UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 000-23267

DEPOMED, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

CALIFORNIA		94-3229046
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)		(I.R.S. EMPLOYER IDENTIFICATION NUMBER)

1360 O’BRIEN DRIVE MENLO PARK, CALIFORNIA 94025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

(650) 462-5900
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.

YES ý NO o

The number of issued and outstanding shares of the Registrant’s Common Stock, no par value, as of November 1, 2002 was 16,439,187.

DEPOMED, INC.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

	Balance Sheets at September 30, 2002 and December 31, 2001

	Statements of Operations for the three-month and nine-month periods ended September 30, 2002 and 2001, and for the period from inception (August 7, 1995) to September 30, 2002

	Statements of Cash Flows for the nine-month periods ended September 30, 2002 and 2001, and for the period from inception (August 7, 1995) to September 30, 2002

	Notes to Financial Statements

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 4. Controls and Procedures

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Item 6. Exhibits and Reports on Form 8-K

Signatures

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DEPOMED, INC.

(A Development Stage Company)

BALANCE SHEETS

	September 30, 2002			December 31, 2001
	(Unaudited)			(Restated)
				(See Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	9,073,730		$	5,150,088
Accounts receivable	20,197			397,277
Receivable from joint venture	1,220,527			642,793
Prepaid and other current assets	44,315			197,479
Total current assets	10,358,769			6,387,637

Property and equipment, net	1,935,875			2,065,175
Other assets	291,876			294,034
	$	12,586,520		$	8,746,846

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	3,717,875		$	2,327,381
Accrued compensation	463,167			446,515
Other accrued liabilities	1,298,339			343,667
Payable to joint venture	2,424,536			845,845
Capital lease obligation, current portion	14,303			13,984
Long-term debt, current portion	487,139			542,251
Other current liabilities	—			137,718
Total current liabilities	8,405,359			4,657,361

Capital lease obligation, non-current portion	25,392			4,216
Long-term debt, non-current portion	466,850			783,416
Promissory note from related party, non-current portion	6,007,914			4,779,054

Preferred stock, no par value; 5,000,000 shares authorized; Series A convertible exchangeable preferred stock: 25,000 shares designated, 12,015 shares issued and outstanding at September 30, 2002 and December 31, 2001	12,015,000			12,015,000

Commitments

Shareholders’ deficit:
Common stock, no par value, 100,000,000 shares authorized; 13,973,309 and 11,530,168 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively	56,664,872			36,109,124
Deficit accumulated during the development stage	(70,998,867		)	(49,601,325		)
Total shareholders’ deficit	(14,333,995		)	(13,492,201		)
	$	12,586,520		$	8,746,846

See accompanying notes to Financial Statements.

DEPOMED, INC.

(A Development Stage Company)

STATEMENTS OF OPERATIONS

(Unaudited)

													Period From Inception (August 7, 1995) to September 30 2002



	*Three Months Ended September 30,*						Nine Months Ended September 30,
	*2002*			*2001*			*2002*			*2001*
				(Restated)(1)						(Restated)(1)			(Restated)(1)

Revenue:
Collaborative agreements	$	171		$	529,516		$	151,684		$	1,200,788		$	3,522,048
Collaborative agreements with affiliates	139,756			679,145			1,220,527			1,483,256			5,101,019

Total revenue	139,927			1,208,661			1,372,211			2,684,044			8,623,067

Operating expenses:
Research and development	6,251,867			4,392,032			15,788,447			11,239,508			45,916,402
General and administrative	2,166,831			576,676			4,116,928			1,814,391			14,023,702
Purchase of in-process research and development	—			—			—			—			298,154

Total operating expenses	8,418,698			4,968,708			19,905,375			13,053,899			60,238,258

Loss from operations	(8,278,771		)	(3,760,047		)	(18,533,164		)	(10,369,855		)	(51,615,191		)

Other income (expenses):
Equity in loss of joint venture	(428,293		)	(875,852		)	(2,435,667		)	(2,327,564		)	(19,811,703		)
Interest income (expense), net	(136,470		)	46,680			(428,711		)	(15,455		)	428,027

Total other income (expenses)	(564,763		)	(829,172		)	(2,864,378		)	(2,343,019		)	(19,383,676		)

Net loss	$	(8,843,534	)	$	(4,589,219	)	$	(21,397,542	)	$	(12,712,874	)	$	(70,998,867	)

Basic and diluted net loss per share	$	(0.55	)	$	(0.40	)	$	(1.52	)	$	(1.30	)

Shares used in computing basic and diluted net loss per share	16,224,763			11,526,835			14,033,854			9,779,351

(1)See Note 1 of the Notes to Financial Statements

See accompanying notes to Financial Statements.

DEPOMED, INC.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

(Unaudited)

							Period From Inception (August 7, 1995) to September 30, 2002


	Nine Months Ended September 30,
	2002			2001
Operating Activities
Net loss	$	(21,397,542)		$	(12,712,874)		$	(70,998,867)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in loss of joint venture	2,435,667			2,327,564			19,811,703
Depreciation and amortization	541,052			433,418			2,145,768
Accrued interest expense on notes	371,884			151,456			649,365
Amortization of deferred compensation	—			24,745			947,250
Value of stock options issued for services	17,410			37,902			227,197
Purchase of in-process research and development	—			—			298,154
Changes in assets and liabilities:
Accounts receivable	377,080			(579,014		)	(20,197		)
Accounts receivable from joint venture	(577,734		)	(246,832		)	(1,220,527		)
Other current assets	153,164			40,285			(44,315		)
Other assets	2,158			(277		)	(292,034		)
Accounts payable and other accrued liabilities	2,345,166			566,512			5,016,214
Accrued compensation	16,652			94,347			395,691
Other current liabilities	(137,718		)	(103,928		)	—
Net cash used in operating activities	(15,852,761		)	(9,966,696		)	(43,084,598		)

Investing Activities
Investment in joint venture	(856,976		)	(2,136,040		)	(17,387,167		)
Expenditures for property and equipment	(372,881		)	(1,186,372		)	(3,727,197		)
Purchases of marketable securities	—			(4,438,627		)	(15,217,066		)
Maturities of marketable securities	—			4,025,126			15,214,109
Net cash used in investing activities	(1,229,857		)	(3,735,913		)	(21,117,321		)

Financing Activities
Payments on capital lease obligations	(17,376		)	(29,106		)	(311,694		)
Proceeds on equipment loan	—			1,155,370			1,947,006
Payments on equipment loan	(371,678		)	(161,307		)	(880,617		)
Proceeds from issuance of promissory notes to related parties	856,976			2,136,040			6,422,167
Payments on notes	—			—			(1,000,000		)
Payments on shareholder loans	—			—			(294,238		)
Proceeds on issuance of preferred stock	—			—			12,015,000
Proceeds on issuance of common stock, net of issuance costs	20,538,338			11,330,528			55,378,025
Net cash provided by financing activities	21,006,260			14,431,525			73,275,649

Net increase in cash and cash equivalents	3,923,642			728,916			9,073,730
Cash and cash equivalents at beginning of period	5,150,088			3,878,354			—
Cash and cash equivalents at end of period	$	9,073,730		$	4,607,270		$	9,073,730

See accompanying notes to Financial Statements.

DEPOMED, INC.

(A Development Stage Company)

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

These unaudited condensed financial statements and the related footnote information of DepoMed, Inc. (the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, the accompanying interim unaudited condensed financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. The results for the interim period ended September 30, 2002 are not necessarily indicative of results to be expected for the entire year ending December 31, 2002 or future operating periods.

The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date and has been changed to reflect the restatement described below. The balance sheet does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K/A for the year ended December 31, 2001 filed with the Securities and Exchange Commission.

As of September 30, 2002, the Company had approximately $9,074,000 in cash and working capital of $1,953,000. The Company had accumulated net losses of $70,999,000 as of September 30, 2002. In the course of its development activities, the Company expects such losses to continue over the next several years. Management plans to continue to finance the operations with a combination of equity and debt financing and revenue from corporate alliances and technology licenses. 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. As more fully discussed in the Management’s Discussion and Analysis, the Company expects its existing capital resources, along with the $18.0 million it expects to receive in connection with the settlement of its litigation against Bristol-Myers Squibb, will permit it to meet its capital and operational requirements through at least December 2003.

Restatement of Financial Information

The accompanying balance sheet as of December 31, 2001 has been restated to present the Company’s Series A convertible exchangeable preferred stock (“Series A Preferred Stock”), with a carrying amount of $12,015,000, outside of permanent shareholders’ equity, as a result of the application of Emerging Issues Task Force (EITF) Topic No. D-98, Classification of and Measurement of Redeemable Securities (Topic No. D-98). The Company issued the Series A Preferred Stock in connection with the formation of its joint venture, DepoMed Development, Ltd. (“DDL”), with Elan Corporation, plc, Elan Pharma International, Ltd. and Elan International Services, Ltd. (together “Elan”). Shares of the Series A Preferred Stock are exchangeable for a portion of the Company’s investment in DDL. The effect of this restatement is to reduce total shareholders’ equity by $12,015,000 for the periods presented. See Note 9 of the Notes to Financial Statements, Redeemable Preferred Stock and Shareholders’ Equity, Series A Preferred Stock.

Net loss per common share for the three- and nine-month periods ended September 30, 2001 has been restated to eliminate the 7% dividends previously accrued on the Series A Preferred Stock and included in the net loss applicable to common shareholders. As the dividends are only convertible into DepoMed’s common shares, the amounts previously recorded as dividends represent adjustments to the conversion price that are accounted for under EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios (Issue No. 98-5). Since the commitment date fair market value of the maximum number of common shares that could be issued pursuant to conversion of the Series A Preferred Stock is less than the proceeds of issuance of the Series A Preferred Stock, the Series A Preferred Stock does not contain a “beneficial conversion feature” subject to recognition pursuant to Issue No. 98-5. See Note 9 of the Notes to Financial Statements, Redeemable Preferred Stock and Shareholders’ Equity, Series A Preferred Stock. The effect of the elimination of the dividends and the related effect on net loss per common share are as follows:

	Three Months Ended September 30, 2001			Nine Months Ended September 30, 2001			Period From Inception to September 30, 2001
As previously reported:
Net loss	$	(4,589,219	)	$	(12,712,874	)	$	(44,714,160	)
Preferred dividend	(233,000		)	(677,000		)	(1,484,000		)
Net loss applicable to common shareholders	$	(4,822,219	)	$	(13,389,874	)	$	(46,198,160	)
Basic and diluted net loss per common share	$	(0.42	)	$	(1.37	)

As restated:
Net loss	$	(4,589,219	)	$	(12,712,874	)	$	(44,714,160	)
Basic and diluted net loss per share	$	(0.40	)	$	(1.30	)

2. SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Revenue related to collaborative research agreements with corporate partners and the Company’s joint venture is recognized as the expenses are incurred for each contract. The Company is required to perform research activities as specified in each respective agreement based on commercially reasonable efforts, and the Company is reimbursed based on the costs associated with supplies and the hours worked by employees on each specific contract. Nonrefundable milestone payments are recognized pursuant to collaborative agreements upon the achievement of specified milestones where no further obligation to perform exists under that milestone provision of the arrangement.

Valuation of Exchange Option of Series A Convertible Exchangeable Preferred Stock

The Company periodically monitors the redemption value of the Series A Preferred Stock, as measured by 30.1% of the fair value of the joint venture that Elan would receive, less the cash payable to the Company upon exchange by Elan. If and when the redemption value of the Series A Preferred Stock exceeds its then current carrying value, the Company will accrete the carrying value of the Series A Preferred Stock to the redemption value and recognize a corresponding dividend to the Series A preferred shareholder. The Company will recognize subsequent increases or decreases in redemption value of the Series A Preferred Stock; however, decreases will be limited to amounts previously recorded as increases, so as not to reduce the carrying amount of the Series A Preferred Stock below the original basis of $12,015,000. The determination of fair value of the joint venture requires the Company to make estimates and assumptions that relate, in part, to the potential success of the joint venture’s ongoing research and development activities. There is inherent risk in making such assumptions and, as a result, actual fair value may differ from such estimates of fair value.

3. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

The Company considers all highly liquid investments with an original maturity (at date of purchase) of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market instruments. The Company places its cash and cash equivalents with high quality, U.S. financial institutions and, to date, has not experienced losses on any of its balances. The Company records cash and cash equivalents at amortized cost, which approximates the fair value.

4. NET LOSS PER COMMON SHARE

Net loss per common share is computed using the weighted-average number of shares of common stock outstanding. Common stock equivalent shares from outstanding stock options, warrants and other convertible securities and convertible loans are not included as their effect is antidilutive.

5. COMPREHENSIVE LOSS

Total comprehensive loss for the three and nine months ended September 30, 2002 is equivalent to net loss. For the three and nine months ended September 30, 2001, total comprehensive loss approximates net loss and includes unrealized gains and losses on marketable securities.

6. RECENTLY ISSUED ACCOUNTING STANDARDS

In October 2001, the Financial Accounting Standards Board (FASB) issued Financial Reporting Standard No. 144 (“FAS 144”), Accounting for the Impairment or Disposal of Long-Lived Assets. FAS 144 supersedes Financial Reporting Standard No. 121 (“FAS 121”), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The primary objectives of FAS 144 are to develop one accounting model based on the framework established in FAS 121 for long-lived assets to be disposed of by sale, and to address significant implementation issues. The adoption of FAS 144 on January 1, 2002 had no impact on the Company’s financial position and results of operations.

In July 2001, the EITF issued Topic No. D-98, Classification and Measurement of Redeemable Securities. Topic No. D-98 clarifies Rule 5-02.28 of Regulation S-X and requires preferred securities that are redeemable for cash or other assets to be classified outside of permanent equity if the redemption of the securities is outside of the issuer’s control. The application of Topic No. D-98 required that the Company classify its Series A Preferred Stock, in the amount of $12,015,000, outside of permanent equity. The effect of this reclassification is to reduce total shareholders’ equity by $12.0 million.

In June 2002, the FASB issued Financial Accounting Standard No. 146 (FAS 146), Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for restructuring, discontinued operation, plant closing, or other exit or disposal activity. FAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. FAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of FAS 146 is not expected to have a significant impact on the Company’s financial position and results of operations.

7. RESEARCH ARRANGEMENTS

Elan Corporation, plc

In 1999, the Company entered into an agreement to form a joint venture, DDL, with Elan to develop products using drug delivery technologies of Elan and DepoMed, Inc. In January 2000, the definitive agreements were signed to form DDL, a Bermuda limited liability company, which is initially owned 80.1% by DepoMed and 19.9% by Elan. DDL funds its research through capital contributions from its partners based on the partners’ ownership percentage. DepoMed is responsible, at its sole discretion, for funding 80.1% of DDL’s cash requirements up to a maximum of $8,010,000 and Elan is responsible, at its sole discretion, for funding 19.9% of DDL’s cash requirements up to a maximum of $1,990,000 through January 21, 2002. On a quarterly basis, the Elan and DepoMed directors of DDL review and mutually agree on the next quarter’s funding of DDL’s cash needs. DDL does not have any fixed assets or employees and its primary focus is to conduct research and development for potential products using the intellectual property of Elan and DepoMed. In October 2002, DepoMed and Elan finalized an agreement extending the funding term through September 30, 2002. Work performed in the first three quarters of 2002 totaled $1,221,000, and $1,221,000 was receivable from DDL at September 30, 2002.

While the Company owns 80.1% of the outstanding capital stock (and 100% of the outstanding common stock) of DDL, Elan and its subsidiaries have retained significant minority investor rights that are considered “participating rights” as defined in Emerging Issues Task Force Consensus No. 96-16. For example, Elan has 50% of voting rights on management and research committees that approve all business plans, operating budgets and research plans. Each matter brought to the respective committee must have the approval of at least one of the Elan directors. Therefore, Elan has the ability to veto any matter that comes before the committees. Accordingly, DepoMed does not consolidate the financial statements of DDL, but instead accounts for its investment in DDL under the equity method of accounting.

For the three and nine months ended September 30, 2002 and for the period from inception (January 7, 2000) to September 30, 2002, DDL recognized a net loss of approximately $535,000, $3,041,000 and $24,734,000, respectively. For the three and nine months ended September 30, 2001, DDL recognized a net loss of approximately $1,093,000 and $2,906,000, respectively. The net loss from formation to September 30, 2002 includes a $15,000,000 payment by DDL to Elan for the acquisition of in-process research and development rights related to certain Elan drug delivery technologies. To date, DDL has not recognized any revenue. DepoMed's equity in the loss of DDL is based on 100% of DDL’s losses (since DepoMed owns 100% of the DDL voting common stock), less the amounts funded by Elan. DepoMed recognized 80.1% of DDL’s loss, or approximately $428,000, $2,436,000 and $19,812,000 for the three and nine months ended September 30, 2002, and for the period from inception to September 30, 2002, respectively.

Biovail Laboratories Incorporated

In May 2002, the Company entered into a development and license agreement granting Biovail Laboratories Incorporated (“Biovail”) an exclusive license in the United States and Canada to manufacture and market Metformin GR. Under the terms of the agreement, the Company is responsible for completing the clinical development program in support of Metformin GR. The agreement provides for a $25.0 million milestone payment to the Company upon approval by the U.S. Food and Drug Administration and further provides for royalties on net sales of Metformin GR. Biovail has an option to reduce certain of the royalties for a one-time payment to the Company of $35.0 million. The Company has an option to have Biovail assume Metformin GR research and development expenses in return for a reduction in royalties and the one-time $35.0 million optional payment to be paid by Biovail.

The transaction was subject to review by U.S. antitrust regulatory authorities, and the review period expired on July 8, 2002 without objection by the regulatory authorities.

In July 2002, Biovail purchased approximately 2.5 million shares and received two options to purchase additional shares of the Company’s common shares in an amount sufficient for Biovail to hold 20% of the Company’s common stock. See Note 9 of the Notes to Financial Statements, Redeemable Preferred Stock and Shareholders’ Equity.

8. COMMITMENTS AND CONTINGENCIES

Elan Promissory Note

In connection with the formation of DDL, Elan made a loan facility available to the Company for up to $8,010,000 to support DepoMed’s 80.1% share of the joint venture’s research and development costs pursuant to a convertible promissory note issued by DepoMed to Elan. The note has a six-year term and bears interest at 9% per annum, compounded semi-annually, on any amounts borrowed under the facility. At Elan’s option, the note is convertible into the Company’s common stock. An anti-dilution provision of the note was triggered by the Company’s March 2002 financing (See Note 9 of the Notes to Financial Statements, Redeemable Preferred Stock and Shareholders’ Equity, Private Placements), which adjusted the price at which the amount borrowed under the facility and the accrued interest convert into the Company’s common stock from $10.00 per share to $9.07 per share. Since the adjusted conversion price was still greater than the fair market value of the common stock on the date of the execution of the loan facility, there was no beneficial conversion feature triggered. The funding term of the loan expired on January 21, 2002; however, in October 2002, DepoMed and Elan agreed to extend the funding term through September 30, 2002. In the three months ended September 30, 2002, the Company did not draw on the facility. In the nine months ended September 30, 2002, the Company borrowed approximately $857,000 under the facility. As of September 30, 2002, a total of $6,008,000 was outstanding on the note, including $636,000 of accrued interest, and was convertible into 662,394 shares of the Company’s common stock.

Equipment Financing Credit Facility

In March 2001, the Company entered into a secured equipment financing credit facility. The credit facility allowed the Company to finance up to $2,000,000 of equipment and leasehold improvements purchased from August 2000 through December 31, 2001. In 2001, the Company utilized approximately $1,347,000 of the credit facility and the unused portion of $653,000 expired on December 31, 2001. Loans under the facility were collateralized initially by a security interest in all of the Company’s assets until the Company completed one or more financings of an aggregate of at least $10,000,000. As a result of the financing completed in June 2001, the security interest in the Company’s assets was released in March 2002. The financed equipment will serve as collateral for the remaining duration of the loans.

9. REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY

Private Placements

In March 2002, the Company completed a private placement of 2,300,000 shares of common stock at $3.83 per share with net proceeds of $8,086,000. Additionally, the Company issued warrants to a placement agent to purchase 121,981 shares of common stock at $4.875 per share. The warrants are exercisable until March 2006. The value of the warrants has been accounted for as offering costs with offsetting entries in shareholders’ equity.

In July 2002, Biovail purchased 2,465,878 shares of the Company’s common stock at $5.00 per share. Additionally, Biovail received a one-year option to purchase up to 821,959 shares of the Company’s common stock at $5.125 per share, subject to a call provision if the common stock price exceeds $6.50 for 20 out of 30 consecutive trading days anytime after November 6, 2002. Biovail also received a three-year option to purchase additional shares of the Company’s common stock in an amount sufficient for Biovail to hold 20% of the Company’s common stock following exercise of the option at an exercise price initially equal to $5.00 per share and increasing at 20% per year, compounded monthly.

Series A Preferred Stock

In January 2000, the Company issued 12,015 shares of Series A Preferred Stock to Elan to fund its 80.1% share of the initial capitalization of DDL. At Elan’s option, the Series A Preferred Stock is convertible into the Company’s common stock or may be exchanged for a 30.1% interest in DDL. Because of this exchange feature, the Company has classified its Series A Preferred Stock, in the amount of $12,015,000, outside of permanent equity at December 31, 2001, in accordance with EITF Topic No. D-98. If Elan elects to exchange the Series A Preferred Stock for a 30.1% interest in DDL, Elan would also be required to reimburse DepoMed for 30.1% of DDL’s historical losses. The Company is currently in discussions with Elan regarding Elan’s termination the relevant exchange right included in the Series A Preferred Stock agreement. If the Company is successful in negotiating the termination of the exchange right, the Series A Preferred Stock will be reclassified to permanent equity. Similarly, if Elan elects to convert the Series A Preferred Stock into the Company’s common stock, $12,015,000 will be reclassified to permanent equity.

The Series A Preferred Stock accrues a dividend of 7% per annum, compounded semi-annually and payable in shares of Series A Preferred Stock. The Series A Preferred Stock dividend is convertible at anytime after January 2002 into the Company’s common stock. The original conversion price of the Series A Preferred Stock was $12.00; however, as a result of the Company’s March 2002 financing, the conversion price has been adjusted to $10.66 per share. As the preferred dividends are only convertible into DepoMed common stock, the amounts calculated as dividends are accounted for as adjustment to the conversion price following EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion. Since the commitment date fair market value of the maximum number of common shares that could be issued pursuant to conversion of the Series A Preferred Stock is less than the proceeds of issuance of the Series A Preferred Stock, the Series A Preferred Stock does not contain a “beneficial conversion feature” subject to recognition pursuant to Issue No. 98-5.

10. SUBSEQUENT EVENTS

Research Arrangement

In October 2002, the Company signed an agreement with ActivBiotics, Inc. to begin feasibility studies with ActivBiotics’ antibiotic compound, rifalazil. Under the agreement, ActivBiotics will fund the Company’s research and development expenses related to the feasibility studies.

Patent Litigation Settlement

In November 2002, the Company entered into an agreement in principle with Bristol-Myers Squibb Company ("Bristol-Myers") related to the settlement of litigation with Bristol-Myers. The agreement provides for a one-time payment of $18.0 million to be made by Bristol-Myers to the Company. As set forth in the agreement, the Company and Bristol-Myers will release all claims in the lawsuit against each other and grant to each other a limited non-exclusive royalty free license. The license that Bristol-Myers will obtain from the Company will extend to certain current and future products.

Elan Agreement

As a result of the sale of securities to Biovail in July 2002, Elan had the right to terminate the technology agreement between Elan and DDL, which in turn would result in Elan's ability to accelerate the payment of the promissory note due from the Company to Elan. In November 2002, the Company and Elan entered into an agreement whereby Elan waived its right to terminate the technology license from Elan to DDL. As a result of the waiver, Elan has no right to accelerate the Company's payment obligation under the convertible promissory note issued to Elan in January 2000.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING INFORMATION

Statements made in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q that are not statements of historical fact are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements include, but are not necessarily limited to, those relating to:

• results and timing of our clinical trials, including the results of the Metformin GR and Ciprofloxacin GR trials and publication of those results;

• our ability to obtain a marketing partner for Ciprofloxacin GR product; and

• our plans to develop other product candidates.

Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in the “ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS” section and elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations included with the company’s Annual Report on Form 10-K/A for the year ended December 31, 2001. We are not obligated to update or revise these forward-looking statements to reflect new events or circumstances.

ABOUT THE COMPANY

We are a development stage company engaged in the development of new and proprietary oral drug delivery technologies. Our primary oral drug delivery system is the patented Gastric Retention System (the “GR 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, on a continuous, controlled release basis. By incorporation into the GR System, a drug currently taken two or three times a day may be administered only once a day. At present, several drug compounds incorporated in the GR System are in advanced clinical trial development. In January 2002, a patent on our GR System was issued, which expands the coverage of our technology for the controlled delivery of a broad range of drugs from a gastric retained polymer matrix tablet to maximize therapeutic benefits. Our intellectual property position includes five issued patents and twelve patent applications pending in the United States. We have also developed the Reduced Irritation System (the “RI System”), (together with the GR System, the “DepoMed Systems”) which is designed to provide for significant reduction in local upper gastrointestinal irritation from the effects of certain drugs.

In this Quarterly Report on Form 10-Q, the “company,” “DepoMed,” “we,” “us,” and “our,” refer to DepoMed, Inc.

We develop proprietary products utilizing our technology internally, as well as in collaboration with pharmaceutical and biotechnology companies. Regarding our collaborative programs, we apply our technology to a partner’s compound and from these collaborations we expect to receive research and development funding, milestone payments, license fees and royalties. For our internal development programs, we apply our proprietary technology to existing drugs and fund development through Phase II clinical trials. With the Phase II clinical trial results, we generally seek a collaborative partner for marketing and sales, as well as to complete the funding of the

clinical trials. We also expect to receive milestone payments, license fees and royalties from these later stage collaborations.

We have internally developed a potential once-daily metformin product for Type II diabetes, Metformin GR™, which is currently in pivotal Phase III human clinical trials. In May 2002, we entered into an agreement with Biovail Laboratories Incorporated (“Biovail”) granting Biovail an exclusive license in the United States and Canada to manufacture and market our Metformin GR. Under the agreement, we are responsible for completing the clinical development program in support of Metformin GR. The agreement provides for a $25.0 million milestone payment to us upon FDA approval of the product and further provides for royalties on net sales of Metformin GR. Biovail has an option to reduce certain of the royalties for a one-time payment to us of $35.0 million. If we do not continue to fund development costs of Metformin GR, Biovail has the right to assume that expense in return for a reduction in royalties and the one-time $35.0 million optional payment to be paid by Biovail. The agreement was subject to a 30-day review period by U.S. antitrust regulatory authorities and became effective in July 2002.

In July 2002, we issued 2,465,878 shares of our common stock to Biovail at $5.00 per share, for net proceeds of approximately $12,264,000. Additionally, Biovail received an option to purchase up to 821,959 shares of our common stock at $5.125 per share, subject to a call provision if the common stock price exceeds $6.50 for 20 our of 30 consecutive trading days anytime after November 6, 2002. Biovail also received a three-year option to purchase additional shares of our common stock in an amount sufficient for Biovail to hold 20% of our common stock following exercise of the option at an exercise price initially equal to $5.00 per share and increasing at 20% per year, compounded monthly.

In January 2002, a broad patent covering the GR System was issued. We subsequently filed and served a complaint against Bristol-Myers claiming that a Bristol-Myers’ metformin product, Glucophage(R) XR, infringes our United States Patent No. 6,340,475, as well as other matters set forth in the complaint. On November 7, 2002, we entered into an agreement in principle with Bristol-Myers related to the settlement of the litigation providing for a one-time payment of $18.0 million to be made by Bristol-Myers to us. Both parties will release all claims in the lawsuit against each other and grant to each other a limited non-exclusive royalty free license, as set forth in the agreement. The license that Bristol-Myers will obtain from us in the agreement will extend to certain current and future products.

In June 2002, we completed a Phase II human clinical trial with an internally developed once-daily formulation of the antibiotic drug ciprofloxacin, called Ciprofloxacin GR™, for urinary tract infections. Our formulation was compared with CIPRO®, a currently marketed ciprofloxacin HCl immediate release product that is taken twice per day. Both treatments were comparably effective in eradication of causative organisms and resolution of clinical signs and symptoms. In addition, patients treated with Ciprofloxacin GR reported fewer gastrointestinal adverse effects compared to the patients treated with CIPRO. These results were consistent with reports of gastrointestinal adverse effects in our Phase I trial in 2001. We are currently in discussions with potential marketing partners for this product and we are also considering whether to initiate Phase III trials.

In October 2002, we signed an agreement with ActivBiotics, Inc. to begin feasibility studies to develop a controlled-release oral tablet which delivers ActivBiotics’ broad-spectrum antibiotic, rifalazil, to the gastrointestinal tract.

In addition, we are developing other product candidates expected to benefit from incorporation into our drug delivery systems. For example, we successfully completed a Phase I clinical trial of the drug furosemide incorporated into the GR System for cardiovascular indications in September 2002. Further, we have begun a feasibility study of a combination product comprising our Metformin GR once-daily formulation of Metformin with a once-daily sulfonylurea for Type II diabetes.

In November 1999, we entered into an agreement to form a joint venture with Elan Corporation, plc, Elan Pharma International, Ltd. and Elan International Services, Ltd. (together “Elan”) to develop products using drug delivery technologies and expertise of both Elan and DepoMed. In January 2000, the definitive agreements were signed to form this joint venture, DepoMed Development, Ltd. (“DDL”), a Bermuda limited liability company. DDL

is initially owned 80.1% by DepoMed and 19.9% by Elan. DepoMed began subcontract development work for DDL in January 2000 and DDL’s first product candidate successfully completed Phase I clinical trials in the first quarter of 2001. Patent applications have been filed for this product and the product rights are available to a potential marketing partner for further development. DDL’s second product candidate successfully completed Phase I clinical trials in the first quarter of 2002 and DDL’s third product candidate had been in preclinical testing. However, as of August 2002, the development of these products has been stopped. We are currently discussing an agreement with Elan relating to the dissolution of DDL that would grant to us rights to the product candidates developed in the joint venture, subject to a royalty payment to Elan in the event that any of those products are commercialized. If we fail to reach mutually agreeable terms with Elan regarding the dissolution of the joint venture, we will not have rights to develop those products. As a result of ongoing negotiations, we are currently unable to determine the full impact or timing of a termination of our joint venture with Elan. As of September 30, 2002, the amount payable to DDL from DepoMed was $2,425,000 and the amount receivable to DepoMed from DDL was $1,221,000. In November 2002, all outstanding DDL payables and receivables were respectively paid and received. Also in November 2002, we reached an agreement whereby Elan waived its right to terminate the technology license from Elan to DDL that Elan had as a result of the sale of securities to Biovail in July 2002. As a result of the waiver, Elan has no right to accelerate our payment obligation under the convertible promissory note we issued to them in January 2000.

Future clinical progress of our products depends primarily on the result of each ongoing study. There can be no assurance that a clinical trial will be successful or that the product will gain regulatory approval. For a more complete discussion of the risks and uncertainties associated with completing development of a potential product, see the section entitled “Additional Factors that May Affect Future Results” elsewhere in this Form 10-Q.

In addition to research and development conducted on our own behalf and through collaborations with pharmaceutical partners, our activities since inception (August 7, 1995) have included establishing our offices and research facilities, recruiting personnel, filing patent applications, developing a business strategy and raising capital. To date, we have received only limited revenue, all of which has been from these collaborative research and feasibility arrangements. We intend to continue investing in the further development of our drug delivery technologies and the DepoMed Systems. We will need to make additional capital investments in laboratories and related facilities. As additional personnel have been hired in 2002 and our potential products have proceeded through the development process, expenses have increased from their 2001 levels and can be expected to continue to increase from their 2002 levels.

DepoMed has generated a cumulative net loss of approximately $70,999,000 for the period from inception through September 30, 2002. Of this loss, $19,812,000 is attributable to our share of the equity in the net loss of DDL.

Critical Accounting Policies

Valuation of Exchange Option of Series A Preferred Stock

We periodically monitor the redemption value of the Series A preferred stock, as measured by 30.1% of the fair value of the joint venture that Elan would receive, less the cash payable to us, upon exchange by Elan. If and when the redemption value of the Series A Preferred Stock exceeds its then current carrying value, we will accrete the carrying value of the Series A preferred stock to the redemption value and recognize a corresponding dividend to the Series A preferred shareholder. We will recognize subsequent increases or decreases in redemption value of the Series A preferred stock; however, decreases will be limited to amounts previously recorded as increases, so as not to reduce the carrying amount of the Series A preferred stock below the original basis of $12,015,000. The determination of fair value of the joint venture requires us to make estimates and assumptions that relate, in part, to the potential success of the joint venture’s ongoing research and development activities. There is inherent risk in making such assumptions and, as a result, actual fair value may differ from such estimates of fair value.

Restatement of Financial Information

The accompanying balance sheet as of December 31, 2001 has been restated to present our Series A Series A Preferred Stock, with a carrying amount of $12,015,000, outside of permanent shareholders’ equity, as a result of the adoption of Emerging Issues Task Force (EITF) Topic No. D-98, Classification of and Measurement of Redeemable Securities (Topic No. D-98). We issued the Series A

Preferred Stock in connection with the formation of DDL, our joint venture with Elan. Shares of the Series A Preferred Stock are exchangeable for a portion of our investment in DDL. The effect of this restatement is to reduce total shareholders’ equity by $12,015,000 for the periods presented. See Note 9 of the Notes to Financial Statements, Redeemable Preferred Stock and Shareholders’ Equity, Series A Preferred Stock.

Net loss per common share for the three- and nine-month periods ended September 30, 2001 has been restated to eliminate the 7% dividends previously accrued on the Series A Preferred Stock and included in the net loss applicable to common shareholders. As the dividends are only convertible into our common stock, the amounts previously recorded as dividends represent adjustments to the conversion price that are accounted for under EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios (Issue No. 98-5). Since the commitment date fair market value of the maximum number of common shares that could be issued pursuant to conversion of the Series A Preferred Stock is less than the proceeds of issuance of the Series A Preferred Stock, the Series A Preferred Stock does not contain a “beneficial conversion feature” subject to recognition pursuant to Issue No. 98-5. This restatement does not affect net loss for any periods previously reported. The effect of the restatement to eliminate the dividends is as follows:

	Three Months Ended September 30, 2001			Nine Months Ended September 30, 2001			Period From Inception to September 30, 2001
As previously reported:
Net loss	$	(4,589,219	)	$	(12,712,874	)	$	(44,714,160	)
Preferred dividend	(233,000		)	(677,000		)	(1,484,000		)
Net loss applicable to common shareholders	$	(4,822,219	)	$	(13,389,874	)	$	(46,198,160	)
Basic and diluted net loss per common share	$	(0.42	)	$	(1.37	)

As restated:
Net loss	$	(4,589,219	)	$	(12,712,874	)	$	(44,714,160	)
Basic and diluted net loss per share	$	(0.40	)	$	(1.30	)

RESULTS OF OPERATIONS

Three and Nine Months Ended September 30, 2002 and 2001

Revenues

Revenue for the three months ended September 30, 2002 and 2001 was $140,000 and $1,209,000, respectively. In the three-month periods ended September 30, 2002 and 2001, revenue from collaborative agreements decreased to $200 in 2002 from $530,000 in 2001 and revenue from our joint venture also decreased to $140,000 from $679,000 in 2001. Revenue for the nine months ended September 30, was $1,372,000 in 2002, compared to $2,684,000 in the same period of 2001. In the nine-month periods ended September 30, 2002 and 2001, revenue from collaborative agreements decreased to $152,000 in 2002 from $1,201,000 in 2001. The decrease in revenue from year to year was due to decreased work performed for an undisclosed collaborative partner while it evaluated the clinical status of the drug program. We currently do not expect to receive any future revenues to fund the development program from the undisclosed collaborative partner. As of August 2002, research and development services for our joint venture have been discontinued, and we are currently in discussions with Elan regarding the dissolution of the joint venture. This accounts for the decrease in revenue from our joint venture from year to year. Development work performed for DDL has been funded by the joint venture partners at the partners’ pro rata ownership percentage. While the original funding period terminated on January 21, 2002, we and Elan agreed to extend the funding period through September 2002.

Research and Development Expense

Research and development expense increased to $6,252,000 and $15,788,000 for the three and nine months ended September 30, 2002, from $4,392,000 and $11,240,000 in the same periods of 2001. The increase from the third quarter of 2001 to 2002 was primarily due to expense of $1,385,000 for clinical trials with DepoMed’s proprietary products, including two Phase III trials with Metformin GR which began in the third quarter of 2001 and

2002, respectively, as well as a Phase II trial with Ciprofloxacin GR which began in fourth quarter of 2001. Other increases included $329,000 related to increased salaries and the hiring of additional employees and $83,000 in consulting services, including services to bring our laboratory up to GMP specifications. The increase in the nine-month periods ended September 30, 2002 relative to the comparable period in 2001 was due primarily to clinical trial expense of $2,894,000, expense related to employees of $997,000 and $303,000 related to consulting services as described above.

Our research and development expenses currently include costs for scientific personnel, supplies, equipment, outsourced clinical and other research activities, consultants, patent filings, depreciation, utilities, administrative expenses and an allocation of corporate costs. The scope and magnitude of future research and development expenses cannot be predicted at this time for our product candidates in the early phases of research and development as it is not possible to determine the nature, timing and extent of clinical trials and studies, the FDA’s requirements for a particular drug and the requirements and level of participation, if any, by potential partners. As potential products proceed through the development process, each step is typically more extensive, and therefore more expensive, than the previous step. Success in development therefore, generally, results in increasing expenditures. Furthermore, our business strategy involves licensing certain of our drug candidates to collaborative partners. Depending upon when such collaborative arrangements are executed, the amount of costs incurred solely by us will be impacted. Due to the advanced stage of development of our Metformin GR program, we are able to estimate that the costs to complete the related clinical trials and studies will not exceed $22.0 million, including costs for internal project management and support. We expect to complete the Phase III clinical trials of Metformin GR by December 2003. Once these trials are successfully completed, we will be able to file a New Drug Application seeking approval from the FDA to market Metformin GR.

General and Administrative Expense

General and administrative expense for the third quarter of 2002 and 2001 was $2,167,000 and $577,000, respectively. General and administrative expense for the nine months ended September 30, 2002 was $4,117,000 compared to $1,814,000 in the same period of 2001. In the three-month periods ended September 30, 2002 and 2001, the increase was primarily due to legal expense of $1,546,000 related to the Bristol-Myers lawsuit. In the nine-month periods ended September 30, 2002 and 2001, the increase was primarily due to legal expense of $2,156,000 related to the Bristol-Myers lawsuit. We expect that general and administrative expense will increase in the future, but at a lower rate than research and development expenses.

Equity in Loss of Joint Venture

DDL was formed in the first quarter of 2000. While we own 80.1% of the outstanding capital stock (and 100% of the outstanding common stock) of DDL, Elan and its subsidiaries have retained significant minority investor rights that are considered “participating rights” as defined in the Emerging Issues Task Force Consensus No. 96-16. For example, Elan has 50% of voting rights on management and research committees that approve all business plans, operating budgets and research plans. Each matter brought to the respective committee must have the approval of at least one of the Elan directors. Therefore, Elan has the ability to veto any matter that comes before the committees. Accordingly, we do not consolidate the financials statements of DDL, but instead account for our investment in DDL under the equity method of accounting.

DDL recognized a net loss of $535,000 and $1,093,000 for the three months ended September 30, 2002 and 2001, respectively. For the nine months ended September 30, 2002 and 2001, DDL’s net loss was $3,041,000 and $2,906,000, respectively. As of August 2002, DDL has discontinued subcontracting research and development services to DepoMed, Elan and others. This accounts for the decrease in DDL’s net loss from year to year. We are currently in discussions with Elan relating to the dissolution of DDL. Our equity in the loss of DDL is based on 100% of DDL’s losses (since DepoMed owns 100% of the DDL voting common stock), less the amounts funded by Elan. Our share of the DDL’s loss was $428,000 and $876,000 for the three months ended September 30, 2002 and 2001, respectively. For the nine-month periods ended September 30, 2002 and 2001, our share of DDL’s loss was $2,436,000 and $2,328,000, respectively. We were responsible, at our sole discretion, for funding 80.1% of DDL’s cash requirements up to a maximum of $8,010,000 and Elan was responsible for funding 19.9% of DDL’s cash requirements up to a maximum of $1,990,000, through January 21, 2002. Upon formation of the joint venture, Elan made available to us a convertible loan facility to assist us in funding our portion of DDL’s losses up to a maximum

of $8,010,000 through January 21, 2002. In October 2002, Elan and DepoMed agreed to extend the funding period for research and development as well as the funding period of the loan facility through September 2002.

Interest Expense

Net interest expense was approximately $136,000 and $429,000 for the three and nine months ended September 30, 2002, compared to net interest income of $47,000 and net interest expense of $15,000 in the three and nine months ended September 30, 2001. The increase in net interest expense was primarily due to interest expense of $131,000 and $372,000 accrued on the Elan convertible loan facility for the three and nine months ended September 30, 2002, respectively, compared to $66,000 and $151,000, respectively, for the same periods of 2001. Interest on the Elan loan facility increased due to additional amounts borrowed under the facility. In 2001, net interest income also included immaterial gains realized on the sale and maturity of marketable securities.

Series A Preferred Stock Dividend

In January 2000, we issued 12,015 shares of Series A Preferred Stock at a price of $1,000 per share to fund our 80.1% share of the initial capitalization of DDL. The Series A Preferred Stock accrues a dividend of 7% per annum, compounded semi-annually and payable in shares of Series A Preferred Stock. The Series A Preferred Stock dividend is convertible at anytime after January 2002 into DepoMed’s common stock. The original conversion price of the Series A Preferred Stock was $12.00; however, as a result of our March 2002 financing, the conversion price has been adjusted to $10.66 per share. As the preferred stock dividends are only convertible into DepoMed common stock, the amounts previously recorded as dividends represent adjustments to the conversion price that are accounted for under Emerging Issues Task Force (EITF) Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios. Since the commitment date fair market value of the maximum number of common shares that could be issued pursuant to conversion of the Series A Preferred Stock is less than the proceeds of issuance of the Series A Preferred Stock, the Series A Preferred Stock does not contain a “beneficial conversion feature” subject to recognition pursuant to Issue No. 98-5.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Cash used in operating activities in the nine months ended September 30, 2002 was approximately $15,853,000, compared to approximately $9,967,000 for the nine months ended September 30, 2001. During the nine months ended September 30, 2002, the cash used in operations was due primarily to the net loss offset by our equity in the loss of the joint venture and increases in accounts payable due to increased clinical trial activity and legal fees. In 2001, the cash used in operations was due to the net loss offset by our equity in the loss of the joint venture.

Investing Activities

Cash used in investing activities in the nine months ended September 30, 2002 totaled approximately $1,230,000 and consisted of a $857,000 investment in our joint venture and $373,000 in purchases of lab equipment, leasehold improvements and office equipment. Net cash provided by investing activities in the nine months ended September 30, 2001 totaled approximately $3,736,000 and consisted of $2,136,000 investment in DDL and $1,186,000 in purchases of lab equipment, leasehold improvements and office equipment, as well as a net decrease in marketable securities of approximately $414,000. We expect that future capital expenditures may include additional product development and quality control laboratory equipment as we work towards implementation of current Good Manufacturing Practices in our laboratories.

Financing Activities

Cash provided by financing activities in the nine months ended September 30, 2002 was approximately $21,006,000, compared to $14,432,000 for the same period of 2001. In 2002, the amount consisted primarily of net proceeds of approximately $8,086,000 from a private placement completed in March 2002 for 2,300,000 shares of common stock and warrants to purchase 121,981 shares of common stock and net proceeds of approximately $12,265,000 received from a private placement completed in July 2002 for 2,465,878 shares of common stock (See

Note 9 of Notes to Financial Statements, Redeemable Preferred Stock and Shareholders’ Equity, Private Placements). Other financing included $857,000 from a credit facility provided by Elan to fund our portion of our joint venture expense and $188,000 of proceeds from the exercise of warrants and stock options. Cash provided by financing was offset by $389,000 of payments on equipment loans and capital lease obligations. In 2001, the amount provided by financing activities consisted of approximately $11,331,000 from a private placement completed in June 2001 for 2,908,922 shares of common stock and warrants to purchase 1,672,630 shares of common stock. Other financing included $2,136,000 from the credit facility provided by Elan and $1,155,000 of proceeds from the equipment financing credit facility we signed in March 2001. Cash provided by financing was offset by $190,000 of payments on equipment loans and on capital lease obligations.

Series A Preferred Stock

In January 2000, we issued 12,015 shares of Series A convertible exchangeable preferred stock to Elan to fund our 80.1% share of the initial capitalization of DDL. At Elan’s option, the Series A Preferred Stock is convertible into DepoMed’s common stock or may be exchanged for a 30.1% interest in DDL. In July 2001, the EITF issued EITF Topic No. D-98, Classification and Measurement of Redeemable Securities. Topic No. D-98 clarifies Rule 5-02.28 of Regulation S-X and requires preferred securities that are redeemable for cash or other assets to be classified outside of permanent equity if the redemption of the securities is outside of the issuer’s control. The exchange feature of our Series A Preferred Stock makes the stock subject to reclassification under Topic No. D-98. Accordingly, we classified our Series A Preferred Stock, in the amount of $12,015,000, outside of permanent equity which has resulted in a $12,015,000 increase to our Net Capital Deficiency for the periods presented. If Elan elects to exchange the Series A Preferred Stock for a 30.1% interest in DDL, Elan would also be required to reimburse DepoMed for 30.1% of DDL’s historical losses. However, we are currently in discussions with Elan regarding Elan’s termination of the relevant exchange right included in the Series A Preferred Stock agreement. If we are successful in negotiating the termination of the exchange right, the Series A Preferred Stock will be reclassified to permanent equity. Similarly, if Elan elects to convert the Series A Preferred Stock into our common stock, $12,015,000 will be reclassified to permanent equity.

Financial Condition

As of September 30, 2002, we had approximately $9,074,000 in cash and cash equivalents and working capital of $1,953,000. We anticipate that our existing capital resources, along with the $18.0 million we expect to receive in connection with the settlement of our litigation against Bristol-Myers, will permit us to meet our capital and operational requirements through at least December 2003. We base our expectations on our current operating plan, and that plan may change as a result of many factors, including the following:

• Greater than expected clinical development costs associated with our exclusive license with Biovail described below under “We are dependent on Biovail for future payments related to the development of Metformin GR.”

• Changes in the focus and direction of our research and development programs that could result in costly additional research and delay the eventual sale of our products.

• Results of clinical testing and the regulatory requirements of the FDA and comparable foreign regulatory agencies that may lead to cash outlays greater than expected.

Accordingly, we could require additional funding sooner than anticipated.

Further, our existing capital resources may not be sufficient to fund our operations until such time as we may be able to generate sufficient revenues to support our operations. To the extent that our capital resources are insufficient to meet our future capital requirements, we will have to raise additional funds to continue our development programs. We may not be able to raise such additional capital on favorable terms, or at all. If we raise additional capital by selling our equity or convertible debt securities, the issuance of such securities could result in dilution of our shareholders’ equity positions. If adequate funds are not available, we may have to curtail operations significantly, or obtain funds through entering into collaboration agreements or settlements on unattractive terms.

Recently Issued Accounting Standards

In October 2001, the Financial Accounting Standards Board (FASB) issued Financial Reporting Standard No. 144 (FAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets. FAS 144 supersedes Financial Reporting Standard No. 121 (FAS 121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The primary objectives of FAS 144 are to develop one accounting model based on the framework established in FAS 121 for long-lived assets to be disposed of by sale, and to address significant implementation issues. The adoption of FAS 144 on January 1, 2002 had no impact on our financial position and results of operations.

In July 2001, the EITF issued Topic No. D-98, Classification and Measurement of Redeemable Securities. Topic No. D-98 clarifies Rule 5-02.28 of Regulation S-X and requires preferred securities that are redeemable for cash or other assets to be classified outside of permanent equity if the redemption of the securities is outside of the issuer’s control. The application of Topic No. D-98 required that we classify our Series A convertible exchangeable preferred stock, in the amount of $12,015,000, outside of permanent equity. The effect of this reclassification is to reduce total shareholders’ equity by $12,015,000 (See Note 9 of the Notes to Financial Statements, Redeemable Preferred Stock and Shareholders’ Equity, Series A Preferred Stock).

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

We are at an early stage of development and are expecting operating losses in the future.

To date, we have had no revenues from product sales and only minimal revenues from our collaborative research and development arrangements and feasibility studies. For the years ended December 31, 2000 and 2001 and for the nine months ended September 30, 2002, we had revenues of $1.8 million, $3.7 million and $1.4 million, respectively. For the years ended December 31, 2000 and 2001 and for the nine months ended September 30, 2002, we incurred losses of $9.7 million, $17.6 million and $21.4 million, respectively. As we continue to expand our research and development efforts, we anticipate that we will continue to incur substantial operating losses for at least the next several years. Therefore, we expect our cumulative losses to increase.

We are dependent on Biovail for future payments related to development of Metformin GR.

In May 2002, we entered into an exclusive license agreement with a subsidiary of Biovail Corporation to manufacture and market Metformin GR, our most advanced product candidate, in the United States and Canada. We are responsible for completing the clinical development of Metformin GR. Biovail will not reimburse us for any of our expenses incurred in connection with the clinical development of Metformin GR. We expect the total remaining amount of development costs for Metformin GR not to exceed $22.0 million. We will not receive any payments from Biovail until the FDA approves Metformin GR for marketing in the United States, which we do not expect to occur prior to the fourth quarter of 2004. Only at that point will Biovail be required to make a $25.0 million payment to us. If we do not continue funding development costs of Metformin GR, Biovail would have the right to assume development of Metformin GR. In that event, our future payments from Biovail would be materially reduced.

Most of our revenues have been derived from our relationship with Elan, which we expect to be terminated.

We have generated all of our revenues to date through collaborative arrangements with pharmaceutical and biotechnology companies. In January 2000, we formed a joint venture with Elan Corporation, plc, Elan Pharma International, Ltd. and Elan International Services, Ltd., to develop products using drug delivery technologies and expertise of both Elan and DepoMed. For the years ended December 31, 2000 and 2001 and for the nine months

ended September 30, 2002, 99%, 58% and 89% of our total revenues, respectively, were derived from our joint venture with Elan. In August 2002, work on the joint venture’s research and development programs ceased. We are not currently performing any work for the joint venture and we are in discussions with Elan related to the dissolution of the joint venture. Accordingly, we do not expect to generate any future revenue from the joint venture.

Our quarterly operating results may fluctuate and result in a decline of our stock price.

The following factors will affect our quarterly operating results and may result in a decline or our stock price:

• variations in revenues obtained from collaborative agreements, including milestone payments, royalties, license fees and other contract revenues;

• our success or failure in entering into further collaborative relationships;

• decisions by collaborative partners to proceed or not to proceed with subsequent phases of the relationship or program;

• the timing and terms of the dissolution of our joint venture with Elan;

• the timing of any future product introductions by us or our collaborative partners;

• market acceptance of the DepoMed Systems;

• regulatory actions;

• adoption of new technologies;

• the introduction of new products by our competitors;

• manufacturing costs and capabilities;

• changes in government funding; and

• third-party reimbursement policies.

Our collaborative agreements may give rise to disputes over ownership of our intellectual property and may adversely affect the commercial success of our products.

Our strategy to continue development and commercialization of products using the DepoMed Systems requires that we enter into additional collaborative arrangements. Collaborative agreements are generally complex and contain provisions which may give rise to disputes regarding the relative rights and obligations of the parties. Such disputes can delay collaborative research, development or commercialization of potential products, or can lead to lengthy, expensive litigation or arbitration. In addition, the terms of collaborative partner agreements may limit or preclude us from developing products or technologies developed pursuant to such agreements. Moreover, collaborative agreements often take considerably longer to conclude than the parties initially anticipate, which could cause us to agree to less favorable agreement terms that delay or defer recovery of our development costs and reduce the funding available to support key programs.

We may not be able to enter into future collaborative arrangements on acceptable terms, which would harm our ability to commercialize our products. Further, even if we do enter into collaboration arrangements, it is possible that our collaborative partners may not choose to develop and make commercial sales of products using the DepoMed Systems technologies. Other factors relating to collaborations that may adversely affect the commercial success of our products include:

• any parallel development by a collaborative partner of competitive technologies or products;

• arrangements with collaborative partners that limit or preclude us from developing products or technologies;

• premature termination of a collaboration agreement; or

• failure by a collaborative partner to devote sufficient resources to the development, and commercial sales of products using the DepoMed Systems.

Our current and any future collaborative partners may pursue existing or other development-stage products or alternative technologies in preference to those being developed in collaboration with us. Our collaborative partners may also terminate partnerships or otherwise decide not to proceed with development of our products. For

example, one of our undisclosed collaborative partners recently elected to suspend indefinitely further development of a potential product we had developed for that partner.

If the settlement and release agreement related to our current lawsuit with Bristol-Myers is not completed as expected, our litigation with Bristol-Myers could continue to distract our management’s ability to focus its efforts on our business.

In January 2002, a broad patent covering the GR System was issued. We subsequently filed and served a complaint against Bristol-Myers claiming that a Bristol-Myers’ metformin product, Glucophage(R) XR, infringes our United States Patent No. 6,340,475, as well as other matters set forth in the complaint. On November 7, 2002, we entered into an agreement in principle with Bristol-Myers related to the settlement of the litigation providing for a one-time payment of $18.0 million to be made by Bristol-Myers to us. Both parties will release all claims in the lawsuit against each other and grant to each other a limited non-exclusive royalty free license, as set forth in the agreement. The license that Bristol-Myers will obtain from us under the agreement will extend to certain current and future products.

If we and Bristol-Myers fail to execute the settlement and release agreement, we may become engaged in a further dispute or additional litigation with Bristol-Myers over the terms of the agreement in principle, and the payment we expect under the agreement in principle may be delayed. If that occurs, our dispute with Bristol-Myers will continue to divert the efforts and attention of some of our key management and personnel.

We may be unable to protect our intellectual property and may be liable for infringing the intellectual property of others.

Our success will depend in part on our ability to obtain and maintain patent protection for our technologies and to preserve our trade secrets. Our policy is to file patent applications in the United States and foreign jurisdictions. We currently hold five issued United States patents and twelve United States patent applications are pending. Additionally, we are currently preparing a series of patent applications representing our expanding technologies for filing in the United States. We have also applied for patents in numerous foreign countries. Some of those countries have granted our applications and other applications are still pending. Our pending patent applications may lack priority over others’ applications or may not result in the issuance of patents. Even if issued, our patents may not be sufficiently broad to provide protection against competitors with similar technologies and may be challenged, invalidated or circumvented.

We also rely on trade secrets and proprietary know-how. We seek to protect that information, in part, through entering into confidentiality agreements with employees, consultants, collaborative partners and others before such persons or entities have access to our proprietary trade secrets and know-how. These confidentiality agreements may not be effective in certain cases, due to, among other things, the lack of an adequate remedy for breach of an agreement or a finding that an agreement is unenforceable. In addition, our trade secrets may otherwise become known or be independently developed by competitors.

Our ability to develop our technologies and to make commercial sales of products using our technologies also depends on not infringing others’ patents. We are not aware of any claim of patent infringement against us. However, if claims concerning patents and proprietary technologies arise and are determined adversely to us, we may consequently be subjected to substantial damages for past infringement if it is ultimately determined that our products infringe a third party’s proprietary rights. Any public announcements related to litigation or interference proceedings initiated or threatened against us could cause our stock price to decline.

We may need to engage in litigation in addition to our suit against Bristol-Myers to enforce any patents issued or licensed to us or to determine the scope and validity of third-party proprietary rights. Our issued or licensed patents may not be held valid by a court of competent jurisdiction. Whether or not the outcome of litigation is favorable to us, defending a lawsuit takes significant time, may be expensive and may divert management attention from other business concerns, as has been the case in our litigation with Bristol-Myers. We 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 our patent applications or other parties’ patent applications.

Adverse determinations in litigation or interference proceedings could require us to seek licenses which may not be available on commercially reasonable terms, or at all, or subject us to significant liabilities to third parties.

It is difficult to develop a successful product. If we do not develop a successful product we will not be able to raise additional funds.

The drug development process is costly, time-consuming and subject to unpredictable delays or failure. Before we or others make commercial sales of products using the DepoMed Systems, we, our current and any future collaborative partners will need to:

• conduct clinical tests showing that these products are safe and effective; and

• obtain regulatory approval from the FDA and foreign regulatory authorities.

We will have to curtail, redirect or eliminate our product development programs if we or our collaborative partners find that:

• the DepoMed Systems prove to have unintended or undesirable side effects; or

• products which appear promising in preclinical studies do not demonstrate efficacy in larger scale clinical trials.

Even if our products obtain regulatory approval, successful commercialization would require:

• market acceptance;

• cost-effective commercial scale production; and

• reimbursement under private or governmental health plans.

Any material delay or failure in the development and commercialization of our potential products, particularly Metformin GR or Ciprofloxacin GR, would adversely impact our financial position and liquidity and would make it difficult for us to raise financing on favorable terms, if at all.

If we are unable to obtain or maintain regulatory approval, we will be limited in our ability to commercialize our products, and our business will be harmed.

Our lead product candidate, Metformin GR, is currently in pivotal Phase III human clinical trials. We intend to file a New Drug Application with the FDA for Metformin GR sometime after completion of the Phase III human clinical trials, which is expected in the fourth quarter of 2003. However, we do not expect to be able to obtain FDA approval to market Metformin GR prior to the fourth quarter of 2004.

In June 2002, we completed a Phase II human clinical trial with an internally developed once-daily formulation of the antibiotic drug ciprofloxacin, for urinary tract infections. We are currently considering whether to initiate Phase III clinical trials for this product. The regulatory process is expensive and time consuming. Even after investing significant time and expenditure on clinical trials, we may not obtain regulatory approval for our products. Data obtained from clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. In addition, changes in regulatory policy for product approval during the period of product development and regulatory agency review of each submitted new application may cause delays or rejections. Even if we receive regulatory approval, this approval may entail limitations on the indicated uses for which we can market a product.

Further, once regulatory approval is obtained, a marketed product and its manufacturer are subject to continual review. The discovery of previously unknown problems with a product or manufacturer may result in restrictions on the product, manufacturer or manufacturing facility, including withdrawal of the product from the market. Manufacturers of approved products are also subject to ongoing regulation, including compliance with FDA regulations governing current good manufacturing practices, or cGMP. Failure to comply with manufacturing regulations can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to renew marketing applications and criminal prosecution.

If we are unable to obtain acceptable prices or adequate reimbursement for our products from third-party payors, we will be unable to generate significant revenues.

In both domestic and foreign markets, sales of our product candidates will depend in part on the availability from third-party payors such as:

• government health administration authorities;

• private health insurers;

• health maintenance organizations;

• pharmacy benefit management companies; and

• other healthcare-related organizations.

If reimbursement is not available for our product candidates, demand for these products may be limited. Third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products, including pharmaceuticals. Our product candidates may not be considered cost effective, and adequate third-party reimbursement may be unavailable to enable us to maintain price levels sufficient to realize a return on our investment.

Federal and state governments in the United States and foreign governments continue to propose and pass new legislation designed to contain or reduce the cost of healthcare. Existing regulations affecting pricing may also change before any of our product candidates are approved for marketing. Cost control initiatives could decrease the price that we receive for any product we may develop in the future.

We may not be able to compete successfully in the pharmaceutical product and drug delivery system industries.

Other companies that have oral drug delivery technologies competitive with the DepoMed Systems include Bristol-Myers, ALZA Corporation, a subsidiary of Johnson & Johnson, Elan Corporation plc, SkyePharma plc, Biovail Corporation International, Flamel Technologies S.A. and Andrx Corporation, all of which are developing oral tablet products designed to release the incorporated drugs over time. Each of these companies has patented technologies with attributes different from ours, and in some cases with different sites of delivery to the gastrointestinal tract.

Bristol-Myers is currently marketing a sustained release formulation of metformin, Glucophage XR, with which Metformin GR will compete. The license that Bristol-Myers obtained from us under the agreement in principle related to the settlement of our litigation in November 2002 extends to certain current and future products, which may increase the likelihood that we will face competition from Bristol-Myers in the future on products in addition to Metformin GR. Additionally, other companies have sustained release formulations of metformin and ciprofloxacin currently in clinical trials. Flamel Technologies S.A. and Andrx Corporation both have metformin products in trials and Bayer SA has filed a New Drug Application with the FDA for a once-daily ciprofloxacin product. There may be other companies developing competing products of which we are unaware.

Competition in pharmaceutical products and drug delivery systems is intense. We expect competition to increase. Competing technologies or products developed in the future may prove superior either generally or in particular market segments to the DepoMed Systems or products using the DepoMed Systems. These developments could make the DepoMed Systems or products using them noncompetitive or obsolete.

All of our principal competitors have substantially greater financial, marketing, personnel and research and development resources than we do. In addition, many of our potential collaborative partners have devoted, and continue to devote, significant resources to the development of their own drug delivery systems and technologies.

We depend on third parties for manufacturing of our products. Failure by these third parties would result in lost revenue.

We do not have and do not intend to establish in the foreseeable future internal commercial scale manufacturing capabilities. Rather, we intend to use the facilities of third parties to manufacture commercial

quantities of our products. For example, Biovail will manufacture Metformin GR for commercial sale pursuant to our agreement with Biovail. Our dependence on Biovail and other third parties for the manufacture of products using the DepoMed Systems may adversely affect our ability to deliver such products on a timely and competitive basis. There may not be sufficient manufacturing capacity available to us when, if ever, we are ready to seek commercial sales of products using the DepoMed Systems. If we are unable to contract for a sufficient supply of required products on acceptable terms, or if we encounter delays and difficulties in our relationships with manufacturers, the market introduction and commercial sales of our products will be delayed, and our revenue will suffer.

Applicable cGMP requirements and other rules and regulations prescribed by foreign regulatory authorities will apply to the manufacture of products using the DepoMed Systems. We will depend on the manufacturers of products using the DepoMed Systems to comply with cGMP and applicable foreign standards. Any failure by a manufacturer of products using the DepoMed Systems to maintain cGMP or comply with applicable foreign standards could delay or prevent their commercial sale.

We could become subject to product liability litigation and may not have adequate insurance to cover product liability claims.

Our business involves exposure to potential product liability risks that are inherent in the production and manufacture of spare pharmaceutical products. We have obtained product liability insurance for clinical trials currently underway, but:

• we may not be able to obtain product liability insurance for future trials;

• we may not be able to maintain product liability insurance on acceptable terms;

• we may not be able to secure increased coverage as the commercialization of products using the DepoMed Systems proceeds; or

• our insurance may not provide adequate protection against potential liabilities.

Our inability to obtain adequate insurance coverage at an acceptable cost could prevent or inhibit the commercialization of our products. Defending a lawsuit would be costly and significantly divert management’s attention from conducting our business. If third parties bring a successful product liability claim or series of claims against us for uninsured liabilities or in excess of insured liabilities, our business, financial condition and results of operations may be materially harmed.

Business interruptions could limit our ability to operate our business.

Our operations are vulnerable to damage or interruption from computer viruses, human error, natural disasters, telecommunications failures, terrorism, intentional acts of vandalism and similar events. In particular, our corporate headquarters are located in the San Francisco Bay area, which is known for seismic activity. We have not established a formal disaster recovery plan, and our back-up operations and our business interruption insurance may not be adequate to compensate us for losses that occur. A significant business interruption could result in losses or damages incurred by us and require us to cease or curtail our operations.

If we cannot meet the American Stock Exchange’s requirements for continued listing, the American Stock Exchange may delist our common stock, which would negatively impact the price of our common stock and our ability to sell our common stock.

Our common stock is listed on the American Stock Exchange, or AMEX. The AMEX rules provide that the AMEX will consider delisting when a company has, among other things, (a) sustained losses in two of its three most recent fiscal years and has stockholders’ equity of less than $2,000,000, and (b) sustained losses in three of its four most recent fiscal years and has stockholders’ equity of less than $4,000,000. In June 2002, the AMEX notified us that we currently do not satisfy these criteria and agreed to continue our listing if we submitted an acceptable plan to regain compliance with the AMEX continued listing standards by January 2004. In July 2002, we submitted our plan, which the AMEX approved in September 2002.

The AMEX will continue to monitor our progress towards achieving the goals set forth in the plan and may institute delisting proceedings if we fail to make progress consistent with the terms of the approved plan. If we are delisted, it would be far more difficult for our shareholders to trade in our securities and more difficult to obtain

accurate, current information concerning market prices for our securities. The possibility that our securities may be delisted may also adversely affect our ability to raise additional financing.

If our common stock is delisted from the American Stock Exchange, we may be subject to the risks relating to penny stocks.

A penny stock is defined generally as any non-exchange listed equity security that has a market price of less than $5.00 per share, subject to certain exceptions. As of November 11, 2002 our common stock was trading at $2.40. If our common stock were to be delisted from trading on the AMEX and the trading price of the common stock were to be $5.00 per share, or below, on or after the date the common stock was delisted, trading in such securities would also be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended. These rules require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors, generally institutions. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of such securities and the ability of purchasers to sell our securities in the secondary market.

If we lose our key personnel or are unable to attract and retain key management and operating personnel, we may be unable to pursue our product development and commercialization efforts.

Our success is dependent in large part upon the continued services of John W. Fara, our President and Chief Executive Officer, and other members of our executive management, and on our ability to attract and retain key management and operating personnel. We do not have agreements with Dr. Fara or any of our other executive officers that provide for their continued employment with us. Management, scientific and operating personnel are in high demand in our industry and are often subject to competing offers. The loss of the services of one or more members of management or key employees or the inability to hire additional personnel as needed could result in delays in the research, development and commercialization of our potential product candidates.

Our advisors may have conflicting obligations to other entities that could result in intellectual property disputes between us and those entities.

Two groups, the Policy Advisory Board and Development Advisory Board, advise us on business and scientific issues and future opportunities. Certain members of our Policy Advisory Board and Development Advisory Board work full-time for academic or research institutions. Others act as consultants to 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 their own intellectual property or that of their institutions or other companies. Further, invention assignment agreements signed by such persons in connection with their relationships with us may be subject to the rights of their primary employers or other third parties with whom they have consulting relationships. If we desire access to inventions that are not our property, we will have to obtain licenses to such inventions from these institutions or companies. We may not be able to obtain these licenses on commercially reasonable terms, if at all.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of our management, including the President and Chief Executive Officer along with the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures within 90 days before the filing date of this quarterly report. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer along with the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation.

We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure

controls and procedures is effective to achieve our goal, future events affecting our business may cause us to significantly modify our disclosure controls and procedures.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In January 2002, we filed, and later served, a complaint against Bristol-Myers in the United States District Court for the Northern District of California for infringement of U.S. Patent No. 6,340,475, issued on January 22, 2002 and assigned to DepoMed.

In November 2002, we entered into an agreement in principle with Bristol-Myers related to the settlement of the litigation providing for a one-time payment of $18.0 million to be made by Bristol-Myers to us. Both parties will release all claims in the lawsuit against each other and grant to each other a limited non-exclusive royalty free license, as set forth in the agreement. The license that Bristol-Myers will obtain from us under the agreement will extend to certain current and future products.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

99.1 Certification of John W. Fara

99.2 Certification of John F. Hamilton

(b) Reports on Form 8-K

On July 10, 2002, we filed a Form 8-K with respect to a License and Development Agreement and a Stock Purchase Agreement with Biovail Laboratories, Inc.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 14, 2002	DEPOMED, INC.


	/s/ John F. Hamilton
	John F. Hamilton
	Vice President and Chief Financial Officer (Authorized Officer and Principal Accounting and Financial Officer)


	/s/ John W. Fara
	John W. Fara
	President, Chairman and Chief Executive Officer

CERTIFICATION PURSUANT TO RULE 15d-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John W. Fara, Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of DepoMed, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

November 14, 2002


	By:	/s/ John W. Fara, Ph.D.
		John W. Fara, Ph.D.
		Chief Executive Officer

CERTIFICATION PURSUANT TO RULE 15d-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John F. Hamilton, Chief Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of DepoMed, Inc.;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

November 14, 2002


	By:	/s/ John F. Hamilton
		John F. Hamilton
		Chief Financial Officer

INDEX TO EXHIBITS

99.1		Certification of John W. Fara, Ph.D.
99.2		Certification of John F. Hamilton

ITEM 1. FINANCIAL STATEMENTS

BALANCE SHEETS

STATEMENTS OF OPERATIONS

Period From Inception (August 7, 1995) to September 30 2002

Three Months Ended September 30,

2002

2001

2002

2001

Revenue Recognition

Valuation of Exchange Option of Series A Convertible Exchangeable Preferred Stock

Series A Preferred Stock

Research Arrangement

FORWARD-LOOKING INFORMATION

Valuation of Exchange Option of Series A Preferred Stock

RESULTS OF OPERATIONS

Revenues

Research and Development Expense

Equity in Loss of Joint Venture

Series A Preferred Stock Dividend

Operating Activities

Series A Preferred Stock

Recently Issued Accounting Standards

PART II. OTHER INFORMATION

Period From
Inception
(August 7, 1995)
to
September 30
2002