thereof with the sole

                                      -4-

<PAGE>
 
exception of any alleged violation of applicable state or federal employment
statutes, and upon payment of the Severance Payments the Company shall be fully
released and discharged as to any and all such claims.

     7.   General Provisions.
          ------------------ 

          (a) Notices.  All notices and other communications hereunder shall be
              -------                                                          
in writing and, unless otherwise provided herein, shall be deemed to have been
duly given if delivered or mailed, first-class postage prepaid:

          If to Company:      DepoMed, Inc.
                              1170 B Chess Drive
                              Foster City, California 94404
                              ATTENTION:  Chairman
                              (Fax Number: 415-513-0999)

          If to Employee:     ___________________________________
                              __________________________________
                              ___________________________________

          (b) Assignment.  The rights and duties of Employee under this
              ----------                                               
Agreement shall not be subject to alienation, assignment or transfer, whether
voluntary or involuntary.

          (c) Supersedes Prior Agreements.  This Agreement supersedes all prior
              ---------------------------                                      
employment agreements, understandings, oral or written, between Employee and the
Company (or any affiliate of the Company).

          (d) Captions.  The captions used in this Agreement are intended solely
              --------                                                          
for convenience of reference and shall not in any manner amplify, limit, modify
or otherwise be used in the construction or interpretation of any of the
provisions hereof.

          (e) Construction.  The language used in this Agreement will be deemed
              ------------                                                     
to be the language chosen by each of the parties hereto to express their mutual
intent, and no rule of strict construction, including the rule that ambiguities
are to be resolved against the drafting party, shall be applied against either
party.

          (f) Severability.  If any term of this Agreement or any application
              ------------                                                   
thereof shall be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining terms contained herein and any
other application of said terms shall not in any way be affected or impaired
thereby.

          (g) Governing Law.  This Agreement shall be governed by and construed
              -------------                                                    
in accordance with the laws of the State of California applicable to contracts
entered into by residents of California and to be performed wholly within the
State of

                                      -5-

<PAGE>
 
California.

          (h) No Third Party Beneficiaries.  This Agreement shall not confer any
              ----------------------------                                      
rights or remedies upon any person other than the parties and their respective
successors and permitted assigns.

          (i) Entire Agreement.  This Agreement constitutes the entire agreement
              ----------------                                                  
between the parties pertaining to the subject matter hereof, and no changes in,
additions to, or modifications of this Agreement shall be valid unless set forth
in writing and signed by each of the parties.

                                      -6-

<PAGE>
 
          IN WITNESS WHEREOF, the undersigned have executed this Agreement on
the date first above written.

COMPANY:                      DEPOMED, INC

                              By: ________________________

                              Title: ______________________



EMPLOYEE:                     ____________________________
                              John W. Fara

                                      -7-



<PAGE>
 
                                                                    Exhibit 10.9
                                                                    ------------

                      AGREEMENT RE SETTLEMENT OF LAWSUIT,
               CONVEYANCE OF ASSETS AND ASSUMPTION OF LIABILITIES
               --------------------------------------------------


     This Agreement Re Settlement of Lawsuit, Conveyance of Assets and
Assumption of Liabilities (the "Agreement"), entered into as of August 28, 1995
is made by and among DepoMed Systems, Inc. ("DSI"), a California corporation,
DepoMed, Inc. ("DI"), a California corporation, Dr. John W. Shell ("Shell"), and
M6 Pharmaceuticals, Inc. ("M6"), a Delaware corporation (collectively, the
"Parties").

                                    RECITALS
                                    --------

     A.   On or about March 29, 1994, DSI and M6 executed an Agreement and Plan
of Merger Between M6 Pharmaceuticals, Inc. and DepoMed Systems, Inc. (the
"Merger Agreement"), providing for the merger of DSI into M6.  A Certificate of
Merger was filed with the California Secretary of State on or about July 26,
1994, merging DSI into M6, the surviving corporation.

     B.   On or about July 17, 1995, DSI and Shell instituted an action against
M6 and David Blech in the United States District Court for the Northern District
of California, DepoMed Systems, Inc., et al. v. M6 Pharmaceuticals, Inc., No.
               ---------------------------------------------------------     
C95 2574 VRW (the "Action"), asserting claims for specific performance,
rescission and damages relating to the merger and related events.

     C.   The Parties now desire to enter into a definitive
 agreement in
settlement of all claims and disputes between M6, on the one hand, and DSI and
Shell, on the other hand.

                                   AGREEMENT
                                   ---------

     In consideration of the mutual covenants, agreements and representations
contained in this Agreement, constituting mutual, valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the Parties agree as
follows:

     1.   Definitions.  As used in this Agreement the following terms shall have
          -----------                                                           
the following meanings:

          A.   "Acquired Assets" is as defined in Paragraph 3.

          B.   "Assumed Liabilities" is as defined in Paragraph 4.

          C.   "Closing Date" means the date upon which DI acknowledges receipt
of all documentation and assets necessary to effect fully the transfers
contemplated by this Agreement, and on

<PAGE>
 
which DI executes the Closing Statement, in the form attached hereto as Schedule
1.1, acknowledging such receipt of assets and documentation; in no event shall
the Closing Date be later than August 31, 1995.

          D.   "Closing Statement" is as defined in Subparagraph 1.C.

          E.   "DepoMed Business" means the research, development, marketing,
production and sales of oral drug delivery systems and technology developed by
or under the direction of Dr. John W. Shell.

          F.   "Furniture, Fixtures and Equipment" is as defined in Subparagraph
3.C.

     2.   Releases.
          -------- 

          A.   Effective as of the Closing Date, Shell, DI and DSI fully and
forever release M6, Dr. Dennis Hruby, and M6's officers, directors and employees
of and from any and all claims, demands, duties, obligations, liabilities and
causes of action, relating in any way to claims asserted in the Action or
otherwise relating to the Merger Agreement, excepting those obligations created
by this Agreement.  Notwithstanding anything to the contrary contained herein,
this Agreement shall not release or otherwise affect in any way the claims or
rights of Shell, DI and DSI, or any of them, against Mr. David Blech.

          B.   Effective as of the Closing Date, M6 fully and forever releases,
Shell, DSI and DI and their respective past and present officers, directors and
employees, of and from any and all claims, demands, duties, obligations,
liabilities and causes of action relating in any way to claims asserted in the
Action or otherwise relating to the Merger Agreement, excepting those
obligations created by this Agreement.

          C.   The releases contained in this Paragraph 2 are intended to cover
all existing or prior claims or possible claims relating to the specified
subjects, as between the specified parties, whether the same are known, unknown,
or hereafter discovered or ascertained.  Each of the Parties acknowledge that
such Party is familiar with the provisions of Section 1542 of the California
Civil Code, which provides as follows:

          A general release does not extend to claims which the creditor does
          not know or suspect to exist in his favor at the time of executing the
          release, which if known by him must have materially affected his
          settlement with the debtor.

                                      -2-

<PAGE>
 
Each of the Parties expressly, knowingly and intentionally waives and
relinquishes any and all rights which it or he has under the provisions of
Section 1542, as well as any other similar statute or common law principle.

          D.   DI agrees to indemnify the present officers and directors of M6
against any claims brought by current or former DSI shareholders arising from
the execution of this Agreement.  Notwithstanding anything else to the contrary
contained herein, nothing in this Paragraph or in this Agreement shall provide
for any indemnity for Mr. David Blech.

     3.   Conveyance of Assets.  M6 hereby agrees to cause to be conveyed,
          --------------------                                            
transferred, assigned and delivered and hereby does convey, transfer, assign and
deliver to DI all assets and all rights, properties, interests, title and claims
in and to the assets of M6 used in connection with or derived from the DepoMed
Business; all assets and all rights, properties, interests, title and claims in
and to the assets previously belonging to DSI that became the property of M6 by
virtue of the Merger Agreement, including, without limitation, all assets and
all rights, properties, interests, title and claims in and to those assets
described in Subparagraphs 3.A through 3.L below.  The Assets described in this
Paragraph 3 are sometimes collectively referred to as the "Acquired Assets."

          A.   All U.S. patents and patent applications listed and identified on
Schedule 3.1 hereto, and any foreign counterpart thereof, and all patents,
patent applications and unpatented inventions of which Shell is named as either
inventory or co-inventor, together with the right to sue for past infringement
thereof.  M6 further agrees to execute, have notarized and deliver to Shell
prior to the Closing Date, the Patent Assignment attached hereto as Schedule
3.2.

          B.   All trade secrets and proprietary rights and knowledge of any
kind related to or used in connection with the DepoMed Business.

          C.   All furniture, fixtures, supplies and equipment (including,
without limitation, computer equipment, computer hardware and software,
leasehold improvements, cabinets, telephones, facsimile equipment, laboratory
equipment, laboratory supplies and materials) and all other physical assets
located on the premises at 1170 B Chess Drive, Foster City, California 94404
(collectively,"Furniture, Fixtures and Equipment").

          D.   All of the lessee's interest under the lease of the premises at
1170 B Chess Drive, Foster City, California 94404.

                                      -3-

<PAGE>
 
          E.  All rights to sue, choses in action and claims relating to the
DepoMed Business.

          F.   All rights and incidents of interest of M6 in and to all
technical documentation used in the DepoMed Business, including, without
limitation, know-how, discoveries, formulae, production outlines, product
designs, drawings, technical data, computerized data and information, computer
software and databases, material specifications, purchasing specifications,
invention records, research records, labor records, manufacturing information,
processes and techniques, testing, inspection and quality control processes and
techniques, equipment lists and other intellectual property; and copies of the
invention file records on the patents, patent applications and inventions
referred to in Subparagraph 3.A, and any file records on the trademarks referred
to in Subparagraph 3.J.

          G.   All business plans, sales and promotional literature, contact and
customer lists, reports and other records relating to compliance with laws and
regulations, state and federal income tax filings, written instructions,
manuals, data, procedures and other records, relating to or used in the DepoMed
Business.

          H.   Copies of all employment history records, employment contracts
and other employee records (including without limitation, records reflecting
salary deductions and filings made with the State of California Employment
Development Department) for those employees of DSI and/or M6 who have worked in
California and whose duties have pertained to the DepoMed Business.  M6 also
agrees to provide information and assistance to former M6 employees (whose
duties have pertained to the DepoMed Business) in terminating and/or
transferring funds from such employees' M6 401(k) plans.

          I.   The goodwill and value of the DepoMed Business as a going
concern.

          J.   All common law, statutory law, or contractual rights in the
trademarks and trade names used in the DepoMed Business, including such rights
to DEPOMED, DEPOMED SYSTEMS, INC. and DEPOMED, INC., and all rights to sue for
past infringements thereof.

          K.   All other intangible rights and assets (including, without
limitation, all rights to receive mail and other communications directed to M6
and related to the DepoMed Business and all post office boxes and telephone
listing related to the DepoMed Business) relating to the DepoMed Business.  M6
shall promptly forward to DI all mail, telephone and fax messages and other
communications received by M6 which are related to the DepoMed Business.

                                      -4-

<PAGE>
 
          L.  All documentation and agreements necessary to implement the
transfers set forth in this Agreement, including without limitation, documents
for submission to or filing with the Patent and Trademark Office.  M6 agrees to
cooperate reasonably after the Closing Date to provide such documentation and
agreements.

     4.   Assumed Liabilities.  Subject to the terms and conditions set forth
          -------------------                                                
herein, effective as of the Closing Date, DI fully assumes and agrees to pay,
perform and discharge when due only those debts, obligations, responsibilities,
contracts and liabilities which are specifically described in this Paragraph 4
(collectively, the "Assumed Liabilities").  The Assumed Liabilities shall
include only the following liabilities, responsibilities and obligations:

          A.   All promissory notes (including interest thereon) executed in
favor of, and all other debt owed to, Shell, Julian N. Stern and Julian N.
Stern, a Professional Corporation.

          B.   All promissory notes executed in favor of, and debt owed to,
McNeil Consumer Products Co.

          C.   All of the lessee's unpaid obligations under the lease of the
premises at 1170 B Chess Drive, Foster City, California 94404.

          D.   All unpaid lease or purchase obligations for the Furniture,
Fixtures and Equipment.

          E.   All obligations arising under the Employment Agreement, Exhibit
"C" to the Merger Agreement, by and between M6 and Shell and under the
Employment Agreement of Edward Brennan and all other salary and related interest
obligations to Shell.

          F.   Any trade payable invoices received by Shell or DSI on or after
July 1, 1995 and not forwarded to M6.

          G.   For the period commencing October 15, 1994, any unpaid salary, or
vacation accrual obligations as of October 15, 1994, for California employees of
the DepoMed Business.

          H.   For the period commencing July 1, 1995, taxes or assessments due
with respect to salaries or wages paid to employees of the DepoMed Business.

          I.   Any obligations relating to the operations of the DepoMed
Business, entered into by Shell on or after July 1, 1995 through the Closing
Date, without the knowledge of M6.

          J.   Any obligations arising from the operations of the DepoMed
Business prior to March 29, 1994.

                                      -5-

<PAGE>
 
          K.  All obligations arising from the operations of the DepoMed
Business after the Closing Date.

          L.   Those specific trade payables related to the DepoMed Business set
forth on Schedule 4.1 hereto.

With the exception of those liabilities and obligations specifically assumed by
DI pursuant to this Paragraph 4, DI shall not assume or be obligated for any of
the liabilities or obligations of M6 or its officers, directors or employees, of
any kind whatsoever, direct or indirect, known or unknown, absolute or
contingent, matured or unmatured, whether or not incurred in connection with or
related to the DepoMed Business or otherwise.

     5.   M6 Stock and Stock Options.  DI shall secure, within sixty (60) days
          --------------------------                                          
after the Closing Date, for submission to M6 for cancellation, certificates
representing all shares of M6 stock (duly endorsed for transfer or accompanied
by duly executed stock powers) issued to the shareholders of DSI as the result
of the merger of DSI and M6.  DSI shall secure and deliver to M6 within sixty
(60) days after the Closing Date, from the holders of any options to acquire
stock of M6 issued to former option holders of DSI as the result of such merger,
the agreement of such holders that any such options still outstanding shall be
canceled without payment of additional consideration by M6.  To the extent that
DI is unable to secure the cancellation of any such M6 stock or stock options,
DI shall, as an alternative, indemnify M6 for the cash value of such stock or
stock options.

     6.   Dismissal.  Concurrently herewith the Parties are executing a
          ---------                                                    
Stipulation and Order for Dismissal With Prejudice of M6 Pharmaceuticals, in the
form attached hereto as Schedule 6.1.  Within five business days following the
Closing Date, attorneys for Shell shall file said Stipulation and Order in the
Action.

     7.   Closing.  The Closing Date shall be on or before August 31, 1995.
          -------                                                          

     8.   No Third Party Rights.  Any assumption by DI of any  liabilities shall
          ---------------------                                                 
not in any way or at any time create any third party beneficiary rights for or
on behalf of any persons or entities other than the Parties to this Agreement
and the persons specifically released hereunder.

     9.   Interpretation of the Agreement.  This Agreement is the product of
          -------------------------------                                   
negotiation by and among the Parties and their respective counsel.  The
Agreement shall be interpreted and construed naturally as to all Parties,
without any party being deemed the drafter of the Agreement.

     10.  Entire Agreement.  This Agreement contains the entire agreement
          ----------------                                               
between the Parties pertaining to the subject matter

                                      -6-

<PAGE>
 
contained in it and supersedes any prior and/or contemporaneous oral or written
negotiations, agreements, representations and understandings of the Parties.
Each Party represents that it has not relied on any inducement, statement,
promise or representation other than those contained in the Agreement.  This
Agreement may not be changed or amended except in writing, executed by all
Parties.

     11.  Governing Law.  This Agreement shall be construed, interpreted and
          -------------                                                     
enforced in accordance with and governed by the laws of the State of California,
without reference to conflicts of law principles.  Any dispute arising from or
relating to this Agreement shall be subject to California law and the exclusive
jurisdiction and venue of the state or federal courts of Santa Clara County or
San Francisco County, California.

     12.  Attorneys' Fees.  Each Party to this Agreement shall bear its own
          ---------------                                                  
attorneys' fees and costs in connection with the Action and the negotiation and
drafting of this Agreement.  The Parties further agree that if legal or
equitable action is brought by any Party against another Party to enforce any of
the provisions of this Agreement, the prevailing party in such action will be
entitled to recover from the opposing party, his or its costs, including
attorneys' fees, of such legal action.

     13.  Warranty of Authorized Signatures.  By execution of this Agreement,
          ---------------------------------                                  
each person signing on behalf of an entity warrants that the consent of all
persons or entities whatsoever necessary for the execution of the Agreement has
been obtained.

     14.  Counterparts.  This Agreement may be executed in any number of
          ------------                                                  
counterparts, each of which shall have the same force and effect as an original
and shall constitute an effective, binding agreement on the part of each of the
Parties.

                                      -7-

<PAGE>
 
     IN WITNESS WHEREOF, the Parties have duly executed this Agreement as of the
date first set forth above.

                               M6 PHARMACEUTICALS, INC.



                               By:    /s/ David de Weese
                                     -------------------
                                     David de Weese,
                                     its President and CEO


                               DEPOMED SYSTEMS, INC.



                               By:    /s/ John W. Shell
                                     ------------------
                                     John W. Shell,
                                     its President and CEO

                               JOHN W. SHELL



                                /s/ John W. Shell
                               ------------------

                               DEPOMED, INC.



                               By:    /s/ John W. Shell
                                     ------------------
                                     John W. Shell,
                                     its President and CEO

<PAGE>
 
                         CLOSING STATEMENT                          Schedule 1.1
                         -----------------            

     DEPOMED, INC. hereby acknowledges receipt of all documentation and assets
necessary to effect the transfers to it contemplated by the Agreement Re
Settlement of Lawsuit, Conveyance of Assets and Assumption of Liabilities, dated
August ___, 1995.


Dated: ________________             DEPOMED, INC.



                                    By: __________________________

                                    Its: _________________________

                                 SCHEDULE 1.1

<PAGE>
 
                                                                    Schedule 3.1
                        PATENTS AND PATENT APPLICATIONS
                        -------------------------------


United States
- -------------

     Patent 5,007,790
          Sustained-Release Oral Drug Dosage Form
     Continuation-in-part of application USSN 07/858,320
     originally filed March 5, 1992
          Alkyl-Substituted Cellulose-Based-Sustained-Release Oral Drug Dosage
          Form


Europe
- ------

     Serial Number 90906689.6-2214
          Sustained-Release Oral Drug Dosage Form
     Application Serial Number 93/02420
          Corresponds to C-I-P of patent application USSN 07/858,320
          Filing Date:  17 March 1993

                                 SCHEDULE 3.1

<PAGE>
 
                                                                    Schedule 3.2
                               PATENT ASSIGNMENT
                               -----------------

     WHEREAS, M6 Pharmaceuticals, Inc. (Assignor) of 599 Lexington Avenue, 23rd
Floor, New York, NY 10022 (address), a corporation of the state of Delaware, is
the owner by assignment of the following patent properties:

<TABLE>
<CAPTION>
       No.                Dated                  Titled
       ---                -----                  ------ 
<S>                  <C>               <C> 
USSN 08/316,265      Filed Sept. 30,   Alkyl-Substituted
                     1994              Cellulose-Based Sustained-
                                       Release Oral Drug Dosage
                                       Forms

USSN 08/453,144      Filed May 30,     Alkyl-Substituted
                     1995              Cellulose-Based Sustained-
                                       Release Oral Drug Dosage
                                       Forms
</TABLE>


     WHEREAS, DepoMed, Inc. (Assignee) of 1170 B Chess Drive, Foster City, CA
94404 (address), a corporation of the state of California, wishes to purchase
all rights to and under the patent.

     NOW, THEREFORE, for valuable consideration, the receipt of which is hereby
acknowledged, Assignor hereby assigns all its right, title and interest in said
patent properties to Assignee for the entire term of the patent(s) and any
reissues, reexaminations or extensions thereof.

Date:  Aug. 28, 1995            /s/ David de Weese
                               -------------------
                              Name:      David H. DeWeese
                              Title:     President & CEO

STATE OF NEW YORK        )
                         )    ss.
COUNTY OF                )

     On August 28, 1995, before me,     Norman H. Henderson   , personally
                                    --------------------------            
appeared    David H. de Weese   , 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.

                                /s/ Norman H. Henderson
                               ------------------------
                              Notary Public
                              My commission expires:   11/29/95
                                                      ---------

                                 SCHEDULE 3.2

<PAGE>
 
                                                                    Schedule 4.1
DEPOMED SYSTEMS TRADE/OTHER PAYABLES/ACCRUALS
ON BOOKS OF M6 AT JUNE 30, 1995 AND STILL OUTSTANDING *
(EXCLUDING ALL LEASES)


<TABLE>
<CAPTION>
=============================================================================================
                                                              Invoice    Invoice     Invoice
Vendor                                                          No.       Date        Amount
=============================================================================================
<S>                                                          <C>         <C>        <C>

Alron Heating & Air conditioning                                 53236     1/4/95      158.46
Altair Gases & Equipment                                        144919    8/19/95       60.00
Anza Building Maintenance                                         3192    9/23/94      160.00
Anza Building Maintenance                                        11048   10/24/94      160.00
Anza Building Maintenance                                        11065   11/23/94      750.00
Anza Building Maintenance                                        11082   12/24/94      160.00
Anza Building Maintenance                                        11111    1/22/95      185.00
Anza Building Maintenance                                        11133    2/21/95      190.00
Anza Building Maintenance                                        11127    3/22/95      160.00
Anza Building Maintenance                                        11164    4/24/95      160.00
Aqualon Company                                                 893889    2/20/95      270.25
Barlocker Insurance (10/15/93-94)                                22088   10/31/94    1,283.00
California Chamber of Commerce                                 B181162    9/18/94      234.41
California Security                                            130041,    5/28/95       60.00
                                                                13081
Clement Communications                                       A-7012343   10/24/94       35.47
CRC Press                                                    85813-009    9/12/94      274.07
Employment Development Dept.                                              12/5/94       42.46
Gerboth Fire & Extin.                                                     4/28/95       39.50
Heller, Ehrman, White & McAuliffe                                                    3,082.21
Roy Kuramoto                                                              10/4/94      750.00
Roy Kuramoto                                                               1/5/95      750.00
Roy Kuramoto                                                               4/3/95    1,437.50
M.J. Murphy & Associates                                                  9/30/94    1,000.00
Pacific Bell                                                              4/23/95      142.03
pacific Bell                                                              5/23/95      141.90
Martha A. Reitman, MD                                                     9/16/94    2,000.00
San Mateo Environmental Health                                             9/1/94      129.00
Standard Insurance                                                        9/21/94      101.70
- ---------------------------------------------------------------------------------------------
</TABLE>
 

                                 SCHEDULE 4.1

<PAGE>
 

<TABLE>
<CAPTION>
=============================================================================================
                                                              Invoice    Invoice     Invoice
Vendor                                                          No.       Date        Amount
=============================================================================================
<S>                                                          <C>         <C>        <C>
Standard Insurance                                                       10/24/94      101.70
Standard Insurance                                                       11/24/94      101.70
Standard Insurance                                                       12/22/94      101.70
Townsend & Townsend                                                       5/10/95   25,725.87
University of Arizona                                                     9/16/94   12,000.00
VWR Scientific                                                19415350    9/22/94       14.75
VWR Scientific                                                19415340    9/22/94      585.00
VWR Scientific                                                20379220   10/13/94       31.06
VWR Scientific                                                19415330   10/25/94    1,458.13
John W. Shell Expenses                                                     5/2/95      437.57
- ---------------------------------------------------------------------------------------------
Total Invoices Rec'd by 6/30/96                                                     53,844.44
=============================================================================================
* Still outstanding as far as we know.
</TABLE>


                                 SCHEDULE 4.1

<PAGE>
 
                                                                    Schedule 6.1

Robert B. Hawk (California Bar #118054)
Edith L. Morris (California Bar #176979)
HELLER, EHRMAN, WHITE & MCAULIFFE
525 University Avenue, Suite 1100
Palo ALto, California 94301
(415) 324-7000


Attorneys for Plantiffs
DEPOMED SYSTEMS, INC.
and JOHN W. SHELL


                          UNITED STATES DISTRICT COURT

                        NORTHERN DISTRICT OF CALIFORNIA
 
 
DEPOMED SYSTEMS, INC., a       )   Case No. C95-2574 VRW
California Corporation; JOHN      )   NOTICE OF DISMISSAL OF
W. SHELL,                      )   M6 PHARMACEUTICALS, INC.,
                               )   PURSUANT TO FED. R. CIV.
                               )   PROC. 41(a)(1)
                                   ---------------------------------------
          Plaintiffs,          )
                               )
v.                             )
                               )
M6 PHARMACEUTICALS, INC.,         )
a Delaware corporations;       )
DAVID BLECH,                   )
                               )
          Defendants           )
______________________________ )

     Pursuant to Federal Rule of Civil Procedure 41(a)(1), plaintiffs DEPOMED
SYSTEMS, INC. and JOHN W. SHELL hereby dismiss defandant M6 PHARMACEUTICALS,
INC., with prejudice, from this action.


DATED:   August __, 1995 HELLER, EHRMAN, WHITE & MCAULIFFE


                         By: ______________________________
                              Robert B. Hawk
                         Attorneys for Plaintiffs DEPOMED 
                         SYSTEMS, INC. and JOHN W. SHELL

                                 SCHEDULE 4.1



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

<TABLE>   
<CAPTION>
                                                                  THREE MONTHS ENDED
                          PERIOD FROM INCEPTION                        MARCH 31,
                           (AUGUST 7, 1995) TO     YEAR ENDED     ------------------- 
                            DECEMBER 31, 1995   DECEMBER 31, 1996   1996      1997
                          --------------------- ----------------- --------- ---------
<S>                       <C>                   <C>               <C>       <C>       
Weighted average common
 shares outstanding.....        2,859,993           3,285,747     3,263,158 3,354,825
Common equivalent shares
 pursuant to Staff
 Accounting Bulletin
 Nos. 55, 64 and 83.....          211,374             211,374       211,374   211,374
                                ---------           ---------     --------- ---------
Shares used in computing
 net loss per share.....        3,071,367           3,497,121     3,474,532 3,566,199
                                =========           =========     ========= =========
Shares used in computing
 pro forma net loss per
 share:
  Shares from above.....                            3,497,121     3,474,532 3,566,199
  Assumed conversion of
   preferred stock at
   the date of
   issuance.............                              815,789       815,789   878,483
                                                    ---------     --------- ---------
  Shares used in
   computing pro forma
   net loss per share...                            4,312,910     4,290,321 4,444,682
                                                    =========     ========= =========
</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       , 1997) included in
Amendment No. 1 to the Registration Statement (Form SB-2, No. 333-25445) and
related Prospectus of DepoMed, Inc. for the registration of 4,687,500 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.     
 
                                                          /s/ Ernst & Young LLP
Palo Alto, California
   
June 16, 1997     





<TABLE> <S> <C>


<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
       
<S>                             <C>                     <C>
<PERIOD-TYPE>                   3-MOS                   3-MOS
<FISCAL-YEAR-END>                          DEC-31-1996             DEC-31-1996
<PERIOD-START>                             JAN-01-1997             JAN-01-1996
<PERIOD-END>                               MAR-31-1997             MAR-31-1996
<CASH>                                         107,523                       0
<SECURITIES>                                         0                       0
<RECEIVABLES>                                  114,301                       0
<ALLOWANCES>                                         0                       0
<INVENTORY>                                          0                       0
<CURRENT-ASSETS>                               364,855                       0
<PP&E>                                         219,784                       0
<DEPRECIATION>                                  56,707                       0
<TOTAL-ASSETS>                                 536,885                       0
<CURRENT-LIABILITIES>                          777,926                       0
<BONDS>                                              0                       0
<PREFERRED-MANDATORY>                                0                       0
<PREFERRED>                                    961,259                       0
<COMMON>                                       382,250                       0
<OTHER-SE>                                    (351,729)                      0
<TOTAL-LIABILITY-AND-EQUITY>                   536,885                       0
<SALES>                                        127,039                       0
<TOTAL-REVENUES>                               127,039                       0
<CGS>                                                0                       0
<TOTAL-COSTS>                                  306,287                 234,157
<OTHER-EXPENSES>                                     0                       0
<LOSS-PROVISION>                                     0                       0
<INTEREST-EXPENSE>                               4,470                       0
<INCOME-PRETAX>                               (183,718)               (233,738)
<INCOME-TAX>                                         0                       0
<INCOME-CONTINUING>                           (183,718)               (233,738)
<DISCONTINUED>                                       0                       0
<EXTRAORDINARY>                                      0                       0
<CHANGES>                                            0                       0
<NET-INCOME>                                  (183,718)               (233,738)
<EPS-PRIMARY>                                    (0.04)                  (0.05)
<EPS-DILUTED>                                    (0.04)                  (0.05)
        

</TABLE>